Cato Policy Forum: Farm Bill Follies

There is no sugar-coating the farm bill's impact on the trade agenda. It's a disaster. The huge ramp-up in subsidies will promote overproduction, depress global prices and distort global trade. It will damage the work of U.S. trade negotiators to open markets to U.S. farm exports. With one scribble of his pen, President Bush undid a decade worth of timid but real progress toward bringing economic sanity to global agricultural markets.

The Uruguay Round Agreement on Agriculture erected three pillars of agriculture reform: improving market access, cutting exports subsidies, and cutting domestic price supports. It's true that the farm bill does not directly raise barriers to trade, but it does alter and expand domestic subsidies in a way that distorts international trade.

The most immediate impact of those subsidies will be to prolong the mismatch between global supply and demand. By design, the farm bill's counter-cyclical payments will maintain production even if market prices are falling. In a normal market, supply would contract when prices fall, but the farm bill is explicitly written to keep farmland in production even when the market is sending the opposite signal. In defending the bill, one USDA official predicted that the amount of farmland in production will probably not vary much from the current 330 million acres regardless of changing prices. But this is exactly the problem. Domestic production and prices will not be allowed to adjust downward when global prices fall. Overproduction will further depress global prices, hurting farmers abroad, especially those in the world's poorest countries.

In most poor countries, the majority of families earn their living by farming. Lower prices will cut directly into their incomes. Oxfam International, in its recent report on global trade, noted that corn growers in the Philippines earning $400 a year are forced to compete against American corn growers receiving an average of $20,000 a year in subsidizes. A study published earlier this year by the National Bureau of Economic Research found that higher prices for rice in Vietnam between 1993 and 1998 dramatically reduced the number of children in the labor force and doubled the percentage of girls attending school. By depressing global prices, farm bill subsidies for rice and other commodities will lead directly to more kids working and fewer attending school in Vietnam and other poor countries.
Supporters of the farm bill claim it will increase the leverage of U.S. trade negotiators by giving them more chips with which to bargain in the WTO and other trade negotiations. But the farm bill has forfeited our most valuable chip of all-American leadership. Our calls for more market competition in agriculture will ring hollow now that we have taken such a giant step in the opposite direction.

International condemnation of the farm bill has been loud, unanimous, and justified.

The United States probably has no better friend in the battle to reduce protectionism in agriculture than New Zealand. That country's trade minister has denounced the farm bill as "a disaster" and "just ludicrous."

Australia's agriculture minister: "The U.S. has clearly abrogated its leadership on the issue of world trade in agriculture."

China's vice minister of trade, said of the U.S. farm bill and steel protection: "It's an embarrassment for us, and psychologically, it has had a negative impact."
What hurts most of all is that even the European Union, the chief of sinners when it comes to farm subsidies, can rightly criticize the United States for its hypocrisy. Franz Fischler, the EU's minister for agriculture, said that the farm bill, quote, "marks a blow for the credibility of US policy in the WTO, where the US has presented a trade-oriented agenda wholly inconsistent with the new Bill. We cannot negotiate on the basis of 'do as I say, not as I do.'"

The Doha round was launched on the promise that it will benefit poor countries as well as the more developed countries. No round can win the support of the 80 percent of WTO members who are less developed without including real market access for agriculture. Disputes over farm trade almost wrecked the Uruguay round. Yet the U.S. farm bill strikes at the heart of U.S. credibility to lead any serious negotiations toward freer trade in agriculture.

Supporters of the farm bill make the legalistic argument that it does not violate our WTO commitments. We shall see. In the Uruguay Round, the United States agreed to limit trade-distorting domestics subsidies-the so call-ed "amber box" subsidies--to $19.1 billion per year. By current estimates the farm bill will shovel $17 to $19 billion a year to the farm sector. Not all of those subsidies will be in the amber box, but if global prices remain low, the counter-cyclical subsidies could push the United States over the limit. Title One, Section 1601 of the farm bill does authorize the secretary of agriculture to quote "make adjustments in the amount of such expenditures during that period to ensure that such expenditures do not exceed such allowable levels" endquote. But it's questionable whether the administration will have the political will to cut subsidies if prices fall any further. Up until now, when domestic politics has clashed with the administration's trade agenda, politics has prevailed every time.

The farm bill will not even be good for U.S. farmers in the long run. The U.S. farm sector has a huge stake in reducing foreign trade barriers to agriculture. While global tariffs on manufacturing goods have fallen steadily in the post-war era, to about 4 percent, tariff- and tariff-equivalent barriers to farm products remain stubbornly high at more than 40 percent. America is the world's number one exporter of food. Last year, American farmers exported more than $52 billion worth of goods-far more than any other country in the world. One out of every three crop acres planted in the United States is exported. Exports produce 25 percent of a U.S. farm income. With only four percent of the world's stomachs located in the United States, U.S. farmers must export to prosper. Yet the 2002 farm bill has vastly complicated the task of opening markets abroad. The U.S. farm lobby has sold the keys to long-term prosperity for a pot of subsidized porridge.

One final criticism: The new farm bill will require that the country of origin be stamped on meat, fish, peanuts and produce imports starting in the fall of 2004. This may sound like innocent consumer information, but it is really a disguised form of protectionism. It is an added regulatory cost that will do nothing to protect consumer health and safety. This provision in the law will make it more difficult for the United States to resist demands by the European Union that all genetically modified products from the United States be labeled, even though GMO products have been proven safe in study after study. Here again, the farm bill is leading the world in a direction that will come back to haunt the American farmer.

In summary, the farm bill is a net loser by any measure. It will hurt U.S. taxpayers, it will hurt U.S. consumers, especially low-income families that spend a disproportionate share of their budgets on food, it will hurt hundreds of millions of farmers in the world's poorest countries, and in the end it will hurt U.S. farmers by foreclosing opportunities to earn more income through honest trade.

Thank you.