Over a year and a half after its initial introduction, a new farm bill was finally signed into law by President Obama on February 7th. With most of the American population caring very little about domestic agricultural policy, this law, like those before it, made few headlines across the country. However, the new law flew in the face of general economic consensus: for years. Economists around the world have roundly condemned the agricultural policies of the United States, the European Union, and other developed markets, decrying their distortionary effects. The truth, though, is that the effects of agricultural support in developed nations are complicated. Economists must acknowledge the fact that liberalization of trade in the agricultural sector is not the universal good they often claim it to be. More importantly, American voters and politicians need to understand that their routine support of domestic agriculture is harmful to the US and to other nations and should no longer be ignored.
The United States’ extensive protection of its agricultural sector has essentially become a fact of life for politicians. Farm support in the US is largely a non-issue in the public discourse, and serious efforts to eliminate agricultural protectionism never seem to manifest themselves. Such is true of developed countries around the world: most wealthy countries provide substantial support for their domestic agricultural sectors. This support manifests itself in diverse ways—including import tariffs, subsidized crop insurance, export subsidies, and direct payments to farmers—with each policy having only slightly different effects on the market.
These policies are a carryover from the beginning of the last century, when farmers were far more numerous, crops were more susceptible to failure, and farms were smaller and less financially stable. Since then, however, the nature of the US and EU’s agricultural sectors have changed dramatically. Farmers now make up only a small portion of the total population, advances in farming technology have rendered more stable yields, and farming is dominated more and more by huge agribusinesses rather than family farms. Roughly 75 percent of total agricultural subsidies in the US go to the top 10 percent of farming companies; meanwhile, the average farmer still makes more money than the average American. Put simply, agricultural protections have become a means by which taxpayers needlessly hand over money to fellow Americans who are already financially stable. In fact, according to the Congressional Budget Office, the implementation of the current farm bill will cost the US roughly $956 billion over the next 10 years. The situation is no different in the EU, yet in both cases, there is little effort to eliminate this wasteful spending. The routineness of protectionism, the average citizen’s apathy toward agricultural policy, and, most important, the strength of the agriculture lobby all prevent necessary changes.
The failure to make these changes has global impacts. Developed nations’ flawed agricultural policies are worse than simply an unnecessary redistribution of wealth to the affluent. Trade barriers and subsidization of crops create distortions in the world market, preventing optimal quantities and prices of agricultural products from being obtained. Various researchers estimate that the total increase in world welfare from the liberalization of agricultural trade policies could be anywhere from tens to hundreds of billions of dollars. Most of this welfare gain would accrue to developed countries, but much of it would also benefit developing countries.
Four months ago, Columbia economist Joseph Stiglitz wrote a scathing op-ed piece in the New York Times about the recent farm bill in which he argued in part that the bill, by financially supporting farmers, would lead to overproduction, a reduction of world food prices, and the “dumping” of cheap crops in developing countries where poor, local farmers cannot compete with low world prices. The issue of dumping has been a lightning rod for the criticism of economists and policymakers who fear for the well-being of developing countries. Agricultural support has been made out to be a policy by which wealthy countries take advantage of poorer countries, whether deliberately or not.
However, the impact of protectionism on developing countries is more complicated than most economists make it out to be. Though they generally agree that agricultural support in developed countries creates a surplus that lowers world prices, many challenge the assumption that this is extremely harmful to poor countries.
First, many farmers in developing countries are subsistence farmers, who farm to feed their families and only sell produce in a local market if they have any extra. These farmers will likely have no interaction with international trade, so depressed world prices will have essentially no effect on them. Second, lower world prices enable poor non-farmers to get food more easily. If a developing country is importing an agricultural product, a lower world price is beneficial. Finally, a number of developing nations benefit from lower tariff rates (sometimes as low as 0%) than those belonging to Most Favored Nation trading partners (nations that grant each other special trade status and low tariff rates). If developed nations remove all trade barriers, developing nations lose this trade advantage and then have to compete with wealthier nations in exporting their goods to lucrative markets, such as those of the US and the EU.
Nevertheless, developing nations would still, as a whole, benefit from trade liberalization and the removal of agricultural protections. Those countries that are exporters rather than importers would benefit from higher prices, with their exports generating higher profits in overseas markets. Higher prices would also encourage developing countries to focus on development in the agricultural sector, helping these nations to rely less on outside food aid and even allowing them to change from being net importers to being net exporters. Further, some portion of the money saved by wealthy countries via the elimination of protections could be used to invest in agricultural development abroad. It is important to keep in mind, though, that not everyone in every developing country would benefit. For many countries, the removal of agricultural support in wealthy countries would come as an unpleasant shock.
Agricultural support predominately benefits well-off farmers at the expense of taxpayers and overall economic welfare. It has been criticized by the World Trade Organization, the World Bank, and independent economists and organizations around the world. This criticism, especially as it pertains to developing countries, should not always be blindly accepted. Nonetheless, agricultural protections are, in general, needlessly distortionary and harmful. The new American farm law is proof that standard agricultural policy does not receive the widespread skepticism it deserves.