Agricultural subsidies and tariffs have been widely debated for several years and this is an issue that

is not going away. There is no doubt that the subsidies and tariffs have benefits for some while simultaneously being detrimental to others. The chief area of concern is regarding the faceoff between developed nations, such as the United States and the European Union, and underdeveloped or growing nations, such as Brazil and African nations. What essentially is occurring is that a developed nation comes up with a price that they feel an agricultural product should be bought and sold at in the world market. Once they have this figure, if the going rate of the product dips below the number then the governments respond by giving subsidies to the farmers of their nation. These subsidies offset the dip in price and allow the developed nations farmers to still maintain their profit margin at no extra cost to them, while tariffs protect domestic farmers from cheaper, developing country export prices. If developed nations did not do this, farmers from their respective nations would not be able to compete with the far cheaper producers in developing nations. By doing so, richer nations are covering portions of the costs for the farmers allowing them to compete on the world market and in some cases dominate it. In developed nations if the subsidies were removed, it may in fact benefit the average consumer in those nations. They would be able to get their goods at a lower price while also not have to lose as much in taxes to pay for the subsidies. On the flip side, they might not have as much access to the products because in all likelihood the market for agricultural products would no longer appear feasible, thereby pushing producers out and depressing the supply.
1) background advantages and disadvantages of tariffs and subsidies 2) removal of tariffs and subsidies effect on developed nations 3) removal of tariffs and subsidies effect on developing nations and 4) a conclusion about whether the total benefits outweigh total costs or vice versa

This in turn brings in more cash flow for the developed nations because the farmers not only sell their product domestically, but also globally. As a farmer, they understand that these subsidies continue to come in, so they plant more of a product then they will be able to sell in their country on purpose and sell or dump the surplus on to the world market. This surplus further depresses the price of the respective product and as a result severely injures the business interests of farmers in poorer and underdeveloped nations. They can no longer sell at a profit in some instances because they are not receiving any subsidies to offset the low selling price as the farmers in richer nations are. As said before, the power of subsidies is not good news for all parties. If there were no dumping of surplus product into the world market by developed nations, the underdeveloped nations would significantly benefit. The revenues these underdeveloped countries lose out on are in the billions of dollars each year. The countries losing out on this revenue are attempting to fight back, but it is not an easy battle. The removal of these subsidies would have an enormous impact; the question is what the impact would actually be. Q1. The current subsidies distort incentives for the global trade of agricultural commodities in which other countries may have a comparative advantage. Allowing countries to specialize in commodities in which they have a comparative advantage in and then freely trade across borders would therefore increase global welfare and reduce food prices. (Anderson, Kym; Will Martin (13). "Agricultural Trade Reform and the Doha Development Agenda". The World Economy 28 (9): 13011327). Ending direct payments to farmers and deregulating the farm industry would

eliminate inefficiencies and deadweight loss created by government intervention. there are arguments for subsidies, it increases social efficiency and provides an alternative to produce. However subsidies are expensive and will requires higher taxes. A removal of agricultural subsidies will benefit the average consumer as they will have to pay less tax. Giving subsidies to firms may encourage inefficiency, because the firms can rely on government aid. Competition, quality and efficiency will therefore increase from a removal of a subsidy. Although dumping and loss of earnings hinders the agricultural development in developing countries, agricultural subsidy cannot be removed in developed areas, such as Europe and the US, mostly because of two reasons; political and economic. Developed countries favour subsidies as it benefits domestic farmers and not the unsubsidised foreign farmers. Farmers have a strong voting power and therefore, politicians will use subsidies to gain votes. Those who are voted into power, generally sell themselves by being in support of high subsidies.Tariffs increase the cost of imports, therefore the removal of tariffs will lead to an increase in consumer surplus. For example, UK consumers have lost out from EU wide tariffs on agricultural products. Many agricultural goods are more expensive because of the high tariffs placed to protect EU farmers. The use of comparative advantage for trading and removal of tarrifs will lead to lower prices for the average consumers. It is hard to think of any benefits from tariffs for consumers. Maybe in the long run consumers benefit from the protection of domestic industries if these industries use the tariffs to improve. Domestic Producers, who produce the good, will lose out from the removal of tarrifs. This is because it makes their domestic production relatively more competitive compared to the imports. Therefore, assuming another country has the comparative advantage, i.e. developing countries, developed countries will lose out. Agricultural tariffs have benefitted European farmers as they have been protected from cheaper competition. However, it is argued that the restriction of competition encourages inefficient firms. Therefore, in the long run, domestic firms may not make the necessary improvements that they would have done without tariffs. Also the introduction of tariffs usually leads to retaliation. Therefore, other countries will place tariffs on EU exports. Therefore, some exporting firms will lose out and sell less exports. If these tariffs are removed, there will be greater levels of exporting. Critics argue that lowering prices from the use of subsidies create unhealthy incentives for consumers. In the USA, cane sugar has been replaced with the cheaper alternative of corn syrup, making high-sugar food cheaper; beet and cane sugar are subject to subsidies, price controls, and import tariffs that distort the prices of these products as well. Market distortions due to subsidies have led to an increase in corn fed cattle rather than grass fed. Corn fed cattle require more antibiotics and their beef has a higher fat content, this can make the average consumer less healthy, which is not economically viable. (Kummer, Corby. "Back To Grass" The Atlantic. http://www.theatlantic.com/doc/200305/kummer ) The argument of the Infant-industry first articulated by Alexander Hamilton in his 1790 Report on Manufactures. The basis of the argument is that nascent industries often do not have the economies of scale, that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale.

Many countries have been successful from industrialisation behind tariff barriers. For example, from 1816 through 1945, tariffs in the USA were among the highest in the world. "Almost all NDCs [Newly Developed Countries] had adopted some form of infant industry promotion strategy when they were in catching-up positions. In many countries, tariff protection was a key component of this strategy, but was neither the only nor even necessarily the most important component in the strategy." (Chang, Ha-Joon (2002.) Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press) Question 2 "Consider a farmer in Ghana who used to be able to make a living growing rice. Several years ago, Ghana was able to feed and export their surplus. Now, it imports rice. From where? Developed countries. Why? Because it's cheaper. Even if it costs the rice producer in the developed world much more to produce the rice, he doesn't have to make a profit from his crop. The government pays him to grow it, so he can sell it more cheaply to Ghana than the farmer in Ghana can. And that farmer in Ghana? He can't feed his family anymore."(Lyle Vanclief, Former Canadian Minister of Agriculture [1997-2003]). In developing countries, agriculture is main source of employment, lifestyle and income for between 50% - 90% of the population. Small farmers make the up the majority of this, up to 70 95% of the farming population. Small farmers are therefore a significant proportion of the countrys population. Traditionally, they have survived on subsistence production. Many in the last 2 decades have experimented with export crops, only a few have had initial success but many have seen disastrous failures. The industrialisation and export orientation of agriculture has not benefited these poorer nations. In the globalised market, the small players have been marginalised. Policies which have led to their marginalisation has caused huge pits of poverty for sectors of society, highly uneven development and hence the inability of many developing countries become high income level countries. Analysts Conroy, Murray and Rosset (1996) wrote about how many developing countries cannot achieve a satisfactory level of development because their small farmers have been sidelined: It is our belief, and that of respected economists (Janvry 1981) and Jeffrey Sachs (1987), that the sort of inequity and poverty the peasantry must face actually blocks true development. The rural masses are so poor that they have little purchasing power. They thus do not constitute an important market for domestic industry. This in turn means that domestic markets are too small to stimulate much economic activity, so production is largely directed toward foreign markets and urban elites. As a consequence, the level of demand in the economy is too narrow to sustain broad based, effective development. This creates a high degree of dependence on foreign markets and a lack of structural incentives (nationally, that can bring about) better living standards for the poor. In short, poverty becomes a vicious circle that is itself an obstacle to development. Although dumping and loss of earnings hinders the agricultural development in developing countries, agricultural subsidy cannot be removed in developed areas, such as Europe and the US, mostly because of two reasons; political and economic. Developed countries favour

subsidies as it benefits domestic farmers and not the un subsidised foreign farmers. Farmers have a strong voting power and therefore, politicians will use subsidies to gain votes. Those who are voted into power, generally sell themselves by being in support of high subsidies. Tariffs increase the cost of imports. For example, UK consumers have lost out from EU wide tariffs on agricultural products. Many agricultural goods are more expensive because of the high tariffs placed to protect EU farmers. The use of tariffs will lead to higher prices for the average consumers, which boosts inflation and spending. It is hard to think of any benefits from tariffs for consumers. Maybe in the long run consumers benefit from the protection of domestic industries if these industries use the tariffs to improve. The U.S agricultural economy is becoming more of a threat to developing countries. In 2011 the net farm income was said to be $94.7 billion, a 19.8% increase to $15.7 billion from the 2010 forecast. Commodities such as corn, wheat and soybean were projected to achieve record sales in 2011 with an increase of 15% from 2010 forecasts. U.S is the leading cotton exporter and was expecting to increase their exports to 31% in July 2011. The U.S governments direct payment to producers was estimated to total $10.6 billion in 2011 which represents 12.2% decrease from 2010 forecasting of $12.2 billion. Although US government is paying farm producers the smallest volume since 1979 in subsidies the poor nations will not be able to enter the market due to artificial production in U.S.

Oscar Arias president of Costa Rica, best sums up the US food aid regime in a letter saying it is designed to subject us to food dependency and to implement what are clearly political/economic objectives- yet it has been presented in our country as an assistance program (Garst, Rachel,

and Tom Barry. Feeding the Crisis: U.S. Food Aid and Farm Policy in Central America . London: University of Nebraska Press, 1990.) While there are many negative effects of food aid, under the correct circumstances its use can be quite beneficial. Food aid needs to become a tool helping nations recover from a disaster and propel it forward as an equal to the United States in income level and not a subsidiary. The receiving countries furthermore need to take steps to insure their domestic production is secured to the capacity that their land can produce. It is critical for small farmers in developing countries to have adequate protection from drastic liberalization measures since the market does not work in their favour, but in favour of the big players. Trade policies must therefore provide small farmers and the rural poor in developing countries the protection needed to ensure the continued viability of their livelihoods. They also need protection against dumping and unreasonable competition from subsidized producers abroad. Providing greater security for the rural masses will bring about more even and equitable development for countries as a whole. Mark Malloch Brown, former head of the United Nations Development Program, estimated that farm subsidies cost poor countries about US$50 billion a year in lost agricultural exports: "It is the extraordinary distortion of global trade, where the West spends $360 billion a year on protecting its agriculture with a network of subsidies and tariffs that costs developing countries about US$50 billion in potential lost agricultural exports. Fifty billion dollars is the equivalent of today's level of development assistance." (Address by Mark Malloch Brown, UNDP Administrator, Makerere University, Kampala, Uganda, 12 November 2002) Furthermore, for reasons of food security, national, political and economic security, as well as due to the special place of agriculture in developing countries economies developing countries also need policy flexibility to ensure that existing production of staples and food crops for domestic consumption are not threatened, and, if insufficient, can be increased. The current Doha Round of trade talks organized by the World Trade Organization is trying to reduce barriers to free trade in agriculture. So far, however, the talks have made little concrete progress on this issue and as of mid-2007 they are stalled. Why do you think this is the case? What other solution might be there to be the problems created by barriers to trade in agriculture?

The Doha Round

The Doha Round is the current round of trade negotiations among the World Trade Organization membership. It was launched in Doha, Qatar in November 2001. The aim of the Doha Round is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules. The talks are originally planned to last three years but the Doha Round has already gone on longer and may not be completed soon. The agenda for the Doha Round included the following items; i) The liberalization of production and trade in agriculture, industrial products and services.

ii) Further tightening of rules for antidumping measures and safeguards iii) Safe guard investment and competition policies (Dominique Salvatore, International Economics Trade and Finance) The original 1 January 2005 deadline was missed. However, members aimed to finish the negotiations by the end of 2006 were again unsuccessful. Several meetings between leading developed countries and developing countries have been taking place since July 2006 to resolve the Doha Development Round issues. However, the Doha Round had made little progress on these issues. What are these issues? Multilateralism plays an enormous role in an increasingly integrated world. World Trade Organization which is an international organization that is multilateral in nature. The Doha Round is the first international forum in which big emerging economies, such as India, Brazil and China have played an influential role. Multilateral liberalization is their determination, which uses exporters to get into foreign markets to overcome domestic lobbies. However, there has been a failure to reach an agreement between the developed countries and developing countries. The participating developing countries, such as India, depend on agriculture since it is the source of revenue and therefore, they wanted fewer farm subsidies and lower tariffs in rich countries but on the other hand they are unwilling to reduce their own barriers. European Union wanted to cut on farm tariffs and America wanted to remove trade barriers but is inclined to political pressure from cotton farmers. As a result, the European Union blames America for both demanding unrealistically large tariff cuts from others and for offering too little farm-subsidy reform of its own. Brazil is an advanced developing country which has large and efficient agricultural systems. They want to make the most of their competitive advantage therefore they are pushing for more liberalization. There are four uncertain solutions to solve these problems can be divided into four main themes. They are as follows; 1. Market Access: To reduce import tariff reductions and safe guard developing countries from big dips in world prices or surges in imports which could likely threaten food security. 2. Domestic Support: Subsidizing payments to farmers which WTO has classified three different colours representing different level of trade distorting financial supports. 3. Export Competition: Include export subsidies of food aid issues. 4. Development Issues: Recognizing reduced agricultural capacity of many developing countries. World Trade Organization 11, which includes countries USA, Europe, Japan, Canada, Australia, China, India, Brazil, Argentina and South Africa held an discussion in late February 2011 to complete the Doha Development Agenda. All 11 countries were not involved but talks between USA, China, India and Brazil. The discussion involved expressions of supporting the above issues at a political level involving presidents, prime ministers and trade ministers.