No free lunch

Discussions at the World Trade Organization meeting in Mexico fell apart today as developing countries unite to fight the hypocrisies of developed nations. The issue, as it has been for years, is trade protectionism. More specifically, it is about farming, which has always been an extremely sensitive political subject the world over.

The problem is very straightforward: developed nations are unfairly subsidizing their farmers so that they can pursue economically unsustainable enterprises. The notion that these subsidies are unfair is a given. It’s not just that poor countries are complaining, but the fact is that rich countries themselves are accusing each other of illegal practices.

The easiest solution that would please the WTO as an able trade body is to force all countries to drop their subsidies to farmers, eliminate all farm product tariffs, and allow free exchange of goods across continents. Doing so would allow cheaper products flood the Western markets, and help Third-World countries prosper by production and not by aid.

Aid is an interesting tool developed nations have chosen to help solve the farming problem. In effect, each such government is paying two subsidies: one to their own farmers to help fend off cheap import, and another to foreign farmers so that they get paid for products they should be able to but did not export. The European Union is practicing this malformed logic to such an extreme that half of the expense of the political federation is going out to their own farmers.

The easiest solution would not work. Not only is it political suicide for any elected assembly to do away with this socialist policy, it would create social instability. Western farmers have little defence against a sudden influx of cheap foreign competing goods. This would create a massive unemployment problem. Since most farmers who need subsidy in the first place are small farmers with mostly break-even balance sheets, a disappearance of subsidy coupled with a sharp decline in demand due to competition and excess supply would bankrupt many small-scale farmers. As they are now mostly hovering around lower-middle class, a sudden change in policy would introduce massive poverty to one specific industry.

Nevertheless, the level of government assistance to farming in developed countries is reaching unsustainable levels, and begs the question as to what makes farming more special than say manufacturing or software development, being two other fields that are seeing massive import of products and export of jobs.

Still, the right thing for the government to do is to make present farmers self-sufficient. Blank checks do not help anyone. More appropriate could this money be invested on better training and more efficient equipment. As a last resort, farmers who have no competitiveness should be provided with the skills to quit and pursue another occupation. This needs to be a gradual process. Unlike manufacturing, where consumer demand can increase when disposable incomes do so, food demand has for the most part reached a plateau in developed nations. Therefore, foreign imports need to be controlled in the meanwhile so that they do not flood the market quicker than local farmers can improve themselves.

There are advantages and disadvantages to the farming question. Access to international market helps Third-World countries reach prosperity with confidence. Cheaper food due to a greater supply in turn helps Western nations not only raise disposable income, but more importantly also combat hunger problems among the poor within their own borders. But this increased competition also creates unemployment and therefore poverty in developed nations, although the savings in subsidies can then be fairly applied to welfare systems for the people in need, not just in farming, but in every walk of life.

A return to fairer trade that minimizes social disruptions is an ambitious project for the Western countries to undertake and may take years. This requires continuity in policy even if governments come and go. Therefore, the success of an orderly change would highly depend on the way current farmers would be protected when the subsidies go away. After all, in order for changes to work, it is important for domestic farmers to realise that foreign farmers are often facing far worse conditions than they are and that every farmer deserves a fair chance at making a living.

September 14, 2003