The Absurdity of U.S. Farm Subsidies

Matthew Yglesias clips this image from NRO's Corner. This is a map of Manhattan, with the red dots representing a recipient of federal farm subsidies. The larger dots represent a recipient of more than $250,000/year. As Yglesias drily notes, "Given that this is clearly a map of Manhattan, one can safely assume that that these people are not struggling family farmers. It's a neat illustration of an out-of-whack system."

The Republicans and Democrats are equally complicit in this, which amounts to a transfer -- through taxation -- from the poorer to the richer. Even worse, this policy kills the U.S.'s credibility in trade negotiations with emerging countries, especially those in South America and Africa. The double standard the U.S. insists on maintaining has derailed Doha, costs Americans billions of dollars a year, condemns millions of people in developing countries to extreme poverty, and allows the U.S. agriculture industries to take rents by eliminating competition from foreign countries. It's a horrible policy, and should be eliminated.

Antigua Defeats U.S. in WTO Battle

Antigua was unhappy because the U.S. banned offshore online gambling, which provided a lot of revenue for the island. The U.S. claimed that it was absurd for Antigua to take this dispute to the WTO, since regulating gambling comes under the jurisdiction of the U.S. government, not the WTO. The U.S. case makes intuitive sense, but it seems to violate WTO rules to which the U.S. agreed, so Antigua won the case. Now the U.S. has to either ban ALL online gaming -- including horse-bettering and lottery programs which are currently legal -- or allow Antiguan online casinos access to U.S. customers, or pay billions in restitution. Traditionally, this restitution comes in the form of punitive tariffs. But Antigua is too small to inflict any noticeable damage to the U.S., so Antigua asked for permission from the WTO to violate U.S. intellectual property, presumably through piracy of movies, music, technology, or something else. So far as I know, the WTO hasn't issued a final ruling on that point.

It's an interesting case, because it directly challenges the authority of U.S. lawmakers to pass laws in the age of the internet. It also could effect online casinos based in Malta and other countries which have been harmed by the U.S.'s online gambling ban. It also has ramifications for the expansion of intellectual property protections in the Doha negotiations, for which the U.S. is pushing hard.

Dani Rodrik has some commentary here.

How Politics Corrupts Good Economics

A good NY Times article highlighting the political difficulties in reforming the bloated farm bill. This bill is a classic example of special interest groups hijacking the government for their own benefit. It is often, and appropriately, called "welfare for the rich," since most of the farm subsidies go to large corporate conglomerates (e.g. Archer-Daniels Midland).

But opposing the subsidies can cost Congressmen their seats. So the likelihood that subsidies will be eliminated is very slight. This has real costs for the U.S. economy, but it also is a large sticking point in getting support for international free trade agreements in other countries. Reforming the bill real have real benefits for the domestic and international economies, will improve the U.S.'s standing in the world, and help open up developing countries to liberalize and develop through trade. But those benefits are likely to be lost to political self-interest groups.

Bhagwati on Doha

A nice piece. His perspective is often the opposite of, say, Rodrik's: Bhagwati still sees large gains from trade on the table, while Rodrik thinks that further liberalization will have a smallish effect on rich countries, but could have a harsh effect on (certain) poor countries. I tend to side with Bhagwati, although I'm not sure I'm as much of a true believer as he. Either way, a great, concise round-up of the issues stalling Doha, and how the U.S. and E.U. are primarily to blame.

The essential outlines of the deal among the G-4 were clear. The EU had to give on agriculture where its barriers and subsidies were huge. With negligible comparative advantage in agriculture, it did not seek concessions in this sector from India and Brazil, but rather wanted reciprocal concessions in manufactures and services. The problem with the US was that it had a strong farm lobby that would not permit meaningful reduction in the substantial US subsidies simply in exchange for concessions in manufactures and services; it sought “sectoral reciprocity” in agriculture itself.

But the problem is that the USTR, reflecting successful lobbying, has wound up making maximalist demands and minimalist concessions: a situation that is properly unacceptable to India and Brazil.

Regarding concessions, the US negotiating position is almost pathetic. Just recall that, even as the G-4 talks were in progress at Potsdam, the agriculture subcommittee of the US House of Representatives voted to retain the subsidy portion of the 2002 Farm Bill for another five years. At Potsdam, Ms. Schwab did not budge from her past hard-line position but insisted, even as she could not offer any ready concessions on US agricultural subsidies, that the poorer countries must offer more!

The problem that Ms. Schwab cannot ignore is that it is politically impossible for a democratic developing country such as India to persuade an aroused public opinion that its farmers, often at the margin of subsistence, should agree to competition from rich-country farmers who are being heavily subsidized. Unless the US, and also the EU, address this issue meaningfully, there is no prospect of movement on Doha.

So there is hope. But only if the U.S. farm lobby steps out of the way, or legislators finally grow some balls (and common sense) and oppose renewal of the 2002 Farm Bill. Which is, essentially, welfare for rich people.

Wait... What?

Dani Rodrik is much smarter than I am, so I must be missing something. He says that the Doha round should fail, because it claims to be focussed on "development" but really isn't. He then cites this as evidence:

Not only are the global welfare effects quite small, low-income African countries emerge as losers in most of the models. The reasons are essentially twofold. First, low-income countries will lose some of their preferential market access to rich countries as the latter reduce their tariffs to other, less poor countries. Second, removal of agricultural subsidies will raise the world price of agricultural commodities, imposing a net burden on the poorest nations of the world, who tend to be food importers. Here is the distribution of gains (and losses) according to the leading models:

Keep this picture in mind next time you hear someone decry what a catastrophe it would be for Doha to fail.

One of us isn't looking at the graph properly. The graph I'm looking at shows the majority of gains going to "low income" and "middle income" countries, with smaller gains for "high income" countries. Indeed, the only losers seems to be low-income countries in Africa and not low-income countries overall. Everyone not in Africa is better off, including the billions in Asia and Latin America who are still incredibly poor.

This isn't too surprising to me. Developing countries in Asia, Latin America, and Eastern Europe all have much more political clout than developing countries in Africa, and the G-20 Developing Countries demands a reduction in agricultural subsidies in the U.S., E.U., and Japan. In other words, they want more market penetration for their farmers in the big markets, and first-world ag subsidies essentially limits (or outright prevents) that.

But Africa, unlike Latin America, isn't a net exporter of agriculture; it's a net importer. So E.U. ag supports not only subsidize E.U. farmers, they also subsidize African consumers. By eliminating the supports, food costs for Africa will increase, and much of Africa exports nearly nothing except natural resources (oil, diamonds, minerals, etc.) to the first-world, they aren't getting anything in return.

But that doesn't mean that liberalization of world agriculture markets isn't a good idea in balance. Agricultural products are highly substitutable, which is why the huge first-world subsidies exist in the first place. Africa will become less reliant on European ag products, but this will necessarily lead to development of their ag capabilities (possibly with an increase in FDI flows from the first-world to Africa, or through increase foreign aid), or purchases from other parts of the developing world who have a comparative advantage in agriculture. True, in the short run Africa might be worse off (while the rest of the developing world is better off), but in the long run this is a necessary step for the enrichment of the developing world.

UPDATE: Okay, I'm not crazy. In the comments section of Rodrik's post, "Justin" says:

I agree with Vyborny's conclusion that the best deal would be to completely open up markets for developing nations - no duties, no quotas. In fact, in an ideal world, this would be the goal that all countries would be working towards. It can even be reasonably argued that the U.S. should unilaterally open its borders to complete and total free trade. What better statement could the U.S. make about its commitment to fight world poverty, while at the same time reaping the benefits of increased international trade?

I do take issues with other portions of Vyborny's report, however. The most flagrant is exemplified by this quote:

"The models are not intended to predict how the world or country level economies will evolve in the future, but rather to estimate the specific role of trade policy changes apart from other changes in the economy"

It is incomprehensible to me how anyone could even ATTEMPT to calculate the impacts of trade policy without considering other economic changes that might occur, let alone justifiy the results of such calculations. Perhaps I am just being obtuse...

And then Ms. Vyborny, author of the essay in question, chimes in:

As commenter Justin noted, the models found that if the U.S. and other rich countries offered a "development package" of complete duty-free quota-free access for the poorest turned the Doha losses into wins for all the African countries - making a true Doha Development Round still very much worth pursuing.

About Time

China has decided to reform their currency controls, fight excessive liquidity, moderate their balance of payments imbalances, and temper their blistering growth - currently at nearly 12% - to prevent a debt crisis or excessive inflation.

There are several good things about this. First, it will help create a policy framework for China to continue growing at sustainable rates. Second, it will help Western countries - like the U.S. - narrow their current account deficits, which might help bring a successful conclusion to Doha. Third, it lowers the potential for China's bubble to burst, or for inflation to run roughshod over the economy, killing that country's poor. Fourth, it removes one of the last American excuses for liberalizing trade further, as China can now band together with the G-20 to force America to practice what it preaches. I think I like everything about this.