February 19, 2003 | Backgrounder on Agriculture
In the past several years, U.S. farm policy has taken a turn for the worse with Congress dramatically increasing agricultural subsidies at the behest of the farm lobby. This trend must be reversed. As the world's largest agricultural exporter, the United States should lower its own subsidies before urging members of the World Trade Organization (WTO) to adopt reforms. In doing this, the United States should consider the examples of New Zealand and Australia, which demonstrate the benefits of free-market policies when applied to agriculture.
In July 2002, the Bush Administration announced the U.S. Agricultural Proposal for WTO Negotiations, which seeks greater global access for agricultural exports. The Administration advocates reducing domestic subsidies and lowering tariffs worldwide to 25 percent or less. The proposal is ambitious, but the excesses of U.S. farm policy have left the United States with little credibility in agricultural liberalization.
WTO members are skeptical of the Bush Administration's proposal and view it as hypocritical. Critics cite the U.S. Congress's reluctance to initiate domestic reforms, as well as high tariffs on imports such as sugar, farm lobbyists who insist on subsidies, and the 2002 farm bill, which increased subsidies by 70 percent.2
In order to regain credibility, Congress needs to cut subsidies by amending the farm bill. The U.S. Trade Representative, Ambassador Robert Zoellick, should urge Congress to remove U.S. tariffs on agricultural imports as well. Once U.S. tariff and non-tariff barriers have been lowered, Zoellick should urge his colleagues in the WTO to do the same.
According to Secretary of Agriculture Ann Veneman, "on average, each week American processors and producers ship a billion dollars in food and farm products to foreign customers."3 Agriculture is one of the few U.S. industries that enjoys a positive trade balance.4 With 96 percent of world consumers living outside the United States, the future of U.S. farmers and ranchers depends on access to foreign markets.
Past trade agreements have opened markets by lowering tariff and non-tariff barriers. Under the North American Free Trade Agreement (NAFTA), for example, Mexico lowered or eliminated many tariffs and has become the fastest-growing market for U.S. beef. Specifically, Mexico eliminated its 15 percent tariff on live slaughter cattle, its 20 percent tariff on chilled beef, and its 25 percent tariff on frozen beef.5 These are only a few examples of the many products that have benefited from past trade agreements.
These agreements notwithstanding, the average global tariff on agricultural products remains at 62 percent. The Bush Administration's proposal would cut global tariff rates to 25 percent or below (to achieve an average tariff rate of 15 percent) and would cut trade-distorting domestic support to 5 percent of a country's total value of agricultural production. To cite only two effects on U.S. policy, U.S. tariffs on imported peanuts--now 140 percent--would have to be reduced to 25 percent. At the same time, domestic subsidies would also be reduced from $19 billion to $10 billion a year.
While this ambitious proposal promotes the WTO's goal of agricultural liberalization, it has been received warily by other countries, partly because of the U.S. farm bill. This bill, with its large subsidies, has crippled American credibility on trade.
Specifically, under the farm bill, U.S. farmers gained a 70 percent increase in subsidies compared to previous levels as part of a 10-year, $180 billion package.6 According to one analyst, "Nearly three-quarters of these funds will go to the wealthiest 10 percent of farmers--most of whom earn more than $250,000 per year."7 The U.S. Department of Agriculture (USDA) reports, for instance, that "47 percent of crop payments in 1999 went to large commercial farms with an average household income of $135,000."8
Since the Great Depression, U.S. farmers have received ever-larger amounts of assistance from the federal government. Although the 1996 Freedom to Farm law was intended to make farmers less dependent on subsidies, crop surpluses in the late 1990s led to dropping crop prices, and Congress overreacted by passing a series of large "emergency" bailouts, which the 2002 farm bill locked into place. Farmers have grown accustomed to receiving a check in the mail and depend on subsidies, instead of relying on the free market. This leaves consumers out of the equation.
A prime example is the U.S. sugar subsidy program. Rather than promote trade, this program protects domestic producers and maintains high sugar prices that are paid by U.S. consumers. According to the USDA, raw sugar prices in the United States are almost three times the world price.
Instead of using the European Union's massive agricultural subsidies (almost 40 billion euros in 1999)9 as an excuse, the United States should reform its own system. In doing this, the United States should look beyond the European Union to the positive examples of New Zealand and Australia.
Australia and New Zealand drastically reformed their farm sectors in the 1980s. Australia's reforms were introduced in the early 1980s and were implemented over a longer period of time than in New Zealand. In New Zealand, farm subsidies "were gradually introduced in the early sixties, and steadily increased until 1984 when it was announced that most of them would be eliminated. By 1987, they had been phased out and the era was over."10
In New Zealand, according to New Zealand Ambassador to the U.S. John Wood, subsidies peaked in 1984, "contributing to 30 percent of total agricultural output."11 The Federated Farmers of New Zealand reports that in 1984, "nearly 40 percent of the average sheep and beef farmer's gross income came from government subsidies."12 In fact, New Zealand farmers were more dependent on subsidies then than U.S farmers are now. They survived the subsidy cuts by slashing their own spending, purchasing only essentials, and implementing more efficient methods. Without subsidies, they began to operate on the basis of market demand.
For instance, "farmers moved into new forms of farming such as wine, venison, and dairy"13 and reduced the number of sheep while increasing the number of cattle.14 Additionally, suppliers were forced to cut prices, knowing that farmers were no longer on the government dole. By pursuing these cost-effective measures, New Zealand farmers were able to keep their heads above water. Although "official predictions were that 8,000 farms would fail, in the end, only about 800 farms, or 1 percent of the total number, faced forced sales."15
Like New Zealand's farmers, Australia's farmers survived reforms through diversification. The market encouraged Australian farmers to diversify according to their comparative advantage, not to produce according to the receipt of a government check. They expanded beyond wheat, beef, and wool into "increased production of products and varieties more suited to Australian conditions."16 While wheat, beef, and wool exports accounted for 55 percent of agricultural exports during 1989-1990, their combined share of exports fell to 38 percent during 2000-2001. During the same period, exports of cotton, wine, non-beef meats, seafood, oilseeds, dairy products, rice, fruit, and vegetables surged from 17 percent to 38 percent.17
Input subsidies would often be of most benefit to those least in need, that is those on higher incomes or operating larger farm enterprises. They also tended to distort the input mix used by farmers through their encouragement of decisions based on assistance rather than commercial or production criteria.18
But while the situation has clearly changed in Australia, the United States continues to lag behind by increasing subsidies instead of reforming. Agriculture has expanded in Australia and New Zealand precisely because subsidies were cut. In fact, in New Zealand, growth in this sector has outpaced growth in the economy as a whole,19 and the advantages of reform extend beyond economic growth to include significant environmental benefits, resulting from more efficient use of land, irrigation, and fertilizer.20
The record shows that reforms have improved the farm economies in Australia and New Zealand. In the United States, meanwhile, things have worsened. In order to become more efficient, and to benefit both farmers and consumers, U.S. agriculture must be made less dependent on government support.
The current system emphasizes production to obtain subsidies, not market consumption to attract consumers. As Adam Smith noted, "in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce."21 Subsidies and tariffs maintain artificially high prices that consumers must pay.
While the U.S. proposal to the WTO is a positive step, much more should be done. The Bush Administration and Congress must lead by voluntarily implementing the proposal before asking the rest of the world to accept it. Specifically, in order to regain credibility and expand market access for U.S. agricultural exporters, they should take the following actions:
As the world's largest agricultural exporter, the United States should take the lead in implementing agricultural reform. This will be politically difficult, but reforms will produce greater prosperity in the U.S. agricultural industry, give consumers better prices and expanded choice, and revive American credibility in the global marketplace. This renewal of credibility will give the United States the additional leverage it needs in trade negotiations.
Sara J. Fitzgerald is a Trade Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.
3. "Remarks by Secretary of Agriculture Ann M. Veneman, AgTrade Event, Thursday, June 21, 2001," Release No. 0113.01, U.S. Department of Agriculture, Office of Communications, at www.usda.gov/news/releases/2001/06/0113.htm.
4. Transcript, "Press Briefing with Agriculture Secretary Ann M. Veneman and Special Trade Representative, Ambassador Robert T. Zoellick, Washington, D.C., July 22, 2002," Release No. 0303.02, U.S. Department of Agriculture, Office of Communications, at www.usda.gov/news/releases/2002/07/0303.htm.
5. See "Trade Promotion and Agriculture: What's at Stake for Texas?" U.S. Department of Agriculture, Foreign Agricultural Service, October 2001, at www.fas.usda.gov/info/factsheets/TPA/tx.html.
9. Commission of the European Communities, "Annex 2a" in 29th Financial Report on the European Agricultural Guidance and Guarantee Fund (EAGGF), Guarantee Section--1999 Financial Year, Brussels, December 27, 2000, p. 28, at europa.eu.int/comm/agriculture/fin/finrep99/tab_en/a2a.pdf.
13. "New Zealand Farmers Thrive After Agony of Pruning," The Times (London), August 28, 2002, at www.timesonline.co.uk.
17. See "Australia's Agribusiness Trade," Australian Department of Foreign Affairs and Trade, at www.dfat.gov.au/geo/australia/tradingnation/agribusiness.html.
21. Adam Smith, The Wealth of Nations, 1776, at www.ibiblio.org/gutenberg/etext02/wltnt10.txt.
23. Organization for Economic Cooperation and Development, "Agricultural Policies in OECD Countries: Monitoring and Evaluation 2002," at www.oecd.org/EN/document/0,,EN-document-1-nodirectorate-no-12-30634-1,00.html.