A RULING by a World Trade Organization panel last week might spell the
beginning of the end for the enormous subsidies rich countries pay their
farmers. That would have profound consequences around the world for
agriculture, the environment, food security and the political stability of
some countries.
Following a complaint brought by Brazil, a panel at the WTO headquarters in
Geneva decided that the $2 billion a year the US has been giving its cotton
farmers is illegal under world trade rules, because it allows the US to
unfairly increase its market share. "The implications of the case are
huge," says Ben Lilliston of the Institute for Agriculture and Trade
Policy, a US think-tank in Minneapolis.
Meanwhile, a decision is pending on another complaint to the WTO from
Brazil, this time about the massive sugar subsidies the European Union
pays. The EU agriculture commissioner, Franz Fischler, said in March that
the case has "severe implications" for the future of subsidies.
If the decision on US cotton is upheld, and if the EU loses the sugar case,
countries opposing farm subsidies would gain a powerful bargaining chip in
the current trade talks. And if the US and EU are forced to end all
trade-distorting subsidies, or at least make major cuts, the result would
be a huge shift in agricultural production from richer to poorer countries.
The consequences would be far-reaching. A lot of money is at stake, for
starters. Brazil says it lost $600 million in 2001 alone because of US
cotton subsidies.
For aid charities like Oxfam the issue is development: it sees ending
subsidies as the key to allowing farmers in poor countries to rise above
subsistence and make the money they need to improve their lot. Oxfam
calculates that if Africa could increase its share of world exports by a
mere 1 per cent, it would earn an extra $70 billion annually, five times
what the continent receives in aid.
When it comes to the environment, the picture is extremely complex. Many
farming methods used in rich countries can damage the environment, but
shifting production to the south might merely shift the problem. If US
cotton subsidies end, for example, a lot more cotton could be grown in
places such as China and Africa. This could exacerbate water shortages, as
cotton is a thirsty crop. But if it brought those countries more money,
poor farmers could invest in more efficient agricultural technology.
Meanwhile Daryll Ray at the University of Tennessee, Knoxville, calculates
that if the US planted some of its cotton fields with crops that could be
burnt to produce energy, instead of subsidising ever more, ever cheaper
cotton, world prices would double, cotton farmers would make profits
without subsidies, and carbon dioxide emissions would fall.
But the US and EU, which pay their farmers around $1 billion a day in
subsidies, are unlikely to risk, without a fight, the political fallout
that ending subsidies would bring. Introduced after food shortages in the
1950s, subsidies have certainly achieved what was intended: ensuring that
farmers produce as much as possible regardless of economic conditions. But
knowing they will make a profit regardless, subsidised farmers can continue
to increase production and export the crop for less than it cost to grow, a
practice called dumping . This means world prices fall. Farmers in
countries that do not pay subsidies cannot compete, lose market share and
struggle to make money.
In a world where the US and EU regularly complain that other countries are
breaking WTO rules by dumping manufactured goods, this seems incongruous.
But when global trade negotiations began, less contentious sectors, such as
manufacturing, were tackled first.
In 1994 WTO members even agreed on a "peace clause", under which no legal
cases would be brought against farm subsidies until January this year, as
long as everyone kept subsidies at 1992 levels. Now this agreement has
expired. But the latest talks, in Cancun, Mexico, collapsed last year after
rich countries refused to make concessions.
Cotton was a major bone of contention at these talks. US cotton production
burgeoned between 1998 and 2001, so US subsidies increased, exports
doubled, and the US's global market share rose from 24 to 37 per cent. But
over the past decade cotton prices have halved. This means US producers are
selling the crop for less than half what it cost to grow it. In 2001 alone,
Oxfam calculates that this lost West African producers $190 million in
export earnings.
So even before the peace clause expired, Brazil went to the WTO,
complaining that the US paid its cotton farmers more than the 1992 limit.
The US argued that its subsidies are "decoupled", or based on the past
year's production, not the current year, so they do not directly encourage
more cotton production this year.
Celine Chaveriat, WTO specialist for Oxfam in Geneva, says this is
nonsense, especially as bigger farms get bigger subsidies. "Subsidies lead
to production that would not otherwise be there."
Now the WTO dispute panel has ruled that decoupled subsidies did boost
production and allow exporters to capture an unfair share of the market.
The US will appeal, but Chevariat and others say the main judgement is
likely to stand.
This is bad news for the EU, home of the world's most heavily subsidised
farmers. The proposed reform of its Common Agricultural Policy is based on
just such decoupling, says Yvonne Apea of the International Centre for
Trade and Sustainable Development, a think-tank in Geneva. If the WTO
continues to rule that this unfairly distorts trade, the EU will either
have to think of something else, or abandon the WTO.
Some fear the EU and the US might take this drastic step, in favour of
separate deals with individual countries where they can drive harder
bargains. "But the US benefits a lot from the WTO dispute mechanism,"
Chaveriat points out.
Whatever happens, the global march towards free trade has now finally
focused on farm subsidies. The outcome may be in doubt, but its importance
is not.:
