USA Farm Programs
Read how the 2008 farm bill continues this trend.
Back in 1996, the Republican Congress bravely sought to end government support of agriculture. The
Freedom to Farm Act largely eschewed the policy of supporting crop prices; instead, it set a schedule of fixed payments to farmers, depending on their acreage, these payments gradually declining to zero over seven years. In exchange, the farmers were allowed to plant what they wanted.
This dose of semi-market discipline worked well in 1997. But in 1998 prices for grain and many staple farm products plummeted. Alas, farmers had already planted too many of the “profitable” crops, creating huge surpluses and sending prices even lower. The government had to intervene with “emergency payments” and “temporary” price supports. Last year, a record $28 billion was doled out.
Roughly half of all subsidies went to the big-acre producers who are only 8% of the total number of farmers.The federal government spent over $20 billion on farm subsidies last year (2005): much less than the European Union lavishes on its mollycoddled farmers, but more than Washington spent on foreign aid and almost twice what it spends on subsidizing college for poor children. And America's farm subsidies, unlike Europe's, have become more, rather than less, trade-distorting. Most of the direct cash is lavished on crops, particularly corn (maize), soybeans, rice, cotton and wheat, often depressing world prices. Farmers who grow these crops got 93% of the subsidies between 2002 and 2005 (see chart). As a result, six out ten American farmers get no federal money, while 10% of farmers get 72% of it. Nor are these small, struggling family farmers. Over half the subsidies go to large commercial farms. And the 60% of farmers who get no cash from Washington, particularly fruit and vegetable producers, are increasingly cross. Politically, these farmers could make a difference. Over 50% of today's farm subsidies are concentrated in 25 of America's 435 congressional districts. In California, which has 53 congressional districts, the vast majority of farm subsidies today go to three districts in the Central Valley (Source: The Economist, 9 Sept. 2006, p. 35).
Farm supports vary widely across countries, as measured by the “producer support estimate” — the annual value of transfers from consumers and taxpayers to farmers. Although these subsidies have fallen relative to output in many countries since the late 1980s, they still reached $235 billion in OECD countries in 2002. More importantly, farm subsidies favor larger producers at the expense of smaller producers, rural communities (fewer stores, schools, and churches), the environment (large feedlots concentrate manure). Although almost 40 percent of farm income comes from farm subsidies in the European Union (dark blue bars on the chart), 80 percent of the farm subsidies goes to 20 percent of the Union's farmers with the largest farms. These bias subsidies encourage intensive industrial farming with all its economic, social, and environmental problems.
As
of 2002, many Washington free-traders argue that all such protectionist measures have been a price worth paying for the greater good of winning
Trade Promotion Authority (TPA). In politics, they argue, you often have to take one step back to move two paces forward. Unfortunately, America seems now to be taking at least two steps back. The strongest evidence, besides steel, is the egregious farm bill that has just been agreed to by the House and the Senate.According to the official numbers, the farm bill will increase government spending on agriculture by 80%—an additional $82 billion over ten years. Those estimates, according to most observers, are likely to be extremely conservative. The bill extends, or re-introduces, subsidies on a host of farm products from honey to chickpeas. For America's biggest crops, soybeans, corn and wheat, it invents new payments that are related to prices and production and hence are highly trade-distorting—exactly the opposite of what the Doha round is meant to be about.
In the Uruguay round, pushed by America, countries agreed to cut and set ceilings on their trade-distorting agricultural subsidies. America's ceiling is currently $19.1 billion. The European Union, which has long been a far greater villain than America in agricultural protection, has a ceiling of euro69 billion. In 1996, Congress passed the Freedom to Farm Act, which aimed to phase out subsidies for most agricultural products. America's trade-distorting support was already well below its permitted ceiling and had seemed likely to fall further.
Unfortunately, as prices fell in the late 1990s, farmers howled and received a series of emergency payments that pushed up total support (see chart 2). The new farm bill entrenches this support and undoes all the other progress made in 1996. Trade-distorting subsidies may rise so much, Europeans think, that America will break its Uruguay-round commitments. Congressional staffers deny this, claiming they have taken great care to stay within the WTO 's limits. If these limits are breached all the same, the farm bill also contains a clause that allows the agriculture secretary, in theory, to cut subsidies.In the meantime Europe's Common Agricultural Policy has been moving away from price- and production-based subsidies towards direct payments to farmers that have far less impact on trade. A decade ago, over 90% of Europe's farm subsidies were highly trade-distorting. But in 2000 the EU spent only around 20% of its total support for farmers in this way. It is no small irony that Europe's top man on agriculture has, with some justification, accused America of “flunking” farm reform.
Good sense abandoned
To be fair, the Bush administration was not responsible for the farm bill. Ann Veneman, Mr Bush's agriculture secretary, suggested a more sensible approach to farm support, unlinking subsidies from production and focusing more on the environment. She was ignored by Congress. The political clout of farm states in an election year led to this gross subsidy-fest, with lawmakers falling over themselves to dole out cash to farmers.
Unfortunately, the same political considerations have made impossible any principled objections from Mr Bush. He has said he will sign the bill. The signal to the rest of the world is unambiguous. American officials in Geneva may be talking about freer trade in agriculture, but Washington politicians are sending American farmers exactly the opposite message.
Add together steel, the TPA compromises and agriculture, and America's commitment to freer trade looks laughable. Its trading partners, poor ones in particular, could be forgiven for doubting Washington's ability to stand up to domestic interests. This doubt threatens the Doha round.
Europeans will be reluctant to push politically tough liberalization of their own agricultural policy if they see America doing the reverse. Poor countries will be even more suspicious of the multilateral system if they reckon America is unwilling to deliver its part of the bargain. Such backsliding may not cause an immediate world economic crisis. But in the long run it could put globalization itself at risk.
Source: The Economist, 11 May 2002 and 21 June 2003