Domestic farm support policies have resulted in inefficient use of agricultural resources, lost trading opportunities for efficient producers, and distorted international trade flows—all at great expense to national economies. Ironically, the countries that most oppose liberalizing agricultural trade have the most to gain from doing so. Despite resistance to fundamental reform, the latest round of GATT talks offers hope for reducing the costs and adverse effects of protectionist policies.
Agricultural protectionism is not new. In Europe it reaches back to the nineteenth century. With some exceptions, it has grown steadily as a by-product of economic development: In essence, it can be seen as an effort to resist and delay the adjustments required of the agricultural sector to remain competitive with other countries and with other sectors in a rapidly changing economic environment.
Estimates of the costs of agricultural protection to consumers and taxpayers vary, depending mainly on which programs are included in the definition of support to agriculture. According to the Organization for Economic Cooperation and Development (OECD), which uses the most inclusive definition, annual consumer and taxpayer costs almost doubled between 1979–1981 and 1984–1986, from 116 billion European currency units (ECUs) to 219 billion ECUs. (The value of the ECU as a monetary unit is based on the weighted average of currencies of European Community members; debts and credits in the European Monetary System are denominated in ECUs.) Costs declined to 140 billion ECUs unit in 1988, but in the absence of significant changes in protectionist policies, this decline is likely to be temporary.
The massive costs of agricultural support have not brought commensurate benefits to farmers. Less than half of the costs end up as increased income in their hands. Further, most of the benefits go to large commercial farmers who do not need assistance. Even on the large farms, incomes benefit only in the short run. In the long run, high support prices are capitalized in the price of land, driving up production costs for new entrants and for farmers who rent their land.
The persistence and growth of agricultural protectionism has become one of the major challenges to the General Agreement on Tariffs and Trade (GATT). While successive GATT negotiations have succeeded in reducing barriers to trade in industrial products, agriculture has been left behind in the process of trade liberalization. When the latest round of GATT talks was launched in Uruguay, in 1986, governments agreed that domestic policies distorting trade in agricultural products must be brought into the negotiations. Indeed, the United States and other agricultural exporting countries indicated that they might not be able to enlist sufficient domestic support for agreements on other aspects of the negotiations if there was no significant progress on liberalizing agricultural trade. Yet as the Uruguay Round of trade negotiations draws to a close, resistance to fundamental agricultural policy reforms remains strong in Europe, Japan, and North America.
Domestic farm support policies are at the root of international agricultural trade problems.
The basic reason for the difficulties experienced in the trade negotiations is that agricultural trade barriers and export subsidies are rooted in domestic farm support policies that have become firmly entrenched in most industrialized countries. High price guarantees to producers—the prevalent method of farm support—stimulate uneconomic production, which has to be protected against imports or dumped abroad, displacing exports of efficient exporting countries. These countries, in turn, may be led to subsidize their own production, or exports, or both (as has been the case in the United States and Canada). This further depresses world prices and escalates budget costs.
Thus international trade in farm products is shaped by the interaction of national agricultural policies. Trade flows are distorted and destabilized by such policies, and trade becomes a balancing mechanism for policy-determined deficits and surpluses. The results are inefficiencies in the use of the world's agricultural resources; lost trading opportunities for efficient agricultural producers; costly and politically dangerous conflicts between otherwise friendly states; and the erosion of the integrity of the multilateral trading system.
Despite these negative impacts, the trend toward agricultural protectionism has accelerated over the last decade. For the OECD, the level of agricultural protection, in terms of Producer Subsidy Equivalents (PSEs), soared from 28 percent in 1980 to 47 percent in 1986. (PSEs are defined as the net assistance provided through market price supports and government expenditures, expressed as a percentage of total farm receipts.) The level of protection is highest in Japan and in the European Community (EC), but the sharpest increases have occurred in the United States and Canada (see figure 1). Most PSEs declined somewhat after 1986, not because of changes in policy, but because of the recovery in world prices that began in 1987.
Consequences of free trade
The approach of the 1990 round of trade negotiations and a U.S. proposal for total liberalization of agricultural trade have stirred interest in what would happen if the industrialized countries did away with all market-distorting government interventions in agriculture. The available econometric models agree that free trade would increase only modestly the total volume of agricultural trade. It would, however, redistribute production and trade in favor of efficient exporters. It would also tend to raise the international trading prices of commodities now being dumped on world markets. It would be wrong to conclude from this that liberalization serves the interests of only a few traditional agricultural exporting countries, with the EC and Japan footing the bill. This is not the case even if attention is focused narrowly on the farm sectors. Because of present high levels of protection, North American producers, too, would have to accept losses, at least in the short term. Furthermore, if consumer and taxpayer interests are taken into account, all countries would gain, with the EC and Japan reaping the bulk of the benefits.
These "static" welfare gains, due to a more efficient allocation of resources, provide the most obvious economic justification for trade liberalization. Although estimates of the size of this dividend vary, it probably would have amounted to U.S. $30 billion to $40 billion in 1986 for the OECD countries as a whole. If gains to the nonagricultural sectors are also counted, the total welfare benefits could be over $70 billion. To this should be added the unquantified but probably even more important social dividend that could be expected to accrue from the "dynamic" effects of liberalization, in terms of more rapid economic growth.
Social dividends accruing from trade liberalization would include more efficient allocation of resources and more rapid economic growth.
This is not to deny that there would be losers from liberalization within each country. In general, producers in highly protected countries would lose when protection was removed. One estimate, based on the hypothetical event that all developed countries had liberalized simultaneously in 1986, puts producer losses in the EC and Japan each at $21 billion and in the United States at $15 billion. Relatively unprotected producers in small exporting countries such as Australia and New Zealand would gain from liberalization. In the long run, per capita farm incomes would tend to recover everywhere because increased competition would accelerate the process of farm consolidation and modernization.
The principal gainers from agricultural liberalization would be the consumers and taxpayers of the most highly protected countries. Their gains would exceed the losses sustained by producers; thus society as a whole would be better off. The consumer/taxpayer gains could be used to fully compensate producers, with something left over to lighten the burden on the public. Alternatively, producers could be compensated in part.
Realizing agricultural liberalization will be difficult, however. At the GATT talks in Geneva in 1989, negotiators achieved a broad measure of consensus for making agricultural policies more responsive to international market signals, and providing producer support and protection in a less market-distorting manner. Among the proposed approaches for achieving these goals are multilateral cuts in overall levels of internal support and protection; changes in methods of support that would make them less trade-distorting; agreements on specific policies and commodities to implement cuts in overall support; and strengthening of the rules governing international agricultural trade by eliminating exceptions, ambiguities, and loopholes. Each of these entails advantages and disadvantages.
Figure 1. Agricultural Producer Subsidy Equivalents (PSEs) in major industrial countries
Note: PSEs are defined as the net assistance provided through market price supports and government expenditures, expressed as a percentage of total farm receipts. Sources: Organization for Economic Cooperation and Development; U.S. Department of Agriculture
Multilateral cuts
All major agricultural trading countries expressed interest in the possibility of using, as a target or monitoring device, a modified version of the Producer Subsidy Equivalent developed by the OECD, or some similar aggregate measure of support (AMS) that would summarize in one number the trade-distorting effects of the entire complex of protectionist policies affecting specific commodities. The AMS approach would commit governments to comparable reductions in their levels of protection while leaving them with considerable flexibility in implementing the reductions. Multilateral cuts in protection would strengthen world markets, easing the adjustment problems of protected producers. Once agreement was reached by the major agricultural trading countries on target cuts, other countries might find it more difficult to refuse to participate.
However, the technical problems in reducing all trade-distorting government interventions to a common denominator are daunting. Agricultural policies involving identical measures of support can have very different trade effects. For example, supply controls offset to some degree—and may even more than offset—the output-stimulating effects of high support prices. Deficiency payments may distort trade less than market price supports do, because they do not depress domestic consumption. Countries could switch from less trade-distorting to more trade-distorting policies without affecting their AMS.
In general, the categorization of policies as trade-distorting or non-trade distorting will be contentious. Heavily subsidized stabilization and disaster relief programs, large income payments (even if decoupled from current production), lavish adjustment assistance without a firm phase-out schedule, producer cartels (even those that do not produce surpluses for export), and two-price systems (even if they limit price supports to quantities consumed domestically) are all open to challenge because they cause substantially more resources to be retained in agriculture than would otherwise be the case. Furthermore, any program that raises domestic market prices will not be workable without import barriers.
The "package" approach
Because negotiations on the definition of the AMS are bound to be difficult and time-consuming, it is likely that the negotiators will turn their attention to some of the major policy and commodity problems. Negotiations will probably focus on identifying "packages" of mutual concessions. The packages could include domestic policies affecting several or all agricultural commodities such as price supports, subsidies, and production or marketing restraints. Agreements arrived at in this way could be integrated into an AMS framework, or they could provide a fallback should it be impossible to reach agreement on a comprehensive solution.
Reform proposals generally involve the replacement of output-stimulating producer price supports by production-neutral income payments or by some form of income insurance.
Without a comprehensive framework, the package approach would sacrifice the political advantages that countries would gain from proceeding together on a broad front. It could encourage governments to drag their feet on sensitive concessions. And it would sacrifice some of the economic advantages of an across-the-board reduction in protection.
But there are also advantages to the package approach. Governments could offer selective concessions or reforms that they consider most feasible in terms of their domestic politics and available policy tools. Trading partners could focus their requests on policies that are most harmful to them. It would be left to each trading partner to assess the value of any package that might prove to be negotiable so as to ensure a rough equivalence of concessions among countries. Moreover, the package approach would be more compatible with divergent domestic policy orientations. It would not prevent the United States from moving toward greater market orientation, or the European Community from increasing its reliance on supply controls in implementing its international commitments.
Policy reinstrumentation
The current interest in policy reinstrumentation—or the reform of policy instruments—is explained by the political difficulty of withdrawing all assistance to agriculture over a reasonably short period of time. However, almost any farm subsidy, even if decoupled from a farm's current production or not product-specific, will cause more resources to be retained in agriculture than are justified by comparative advantage. Since the degree of trade distortion (which depends not only on the general nature of the programs but also on the level of subsidization and other specific parameters) is difficult to analyze in quantitative terms, a new source of controversy would be introduced into an already difficult negotiating framework.
The analytical and negotiating problems are compounded by proposals that envisage the decoupling of farm subsidy from production only at the margin (that is, affecting only production exceeding a basic quantity that would remain eligible for price support). Nor is it clear that decoupling proposals would be more acceptable than gradual across-the-board reductions in price supports. Farm organizations are generally opposed to types of assistance that would make the nature of the income transfers more obvious and, hence, more vulnerable to budget cuts. Finance ministers, on the other hand, are wary of increased budget costs, particularly in situations where farm support is now provided by consumers rather than the budget.
Reform of GATT rules
Strengthening GATT rules on agricultural trade is a long-standing objective toward which little progress has been made in the past. Wide differences remain over what can be accomplished. The United States and other traditional agricultural exporting countries favor the elimination of the exemptions provided for agriculture in the GATT. Export subsidies would be prohibited and import quotas, variable levies, "voluntary" export restraint agreements, and other nontariff barriers would be replaced by fixed tariffs that would be reduced simultaneously with the reductions in domestic support. "Tariffication"—as this process is known—would make protection more transparent and more readily negotiable and make domestic markets more responsive to world market conditions. The EC and Japan believe that special provisions must continue to apply to agricultural trade. The EC considers variable levies to be a legitimate means of stabilizing internal markets; Japan has pleaded for exempting basic foodstuffs on the grounds of food security. Short of a radical reform to eliminate all nontariff distortions, an effort could be made to strengthen the present constraints on such measures so as to make them more effective in protecting the existing trade of other countries against adverse effects of domestic support policies.
Prospects for progress
The consensus on principles of agricultural policy reform reached in the OECD and the negotiations begun in the GATT represent the most important attempt ever made to reshape national agricultural policies and to have agricultural trade determined by market forces. Whether radical reductions in the level of agricultural subsidization and the liberalization of agricultural trade will result remains to be seen.
History is on the side of the pessimists. Agricultural protection has proved impervious to past efforts to deal with it. Although the adjustment costs of reducing protection would be attenuated if cuts were made on a phased, balanced, multicountry, and multicommodity basis, the fact is that the incomes and net worth of many protected farmers would fall if programs that transfer income to them were ended. Farmers everywhere are opposed to changes in both the level and the form of the subsidies and protec-tion they enjoy. In addition, agricultural policy reform remains hostage to cycles in world market conditions. After the farm crisis of the first half of the 1980s, markets seemed to come back into balance, supporting the view on both sides of the Atlantic that the present farm programs are working and require only minor modifications. This attitude dims prospects for fundamental policy reforms.
Taxpayers, consumers, and national governments are increasingly disenchanted with the expenses, inequities, and failures of domestic farm support programs.
Optimists find comfort in the fact that taxpayers, consumers, and national governments everywhere are increasingly disenchanted with the budgetary expense, the inequities, the failures, and the perversities of the national farm programs that are the root cause of international agricultural trade problems. Competing demands on national budgets have brought expenditures for farm support under much closer scrutiny.
The European Community, since its transformation from a major importer to a major exporter of agricultural products, can no longer avoid mounting budget costs unless surplus production is brought under control. Japan, acutely aware of its dependence on foreign trade and its vulnerability to foreign retaliation, is relaxing its agricultural protectionism. Trade and budget deficits and falling shares in world agricultural markets have made the United States more determined to secure the benefit of its comparative advantage in agriculture.
In the final analysis, the integrity of the multilateral trading system must be an overriding concern. Both the European heads of government and the U.S. Congress have given notice that even the status quo may be in jeopardy if the agricultural negotiations fail to produce significant results. Beyond this, another failure to address the problems of agricultural trade would undoubtedly contribute to the spread of protectionism in other economic sectors. The fateful consequence for the world economy and polity is perhaps the best hope for progress in agricultural trade and policy reform.
A correction
In Hans H. Landsberg's article, "Two decades of energy policy" (Resources no. 99, Spring 1990), it was erroneously stated that efficiency standards for household appliances never became law. Though such standards were first called for in a 1975 law, specific standards were not mandated by Congress until 1987.
Fred H. Sanderson is a senior fellow at the National Center for Food and Agricultural Policy at RFF. This article is exerpted from his introduction to Agricultural Protectionism in the Industrialized World, published in July 1990 by RFF.
A version of this article appeared in print in the June 1990 issue of Resources magazine.
A version of this article appeared in print in the June 1990 issue of Resources magazine.
