Essay: Agricultural Impacts on the Third World

Review the protectionist agricultural policies of USA (developed country) and evaluate their impact on the exports of the Third World or third world country

It should not surprise anyone that protectionist agricultural policies, has been pursued by the United States since its founding as an independent nation. Taxes levied by the British Crown on trade with American colonies was an influential factor in the early establishment of the United States.

Over the course of this century, US agricultural policy has undergone thorough reform which has been as dramatic as the changes in the US agricultural sector itself. The USDA claims that American tariffs on agricultural policies are among some the lowest and cites the fact that the average world tariffs on agricultural products of 62% while the US average is just 12%. The US proposes to lower the allowable rate of tariffs to just 15% offering to reduce its tariff rates to 5% in return.

Although the US has comparatively low tariff rates the US agricultural policy remains highly protectionist. The US spends more than any other country on subsidising its agricultural sector. The enormous size of US subsidies to the agricultural sector, $16.5 billion last year makes the domestically produced commodities in developing countries uncompetitive.

The reduction of tariffs and the liberalisation of agricultural trade was raised at the World Trade Oragainastion, WTO, negotiations during the Uruguay round. The US has used its influence at the negotiating table to standardise the rules that govern international trade. Under the WTO regulations countries have agreed on a process of tariffisation: the removal of all non-tariff barriers such as quotas or their conversion to work to reduce tariffs rates. This paper argues that because the US continues to subsidise its farm sector while pushing for further liberalisation it is damaging the growth prospects of adricultural sectors in developing countries.

The US agricultural policy has three principal aims. To maintain price stability in agricultural markets. To ensure national food security and, to promote US agricultural exports on foreign markets. The pillars of US operates farm programmes through government institutions which operate substantial subsidies to farms through direct assistance programmes supervised by the US Department for Agriculture, USDA.

The newest omnibus farm law, the Farm Security and Rural Investment Act of 2002 is intended to avert the need for such supplemental aid but it increased the amount of funds available for farm subsidies by 62%. Farm policy supports wheat and feed grain production (corn, sorghum, barley, oats), cotton (upland and extra-long staple-ELS), rice, soybeans, other oilseeds (sunflower seed, canola, rapeseed, safflower, flaxseed, mustard seed), milk, peanuts, beet and cane sugar, wool, mohair, honey, dry peas, lentils, small chickpeas, and tobacco. These products are all vital export crops for developing countries.

Other commodities normally receive no direct support include meats, hay, poultry, fruits, nuts, vegetables, and nursery/greenhouse products but even producers of these items can be affected by farm policy decisions, either because such producers also raise some price-supported commodities, or because Government intervention in one farm sector can influence production and prices in another sector. They may also receive disaster payments of benefit for export credit guarantees.

Source: Environmental Working Group. Farm Subsidy Data base.

Market Price Supports

At the heart of U.S. farm policy are agricultural commodity and price support programs. They have existed since the 1930s and the cost in net outlays for the Commodity Credit Corporation (CCC). All major commodities have some form of market price floor controlled by the standing commitments of the federally chartered CCC. The CCC programme puts a floor on commodity prices by removing commodities from the market at designated ’support price levels’. By fixing prices of agricultural products the USDA creates incentives for over production.

These price stabilisation policies are subsidies, direct payments, to US farms which make US producers unduly competitive on international markets. Since developing countries do not have the resources to subsidise their agricultural sectors subsidies act as a barrier to developing countries entering the US agricultural market.

US policy is explicit in its intention to dominate world agricultural markets. The farm sector’s reliance on exports can be further appreciated by observing the share of production of individual commodities exported each year. International markets take a large share of basic commodities such as wheat 45% and soybeans 34% as well as high-value processed products. Some high-value products, including almonds 66% and sunflower oil 63%, rely on exports for well over half of sales.

Overall, exports account for 25 percent of total farm sales, double the percentage for the economy as a whole.

The importance of trade for the agriculture sector is undeniable. The US produces far more than it can consume. In order to encourage trade the US pursues an number of pro-export policies. At the centre of which are export credit policies.

The 1978 Agricultural Trade act authorised the export credit guarantee, and each successive farm act has reauthorized the programme. Export credit guarantee programmes act like export subsidies. The Export Credit Guarantee Program, the Intermediate Export Credit Guarantee Program and the Supplier Credit Guarantee programme underwrite credit extended to foreign buyers of American agricultural products.

The stated aim of these schemes, according to the Foreign Agricultural Service is to increase exports of US agricultural commodities and compete with foreign agricultural products. The US export credit offers favourable conditions, such as low interest rates, long repayment periods, small down payment and less frequent repayments, and a waiver of any fee or premium; all of which provide incentives for importers to favour US products. The knowledge that the US will repay the loan principal and interest in the event that an importer defaults.

The combination of domestic farm subsidies and export credits has brought the US heavy criticism in the international community. US dumping agricultural commodities on developing damages domestic agricultural producers.

Trade theory has long been held up as the justification of the reduction of tariff and non-tariff barriers to trade. The conventional belief is part of the multilateral institutions approach (World Bank, International Monetary Fund, OECD) which is based on the Ricardian comparative advantage and Heckscher-Ohlin (HO) models.

Liberalisation is supposed to generate predictable and positive consequences for growth. However there is increasing support for competing arguments which defend the right of developing countries to protect their under developed markets form competition from developed industrialised countries. Trade models are criticised for being reductionist, overly simplistic, and a historical.

First mover advantage supports the argument that developing countries should protect markets from foreign competition. The US agricultural industry has benefited from productivity increases as a result of the introduction of high yield varieties of crops, the use of chemical and fertilisers, and economies of scale from the increased size of farms and field acreages. Developing countries which lack the resources to catch up on productivity gains realised in the US have little option but to protect agricultural markets with protectionist tariffs and non-tariff barriers not only to protect domestic producers but also counteract the substantial subsidies which US farmers receive. The US produces more than it can consume. Subsidies that support prices and encourage export allow the US to compete in foreign markets at below the cost of production which has damaging consequences for the developing world.

Bibliography

• Bruce E Moon, From Seattle & Doha to Cancún, in Trade Politics Ed. Brian Hocking & Seven McGuire. Routledge 2004
• David Balaam, Agricultural Trade Policy in Trade Politics Ed. Brian Hocking & Seven McGuire. Routledge 2004
• Krugman & Obstfeld, International Economics Theory & Policy. 6th Edition, Addison Wesley, 2003
• Oxfam America Briefing Note, US Export Credits: Denials and Double Standards. Oxfam America, March 2003
• USDA, Food and Agricultural Policy: taking stock for the new century. USDA, September 2001
• Paul Gibson, John Wainio, Daniel Whitley, and Mary Bohman, Profiles of Tariffs in Global Agricultural Markets, Agricultural Economic Report No. (aer796), January 2001
• Agriculture and the new trade agenda : creating a global trading environment for development / edited by Merlinda D. Ingco and L. Alan Winters. Cambridge University Press, 2004
• Environmental Working Group, Farm Subsidy Database

Useful websites:

• Paul Gibson, John Wainio, Daniel Whitley, and Mary Bohman, Profiles of Tariffs in Global Agricultural Markets, Agricultural Economic Report No. (aer796), January 2001

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