WTO, Agricultural WTO, Agricultural Subsidies and Subsidies and DevelopmentDevelopment

Strathmore University Strathmore University Presentation Presentation

Dr. Reid E. WhitlockDr. Reid E. WhitlockNairobi, KenyaNairobi, KenyaJanuary 2006January 2006

WTO Meetings In Hong KongWTO Meetings In Hong Kong18 December 200518 December 2005

#1 “WTO secured an end date - #1 “WTO secured an end date - 2013 -- for all export subsidies in 2013 -- for all export subsidies in agricultureagriculture

*** *** The declaration makes clear that The declaration makes clear that the agreed date is conditional. the agreed date is conditional. Loopholes have to be plugged to Loopholes have to be plugged to avoid hidden export subsidies in avoid hidden export subsidies in credit, food aid and the sales of credit, food aid and the sales of exporting state enterprisesexporting state enterprises

AgreementsAgreements

#2 There is an agreement on #2 There is an agreement on cotton. cotton.

For cotton the end date for subsidies For cotton the end date for subsidies by developed countries is by developed countries is accelerated to the end of 2006. In accelerated to the end of 2006. In addition, cotton exports from least-addition, cotton exports from least-developed countries will be allowed developed countries will be allowed into developed countries without into developed countries without duty or quotas from 2006.duty or quotas from 2006.

Cotton (cont’d)Cotton (cont’d)

" " Ministers have also agreed to aim to Ministers have also agreed to aim to cut trade-distorting domestic subsidies cut trade-distorting domestic subsidies on cotton by more than would normally on cotton by more than would normally apply under the new agreement, and to apply under the new agreement, and to do so more quickly."do so more quickly." The main The main countries involved in this outcome countries involved in this outcome were: United States and the four were: United States and the four countries pushing for an agreement on countries pushing for an agreement on cotton (Benin, Burkina Faso, Chad and cotton (Benin, Burkina Faso, Chad and Mali).Mali).

Item 3Item 3

The member nations negotiated " a The member nations negotiated " a very solid" duty-free, quota-free very solid" duty-free, quota-free access for the 32 least-developed access for the 32 least-developed country members. (country members. (When??)When??)

Item 4: Food AidItem 4: Food Aid we reconfirm our commitment to maintain an we reconfirm our commitment to maintain an

adequate level and to take into account the adequate level and to take into account the interests of food aid recipient countries. To this interests of food aid recipient countries. To this end, a “safe box” for bona fide food aid will be end, a “safe box” for bona fide food aid will be provided to ensure that there is no unintended provided to ensure that there is no unintended impediment to dealing with emergency impediment to dealing with emergency situations. Beyond that, we will ensure situations. Beyond that, we will ensure elimination of commercial displacement. To this elimination of commercial displacement. To this end, we will agree effective disciplines on in-kind end, we will agree effective disciplines on in-kind food aid, monetization and re-exports so that food aid, monetization and re-exports so that there can be no loop-hole for continuing export there can be no loop-hole for continuing export subsidization. subsidization.

Item 5: Role of LDCsItem 5: Role of LDCs

# 5 We reaffirm our commitment to # 5 We reaffirm our commitment to effectively and meaningfully effectively and meaningfully integrate LDCs into the multilateral integrate LDCs into the multilateral trading system and shall continue to trading system and shall continue to implement the WTO Work implement the WTO Work Programme for LDCs adopted in Programme for LDCs adopted in February 2002. February 2002.

Item 6: Help To LDCsItem 6: Help To LDCs

We recognize the dependence of We recognize the dependence of several developing and least-several developing and least-developed countries on the export of developed countries on the export of commodities and the problems they commodities and the problems they face because of the adverse impact face because of the adverse impact of the long-term decline and sharp of the long-term decline and sharp fluctuation in the prices of these fluctuation in the prices of these commoditiescommodities

WTO SummaryWTO Summary

SubsidiesSubsidies Food aid Food aid Access for LDCsAccess for LDCs

DefinitionsDefinitions

A monetary grant given by A monetary grant given by government to lower the price faced government to lower the price faced by producers or consumers of a good by producers or consumers of a good

A payment that a government makes A payment that a government makes to a producer to supplement the to a producer to supplement the market price of a product or market price of a product or commodity the producer is selling.commodity the producer is selling.

(continued)(continued)

Definitions (cont’d)Definitions (cont’d)

A payment, designed to increase producer A payment, designed to increase producer income by raising the level of prices above income by raising the level of prices above market rates (BUYERS are given vouchers by market rates (BUYERS are given vouchers by the government to give to sellers when a sale the government to give to sellers when a sale is made. They can announce the higher price is made. They can announce the higher price but only have to pay their original, lower but only have to pay their original, lower price)price)

Export subsidies are payments given by the Export subsidies are payments given by the government to farmers so that they will sell government to farmers so that they will sell their product abroadtheir product abroad

What Do Subsidies Mean What Do Subsidies Mean For Countries Like the For Countries Like the

U.S.?U.S.? By guaranteeing U.S. farmers a By guaranteeing U.S. farmers a

minimum payment for commodities minimum payment for commodities such as corn, rice and soybeans, the such as corn, rice and soybeans, the government encourages government encourages overproduction. That drives down overproduction. That drives down the market price, forcing even the market price, forcing even higher subsidies and creating more higher subsidies and creating more surpluses that can be exported.surpluses that can be exported.

Myth of the FarmerMyth of the Farmer

A part of the problem is that A part of the problem is that Americans still believe the myth of Americans still believe the myth of the family farmer as somehow the family farmer as somehow ‘superior’ to other classes of ‘superior’ to other classes of workers. That gives farm lobbyists a workers. That gives farm lobbyists a potent hook with which to demand potent hook with which to demand public assistance.public assistance.

The Myth is CostlyThe Myth is Costly

… …and not only for the 97 percent of and not only for the 97 percent of Americans who don't live on farms. Americans who don't live on farms. Boosting farm subsidies in the Boosting farm subsidies in the U.S.will be enormously damaging to U.S.will be enormously damaging to the U.S. position in global trade talks, the U.S. position in global trade talks, where negotiators have been trying where negotiators have been trying to get other countries to reduce their to get other countries to reduce their own agricultural subsidies.own agricultural subsidies.

What Do Subsidies Mean What Do Subsidies Mean For LDCs?For LDCs?

As a condition for helping many As a condition for helping many LDCs service their large foreign LDCs service their large foreign debt, international lending agencies debt, international lending agencies demand that the countries keep demand that the countries keep their tariffs low. The governments their tariffs low. The governments are then unable to bar American are then unable to bar American sugar, grain, and other food sugar, grain, and other food products from their countries, so products from their countries, so their own farmers get stucktheir own farmers get stuck

The Problem In A The Problem In A NutshellNutshell

An American farmer has high labor costs, high An American farmer has high labor costs, high machinery costs, high land acquisition costs, machinery costs, high land acquisition costs, high regulatory compliance costs (environment, high regulatory compliance costs (environment, pesticides, labeling, storage, etc..). Because the pesticides, labeling, storage, etc..). Because the American market is well-served by farmers, American market is well-served by farmers, there is not much market for an individual there is not much market for an individual farmer's maize. The farmer looks to foreign farmer's maize. The farmer looks to foreign markets that are fragmented and/or easy to markets that are fragmented and/or easy to penetrate to sell his/her products into. Because penetrate to sell his/her products into. Because the American farmer's costs are so high (s)he the American farmer's costs are so high (s)he can only sell can only sell at all at all by having the government by having the government supplement what (s)he earns on each foreign supplement what (s)he earns on each foreign salesale

An ExampleAn Example

If the price in the Kenya market was $2 per If the price in the Kenya market was $2 per kilo of maize, the American farmer would kilo of maize, the American farmer would lose money accepting this price, when lose money accepting this price, when his/her costs are $ 3 per kilo. Instead of his/her costs are $ 3 per kilo. Instead of withdrawing from the market and withdrawing from the market and producing something else, cutting costs or producing something else, cutting costs or leaving farming altogether, American leaving farming altogether, American farmers appeal to the public -- the farmers appeal to the public -- the American people -- and the U.S. American people -- and the U.S. government and claim that they can only government and claim that they can only continue to exist with help. continue to exist with help.

The Example Continues…The Example Continues…

The government gives this help in The government gives this help in the form of subsidies. These the form of subsidies. These subsidies bring the U.S. production subsidies bring the U.S. production cost per kilo down from $ 3 to $ 1 -- cost per kilo down from $ 3 to $ 1 -- enough to ensure that Kenyan enough to ensure that Kenyan consumers will buy their maize from consumers will buy their maize from American -- and not Kenyan -- American -- and not Kenyan -- farmers.farmers.

The ParadoxThe Paradox

domestic supports can encourage domestic supports can encourage overproduction because if the overproduction because if the government is paying producers of a government is paying producers of a certain crop, others will want to certain crop, others will want to start producing it too or will produce start producing it too or will produce more of it than normal. This can more of it than normal. This can make global prices make global prices

Historical BackgroundHistorical Background

ModernModern subsidies began In WW1 when the subsidies began In WW1 when the U.S. needed higher production for the war U.S. needed higher production for the war and offered subsidies as inducements to and offered subsidies as inducements to farm. After WW1 prices dropped with farm. After WW1 prices dropped with overproduction so the government propped overproduction so the government propped up prices with subsidies to avoid farm up prices with subsidies to avoid farm failures. During the Great Depression (1930). failures. During the Great Depression (1930). Dustbowl. Designed to increase, or at least Dustbowl. Designed to increase, or at least stabilize, farm income. WW2 stimulus needed stabilize, farm income. WW2 stimulus needed again. Post-war, prices fell with again. Post-war, prices fell with overproduction. Subsidies propped up prices.overproduction. Subsidies propped up prices.

The Political Economic The Political Economic RealitiesRealities

There is a popular belief in the There is a popular belief in the farmer as a “folk figure” in American farmer as a “folk figure” in American culture – like the cowboyculture – like the cowboy

Leaders can’t favor producers at the Leaders can’t favor producers at the expense of consumers or vice versaexpense of consumers or vice versa

As a major food aid donor, subsidy-As a major food aid donor, subsidy-generated surpluses have a natural generated surpluses have a natural outletoutlet

More RealitiesMore Realities - Agricultural subsidies are insignificant - Agricultural subsidies are insignificant

in the American budget.in the American budget. State 20 mmm (of which, USAID State 20 mmm (of which, USAID

3.9mmm in 2005; joint State-Ag 3.9mmm in 2005; joint State-Ag programs for another 4.8 mmm, global programs for another 4.8 mmm, global HIV/AIDS for 1.45 mmm and 2.5 mmm HIV/AIDS for 1.45 mmm and 2.5 mmm for the Millenium Challenge Corp), Ag for the Millenium Challenge Corp), Ag 90 mmm, defence 540 mmm, health & 90 mmm, defence 540 mmm, health & human svc 660, interest on debt 440 human svc 660, interest on debt 440 mmm, social security 510 mmm -- total : mmm, social security 510 mmm -- total : over 4 trillionover 4 trillion

More RealitiesMore Realities

- focusing on the aid part of the US - focusing on the aid part of the US budget, the US ranks 22 out of 22 budget, the US ranks 22 out of 22 DCs in aid as a % of GNP. Most is DCs in aid as a % of GNP. Most is spent on middle income countries spent on middle income countries and democratic success stories or and democratic success stories or disasters.disasters.

Realities (cont’d)Realities (cont’d)

- the costs to LDC's of lost sales seem - the costs to LDC's of lost sales seem big to them. big to them.

- there are costs in innovation not - there are costs in innovation not undertaken by DC's that continue to undertaken by DC's that continue to subsidize and LDCs that continue to subsidize and LDCs that continue to stagnate and complain rather than stagnate and complain rather than changing focus.changing focus.

Details About SubsidiesDetails About Subsidies

Remember, farm subsidies are a Remember, farm subsidies are a TINY percentage of the U.S. TINY percentage of the U.S. government budget -- 5 to 20 government budget -- 5 to 20 billion/year (direct plus indirect -- billion/year (direct plus indirect -- subsidized loans, loan guarantees, subsidized loans, loan guarantees, insurance) out of 4 trillioninsurance) out of 4 trillion

Details (cont’d)Details (cont’d)

58 percent of farmers including most 58 percent of farmers including most vegetable, beef cattle, and chicken producers vegetable, beef cattle, and chicken producers are able to operate in the market economy are able to operate in the market economy without receiving taxpayer subsidies. But without receiving taxpayer subsidies. But producers of producers of just five cropsjust five crops - wheat, corn, - wheat, corn, soybeans, rice, and cotton - have secured a soybeans, rice, and cotton - have secured a direct pipeline to more than 90 percent of U.S. direct pipeline to more than 90 percent of U.S. farm hand-outs. Stated another way, while just farm hand-outs. Stated another way, while just 7 percent of all U.S. farms have sales of 7 percent of all U.S. farms have sales of $250,000 or more, this 7 percent receive $250,000 or more, this 7 percent receive almost half of all government payments.almost half of all government payments.

More DetailsMore Details

Many of the largest, most profitable Many of the largest, most profitable farms and agribusinesses that have farms and agribusinesses that have received the lion's share of subsidies received the lion's share of subsidies have used these funds to buy out have used these funds to buy out smaller farms.smaller farms.

It’s Not Just the U.S. !!!It’s Not Just the U.S. !!! Japan. Japan. Europe – a high-cost producer – Europe – a high-cost producer –

generates an export surplus of generates an export surplus of approximately 5 million tonnes of sugar. approximately 5 million tonnes of sugar. Currently, the EU is spending €3.30 in Currently, the EU is spending €3.30 in subsidies to export sugar worth €1. In subsidies to export sugar worth €1. In addition to the 1.3bn in export subsidies addition to the 1.3bn in export subsidies recorded annually in its budgets, the EU recorded annually in its budgets, the EU provides hidden support amounting to provides hidden support amounting to around €833m on nominally around €833m on nominally unsubsidised sugar exports.unsubsidised sugar exports.

Food Aid & DevelopmentFood Aid & Development

United States is now in the United States is now in the embarrassing situation of embarrassing situation of undermining its own foreign-aid undermining its own foreign-aid program. program.

80% of U.S. aid actually goes to 80% of U.S. aid actually goes to American companies implementing American companies implementing projects in LDCs. Italy and US tie projects in LDCs. Italy and US tie over 70% of their aid.over 70% of their aid.

Access For Countries Access For Countries Like KenyaLike Kenya

What Can Kenya Do?What Can Kenya Do?

Buy into the U.S. (invest behind the Buy into the U.S. (invest behind the subsidy wall)subsidy wall)

Develop products the U.S. cannot Develop products the U.S. cannot produce (too labor intensive, requires produce (too labor intensive, requires too much heat, sunshine or rainfall) -- too much heat, sunshine or rainfall) -- examples are: tea, coffee, gum arabicexamples are: tea, coffee, gum arabic

Protest to WTOProtest to WTO

Kenya Could Introduce Kenya Could Introduce Counter-SubsidiesCounter-Subsidies

This could work if agriculture mattered so This could work if agriculture mattered so much to Kenya that it was prepared to much to Kenya that it was prepared to match and beat any subsidy provided by match and beat any subsidy provided by American (or other) goverments to American (or other) goverments to itsits farmers. The reality is that Kenya -- maybe farmers. The reality is that Kenya -- maybe the government and maybe the citizens -- the government and maybe the citizens -- doesn't care about this issue as much as doesn't care about this issue as much as America does, It does not have the political America does, It does not have the political will to shift public funds from other sectors will to shift public funds from other sectors to agriculture. to agriculture.

ClarificationClarification

Note I did not say Kenya lacks the money to Note I did not say Kenya lacks the money to win a subsidy war. I believe that there are two win a subsidy war. I believe that there are two categories of developing countries that are categories of developing countries that are relevant for this discussion: those that have relevant for this discussion: those that have the money to wage such a war but choose not the money to wage such a war but choose not to spend it for such a war, and those whose to spend it for such a war, and those whose agricultural sector is so small, so backwards, agricultural sector is so small, so backwards, so undeveloped, so uncompetitive, that even if so undeveloped, so uncompetitive, that even if every advantage and protection was given to every advantage and protection was given to it, it would not be able to adequately and it, it would not be able to adequately and professionally serve the market. professionally serve the market.

One More Option:One More Option:

What if Kenyans Stopped What if Kenyans Stopped Farming - Admitting Defeat in Farming - Admitting Defeat in This Trade War?This Trade War?

Option AnalysisOption Analysis This might be a good thing if the energy and This might be a good thing if the energy and

determination of Kenyan farmers and the determination of Kenyan farmers and the government structures that support them such government structures that support them such as agricultural research stations and technical as agricultural research stations and technical schools and extension workers and schools and extension workers and government anti-locust spraying programs and government anti-locust spraying programs and water infrastructure projects were redirected water infrastructure projects were redirected towards something about which the U.S. did towards something about which the U.S. did not care about in which the U.S. could not not care about in which the U.S. could not defeat Kenya. Even if such a product existed, defeat Kenya. Even if such a product existed, the transition would be slow and painful. Many the transition would be slow and painful. Many farmers don't know how to do anything but farmers don't know how to do anything but farm, and are too old, too set in their ways, or farm, and are too old, too set in their ways, or too committed to farming to do anything else.too committed to farming to do anything else.

A Few ThoughtsA Few Thoughts

Societies have a right to decide what they Societies have a right to decide what they collectively collectively reallyreally care about. The U.S. should care about. The U.S. should not be faulted because it cares about keeping not be faulted because it cares about keeping farming alive in America. That is its right. Its farming alive in America. That is its right. Its choice. Kenya should be equally clear and choice. Kenya should be equally clear and decisive about the things important to Kenya. decisive about the things important to Kenya. Kenya Kenya couldcould erect tariff barriers to keep erect tariff barriers to keep American farm products out. This would American farm products out. This would require that require that itit leave the WTO or face sanctions leave the WTO or face sanctions and reprisals. It would mean not taking IMF and reprisals. It would mean not taking IMF and World bank money. Kenya has to decide if and World bank money. Kenya has to decide if it is worth it.it is worth it.

UnacceptableUnacceptable

That the U.S. joins a forum -- the WTO That the U.S. joins a forum -- the WTO -- committed to removing subsidies, -- committed to removing subsidies, when it has no intention of playing when it has no intention of playing along with the game. It would be much along with the game. It would be much more honest -- and would make the more honest -- and would make the battle lines clearer to understand -- if battle lines clearer to understand -- if the U.S. withdrew from WTO as it did the U.S. withdrew from WTO as it did from the global warming, greenhouse from the global warming, greenhouse gases and emissions organizations.gases and emissions organizations.

Unacceptable, part 2Unacceptable, part 2

that developing countries have not done that developing countries have not done more to improve the competitiveness of more to improve the competitiveness of their agricultural sectors though they their agricultural sectors though they are quick to criticize the developed are quick to criticize the developed countries for their problems. In my countries for their problems. In my experience, the countries that experience, the countries that reallyreally care about something, do something care about something, do something about the problem rather than just about the problem rather than just complain. Chile, Vietnam, Thailand, complain. Chile, Vietnam, Thailand, China come to mind.China come to mind.

Unacceptable, part 3Unacceptable, part 3 that many developing countries are still that many developing countries are still

blaming colonialism for their inability to blaming colonialism for their inability to improve their situation. There is not --never was improve their situation. There is not --never was and never will be -- any such thing as a level and never will be -- any such thing as a level playing field. A country has to deal with playing field. A country has to deal with problems and opportunities it inherits, and has problems and opportunities it inherits, and has to make the best of them. No one is listening to make the best of them. No one is listening and no one will ever be swayed in the ways you and no one will ever be swayed in the ways you hope, by your complaints. Not the U.N., not the hope, by your complaints. Not the U.N., not the WTO, not England, which colonized you, and WTO, not England, which colonized you, and certainly not the U.S., which cares next-to-certainly not the U.S., which cares next-to-nothing about Kenya and feels no obligation to nothing about Kenya and feels no obligation to give it any special consideration.give it any special consideration.

The World Is ChangingThe World Is Changing

For better or worse, the world as we know For better or worse, the world as we know it is merging, partnering, growing, in ways it is merging, partnering, growing, in ways that make it extremely difficult for small that make it extremely difficult for small economies to flourish. Small economies will economies to flourish. Small economies will be permanently relegated to pauper status be permanently relegated to pauper status -- forgotten footnotes to history, economics -- forgotten footnotes to history, economics and politics that occasionally make the and politics that occasionally make the headlines when there is another coup or headlines when there is another coup or drought or massacre or ethnic cleansing or drought or massacre or ethnic cleansing or descent from democracy.descent from democracy.

Thank YouThank You

Q&A: Single questions only please -- Q&A: Single questions only please -- short and to-the-point.short and to-the-point.