Six Reasons to Kill Farm Subsidies and Trade Barriers

A no-nonsense reform strategy.

America's agricultural policies have remained fundamentally unchanged for nearly three-quarters of a century. The U.S. government continues to subsidize the production of rice, milk, sugar, cotton, peanuts, tobacco, and other commodities, while restricting imports to maintain artificially high domestic prices. The competition and innovation that have changed the face of the planet have been effectively locked out of America's farm economy by politicians who fear farm voters more than the dispersed consumers who subsidize them.

The time is ripe for unilaterally removing those distorting trade policies. In 2006 Congress will begin to write a new farm bill to replace the protectionist and subsidy-laden 2002 legislation that is set to expire in 2007. Meanwhile, the Bush administration will be negotiating with 147 other members of the World Trade Organization to conclude the Doha Round before the president's trade promotion authority expires in mid-2007. Congress and the administration should seize the opportunity to do ourselves a big favor by eliminating farm subsidies and trade barriers, a change that would benefit all Americans in six important ways.

1. Lower Food Prices for American Families

The foremost reason to curtail farm protectionism is to benefit American consumers. By shielding the domestic market from global competition, government farm programs raise the cost of food and with it the overall cost of living. According to the Organization for Economic Co-operation and Development, the higher domestic food prices caused by U.S. farm programs transferred $16.2 billion from American consumers to domestic agricultural producers in 2004. That amounts to an annual "food tax" per household of $146. This consumer tax is paid over and above what we dole out to farmers through the federal budget.

American consumers pay more than double the world price for sugar. The federal sugar program guarantees domestic producers a take of 22.9 cents per pound for beet sugar and 18 cents for cane sugar, while the world spot price for raw cane sugar is currently about 10 cents per pound. A 2000 study by the General Accounting Office estimated that Americans paid an extra $1.9 billion a year for sugar due to import quotas alone.

American families also pay more for their milk, butter, and cheese, thanks to federal dairy price supports and trade barriers. The federal government administers a byzantine system of domestic price supports, marketing orders, import controls, export subsidies, and domestic and international giveaway programs. According to the U.S. International Trade Commission, between 2000 and 2002 the average domestic price of nonfat dry milk was 23 percent higher than the world price, cheese 37 percent higher, and butter more than double. Trade policies also drive up prices for peanuts, cotton, beef, orange juice, canned tuna, and other products.

These costs are compounded by escalating tariffs based on the amount of processing embodied in a product. If the government allowed lower, market prices for commodity inputs, processed foods would be substantially cheaper. Lifting sugar protection, for example, would apply downward pressure on the prices we pay for candy, soft drinks, bakery goods, and other sugar-containing products.

The burden of higher domestic food costs falls disproportionately on poor households. Farm protections act as a regressive tax, with higher prices at the grocery store negating some or all of the income support the government seeks to deliver via programs such as food stamps.

If American farm subsidies and trade barriers were significantly reduced, millions of American households would enjoy higher real incomes.

2. Lower Costs and Increased Exports for American Companies

Producers who export goods to the rest of the world and manufacturers who use agricultural inputs would also stand to benefit significantly from farm reform. So would their employees.

When government intervention raises domestic prices for raw materials and other commodities, it imposes higher costs on "downstream" users in the supply chain. Those higher costs can mean higher prices for consumers, reduced global competitiveness for American exporters, lower sales, less investment, and ultimately fewer employment opportunities and lower pay in the affected industries. Artificially high commodity prices drive domestic producers abroad to seek cheaper inputs--or out of business altogether.

In the last two decades, the number of sugar refineries in the U.S. has dwindled from 23 to eight, largely because of the doubled price of domestic raw sugar. During the last decade thousands of jobs have been lost in the confectionary industry, with losses especially heavy in the Chicago area. Expensive food also hurts restaurants.

Enterprises outside the food business would benefit from farm reform as well. Rich countries' agricultural trade barriers remain the single greatest obstacle to a comprehensive World Trade Organization (WTO) agreement on trade liberalization. The current round of talks, the Doha Development Round, came to a halt in Cancun in 2003 when the Group of 20 developing countries demanded more serious farm reform by the rich countries as an essential pre-condition. Any progress at the December 2005 meeting in Hong Kong and beyond will depend on real progress in cutting U.S. farm subsidies and trade barriers.

A successful Doha Round would lower trade barriers for a whole swath of industrial products and services. A 2001 study by Drusilla Brown at Tufts University and Alan Deardorff and Robert Stern at the University of Michigan estimated that even a one-third cut in tariffs on agriculture, industry, and services would boost annual global production by $613 billion, including $177 billion in the United States--or about $1,700 per American household. Some of the country's most competitive sectors, including information technology, financial services, insurance, and consulting, probably would increase their share of global markets if the Doha Round were successful. Farm reform remains the key.

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