Friday, February 27, 2009

Subsidies, the "Green Box", and the US

Yesterday some details concerning the 2010 budget for the USDA came to light, including a proposed phase-out over the next three years of direct-payment subsidies for farmers whose sales revenue is over $500,000, which according to USDA Chief Economist Joe Glauber affects about 3% of US farms (see source 1). Apparently, subsidies for farms whose sales are below the $500,000 dollar mark will also be capped at $250,000, and there will be cuts to crop insurance subsidies and programs to promote exports (see sources 2,3). So, how will this affect international agriculture? Will reducing this one kind of subsidy help in ameliorating some of the problems we've seen with how cheaply available US exports can destabilize the livelihoods of local farmers in the global south?

First, I wanted to investigate the WTO rules on subsidies. According to their web page (see 4), "green box" subsidies must cause "minimal distortion" (what a vague statement) in trade, must be government-funded, and must not involve (direct) price support. Direct income supports fall under this "green box" category so long as they are " not related to current production levels or prices" (ie. so long as they are "decoupled"). Programs for environmental and regional development also fall under this category.

So, if the WTO is to be believed, any changes in US policy regarding direct income subsidies should have minimal effect on trade (because the existence of direct income subsidies has a minimal effect in the first place). However, according to much of the reading, including most significantly World Hunger, Stuffed and Starved, and chapter seven of Hungry for Profit( "Global Food Politics" by Philip McMichael), even these kinds of indirect subsidies do have a hand in artificially lowering the prices of export crops. McMichael highlights this when he states, "the 'level playing field' is not level−because the U.S. and the EU retain indirect agricultural subsidies by decoupling farm payments from commodity prices."

So, given that these subsidies do in fact have an effect on trade, reducing direct farm payments should, in part, help to prevent flooding of overseas markets with artificially low-priced produce. However, I am ambivalent as to whether or not this is actually a good development in terms of increasing food security and reducing world hunger. On the one hand, a trend toward reduction of subsidies of US produce will help local farmers in other countries compete more fairly given that the price of US produce won't be as artificially deflated. However, other indirect subsidies through land management and environmental programs still may result in US produce having a lower price than locally produced agricultural goods. In light of this, the solution clearly shouldn't be to get rid of land management and environmental programs, which are certainly important for promoting sustainability (see 5).

Reducing subsidies is a key component of trade liberalization (see 6). However, liberalization of trade seems to be, at least in this transitory period, a major problem with regard to food security in that it results in many countries becoming dependent on foreign imports and reduces incentives for countries to have strong domestic agriculture programs. Ideally, under trade liberalization, cheap agricultural goods will be available at all times even if one source runs out in the short term; however, as we have seen throughout the readings in this course, and especially in Stuffed and Starved, World Hunger, and the Buttel reading, the problem of world hunger is a problem of inequality and poverty; it is a matter of people not being able to afford whatever food is available. Trade liberalization will likely not help end inequalities and poverty, and consequently it will not help reduce the problem of hunger. As it stands, rather, when local farmers are out-competed in "the race to the bottom," local agriculture no longer is able to flourish, and food security is diminished. An aside: If in an ideal situation trade liberalization and rapid transportation were universally imposed and worked, the dependence of local communities on outside agriculture would not be as much of an issue; however, were an upset in transportation or trade to occur, these areas would be left without the means to sustain themselves. Thus, even in the ideal case, the system is problematic

Consequently, regardless of whether lower foreign prices are caused artificially by indirect subsidies or different factors entirely (an exceptionally good harvest in a given region, for example), the effect is still going to be the same under trade liberalization. So, ultimately, the effect of unequal levels of subsidizing across nations are simply symptoms of this underlying problem. Thus, while the impact of reducing direct subsidies might have some beneficial consequences, these would only be beneficial in the context of an already incredibly broken system.

So, overall, while at first this reduction in farmer income subsidies might have seemed like a step in the right direction toward "leveling the playing field" and possibly enabling greater local food security in other nations by allowing local farmers to have more realistically priced competition, upon closer examination it seems likely that a general trend toward reducing subsidies likely won't contribute much toward increasing food security in the long run given that it is part of the process of trade liberalization. At least it will help to reduce the amount of money flowing from the federal government to agribusiness. That surely counts for something.

1. Feedstuffs
2. Drilling Down on the Budget. New York Times
3. Opposition, Skepticism Greet Obama's USDA Budget. Agriculture Online.
4. Domestic Support in Agriculture. WTO.
5. Agricultural Resources. Economic Research Service/USDA
6. Agricultural Subsidy Programs. Library of Economics and Liberty.
7. Farm A Summary of Farm Policy News
8. Farming: Farm Subsidies. Environmental Working Group.
Schwartz, Barry.The Paradox of Choice. Harper Perennial. 2004.
Patel, Raj. Stuffed and Starved. Melville House Publishing. 2007.

1 comment:

  1. I am so glad someone took the time to analyze the proposed Farm Bill. This is an excellent analysis. Thank you for putting it together for us.

    So what is the alternative to trade liberalization in agriculture? Should all governments be subsidizing food production? Is there a "third way"?