WTO, Agricultural Subsidies and Development

1. WTO, Agricultural Subsidies and Development Strathmore University Presentation Dr. Reid E. Whitlock Nairobi, Kenya January 2006

2. WTO Meetings In Hong Kong18 December 2005 • #1 “WTO secured an end date - 2013 -- for all export subsidies in agriculture *** The declaration makes clear that the agreed date is conditional. Loopholes have to be plugged to avoid hidden export subsidies in credit, food aid and the sales of exporting state enterprises

3. Agreements • #2 There is an agreement on cotton. • For cotton the end date for subsidies by developed countries is accelerated to the end of 2006. In addition, cotton exports from least-developed countries will be allowed into developed countries without duty or quotas from 2006.

4. Cotton (cont’d) • " Ministers have also agreed to aim to cut trade-distorting domestic subsidies on cotton by more than would normally apply under the new agreement, and to do so more quickly." The main countries involved in this outcome were: United States and the four countries pushing for an agreement on cotton (Benin, Burkina Faso, Chad and Mali).

5. Item 3 • The member nations negotiated " a very solid" duty-free, quota-free access for the 32 least-developed country members. (When??)

6. Item 4: Food Aid • we reconfirm our commitment to maintain an adequate level and to take into account the interests of food aid recipient countries. To this end, a “safe box” for bona fide food aid will be provided to ensure that there is no unintended impediment to dealing with emergency situations. Beyond that, we will ensure elimination of commercial displacement. To this end, we will agree effective disciplines on in-kind food aid, monetization and re-exports so that there can be no loop-hole for continuing export subsidization.

7. Item 5: Role of LDCs • # 5 We reaffirm our commitment to effectively and meaningfully integrate LDCs into the multilateral trading system and shall continue to implement the WTO Work Programme for LDCs adopted in February 2002.

8. Item 6: Help To LDCs • We recognize the dependence of several developing and least-developed countries on the export of commodities and the problems they face because of the adverse impact of the long-term decline and sharp fluctuation in the prices of these commodities

9. WTO Summary • Subsidies • Food aid • Access for LDCs

10. Definitions • A monetary grant given by government to lower the price faced by producers or consumers of a good • A payment that a government makes to a producer to supplement the market price of a product or commodity the producer is selling. (continued)

11. Definitions (cont’d) • A payment, designed to increase producer income by raising the level of prices above market rates (BUYERS are given vouchers by the government to give to sellers when a sale is made. They can announce the higher price but only have to pay their original, lower price) • Export subsidies are payments given by the government to farmers so that they will sell their product abroad

12. What Do Subsidies Mean For Countries Like the U.S.? • By guaranteeing U.S. farmers a minimum payment for commodities such as corn, rice and soybeans, the government encourages overproduction. That drives down the market price, forcing even higher subsidies and creating more surpluses that can be exported.

13. Myth of the Farmer • A part of the problem is that Americans still believe the myth of the family farmer as somehow ‘superior’ to other classes of workers. That gives farm lobbyists a potent hook with which to demand public assistance.

14. The Myth is Costly …and not only for the 97 percent of Americans who don't live on farms. Boosting farm subsidies in the U.S.will be enormously damaging to the U.S. position in global trade talks, where negotiators have been trying to get other countries to reduce their own agricultural subsidies.

15. What Do Subsidies Mean For LDCs? • As a condition for helping many LDCs service their large foreign debt, international lending agencies demand that the countries keep their tariffs low. The governments are then unable to bar American sugar, grain, and other food products from their countries, so their own farmers get stuck

16. The Problem In A Nutshell • An American farmer has high labor costs, high machinery costs, high land acquisition costs, high regulatory compliance costs (environment, pesticides, labeling, storage, etc..). Because the American market is well-served by farmers, there is not much market for an individual farmer's maize. The farmer looks to foreign markets that are fragmented and/or easy to penetrate to sell his/her products into. Because the American farmer's costs are so high (s)he can only sell at all by having the government supplement what (s)he earns on each foreign sale

17. An Example • If the price in the Kenya market was $2 per kilo of maize, the American farmer would lose money accepting this price, when his/her costs are $ 3 per kilo. Instead of withdrawing from the market and producing something else, cutting costs or leaving farming altogether, American farmers appeal to the public -- the American people -- and the U.S. government and claim that they can only continue to exist with help.

18. The Example Continues… • The government gives this help in the form of subsidies. These subsidies bring the U.S. production cost per kilo down from $ 3 to $ 1 -- enough to ensure that Kenyan consumers will buy their maize from American -- and not Kenyan -- farmers.

19. The Paradox • domestic supports can encourage overproduction because if the government is paying producers of a certain crop, others will want to start producing it too or will produce more of it than normal. This can make global prices

20. Historical Background • Modern subsidies began In WW1 when the U.S. needed higher production for the war and offered subsidies as inducements to farm. After WW1 prices dropped with overproduction so the government propped up prices with subsidies to avoid farm failures. During the Great Depression (1930). Dustbowl. Designed to increase, or at least stabilize, farm income. WW2 stimulus needed again. Post-war, prices fell with overproduction. Subsidies propped up prices.

21. The Political Economic Realities • There is a popular belief in the farmer as a “folk figure” in American culture – like the cowboy • Leaders can’t favor producers at the expense of consumers or vice versa • As a major food aid donor, subsidy-generated surpluses have a natural outlet

22. More Realities • - Agricultural subsidies are insignificant in the American budget. • State 20 mmm (of which, USAID 3.9mmm in 2005; joint State-Ag programs for another 4.8 mmm, global HIV/AIDS for 1.45 mmm and 2.5 mmm for the Millenium Challenge Corp), Ag 90 mmm, defence 540 mmm, health & human svc 660, interest on debt 440 mmm, social security 510 mmm -- total : over 4 trillion

23. More Realities • - focusing on the aid part of the US budget, the US ranks 22 out of 22 DCs in aid as a % of GNP. Most is spent on middle income countries and democratic success stories or disasters.

24. Realities (cont’d) - the costs to LDC's of lost sales seem big to them. - there are costs in innovation not undertaken by DC's that continue to subsidize and LDCs that continue to stagnate and complain rather than changing focus.

25. Details About Subsidies • Remember, farm subsidies are a TINY percentage of the U.S. government budget -- 5 to 20 billion/year (direct plus indirect -- subsidized loans, loan guarantees, insurance) out of 4 trillion

26. Details (cont’d) • 58 percent of farmers including most vegetable, beef cattle, and chicken producers are able to operate in the market economy without receiving taxpayer subsidies. But producers of just five crops - wheat, corn, soybeans, rice, and cotton - have secured a direct pipeline to more than 90 percent of U.S. farm hand-outs. Stated another way, while just 7 percent of all U.S. farms have sales of $250,000 or more, this 7 percent receive almost half of all government payments.

27. More Details • Many of the largest, most profitable farms and agribusinesses that have received the lion's share of subsidies have used these funds to buy out smaller farms.

28. It’s Not Just the U.S. !!! • Japan. • Europe – a high-cost producer – generates an export surplus of approximately 5 million tonnes of sugar. Currently, the EU is spending €3.30 in subsidies to export sugar worth €1. In addition to the 1.3bn in export subsidies recorded annually in its budgets, the EU provides hidden support amounting to around €833m on nominally unsubsidised sugar exports.

29. Food Aid & Development • United States is now in the embarrassing situation of undermining its own foreign-aid program. • 80% of U.S. aid actually goes to American companies implementing projects in LDCs. Italy and US tie over 70% of their aid.

30. Access For Countries Like Kenya

31. What Can Kenya Do? • Buy into the U.S. (invest behind the subsidy wall) • Develop products the U.S. cannot produce (too labor intensive, requires too much heat, sunshine or rainfall) -- examples are: tea, coffee, gum arabic Protest to WTO

32. Kenya Could Introduce Counter-Subsidies • This could work if agriculture mattered so much to Kenya that it was prepared to match and beat any subsidy provided by American (or other) goverments to its farmers. The reality is that Kenya -- maybe the government and maybe the citizens -- doesn't care about this issue as much as America does, It does not have the political will to shift public funds from other sectors to agriculture.

33. Clarification • Note I did not say Kenya lacks the money to win a subsidy war. I believe that there are two categories of developing countries that are relevant for this discussion: those that have the money to wage such a war but choose not to spend it for such a war, and those whose agricultural sector is so small, so backwards, so undeveloped, so uncompetitive, that even if every advantage and protection was given to it, it would not be able to adequately and professionally serve the market.

34. One More Option: • What if Kenyans Stopped Farming - Admitting Defeat in This Trade War?

35. Option Analysis • This might be a good thing if the energy and determination of Kenyan farmers and the government structures that support them such as agricultural research stations and technical schools and extension workers and government anti-locust spraying programs and water infrastructure projects were redirected towards something about which the U.S. did not care about in which the U.S. could not defeat Kenya. Even if such a product existed, the transition would be slow and painful. Many farmers don't know how to do anything but farm, and are too old, too set in their ways, or too committed to farming to do anything else.

36. A Few Thoughts • Societies have a right to decide what they collectively really care about. The U.S. should not be faulted because it cares about keeping farming alive in America. That is its right. Its choice. Kenya should be equally clear and decisive about the things important to Kenya. Kenya could erect tariff barriers to keep American farm products out. This would require that it leave the WTO or face sanctions and reprisals. It would mean not taking IMF and World bank money. Kenya has to decide if it is worth it.

37. Unacceptable • That the U.S. joins a forum -- the WTO -- committed to removing subsidies, when it has no intention of playing along with the game. It would be much more honest -- and would make the battle lines clearer to understand -- if the U.S. withdrew from WTO as it did from the global warming, greenhouse gases and emissions organizations.

38. Unacceptable, part 2 • that developing countries have not done more to improve the competitiveness of their agricultural sectors though they are quick to criticize the developed countries for their problems. In my experience, the countries that really care about something, do something about the problem rather than just complain. Chile, Vietnam, Thailand, China come to mind.

39. Unacceptable, part 3 • that many developing countries are still blaming colonialism for their inability to improve their situation. There is not --never was and never will be -- any such thing as a level playing field. A country has to deal with problems and opportunities it inherits, and has to make the best of them. No one is listening and no one will ever be swayed in the ways you hope, by your complaints. Not the U.N., not the WTO, not England, which colonized you, and certainly not the U.S., which cares next-to-nothing about Kenya and feels no obligation to give it any special consideration.

40. The World Is Changing • For better or worse, the world as we know it is merging, partnering, growing, in ways that make it extremely difficult for small economies to flourish. Small economies will be permanently relegated to pauper status -- forgotten footnotes to history, economics and politics that occasionally make the headlines when there is another coup or drought or massacre or ethnic cleansing or descent from democracy.

41. Thank You • Q&A: Single questions only please -- short and to-the-point.