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.

In an effort to revive stalled World Trade Organization (WTO) talks, US Trade Representative Rob Portman said the US would cut farm subsidies by 60%. EU Trade Commissioner Peter Mandelson responded by saying that the EU “will match, and indeed go substantially beyond” that reduction… Europe’s response came after the US said its offer was valid only if the EU and Japan also made large cuts in trade-distorting support for agriculture. [BBC]

Will Japan move to match?

(On an almost unrelated note, the BBC story features an old photo of anti-WTO protestors in turle costumes. Recall, as Jagdish Bhagwati has noted, that those activists didn’t understand the shrimp/turtle decision and that the WTO actually ruled in favor of the environmental protection.)