December 7, 2001 | Backgrounder on Agriculture
The Bush Administration has been working hard to lower trade barriers on U.S. agricultural products. However, it has encountered opposition from an unexpected quarter: the U.S. Congress, where a group of lawmakers are working hard to increase America's non-tariff barriers for other countries.
Specifically, the farm bill that is currently being discussed in Congress--the Agriculture, Conservation, and Rural Enhancement Act of 2001 (S. 1731)--would significantly increase subsidies to American farmers. This distortion of the market, which is bad policy in itself, would send a conflicting message to America's trading partners. Although the United States has often joined other countries in criticizing subsidies in the European Union (EU), the U.S. in reality is far from guiltless when it comes to subsidies. Put another way, America is essentially telling its friends to do as we say, not as we do.
And because America's trading partners are not likely to accept such hypocrisy, they can be expected to respond with additional trade barriers that could well hurt America's current ability to export one-third of its farm production each year. To enable the U.S to maintain its credibility and leadership in the global economy, President Bush therefore should veto the farm bill when it comes to his desk.
Maintaining American credibility in the global economy is essential for the U.S. farm industry because the U.S. is the world's largest agricultural exporter. Each year, according to the Montana Department of Agriculture, "one American farmer produces food and fiber for 129 people--97 in the U.S. and 32 abroad. One-fourth of the world's beef and nearly one-fifth of the world's grain, milk, and eggs are produced in the United States."1 America's farmers produce far more than the American people can eat. With 96 percent of the world's consumers living outside the United States, trade is not a luxury for American farmers, but a necessity.
The average global agricultural tariff is 62 percent. As invisible taxes, tariffs add to the price of American goods, making them less palatable to foreign consumers. Free trade agreements have benefited American farmers by lowering barriers to foreign markets. For instance, the U.S. Department of Commerce reports that
Farmland Industries of Kansas City, the largest farmer-owned cooperative in North America, sold $50 million in wheat, corn, and soybeans to Mexico before NAFTA [the North American Free Trade Agreement]. Today exports have grown to $450 million and include beef and pork.2
The U.S. Department of Agriculture (USDA) reports that "some high value products, including almonds (66 percent) and sunflower oil (63 percent), rely on exports for well over half of sales."3 One in three acres of U.S. agricultural production is exported.
According to the USDA, agriculture is one of the few sectors of the economy that consistently enjoys a trade surplus. Last year, U.S. agricultural exports were valued at over $14 billion. In order for the U.S. to maintain and expand this level of agricultural exports, new trade agreements must be forged to lower both tariff and non-tariff barriers. This means the U.S. must agree to lower its barriers as well.
Subsidies act as a non-tariff barrier to free trade because they tilt the playing field to favor one producer over another. U.S. farmers have been receiving ever-larger amounts of assistance from the federal government since the Great Depression.
Although the 1996 Freedom to Farm law was intended to wean farmers from subsidies, natural disasters took farm policy down another road. These disasters caused the federal government to step in with economic assistance payments. The result: Farmers have grown accustomed to receiving a check in the mail and thus expect the subsidies instead of relying on the free market.
Regrettably, S. 1731 would place no limits on this system of subsidies: a system that rewards the largest farmers, who receive the majority of federal cash payments even though they represent less than 25 percent of the nation's farmers. A recent USDA study reflects that "47 percent of crop payments in 1999 went to large commercial farms with an average household income of $135,000."4
Senator Richard Lugar (R-IN) has likewise stated that subsidies "encourage overproduction, depress prices and flow to the wealthiest farmers in a few Midwestern and southern states." 5 Overall, subsidies encourage dependence and overproduction while they limit competition.
According to data from the Organisation for Economic Co-operation and Development (OECD), the average level of support for U.S. agriculture from 1998-2000 was 23 percent, while support by the EU was 40 percent. Senator Kent Conrad (D-ND) argues that U.S. farmers need large subsidy payments to compete with subsidized European farmers.6 The OECD, however, reports that U.S. subsidies exceed those of the EU in cases such as sugar and dairy.7
It is hypocritical for the United States to preach one doctrine and live by another. According to the U.S. Department of Commerce, "the WTO [World Trade Organization] agriculture negotiations the Bush administration is seeking to launch will be critical for cutting the European Union's export subsidies and domestic support payments."8 But Ambassador Robert Zoellick, the U.S. Trade Representative, cannot be expected to press countries to lower agricultural tariffs and non-tariff barriers while the U.S. Congress is working to increase non-tariff barriers.
America's trading partners are not blind to U.S. subsidies and will not ignore them in negotiations. The effect of the current Senate farm package could be to ignite an "arms race" of subsidies between the United States and the European Union that, far from making American farmers stronger, will actually weaken the chance that U.S. agricultural goods will receive fair treatment in the foreign marketplace.
Trade is essential not only for the health of the agricultural industry, but for the well-being of the American economy as a whole. According to the USDA, "every dollar of direct export sales generates another $1.39 in supporting economic activity."9
Increasing non-tariff barriers by implementing the subsidies required in this farm bill would leave the U.S. vulnerable to possible retaliation from its trading partners. Is America ready to accept higher tariffs on agricultural goods and possibly on our other products overseas?
Furthermore, such subsidies invite other countries to file a complaint against the United States before the World Trade Organization. If other countries view these subsidies as a violation of WTO agreements, they will first consult with the U.S. If differences are not resolved at that level, they will ask the WTO to appoint a panel to hear the case. If found guilty, at the very minimum, the U.S. would be fined. Beyond that, if agreement on satisfactory compensation is not reached, trade sanctions could be imposed.
It is in America's best interest for its policymakers to practice what they preach, but the Senate farm bill unfairly favors a particular industry. As the Dallas Morning News observes, "newspaper publishing is risky, too. So are telecommunications and retail sales. But nobody expects the government to protect those industries with billions of dollars of aid."10
If enacted into law, S. 1731 will set a dangerously counterproductive precedent for the farm industry. Subsidies will remain the rule rather than an exception, and the chances for reform will diminish if not evaporate. Congress must take the time to craft a thoughtful bill. The current farm bill will not expire until September 2002; there is therefore no need for Congress to run the risk of acting rashly, as if immediate action were essential.
The Bush Administration has insisted that any new farm bill must respect U.S. international trade agreements and their limits on subsidies. The unlimited subsidies to America's largest farmers clearly ignore that premise.
To ensure a strong and amicable relationship with our trading partners, President Bush must veto this farm bill. A veto will not only tell U.S. farmers that the government refuses to continue these outrageous subsidies; it will send a message throughout the world that America intends to play fair.
Sara J. Fitzgerald is a Trade Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.
1. Reported at http://agr.state.mt.us/news/first.htm.
8. See www.tpa.gov/tradeag.htm.