The effects of EU and US subsidies on developing countries

For many developing countries, investment in agriculture has been declining since the '80s. External assistance to agriculture has also been declining, as have government expenditures in developing countries. However, the reverse is true for OECD countries, which has spent $6.5 trillion on agriculture since 1980. This huge excess has created the off-loading of surplus products on the world market and the consequent decline in international prices for most agricultural products since the '60s.

Meanwhile, for many developing countries, investment in agriculture has been declining since the '80s. Under the current WTO-brokered global trading system, wealthy countries spend billions of dollars each year to support their domestic agriculture sectors. In 2002, direct support to farmers by countries belonging to the Organization for Economic Co-operation and Development (OECD) added up to around $235 billion -- three quarters of the total OECD support estimate of $318 billion. Subsidies by this group of countries account for over 90 percent of trade-distorting domestic support and export subsidies reported to the WTO (Food and Agriculture Organization Annual Report).

Subsidies to farmers in the developed world have negative ramifications for agriculture in the developing world in a number of ways. By enabling farmers and agro-companies to sell on the international market at prices far below production value, they leave growers in the developing world unable to compete. They also encourage excess supply, which further lowers world agricultural prices -- reducing the money that poor farmers make, or pushing them out of the business entirely.

Small-scale farmers in developing countries have a hard time competing against subsidized products that are dumped on their local markets. One more kilogram of subsidized sugar in the European Union could very well mean one less kilogram produced in Kenya or Guatemala. Another bale of subsidized cotton in the United States may mean less production in Mali. Or another ton of subsidized rice in Japan can have the same displacement effect in Vietnam.

Although the framework for international trade does not guide the work of poverty reduction, it can provide opportunities or put a brake on its efforts, depending on how it is applied. The current framework is inequitable for developing countries and for small farmers. Essentially, the framework was created by the US and the EU, and developing countries accepted it for many reasons. A number of significant problems emerged when the framework was implemented, among them domestic support through the issue of subsidies, which governments of developing countries provide when they can afford to.

The vast part of these subsidies goes to big farmers, who are prominent in international competition. The small farmers from developing countries are not able to compete in the international market with this type of competition. Moreover, the subsidies are immune from any reduction. In fact, they have increased over the past ten years. Obligations of subsidy reduction in agriculture have been implemented in letter but fully violated in spirit, because the subsidies are increased through other means. These subsidies protect the farmer and provide an incentive to the farmer to continue with unviable farming and production.

Europe's sugar-production costs are among the world's highest but, paradoxically, the EU is the world's second biggest sugar exporter. This is made possible by setting the domestic sugar price at three times that of international prices, and subsidizing exports of excess production onto the world market. EU consumers and taxpayers are forced to pay the hefty bill of $1.97 billion, but the impact falls hardest on developing countries. This is because the EU sugar regime has the following effects:

-- It blocks developing-country exporters, including some of the world's poorest countries like Mozambique, from European markets.

-- It undercuts developing countries in valuable third markets, such as the Middle East, by subsidizing exports to prices below international costs of production.

-- It depresses world prices by dumping subsidized and surplus production, so damaging foreign-exchange earnings for low-cost exporters such as Brazil, Thailand, and Southern Africa.

Let us consider the Indian dairy sector, now one of the largest milk producers in the world and a potential exporter. Even if it could overcome EU tariffs of 144 per cent on butter and 76 per cent on milk powder, it could hardly compete in Europe with domestic producers, half of whose income is derived from subsidies. Nor can it compete with EU milk-powder exports, sold at about half the cost of production in third markets such as the Middle East and southern Mediterranean. It not surprising that Europe is the world's largest exporter of skimmed milk powder. Ironically, the EU was one of the aid donors that supported the development of the Indian industry in the first place.

For many developing-country producers, reaching an EU customer involves running a marathon with hurdles. First there are the tariff barriers, averaging 20 per cent on agricultural products, with peaks rising to 250 per cent. For example, Brazilian chickens cross the Atlantic with a 46 per cent surcharge; the corresponding surcharge for orange juice is 34 per cent. In the case of textiles and clothing, the EU maintains quotas on most important product lines, while liberalizing marginal items such as parachutes and umbrellas. But when quotas cease, as they eventually all must under existing multilateral commitments, high tariffs will remain, further deferring genuine access.

The possible measures that the US and EU administration could undertake are:

-- The interests of poor Third World producers should be taken into account in a radical reform of the Common Agricultural Policy.

-- A clear timetable should be agreed for phasing out export subsidies and ending dumping.

-- Developing countries should be able to protect their smallholders from unfettered and often unfair international competition.

The poor countries should not be required to liberalize their economic policies in return for reductions in the current high and unfair level of EU protectionism. The World Bank and IMF should stop attaching trade liberalization conditions to their loans and WTO should not be pressured to include new liberalizing agreements on investment, competition, and procurement and their agenda.

However, these measures might give developing countries too much freedom and may result in government policy failure and further create economic inefficiency. Thus, there must be a check and balance system to even out the affects of the massive subsidies paid out by the USA and EU.

Shouro Dasgupta is a Bangladeshi student studying in Oklahoma City University.