Trade distortion and protectionism
Agricultural subsidies: Everyone's doing it
Published 15 October 2020
Agricultural subsidies are in part, a recognition of the unique challenges that the sector faces – and the important role it plays in our society by ensuring food security. However, agricultural subsidies can also have trade-distorting effects. For this reason, they are the basis of many international disputes.
US$700 billion every year – that’s how much governments worldwide provide in some form of subsidy to their agricultural sectors. Researchers behind the OECD’s “Agricultural Policy Monitoring and Evaluation 2020” report found that the 54 countries studied (all OECD and EU countries, plus 12 key emerging economies) provide over US$700 billion a year in total support to the agricultural sector. The vast majority of this, US$536 billion, is in the form of payments to producers; the rest takes the form of consumer support and enabling services such as infrastructure investment or research and development.
Subsidies are in part, a recognition of the unique challenges that the agriculture sector faces – and the important role it plays in our society by ensuring food security. Farming is highly weather dependent and extremely vulnerable to uncontrollable events such as natural disaster. Agriculture also requires significant investment from producers in expensive equipment, inputs and labor before any profit can be made, and faces an obvious time delay between shifts in demand and supply.
Fifty-four OECD countries and 12 emerging economies provide over US$700 billion each year in some form of support to their agricultural sector.
However, agricultural subsidies can also have trade-distorting effects. For this reason, they are the basis of many international disputes. In the recently negotiated US-Mexico-Canada Agreement agricultural subsidies played a key role: Canadian dairy subsidies were perhaps the biggest agriculture-related sticking point for the US, and Mexican tomato subsidies continue to cause tensions. Across the globe Brazil, Australia and Guatemala have disputed India’s subsidies to its sugar industry.
The complaint from least developed countries is that global subsidies disproportionately disadvantage their small producers, whose own governments cannot provide the same support, leaving them unable to compete with the heavily-subsidized farms of richer countries. Communities say that foreign products, such as European milk, are flooding their markets, crippling local herders and farmers and leaving consumers vulnerable to price changes.
The United States has borne the brunt of criticism for its agricultural subsidies. American farmers receive billions in support. However, when measured as a percentage of total farm revenues, South Korea, Japan, China, Indonesia and the EU all provide producer support above the global average of 12 percent, whereas the United States, along with Russia, Canada, and Mexico have historically been at or below this average.
China, Japan, South Korea, Indonesia and the EU provide levels of support to their agricultural producers above the global average of 12 percent of total farm revenues. The US, Canada and Mexico have historically been at or below this average.
Who subsidizes the most?
The tables below show the largest subsidizers ordered by total spending, and by percentage of gross farm revenues, according to the data collected by the OECD. Smaller countries like Norway, Iceland and Switzerland top the tables when it comes to support as a percentage of gross farm revenue at 57.6 percent, 54.6 percent and 47.4 percent respectively. The United States does not even make the top 10 on this measure, with total producer support calculated at 12.08 percent.
In terms of total spend, China, the EU, and United States comprise the top three. However, China spends almost four times as much as the United States, and more than the next three biggest spenders – the EU, United States and Japan – combined.
Exactly how and to whom subsidies are dispensed differs widely by country, as do the goals of agricultural subsidy programs. Here we look at a few of the biggest subsidizers: China, the United States, Japan, and the EU, as well as the case of New Zealand, a nation with virtually none.
The United States
Throughout most of its early history, the United States did not subsidize agriculture. A nation largely founded by farmers and land workers held agriculture in high esteem, but was determined that no other group should be taxed to fund another. However, the Great Depression of the early 1900s and the presidencies of Hoover and Roosevelt reversed this. Hoover established the Federal Farm Board which fixed market prices for certain produce, inducing excess production of the supported items. Roosevelt supported the Agricultural Adjustment Act (AAA), which paid farmers not to produce in order to reduce agricultural surpluses.
In 2019, OECD data show that the United States provided agricultural support of over US$48 billion, however, close to half of this was in the form of support to consumers through nutrition assistance programs. Federal support to agriculture has shifted and changed with various administrations, with the five-year Farm Bill being the primary legislative vehicle used to implement changes to the “farm safety net“, including government subsidies.
Under the rules of the WTO the United States, along with other developed countries, agreed to set limits on spending. The US limit is US$19.1 billion on certain types of “market distorting“ support. However, the latest data shows that direct support to farmers in 2019 was the highest it has been in 14 years, at around US$22 billion, leading to questions about whether the United States exceeded its annual limit on “amber box” spending.
This spike is largely attributed to recent ad-hoc compensation to farmers, unrelated to the Farm Bill and initiated by the Trump administration, to compensate farmers for unforeseen losses. To make up for lower prices and lost sales caused by the US-China trade war, the US government committed billions in dollars to farmers in 2018 and 2019 through the Market Facilitation Program. When COVID-19 hit, and the administration implemented another program – the Coronavirus Food Assistance Program – to help farmers stay afloat despite disrupted supply chains. All in all, government payments to farmers are projected to reach as high as US$37.2 billion in 2020.
China began subsidizing agriculture in earnest relatively recently but has quickly become the world’s biggest subsidizer by dollar amount. Formerly the nation’s primary source of employment, the Chinese government for years taxed agriculture to support urban populations. In 2004, China first implemented subsidies to protect rural workers from foreign competition. Although it has now evolved into a manufacturing economy, roughly half the labor force is still employed in agriculture, with lower living standards than their urban counterparts. The Chinese government subsidizes rural farmers to prevent political instability, while bolstering the production of particular crops to reduce reliance on foreign produce, such as US soybeans.
China’s agricultural subsidies have ruffled the feathers of other world powers, particularly the United States, which won a WTO case against the country’s unfair wheat and rice subsidies. The US Trade Representative complained that Chinese subsidies undercut US producers exporting their produce to China’s vast market. The WTO panel investigating the issue found that in 2012, 2013, 2014 and 2015, “China provided domestic support… in the form of market price support to producers of wheat, Indica rice and Japonica rice in excess of its commitment level of “nil””. Disagreements over subsidies remain a sticking point in the US-China trade war.
China may be beginning to scale back its subsidies. After two decades of steady growth, the OECD data show that China’s share of gross farm receipts going to support producers has started to decline in the last two years. Given its astronomical spending it will take a long time for China’s spending to approach anything on par with the European Union, let alone the United States.
Japan’s agricultural subsidies as a share of gross farm revenues are two times above the OECD average, at 41.3 percent, remaining high despite over a decade of cutting back. About 80 percent of the support is in the form of market price support, artificially keeping prices at a certain level, which is achieved mainly by border controls for rice, milk and pork.
In their discussion paper for the International Food Policy Research Institute, Yoshihisa Godo and Daisuke Takahashi outline Japan’s unique subsidy landscape. Most Japanese farmers farm as a secondary business and have another stable source of income, yet they receive the same benefits as full-time farmers, without feeling the same need to innovate and compete. The political pressure these small plot farmers yield gives them much sway over farmland use regulations and other policies that benefit them, such as income compensation programs.
These issues result in inefficiency and a lack of productivity, helping to explain why Japan is the only country with a declining food self-sufficiency rate, entrenching established interests and driving away young potential farmers.
This puts Japan’s heavy agricultural protection in a category of its own. Whereas the action of heavy-subsidizers like Europe and the United States increase their agricultural output – in Japan it has decreased. This may help to explain why Japan is becoming more willing to reduce tariffs on agricultural goods, pledging to cut back such tariffs on pork and beef in their recent free trade agreements with the EU, United States and UK.
The European Union
Since 2010, government support to agriculture in the EU has been stable at around 19 percent. The EU’s Common Agricultural Policy (CAP) is an extensive EU-wide policy and their largest budget item, accounting for around 40 percent of the annual budget. It aims to support farmers, improve productivity, and safeguard the livelihoods of European farmers, while improving sustainability and protecting rural land. The EU’s outline of the CAP explains that farming requires special protections given its distinctness from other productive activities, such as its reliance on the weather and time delays. The CAP provides three forms of protection: income support through direct payments to farmers; market measures to combat price or demand drops; and rural development.
The centrally organized system however lends itself to opacity and corruption in the distribution of these subsidies in some member states where populist governments are able to capture the benefits and use them to reward friends and punish enemies. The burdensome administration process and system that doles out cash based on the amount of land-owned is also proving to be a roadblock for young farmers who access their land through non-conventional contracts or seek to start small – meaning they miss out on subsidies that are propping up their larger competitors.
Subsidies are also forming a key part of the UK-EU Brexit negotiations. UK farmers will lose out on billions of dollars of EU agricultural subsidies when the country breaks with the bloc, which will be a huge challenge for the government and the country’s farmers who will see a phasing out of subsidies they rely on to keep their farms afloat. But it will also provide an opportunity for them to take a new approach that rewards farmers who incorporate good environmental practices.
India and what’s hidden in the data
India is notably absent from these tables given that they are the world’s largest producer of milk, pulses and spices and second largest producer of rice, wheat and fruit among many others. They are undeniably an agricultural super power, so is it that they don’t subsidize? No, they definitely do, but the answer is a bit more complicated.
Indian farmers are aided by direct payments and large subsidies for inputs, such as irrigation water, power and fertilizers. Producers in India receive support corresponding to about 7.8 percent of gross farm receipts, as well as market price support of 2 percent. If we only take into account the positive support, India is subsidizing agriculture by over US$11 billion. However, this is offset in the OECD data by what they term India’s negative market price support, which reflects the amount that domestic producers are implicitly taxed due to a series of complex domestic regulations and trade policy that more than offsets any gains they receive from subsidies to the tune of US$77 billion, a -14.8 percent hit in terms of farm receipts.
Generally, developed countries such as OECD member countries have very low values for this negative market price support category, sometimes even zero. But other countries with restrictive domestic and trade policy – such as Argentina and Vietnam, which have negative support values of US$11.4 and US$5.2 billion respectively – hurt their producers in this way.
A world without subsidies? Just look to New Zealand
Not all wealthy, agriculture driven countries rely on subsidies, however. Australia and New Zealand’s agricultural supports are just 1.85 and 0.7 percent of their gross farm revenues respectively. New Zealand in particular is a fascinating case. Its low agricultural support may be surprising given New Zealand is five times more dependent on farming than the United States.
In 1984 New Zealand’s government ended all farm subsidies, which at the time represented around 30 percent of the value of farm production. Despite fear and protests at the time, around twenty years after the action just one percent of farms had gone out of business and the value of farm output increased by 40 percent. By reacting to competitive pressure and consumer demand, cutting costs, and innovating, New Zealand farmers were able to rebuke the argument that agriculture needed government support to survive.
Effects of the “new subsidizers”
Certain types of agricultural subsidies have trade-distorting effects, but their historical use among the biggest and wealthiest agricultural exporting countries provoked a “they’re doing it, so we should too” response. The biggest growth in subsidy use over the last decade has been among the fast-growing emerging economies such as China, India, and Turkey, clearly seen in the data from the OECD.
Given differing WTO rules on agricultural subsidies for developed versus developing countries, and the significant amount of spending particularly by China, this shift is important to recognize to both break old perceptions of who subsidizes and to ensure that new baselines are used to negotiate future rules on agricultural subsidies.
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