The $300 Billion Question: How Much Do the Governments
of High-Income Countries Subsidize Agriculture?

By Joseph Wright

December 4, 2003

In the media, as well as many public discussions, it has been stated repeatedly that the governments of the high-income counties spend $300 billion annually on subsidies to agriculture.[1] This is not true.  The actual amount of such subsidies is probably less than one-third of this figure.

The much-cited $300 billion figure includes not only direct government subsidies to producers but also the increased price to high-income country (OECD)[2] consumers of agricultural goods due to trade restrictions (tariff and non-tariff barriers).  The redistribution of income caused by such trade restrictions cannot accurately be described as subsidies from the governments of the high-income countries to their agricultural producers. In fact, some of the income redistributed by these trade barriers accrues to producers in developing countries, as a result of higher prices for their output, rather than to farmers or companies in the high-income countries. And a trade restriction is distinctly different from a government payment to a producer.

Table 1[3] shows the total amount of support for agricultural producers (Producer Support Estimates or PSE) in the OECD, the European Union, and the United States.  These numbers include both the market price support (MPS) and direct subsidies from government budgets.  The MPS is calculated by multiplying the increased price that agricultural producers receive as a result of trade restrictions by domestic production. This total amounts to a transfer, as a result of higher prices, from individual consumers to domestic agricultural producers. 

Source: OECD.  “Agricultural Policies in OECD Countries: Monitoring and Evaluation 2003”

Table 2 shows the percentage of agricultural support that is due to these trade restrictions (MPS).  As shown below, over 60 percent (62.6%) of agricultural support in the OECD comes from trade restrictions that increase domestic agricultural product prices.

Source: OECD.  “Agricultural Policies in OECD Countries: Monitoring and Evaluation 2003”

It is important to note here that when countries impose trade restrictions on agricultural goods, this increases the domestic price of those goods for both domestic producers and foreign producers (those that get their goods in under the trade restrictions).  For example, sugar producers in Brazil and Nicaragua that have access to the US market are able to sell their sugar in the United States for an amount that is close to three times the world price.  Eliminating sugar quotas would hurt those Brazilian or Nicaraguan sugar producers. In addition, for some developing countries, the agricultural subsidies of the rich countries provide a benefit in the form of lower-cost food and other imports. For these reasons, when economists estimate the impact on developing countries of removing restrictions on their agricultural exports to the high-income countries, the result are mixed: some countries or regions come out ahead (Taiwan and Thailand), while others are hurt (Indonesia, China, Mexico and South America, the Philippines).[4]

When we take the total support for agricultural producers and subtract the amount of support due to trade restrictions, we are left with an amount that can reasonably be called “direct government subsidies to producers.”[5]  Table 3 shows this figure for the OECD, the EU, and the US. As shown below, the total amount of direct government subsidies to agriculture in the OECD is approximately $88 billion annually.  For the US, this figure is less than $20 billion annually, and for the EU just over $50 billion annually.

Source: OECD.  “Agricultural Policies in OECD Countries: Monitoring and Evaluation 2003”

So the answer to our question is that rich country governments do subsidize agriculture, but not to the tune of $300 billion.  More importantly, trade liberalization for agricultural goods will undoubtedly help some producers and hurt others: those producers (both domestic and foreign) that benefit from higher prices due to trade restrictions would lose, while those producers that are currently kept out of markets because of trade restrictions, or face lower prices due to subsidies, would benefit. 

Joseph Wright is Research Assistant at the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net)