Fair Trade?

Maxhavel/German Wikipedia under Creative Commons LicenseMaxhavel/German Wikipedia under Creative Commons License

In 2001, leaders from 143 member states of the World Trade Organization (WTO) met in Doha, Qatar to begin a new round of talks. The aim of these talks, known as the Doha Development Round, was to reduce global barriers to trade, a mission in keeping with the increasingly globalised economy of the 21st century. The hope was to come to an agreement by 2007 which would precipitate a fairer economic landscape for developing countries.

Seven years on, no agreement has been reached. What went so wrong? Why was it so hard for the international community to open up global trading markets? The answer is not simple, but much of the problem can be traced back to the agricultural subsidies prevalent throughout the Western world.

Farming subsidies have long been a part of global agriculture. Until their repeal in 1846, the Corn Laws in this country tightly regulated the trade of grain in order to protect domestic cereal producers against competition from cheap, foreign imports. The development of subsidies within the New Deal program in the United States in the 1930s could be considered the beginning of the modern era of crop subsidies. The 1933 Agriculture Adjustment Act intended to raise the value of crops by reducing production. Farmers were paid to keep part of their land idle, and in some cases to kill off livestock.

Today, subsidies are still used to protect farmers against fluctuations in crop prices. This February, President Obama signed into law the Agriculture Act, which further increased crop insurance subsidies in the US. The insurance pays-out to farmers if the value of one or more crops dips below a previously agreed upon target value. The new bill involves higher price targets, based upon the current value of various crops. However, as these values are currently approaching all-time records, it is predicted that shortfall in crop prices will result in up to US$18 billion (£10.7bn) in spending to subsidize farmers.

Similar protectionist policies have been put in place throughout the EU via the Common Agricultural Policy. A system of production quotas as well as target and intervention prices are used to ensure commodity costs remain reasonably constant. As in the US, large agricultural producers get most benefit from the subsidies, whilst small farmers fail to get access to significant aid.

These types of farming subsidies have been widely criticised as trying to preserve a manner of trading that is no longer feasible in our globalised economy. Until the 1980s, the US refused to include farm subsidy programs in trade negotiations. As a result, despite early efforts such as the General Agreement on Tariffs and Trade (GATT) in the 1940s and 1950s, agricultural markets were not fully opened until the 1980s. The WTO was finally created in 1994 by the GATT, initiating the increasing liberalisation of agricultural markets. Nevertheless, it is clear that significant issues still exist in compromising between the desire of developed countries to protect their farmers, and developing countries’ need for fair and equitable competition.

A direct effect of farming subsidies in developed countries is to artificially drive down prices for crops globally. While this is acceptable for the American and European farmers, who can compensate with subsidies from their governments, small-scale farmers from developing countries are often unable to recoup their investments.

This can be a huge problem for cotton farmers, in particular. Those in the U.S. and the E.U. benefit from strong protectionist policies, with not just crop insurance but direct subsidies also available, which pay-out to farmers simply for owning land on which cotton has historically been farmed. Such protectionism has directly contributed to the halving of the value of cotton since 1975.

In the “Cotton-4” countries of West Africa, including Mali, Chad, Benin and Burkina Faso, small farmers are suffering from the dramatic price decrease these Western subsidies cause. Unlike their Western counterparts, they are unable to compensate for low market values with government subsidies. Their production suffers as a result, increasingly the unassailability of the competition from large Western farmers.

Farming subsidies have also been criticised for restricting global free trade. Whilst the creation of the WTO was heralded as a step towards redressing global trade imbalances, significant discrepancies still exist in the ability of particular countries to dominate market prices. By spending large amounts on subsidies, E.U. members and other Western countries effectively neuter any potential for competition from other nations, creating the so-called “Fortress Europe”. After all, as with the cotton farmers in West Africa, it is near impossible to compete with the approximately US$1 trillion (£600bn) that is earmarked for farming subsidies in Obama’s Agriculture Act.

However, despite the negative effects subsidies can have on global competition and market values, it is clear that they benefit the countries which implement them. Perhaps it is not surprising that Western countries no longer dominate the farming subsidy scene. In particular, the BRIIC countries (Brazil, Russia, India, Indonesia, and China) have increased farming subsidies significantly over the past few years. China’s agricultural subsidies are significantly more than those of the US and EU combined, while Brazil’s have more than doubled since 2010. In India, besides subsidising wheat and rice production, the government also contributes towards the cost of irrigation.

Unfortunately, such changes to established farming practices can have unintended consequences. The initiation of water subsidies in India has resulted in a massive increase in water use, and as a result Indian farming water efficiency is near the lowest in the world. Other, poorer nations have also begun to run subsidy programs, which have been criticised by some as a waste of money when basic infrastructure is lacking. Subsidies for fertiliser and other such farming aids in, for example, Malawi, have also been criticized for initiating a reliance of farmers on government aid which is potentially unsustainable in the long run.

At Doha in 2001, and at the various other meetings over the intervening 13 years, farming subsidies have been a continual point of contention between the Western countries, particularly the US, and developing countries led by Brazil, China and India. The US was, and continues to be, unwilling to reduce domestic support for agriculture as demanded by China and India. At the same time, demands by the US that tariffs are cut in the EU and elsewhere are going nowhere fast. Some progress was made at the Bali Conference in December 2013. The Bali Package dealt with the less controversial “red-tape” regarding trade facilitation. This involved the reduction of cross-border tariffs and other barriers to international trade. While not dealing with the meat of the matter, the small success has raised hopes that the Doha talks might be restarted in the near future. However, the passage of the 2014 Agriculture Act in the US seems likely to harm any such talks, as it is clear the United States has no intention of minimising the crop insurance subsidies provided to its domestic farmers. Sadly, the impasse between developed and developing nations seems unlikely to disappear any time soon.