Category Archives: Economics

Disagreements over farm subsidies have caused the current round of WTO negotiations to collapse. Developing countries are upset that subsidized farmers from rich countries are hard to compete against in the world market.

India’s proposed solution is to trigger a raise in their own farm subsidies if imports rise above a certain level. Other countries found this unacceptable, hence the current impasse.

Rather than fret about unfair competition, developing countries could just sit back and welcome imports from subsidized farmers. Consider it a gift from U.S. and EU taxpayers.

Or better yet, all nations rich and poor could drop their market-distorting subsidies altogether. In the long run, the way to freer trade — and fuller stomachs — is fewer subsidies, not more. All that’s in the way is political inertia.

Unfortunately, in politics as well as in physics, inertia always wins.

The U.S. government transfers about $17 billion from taxpayers to farmers in an average year. Every man, woman, and child in the country gives more than $50 to a group smaller than 2% of the population. The average farming household will make $89,434 this year, well above the national average. Farmers hardly seem to need the help.

Farm subsidies have failed to lower food prices, cause overproduction of some crops, and underproduction of others. They are also the main reason the Doha Round of trade negotiations is at a standstill.

Rich subsidized farmers have largely shut out Third World farmers from the world market. Understandably, developing countries resent this. Many of them are refusing further action on Doha until the agricultural playing field becomes more level.

Enter U.S. Trade Representative Susan Schwab. To get Doha back on track, she is offering to cut U.S. farm subsidies by about 12 percent if other countries reciprocate. Schwab’s proposal is modest, but it is a start.

A better proposal would be to abolish the subsidies outright, even if the U.S. does it unilaterally. Schwab is basically saying, “OK, we’ll stop shooting ourselves in the foot. But only if you do, too.” Why not just stop shooting ourselves, period, no matter what other countries do?

The trouble is Congress. Farm subsidies are sure-fire vote-getters. The incentives just aren’t there for Congress to do the right thing, no matter how hard Schwab pushes them. And ultimately, it is Congress that has power over farm subsidies, not the U.S. Trade Representative. Meanwhile, Doha languishes.

I had the pleasure of seeing distinguished trade economist Jagdish Bhagwati speak yesterday. He is promoting his new book, Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Bhagwati’s insights are well worth sharing.

He attacked the current wave of bilateral Free Trade Agreements… on the grounds that they hurt free trade. Bhagwati, always a stickler for precision of language, thinks these FTAs are better called PTAs, or Preferential Trade Agreements. By only including a few countries, they are discriminatory by their very nature. True free trade does not discriminate.

The agreements are also too complicated. They contain provisions that have nothing to do with trade, such as labor and environmental standards. Trade-unrelated provisions can slow economic growth, and can intrude on nations’ sovereign right to make their own laws. They also turn international trade law into a complex thicket that is all but impossible to navigate; simplicity is beautiful.

Bhagwati’s preferred approach is to revive the Doha round, and to institute much broader, less discriminatory agreements like the Free Trade Area of the Americas (FTAA).

He also had a few things to say about the presidential candidates’ trade positions. In short, neither gets it. McCain is solidly pro-trade, but confused. He thinks PTAs are the same thing as free trade. Obama is harder to read. His heart seems to be in the right place, but he appears to have been captured by his party’s labor and environmental interests. Obama has to appeal to his base, so he says things he shouldn’t.

Bhagwati’s approach to trade is simple, principled, and refreshing. But I fear that he is letting the perfect be the enemy of the good. The Doha round is all but dead, despite a few recent stirrings. The FTAA is less than likely in the current political climate. PTAs are certainly not ideal, but they’re all we have right now. Some progress is better than none.