Prospects For Free Trade Look Bleak

Source: Oxford Analytica

Published February 3, 2010

Farm BillForestryWorld Trade Organization (WTO)

Farm groups on both sides of the Atlantic are gearing up for a bruising battle over subsidies, as the next two years will see decisions taken on U.S. Farm Bill renewal and the E.U. Common Agricultural Policy. The outcome will have major implications for global trade, food prices, fiscal policy and agribusiness over the next decade.

Over the next two years, the main U.S. and E.U. agricultural policy frameworks will be overhauled:

CAP. The E.U. Common Agricultural Policy (CAP) needs to be accommodated within the E.U.'s next multi-year budget horizon, for 2014-20. The amount of money agricultural ministers will be able to spend on E.U. rural programs will be a major factor in political decisions on the budget.

--U.S. Farm Bill. In Washington, discussion of a new Farm Bill, which will be needed by the end of 2012, has also started. Again, the struggle will be over the amount of funding allocated to agricultural production programs, relative to nutrition and conservation schemes.

Any liberalizing changes may be too late to save the WTO Doha Round, which is limping towards a 2010 finishing line. Yet agricultural policy has been the most significant barrier to global trade liberalization, so that upcoming U.S. and E.U. policy changes may hold the key to the success or failure of future trade talks.

Reforming E.U. The E.U. has become a leader in farm policy reform, with a remarkable reshaping of the CAP over the past 18 years. Although still protected by high tariffs, E.U. farmers now get most of their support through less trade-distorting direct payments only loosely connected to their farming decisions. The market increasingly works to guide production and link farmers to consumers. However, the distribution of direct payments brings its own problems, principally of achieving equity between farmers and countries, and of fiscal sustainability in a tight-budget era. Therefore, the main issue facing those taking decisions on the future of the CAP in the post-2013 period is how to reposition the direct payments program to satisfy the political needs of 27 member states.

--Resistance to reform. Instead of building on the 1996 Farm Bill, which offered a measure of agricultural policy modernization, Congress largely abandoned reform in the 2002 and 2008 renewal rounds. Therefore, the key question is whether U.S. farm policy can transition from a subsidy-based system to one that provides affordable income insurance to farm households and incentives for environmental stewardship.

--Obama hesitation. Given that President Barack Obama's fiscal year 2011 blueprint calls for significant cuts in less trade-distorting 'conservation' programs, and little change in 'program crop' subsidies, the outlook is not promising for reform. The next Farm Bill could again erect a firewall around the traditional programs that benefit disproportionately the producers of a handful of commodities such as corn, wheat, soybeans, rice and cotton.

Agricultural reform outlook. Multilateral trade talks, such as the Doha Round, could help prevent backsliding away from agricultural policy reform, although they are unlikely to drive it:

--Developing world disquiet. International concern is growing about the inequity of rich farmers in the developed world receiving the lion's share of government agricultural support assistance. If India, China and Brazil are to be persuaded to relax import barriers to U.S. and E.U. exports, particularly of manufactured goods, direct agricultural support payments in the OECD countries will need to be further restricted.

--Doha fix? The proposed constraints on domestic support for agriculture that are being considered in the Doha Round are perfectly suited to such a purpose.

In both the United States and the E.U., fiscal political and institutional pressures mean that the prospects for reform of trade-distorting agricultural policies have fallen sharply. This does not bode well for significant trade liberalization affecting either food products or manufactured goods over the next decade.