Cotton subsidies, again

Joe Stiglitz calls for trade liberalization by the United States:

Americans like to think that if poor countries simply open up their markets, greater prosperity will follow.

Unfortunately, where agriculture is concerned, this is mere rhetoric. The United States pays only lip service to free market principles, favouring Washington lobbyists and campaign contributors who demand just the opposite. Indeed, it is America’s own agricultural subsidies that helped kill, at least for now, the so-called Doha Development Round of trade negotiations that were supposed to give poor countries new opportunities to enhance their growth.

Subsidies hurt developing country farmers because they lead to higher output – and lower global prices. The Bush administration – supposedly committed to free markets around the world – has actually almost doubled the level of agricultural subsidies in the US.

Cotton illustrates the problem. Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of the recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone.

I support Stiglitz’s prescription and would love to see the US drop its agricultural trade barriers. But I must continue tradition here at Trade Diversion by noting that agricultural subsidies do not hurt the poorest of the poor as badly as advocates say. Preferential access programs, notably the EU’s Everything But Arms regime, mean that LDCs import agricultural commodities at subsidized prices while exporting them at high prices. Cotton does not accurately illustrate the broader agricultural picture:

The common assertion that agricultural liberalization in rich countries would bring large benefits to LDCs is mistaken. These states — many of them poor African countries — benefit from the current regime because they can sell their exports at the high EU prices and buy imports at the low world prices. (Cotton is perhaps the sole exception: U.S. subsidies hurt poor countries because the EU tariff on cotton is zero and therefore its internal price for cotton is the same as the world price.) Gains to those developing countries not in the Cairns Group would accrue principally from their own liberalization. The principle of comparative advantage applies just as much to agriculture as to industry. Moreover, because developing countries do not currently enjoy trade preferences in one another’s markets, they stand to gain from access there. [“Liberalizing Agriculture,” Foreign Affairs, 12/05]

I apologize for quibbling, but I have yet to see anyone refute Arvind Panagariya on this point. (emphasis added in each article)