Sallie James of Cato thinks that this Jonah Goldberg op-ed on farm subsidies is “excellent.” I disagree.

First, he writes: “Subsidies combined with trade barriers (another term for subsidy) prop up the price of food for consumers at home and hurt farmers abroad.”

No, subsidy and trade barrier are not synonmous. That’s the whole point of the amber box distinction. Moreover, subsidies don’t “prop up” prices like a tariff or quota.

Then suddenly the distinction is relevant again: “Our farm subsidies alone — forget trade barriers — cost developing countries $24 billion every year, according to the National Center for Policy Analysis.”

The NCPA study from which that number comes is two pages in length, and I have no idea how the $24b figure is calculated. Maybe they took that number from a widely quoted 2003 study by the International Food Policy Research Institute. It says: “Protectionism and subsidies by industrialized nations cost developing countries about US$24 billion annually in lost agricultural and agro-industrial income.” Oops, looks like those trade barriers count too.

I’m glad that Goldberg opposes subsidies, but that doesn’t make his arguments sound.

In an editorial on the Doha stalemate, the LA Times says:

Much of U.S. agricultural policy is designed to protect the interests of a small number of large and wealthy producers. Laws originally passed to aid small farmers during the Depression now result in astonishing inequities and are often counterproductive. The Washington Post recently revealed that the federal government has paid at least $1.3 billion since 2000 to people who don’t farm at all — they simply happen to own property that was once used as a farm. Meanwhile, real farmers who rent cropland are being forced out of business by landowners who find it more profitable to use their property for other purposes while continuing to collect federal cash for crops they aren’t growing.

Ending these subsidies and lowering agricultural tariffs would boost the U.S. economy, eliminate waste and help farmers in the Third World trade their way out of poverty. It’s a shame Washington thinks that its protectionist farm policies are something to be surrendered only grudgingly, and only if others do so. Good riddance, we say.

While I agree it is absurd to pay $1.3 billion in agricultural subsidies to people who don’t farm at all, abolishing those payments won’t help farmers in the Third World trade their way out of poverty. Poor country exporters are only damaged by subsidies that actually affect their competitors’ level of agricultural output. These trade-distorting payments, which in WTO jargon are classified as “amber box” subsidies, are what the EU and US need to cut more deeply in order to achieve a trade deal with developing countries. Abolishing handouts to non-farmers who live on former farmland is a great idea, but it won’t break the Doha stalemate.

A number of people have pointed to Alan Beattie’s FT column titled “The truth behind the top five trade myths and why it matters.” You can read most of the article at the New Economist. But if you’re a regular Trade Diversion reader, you’ll find that I’ve already covered each of these myths!

Here are Beatle’s five myths and links my previous posts on the topic:

1. “Ghana is allowed to sell raw cocoa beans to the European Union, but if it exports finished chocolate it gets hit by big tariffs.” No it does not.

2. “Each European Union cow gets $2.40 a day in subsidies, more than what 1bn people each have to live on.” Not really.

3. “The World Trade Organisation is undemocratic and secretive.” Yeah, right.

4. “No economy ever got rich without using tariffs to industrialise.” Hong Kong.

5. “Cutting rich countries’ farm subsidies and tariffs will be a big boost for the world’s poorest.” Sadly, this is not true.

The last link even covers the first comment posted at New Economist, which highlights that cotton subsidies are the exception to that rule. Though I’m already familiar with the nature of these myths, it’s nice to see Beattie offer concise and accurate refutations of them in a publication of the FT‘s renown.

I’m sure that the headline of the Washington Post‘s front page story, “Farm Program Pays $1.3 Billion to People Who Don’t Farm,” will incite rage in many readers.

However, my reaction was “well, at least it’s not market distorting.” Respect the amber box.

CEI:

This paper explores the possibility of reform of the sugar program by considering other agricultural reforms at home and abroad. The cases examined are New Zealand’s agricultural policy reform in the mid-1980s, changes to the United States peanut quota program through a buyout program, and the buyout program for tobacco quota holders in the United States.

[Hat tip: H&R]

I’m unclear as to whether the EU has made substantial strides in eliminating its non-export agricultural subsidies as a market distortion.

At a July 7, 2005 event at the Washington Council on International Trade, Nikolaos Zaimis, an EU trade delegate, said that, for domestic subsidies, the EU will shift to an income-based regime as of January 1, 2006, terminating its production-linked subsidies (this severance is known as “decoupling”). This shift will be very costly — the EU will pay guaranteed incomes to farmers equal to their average subsidy receipts in the last few years. However, this means that farmers will now respond to market incentives in making their production decisions, as the marginal revenues associated with various output levels are entirely unaffected by subsidies.

Does anyone know if the EU is really committed to 100% decoupling in 2006? Prior policy commitments, such as the 2003 reform of the Common Agricultural Policy, implemented a variety of minimum levels for decoupled payments, ranging from 40% for tobacco to 75% for grains. Was Zaimis mislabelling the EU’s previous partial decoupling as a more significant shift, or are there new policies taking effect in 2006?

Arvind Panagariya has consistently been the most insightful analyst of agricultural subsidy issues. In a Wall Street Journal article, he criticizes “fuzzy trade math”

Trade talks at Cancun broke down principally because the G-20 group of mainly larger developing countries rejected U.S. and EU offers on reducing their agricultural protection. Two years later, as the Hong Kong Ministerial approaches, agriculture remains the make-or-break issue in the Doha negotiations. But the impasse can be broken once we clear up the misinformation on (a) the magnitude of EU and U.S. subsidies and (b) the level of protection through trade barriers in developed and developing countries in agriculture.

The New York Times has editorialized that the “developed world funnels nearly $1 billion a day in subsidies,” which “encourages overproduction” and drives down prices. The World Bank’s president, Paul Wolfowitz, similarly referred to developed countries expending “$280 billion on support to agricultural producers” in an op-ed in the Financial Times. Oxfam routinely accuses rich countries of giving more than $300 billion annually in subsidies to agribusiness. Astonishingly, these estimates bear virtually no relationship to the subsidies actually at the heart of the Doha negotiations. Instead, they have their origins in the altogether different measure called the Producer Support Estimate (PSE), published by the OECD. The PSE includes all measures that raise the producer price above the world price, including border measures such as tariffs and quotas. All economists would find the identification of such a measure with subsidies unacceptable.

Read the whole thing.

The BBC has posted a helpful overview of the EU’s Common Agricultural Policy.

Baron Coleman responds to my previous post and continues to argue that agricultural subsidies are key to national security. I continue to believe that agricultural liberalization would not harm, and could perhaps enhance, our economic “security.”

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Baron Coleman defends agricultural subsidies on national security grounds:

In theory, opening America’s agricultural markets makes sense… Free competition would dictate the price of goods, which likely wouldn’t change much for the average American consumer. If that was the end of the analysis, I would be on board.

But it isn’t.

The implications of being dependent on “foreign food” – much like the US has become dependent on “foreign oil” – would eventually become disastrous. America’s food supply would quickly become dependent on the stability of the politics and climates of developing countries.

That’s a risk I’m not willing to take. [The Baron]

There is no need for agricultural subsidies, even if one is afraid of dependence upon foreign producers.

First, the United States is a dominant agricultural producer. According to the USDA, “the United States is the largest exporter of agricultural products in the world and is a highly competitive producer of many products.” The US’s strengths vary. For example, the US is a net exporter of rice & wheat and a net importer of macaroni & pastries. The Midwest heartland was the “breadbasket of America” long before agricultural subsidies.

Second, Baron’s analysis doesn’t assess the marginal impact of subsidies. The removal of subsidies would not wipe out all American agricultural producers; rather, marginal producers whose operations were only profitable due to the receipt of subsidies would exit the market. [This reduction in domestic producers would be somewhat offset by the entry of new producers from other countries to the degree that there was a global price increase.] The allocation of agricultural production globally would better reflect comparative advantage (subject to the constraint of other nations protecting and subsidizing their own agricultural markets). The US would still produce a lot of food.

Third, specialization through international trade does not permanently erode the supply capacity of output sectors that are at a comparative disadvantage vis-a-vis foreign competitors. Just as reductions in the foreign supply of oil raise the global price and induce new investments in drilling for oil in the United States, global price increases spurred by reduced agricultural production abroad would result in increased domestic production of agricultural goods in the US.

[There might be dynamic concerns. For examples, if factories or IT parks were erected on every piece of arable land in the United States, it would take time to transform those assets into production inputs for agricultural firms. If someone wants to develop this structural friction into a scenario for a temporary food shortage, I may or may not refute that story.]

Fourth, oil “dependence” has served us fairly well. While we could have adopted “oil security” by only using American oil, we’d have had to pay much higher prices at the pump. We’ve reaped gains from trade by allowing US entities to purchase oil from foreigners. When people complain about events or factors that increase the price of oil by reducing the certainty of being able to obtain imports, they are complaining about the loss of gains from trade, not harm that makes us worse off than if we had never traded. [Recall Brad DeLong’s more general formulation of this argument in regards to international trade.]

Any harm due to our “dependence upon foreign oil” has been due to the efforts of US policymakers to “secure” access to foreign oil through a military presence in the Persian Gulf or other policies. The country can’t be hurt by being willing to import foreign goods (unless the income is used by foreigners to engage in damaging non-economic activities like terrorism).

Fifth, markets compensate for uncertainty. When there are fears that an oil-exporting regime may collapse or cease exporting, the perceived probability of that risk is incorporated into the present price of oil, raising it (because the potential of reduced supply increases the expected future price of oil, which is equal to the current price of oil).

Food futures won’t operate quite as smoothly, to the degree that food commodities have storage costs. But if the expected price of food for next year’s harvest is higher due to the potential that some foreign producers won’t be able to reach the market (due to political uncertainty, etc), then more investments in food production will usually be made. If the damaging event doesn’t happen, then there’s an oversupply and some of those investments lose money. If it does occur, then the price is higher and those investments pay off. If it’s true that there are significant risks attached to “dependence on foreign food,” then we shouldn’t expect domestic production to disappear.

The bottom line: In the absence of agricultural subsidies, United States farmers would continue to produce massive amount of food, and the US would likely remain a net exporter of agricultural commodities. But even in a world where the US produced very little food domestically, the situation would more closely resemble our dependence on foreign textiles than our dependence on foreign oil. And I’m not worried about China leaving me naked.