December 04, 2003
December 2003, Joseph Wright
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 13 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.
| Table 1: Producer Support Estimates (PSE) | Annual Average | |||
| 2000 | 2001 | 2002* | 2000-2002 | |
| OECD | 242.4 | 226.8 | 234.8 | 234.7 |
|
EU |
88.6 |
87.7 |
100.5 |
92.3 |
|
US |
49.7 |
51.7 |
39.6 |
47.0 |
|
Combined EU/US |
138.3 |
139.4 |
140.1 |
139.3 |
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.
|
Table 2: Market Price Support (MSE) as a % of PSE |
Annual Average |
|||
|
2000 |
2001 |
2002* |
2000-2002 |
|
|
OECD |
63.2 |
61.2 |
63.3 |
62.6 |
|
EU |
58.0 |
55.0 |
57.0 |
56.7 |
|
US |
30.0 |
38.0 |
39.0 |
35.7 |
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.
|
Table 3: Direct Government Subsidies to Producers |
Annual Average |
|||
|
OECD |
89.2 |
88.0 |
86.1 |
87.8 |
|
EU |
51.4 |
48.2 |
57.3 |
52.3 |
|
US |
14.9 |
19.6 |
15.4 |
16.7 |
|
Combined EU/US |
66.3 |
67. |
72.7 |
69.0 |
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)
[1] See for example: The New York Times – “WTO breakdown: Why the walkout?; U.S. presidential campaign is seen as factor in collapse of farm aid talks.” By Elizabeth Becker, September 16, 2003; CNN News – “WTO talks break down,” on Q&A With Jim Clancy, Sept. 16, 2003; The Economist – “Tequila sunset in Cancun; World Trade,” September 17, 2003; The Times (London) – “Annan warns of political backlash by world’s poor over farm subsidies,” by Carl Mortished, September 11, 2003; National Public Radio’s Morning Edition – “WTO talks in Cancun.” Kathleen Schalch, reporter, Bob Edwards, anchor, September 12, 2003; Financial Post – “Bloodshed mars Cancun WTO summit: Rich and poor countries squabble over farm subsidies as protesters clash with riot police,” by Ian Jack, September 11, 2003.
[2] The OECD includes Australia, Canada, the Czech Republic, the European Union, Hungary, Iceland, Japan, Korea, Mexico, New Zealand, Norway, Poland, Slovakia, Switzerland, Turkey, and the United States.
[3] Source (Tables 1-3): OECD. “Agricultural Policies in OECD Countries: Monitoring and Evaluation 2003”
[4] Drusilla Brown, Alan Deardorff, and Robert Stern. “CGE Modelling and Analysis of Multilateral and Regional Negotiating Options.” Research Paper in International Economics. School of Public Policy: The University of Michigan, Discussion Paper No. 468. See also Dean Baker and Mark Weisbrot. “The Relative Impact of Trade Liberalization on Developing Countries.” (https://www.cepr.net/relative_impact_of_trade_liberal.htm)
[5] The OECD defines these subsidies as, “gross transfers from taxpayers to agricultural producers arising from policy measures based on: current output,area planted/animal numbers, historical entitlements, input use, input constraints, and overall farming income.” (See fn 3.)
