For several years, many countries and especially developed ones have been heavily relying on agricultural subsidies and tariffs in order to boost the agricultural production and stability to their domestic farmers. The outcome has been obvious, depressing world commodity prices and making it difficult for farmers from third world countries to produce. Agricultural subsidies lead to lower production costs to the targeted farmers through guaranteeing minimum prices to farmers’ produce. For these minimum prices to be useful, they should be far above the cost of production. In the event that the world prices is lower than the guaranteed price the government of the nation in question will make up the difference through its subsidy kit set aside for this purpose. This mechanism has protected farmers from adverse effects resulting from falling global prices. Among the countries actively involved in this practice are nations from European Union (EU), United States, and Switzerland.
For instance, in European Union the governments have agreed on a given prices to dairy farmers to enhance their profitability in milk and butter revenues. This too has been adopted by the US. The US is one of the world’s biggest producers of cotton. In order to protect its cotton producers, it has offered subsidy equivalent to three times as much as foreign aid it gives to all African nations. This has helped the US to maintain the status quo in the cotton production thereby keeping all the other competitors aside. As a result, there has been surplus production, which is dumped to the global markets depressing the cotton prices.
The administration of subsidies in US has produced so many economic impacts both nationally and internationally. The economic harm created by this cannot be neglected. However, the cotton farmers from US can boast of the effects brought by the introduction of this subsidy, their counterparts in cotton producing nations have got nothing to show off. The most affected is the US neighboring country Brazil. Brazil claims that the overproduction in US has largely led to the falling world cotton prices as it dumps (US) the excess produce to the world markets. The reason attributed to the dumping of a commodity in the market is that once the country in question has sold enough of the commodity in question and realized the desired or anticipated revenues it sees no reason to hoard the excess and therefore it opts to sell at even lower price than that of unit production cost. This helps to save a country from incurring the storage costs and this is what the US is doing in cotton production. The low cotton price caused by the US has cost Brazil millions of shillings.
The Brazil is not only affected country in this. Other victim nations are India and Mali. For example, Mali in 2001 incurred a huge loss in export of its cotton than the total aid received from the US.
Generally, the introduction of subsidies in US impacted positively on its own economy while impacting negatively on other country’s economies. The introduction of agricultural subsidies can be viewed as a politically oriented motive. The leaders have a vested interest in gaining political support from farmers, thus it seems that these farmers are lured by being given the subsidies. This can very easily keep one generation of leaders in power for quite a long time since one of the most target groups of the population that is farmers is adequately satisfied through critical economic decisions. Despite the US government receiving admiring support from its citizens, it attracts global criticism from the other global political leaders as their actions are viewed as a move to diminish the other nations economically for its own economic gains.
In addition, this has been one of the contexts in which the US is being condemned by other countries as all its actions are geared towards its own economic benefits in the name of assisting the other countries. This implies the gains accruing from aid given by the US to the needy nations are cancelled by the continuous administration of agricultural subsidies. According to World Trade Organization rules, the countries are discouraged from using the subsidy as a mean of boosting production and protecting their farmers.
However, in the 1995 ‘peace agreement’ WTO members agreed not to take each other to court over the subsidy dispute. This might be one of the reasons cited by the US in its extensive use of agricultural subsidies. Nevertheless, this agreement expired back in 2004 and before its expiry Brazil had already moved to court and filed a suit with the WTO against US against. Later in the case, it was found out that the US was the main cause of falling world prices and economic suffering posed to Brazil and other nations. Nevertheless, US went ahead and made an appeal against the charges.
In later ruling after the appeal the WTO condemned US for the effects brought about by the subsidies and demanded their immediate withdrawal which the US complied later only by removing some of the subsidies. As the events unfolded, some countries called for legal framework panel to control and regulate trade activities among its nations including agricultural subsidies. The overall implication over the adoption of subsidies in a given nation can be well analyzed by looking at the economic benefits accruing from the same in both the country practicing the policy and the international community at large. Oxfam has advised on total elimination of all the agricultural subsidies.
In this, consumers in the developed nations will benefit from waving of high taxes they part with to compensate the subsidies from the governments while producers from third world nations would benefit from fairer competition and higher prices. Persistence use of these subsidies by the developed countries will hamper the economic growth and development of many affected nations and therefore becoming donor-dependent even in their development projects due to stagnating and low incomes. The abrupt removal of Agricultural tariffs and subsides will result to remarkable benefits to the average consumers in the developed nations. As quoted earlier, they will end up paying lower prices for consumer goods and also exempted from paying the taxes required for the subsidies. However, the average farmer will have no something to smile about since the minimum price guarantee from the government will no longer exist.
In this case, the farmers may not necessarily incur losses but their income will be as determined by the global forces of demand and supply. In conclusion, the overall benefits will outweigh the total costs. From the case study, removing the agricultural subsidies and tariffs would be of much benefit than increasing the foreign aid to developing aid. As it has been observed, in many instances the total cost resulting from use of subsidies are higher than the foreign aid being given to these countries. It is the prime duty of every government to ensure that there is enough production of a given commodity for its citizens. This in turn is coupled with ensuring that the farmers maximize their revenues from their agricultural activities. Since the agricultural producers in the developed nations constitute a very small segment of the total population, the governments in these nations have launched extensive support programs to cater for both domestic needs, ensure farmers realize profits, and keep other nations out of production thus dominating the overall activity.
The WTO has tried as much as it can to reduce barriers to trade. However, these efforts seem to be fruitless. One of the reasons is that, most of the countries failing to comply are developed nations and at the same time are the ones, which seem to have largest say in this organization.
One of the approaches that can be used to the non-compliant member countries is to impose certain sanctions and discourage the dumping of surplus production to the world market.
International Food Policy Research Institute. How much does it hurt? The impact of agricultural trade policies on developing countries, Washington: International Food Policy Research Institute, 2003.