Commentary: Farm Subsidies: A Blight on the Economy

By Paul Magnusson

The trouble started just three months after President George W. Bush signed the 10-year, $182 billion farm bill. On Aug. 8, Mexican President Vicente Fox went tit for tat by promising to "armor plate" Mexico's farm sector against a flood of cheap U.S. imports next January when, under the North American Free Trade Agreement, duties on most food trade will be eliminated. To fight back, Fox will use hefty taxpayer subsidies to boost production and add high "anti-dumping" tariffs to keep out subsidized imports. Mexico's first target for retaliatory tariffs: American apples.

Don't blame Mexico, though, when American farmers suddenly face stiffer barriers abroad. The big crop production subsidies in the U.S. farm bill will certainly invite similar retaliation from trading partners. Even worse, Washington's payouts to politically powerful farmers and big agribusiness threaten to derail the Administration's ambitious plans to extend NAFTA throughout the Western Hemisphere and to craft bilateral free trade deals around the globe.

That should come as no surprise. After all, creating a free-trade zone of the Americas depends on convincing fragile, agriculture-dependent economies such as Brazil, Argentina, and Uruguay that they won't be overwhelmed by U.S. farm exports artificially priced low. In addition, Administration plans to cut free-trade deals directly with nations such as Chile, Morocco, Honduras, and South Africa rely on promises of fair treatment.

The ag-subsidy dispute isn't just about food trade. Unless the agriculture-based economies of the world can market their food to the industrialized world, they'll never be able to afford U.S.-made goods. "When we make it harder for a Zambian farmer to sell his peanuts in the U.S., we also make it harder for Caterpillar to export the excavators our people build in Aurora, Ill.," says Cat Chairman and CEO Glen Barton.

The U.S. is not alone in coddling farmers and food processors. Rich countries spend more than $311 billion a year in ag subsidies, twice the amount of total farm exports from developing nations, according to a study by the Paris-based Organization for Economic Cooperation & Development. U.S. farmers, on average, receive a fifth of their income from Washington. European and Japanese farm sectors are even more pampered. Their subsidies run to 31% and 59% of farm income, respectively. That results in overproduction, which artificially cuts prices around the globe.

Poorer nations' only defense is high import duties. Their average farm tariff, 17%, is more than twice the average among industrialized nations, 6.4%, according to the World Bank. To a small Third World farmer, a free-trade deal with the U.S. could mean being forced off the land. "The whole system is unbelievably irrational and unjust," insists Martin Kohr, a Malaysian economist.

True, but there's little chance of it ending. The Bush Administration has proposed to the 144-member World Trade Organization a formula that would greatly reduce farm subsidies worldwide. Proponents of the plan liken it to the Cold War strategy of boosting military spending while pushing for arms-control talks. But America lacks credibility on the issue in the wake of Bush's decision last March to levy tariffs of up to 30% on steel imports. The argument in that case--that foreign subsidies to steelmakers were creating a glut, driving down prices and requiring the U.S. to hike its own tariffs--sounds a lot like the spiel of farm protectionists.

U.S. Trade Representative Robert B. Zoellick likes to point out that one in three U.S. acres of farmland is planted for export and that U.S. farmers are 2.5 times more dependent on exports than the rest of the economy. If so, that's all the more reason Washington should abandon its counterproductive farm subsidy program before the rest of the world starts "armor plating" its own farm economies.

Magnusson covers international trade and economics from Washington.

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