Farm Subsidies Suffocate South

17 April 2003

By Stentor Danielson

In Mexico, small corn farmers are struggling. Ever since the North American Free Trade Agreement (NAFTA) reduced the tariffs that once shielded Mexican agriculture from competition, cheap corn has been flowing south over the U.S. border. Poor Mexicans aren't inclined to pass up a deal on the countryís main staple, so they pass by local produce, sending farmers' revenues down.

This is a classic anecdote about the pernicious effects of free trade, right? That's how it was originally presented to me. It would seem that the U.S. has a clear comparative advantage in corn production, even after transport costs, so the only way to protect Mexican farmers is to put back the tariffs.

Then I discovered why U.S. corn is so cheap: it's subsidized. Agriculture subsidies -- payments to farmers -- drive down the cost of producing food, allowing it to be sold more cheaply. Exported U.S. corn can sell at 20% below its production cost because subsidies make up the balance. For all Americaís rhetoric about free trade, it pursues a distinctly illiberal and unfree policy with regard to production of one of the most important products of the developing world.

Developing countries around the world are hurt by U.S. farm subsidies. For example, Brazil estimates that it will lose $9.6 billion over the next four years because U.S. agricultural subsidies allow American food to undercut domestic sales and exports of Brazilian produce.

Overall, the U.S. is projected to spend $100 billion on farm subsidies over the next decade. Last year Congress boosted the size of payments by $31.2 billion over six years. The U.S. is not alone on this front -- in fact, agriculture subsidies are one of the backbones of European Union policy. France has vowed to resist changes in the $45 billion Common Agricultural Policy that would target small farmers and encourage more environmentally friendly agriculture. Together, these two blocs produce a giant disincentive for poor countries, which canít afford similar subsidies, to resist opening their borders to free trade. This situation has created an impasse at the latest round of World Trade Organization (WTO) talks, as the body passed a self-imposed deadline at the end of March without an agreement on agricultural trade.

Removing agriculture subsidies would have important effects on poor farmers. If would reduce developing countries' dependence on imported food. It would be foreign aid that saves the U.S. government money. And unlike much foreign aid, it would work from the bottom up, improving the lives of farmers through transactions in their local markets rather than through aid bureaucracies. Reducing subsidies could reduce the long-term need for foreign aid, as it would support economic development instead of turning into handouts -- the "teach a man to fish" theory of development. There would also be psychological benefits, as these farmers would no longer feel victimized by U.S. farm policy.

The ill effects of agriculture subsidies are hardly a secret. It seems like an issue that could bring together a coalition of genuine libertarians and critics of the U.S.'s economic impact on the developing world. Unfortunately, the farm lobby is a powerful one. And in the U.S., the organization of the Senate -- giving two Senators to every state regardless of its size -- means that sparsely populated farming states, whose representatives naturally argue for farmers' interests, are over-represented. Indeed, the more representative House recently voted (in a non-binding budget resolution) for $18.6 billion in subsidy reductions over the next 10 years, as part of their belt-tightening to make President Bush's new tax cut -- which was passed in full by the House -- more affordable. Even if it withstands Senate approval, this reduction is (if youíll forgive the pun), small potatoes, amounting to about half of last year's increase.

Opponents of farm subsidies also have to contend with the rhetoric of "small family farms." Agricultural subsidies are presented as a way to keep struggling family farms alive. The truth is that subsidies also flow to the pockets of the agribusiness corporations that are driving family farms out of business. There is a theoretical cap of $360,000 on the subsidy that a farmer can receive, but generic commodity certificates allow large farms to circumvent the limit. An estimated two thirds of subsides go to the largest 10% of producers. Limited subsidies targeted at the most vulnerable and truly independent small farms would be less harmful to foreign farmers because small farms are less likely to export.

Another concern for progressive critics of agriculture subsidies are their effects on the American poor. Just as subsidies lower prices of U.S. produce both domestically and abroad, repealing subsidies would raise those prices. While the impact of higher prices on developing country farmers would be positive, the impact on poor American consumers would be negative. Higher food prices would disproportionately affect the poor, who spend a greater proportion of their income on food.

Reducing subsidies would need to come hand in hand with a commitment to improving and adjusting entitlement programs such as food stamps. Doing this could still result in a net savings for the government. The Cato Institute calculates that the government could save $20 billion a year through agriculture reform -- plenty of money for helping the less fortunate, with some left over if all we do is maintain current levels of access to food. Agriculture subsidies are essentially food stamps for everyone -- rich and poor, domestic and foreign.

Free trade proponents talk a good game, but the real world effects of free trade policies are much more ambivalent. In the case of agriculture subsidies, the problem is not in the idea of free markets, itís in the implementation. A halfway free market, in which tariffs are lowered but one partner lavishly subsidizes production, distorts the market to the detriment of the most vulnerable participants.