Agricultural Subsidies’ Effect on the World Economy

Subject: Economics
Pages: 6
Words: 1673
Reading time:
6 min
Study level: PhD

Agricultural Subsidies

It is a fact that resources are not equally distributed among nations. Some countries experience economic growth, while others have their citizens suffer from the lack of food, water, housing, and other necessary goods. The modern trend of globalization pushes many nations to interfere with each other in the economic field. Trade is one of such relations, which is regulated by international committees like the WTO. This organization focuses, among others, on the issue of supporting the agricultural industry and ensuring all countries have equal access to trade. While agricultural subsidies support local farmers and balance home economics, this measure is unacceptable since it creates a basis for international dumping and increasing the poverty rate in developing countries. The purpose of this paper is to analyze the impact of agricultural subsidies and their usage in the world. It focuses specifically on the United States, the European Union, and Japan as nations which provide the most financing for this purpose.

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Case Study Summary

The main idea of the case study is that agricultural subsidies have an adverse effect on world economics. This measure creates the opportunity to make food cheaper, yet this often leads to dumping prices on the international market. Moreover, the local economy does not benefit from subsidizing as well. It may seem like it is creating jobs and ensuring farmers receive a decent income. However, this labor program is non-transferable, and spending taxes of other people on supporting farmers in such amounts is questionable.

The case study describes measures that were taken to address this issue. The GATT agreement used to feature the problems in the agricultural field, yet there were no effective decisions for tackling the issue. The Uruguay Round and the Doha Development Agenda became the consequent regulations that aimed to reduce the adverse impact of agricultural subsidies. However, there are still issues that need to be discussed on the international level.

Finally, the case study has the table featuring the amount of financing that some developed countries provide for their farmers. These countries include Australia, Canada, the European Union, Japan, and the United States. It is understandable that the EU offers the largest portion of subsidies among these states. The EU is a combination of countries that partially share their economies, thus the data for it is presented as a single value.

Trade Negotiations

GATT

GATT, or the General Agreement on Tariffs and Trade, used to be the framework accepted by the international community after the WWII. It aimed to regulate the processes in the international trade (Hoda, 2002, p. 7). Some of the post-war countries like the United States had strong economic positions, while others suffered from destruction and the loss of the necessary infrastructure. As Europe united to form the European Economic Community, it raised discussions about showing the signs of competitiveness. However, all the solutions of GATT covering tariffs did not benefit much the developing countries much. An appearance was created that they were welcome to join the international trade, yet the interests of the United States and Europe remained primary.

Uruguay Round

The Uruguay Round is a set of international trade negotiations that came to improve the GATT framework in 1986 (Martin & Winters, 1995, p. 1). The members of this round realized the importance of reducing the influence of agricultural subsidies. They also included several fields like banking and insurance in the scope of international trade. Another important achievement was the recognition of copyright policies to be followed in all participant countries.

However, the round still did not answer the issues regarding the agricultural subsidies. Although it provided measures for reducing them, some elements of the process were omitted. For instance, it did not regulate such subsidies that were potentially limiting the local production levels or served for developing an infrastructure. It is possible that these issues were caused by the fact that the major decisions were made by wealthy and influential countries who had a purpose of keeping as much agricultural subsidies as they can to export cheap food and receive more income.

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One of the most important achievements of the Uruguay Round is the creation of the World Trade Organization (World Trade Organization, 2017b). It exists nowadays as the controlling organ that regulates most of the international trade processes. One of the functions that the WTO has is to answer the demand of wealthy countries to keep the farm subsidies and balance it with the need of emerging states to ensure the principles of the fair trade in agriculture. Most of the countries in the world are currently members of the WTO.

Doha Development Agenda

While the issue of subsidies was not entirely solved during the Uruguay Round, there was a need for creating a more inclusive approach that would address the issues of the developing countries. The Doha Development Agenda (DDA) calls for opening access to international trade for all states independent of their economic status (World Trade Organization, 2017a). There are major discussions on eliminating subsidies for the production of food that is meant to go on export. Another key point of the DDA is to give access for developing states to foreign markets through lifting barriers of pricing and quotas. However, it is understandable that every government puts the interests of its country as the top priority. Many industrialized states do not wish to give up their right to subsidize farmers. Although representatives of the United States, the EU, and other developed countries recognize the importance of the fair trade, they do not easily agree with measures influencing their national income from agriculture export.

Subsidies by Country

The case study features a table that shows the number of subsidies given to farmers in 2007. The table includes five countries that are considered to be wealthy. These are Australia, Canada, the European Union, Japan, and the United States. As it was mentioned earlier, the European Union is not technically a country, but its budget for supporting agriculture is formed commonly instead of each nation drafting its own policies. The table shows that the EU spends the largest amount of money on agricultural subsidies, making a total of $134,318 million. However, this does not result in the greatest percentage of supported farmers. Japan has the leading position here with 45 percent of farmers being supported with subsidies. The United States has the third place by the sum of subsidies being $32,663 million. Although Canada spends much less financing than the USA, its share of supported farmers is greater by 8 percent. Australia is an interesting case as well. While is does not spend much on subsidies (only $1,827 million), it remains competitive in exporting.

Fair Trade

There are questions raised with people from countries with developed economies wishing to understand why would they want to support the principles of fair trade (Suranovic, 2015, p. 45). Of course, local economy should be the top priority for all citizens. However, there are several factors influencing the international wellbeing that should be kept in mind to eliminate the possible adverse outcomes. These factors include, for example, the immigration crisis. Farming requires infrastructure, and the failure to ensure the food is sold creates a situation where governments in developing countries do not make any efforts to improve the workers’ quality of life. Nowadays, 75 percent of the planet’s population works in the agricultural field, either growing or collecting food. Inability to receive enough income to support their families pushes people to move to other countries in search of a better place to live and work. Places like Europe are already experiencing the immigration crises associated with the war in the Middle East.

There are presumptions that fair trade would not have any positive effect for ordinary farmers, as most government representatives are corrupt. Some critics of the policy also note that agricultural subsidies create opportunities for supporting the world with cheap food, which is a good initiative in the world challenged by hunger and lack of resources. However, creating conditions where some states are more privileged than the others is initially the wrong position to take. The current agenda of the DDA works towards ensuring the agricultural subsidies would not create barriers for developing countries engaging in the international trade process.

Conclusion

The food trade is a complex process that has to be regulated on the international level. The case study is evidence that although the world is striving to find the best solution for international trade, some countries wish to stick to their existing policies of providing agricultural subsidies for receiving more income from export. However, this step increases the poverty level in developing states and creates a base for an immigration crisis. Governments all over the world must think of the best solutions for making the trade process equal for all participants. The recent situation with imposing import sanctions by Russia is beneficial for the country’s economy as it supports local farmers and ensures their products are sold at a competitive price. However, this is an example of a conflict that eliminates the opportunities for the world to unite. This can lead to the lack of foreign food that people already got used to. That is why developed countries should make a step towards creating opportunities for fair trade.

References

Hoda, A. (2002). Tariff negotiations and renegotiations under the GATT and the WTO: Procedures and practices. Cambridge, UK: Cambridge University Press.

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Martin, W., & Winters, L. A. (1995). The Uruguay Round: Widening and deepening the world trading system. Washington, DC: The World Bank.

Suranovic, S. (2015). The meaning of fair trade. In L. T. Raynolds & E. A. Bennett (Eds.), Handbook of research on fair trade (pp. 45-60). Cheltenham, UK: Edwards Elgar Publishing Limited.

World Trade Organization. (2017a). The Doha Round. Web.

World Trade Organization. (2017b). What is the WTO?. Web.