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The effects of subsidies on agricultural exporting countries

ISSUE: “Unless the EU and USA take steps to cut subsidies to agricultural farmers soon, a number of efficient agricultural exporting countries in Africa and Latin America will take legal action against them on farm subsidies.”

The motion of argument is against the key issue; thereby focusing on ‘the agriculture subsidies given to the farmers by the developed countries does not affect the farmers economy of the developing nations/exporters (Latin America and Africa).’

The growth in world trade phenomenally during the last decade was due to the liberalization of global economies and the formation of World Trade Organization. WTO sought tariff reduction and trade barriers, regulates importing and exporting and eliminates discriminatory treatment in international commerce. Subsidies are the monetary or financial assistance given by the government to the domestic farmers as supplement to their income for the negotiating supply and pricing of commodities. The Government of EU and USA have spend a negotiable amount in providing subsidies to increase production, reduction in the price of the commodities below the market level and protect people from relying on imported foods. As these developed countries globally stands first in economy they can provide subsidies to farmers and spend more on new technologies to produce commodities effectively at low expenditures, hence avoid importing of goods from developing nations.

Mercantilism theory states, ‘the trade surplus can be achieved by maximising the exports through subsidises and minimising the import through tariffs.’ The fluctuations in the market price of agricultural commodities can vary due to weather conditions and market volatility. If there is no support from the Government, the farmers will be pushed into bankruptcy and forced off lands. Thereby, the consumer faces price hikes for the commodities if the price of import goods increases; this affects the standard life of people. The farmers of these countries were overwhelmed by providing subsidies through Farm Bills which helps in creating a stable farming and ensuring the profits. During 1995 to 2010, the federal Government have spent over $130 billion for agricultural subsidies. In that, EU provides $100 billion and US provides $44 billion annually as agriculture subsidies.

The subsidy leads to sustain production even as the price of the commodity fall below the cost of production. When analysed, the inflation adjusted price have declined over the last three decade years (1975 to 2009) due to the increase in the competitive pressure in the supply side of the market. Usual expectation, due to subsidies, production increases, hence commodities get accumulated and the prices fall. But inventories stated, the price of the commodities have fallen since the early 1980’s because the overall share of total worlds export from the developed countries, EU and USA was reduced. Though these countries were adopting subsidizing practices, the farmers of the developing countries will not cease their production. So it is unfair to blame the agricultural subsidies for the issues of developing countries when there is the stressed condition for the developing nations and for the fall of global economy.

WTO has signed, since from 1995, the developed nations have to reduce the agricultural product tariff upto 36% while the developing countries have to reduce upto 24%. If the trade barriers have been removed, it is beneficial for developing countries as they enjoy free trade. This enables instability in the economy of international trade cycles and increase in competitive environment due to the open up of new markets

The basic arguments recognized and justified by GATT in the implementation of agricultural subsidies are the Infant Industry Argument and the National Security Argument. The Infant Industry Argument argues certain agricultural production has to be protected from foreign competition for gaining significant market share. For instance, in USA, maize production has been heavily subsidized 1,641,218 farmers with $73,792,669,478 because its market share dominates globally. So, the USA Federal Government provides support for maize growth as it contributes mostly for the ethanol production, thereby reducing the dependence on imported oil. From the above analysis, it is understood that USA adopt ‘Comparative advantage’ as it produces maize needed by another country with its own available resources and thereby increasing the maize export. Also it follows ‘Absolute advantage theory’ as it produces ethanol from its available resource, maize and thereby reducing the import of ethanol. Furthermore, the discussions of GATT forums regarding the National Security Argument was certain domestic producers can sustain for competition and operates without irregularities in domestic market due to national security measures. For example, during war crisis, food supply becomes inconvenient. Hence many countries frame subsidizes for agriculture. The consumers have to pay high prices for agricultural commodities in the food exporting nations as these nations were unable to sell their agricultural products in the subsidized markets.

Thus from the above research it is understood that providing subsidies to farmers by the Government of EU and USA, increase production, low priced commodities in market and avoid relying on imported foods.

REFERENCES

Copenhagen Consensus Challenge Paper (2004), ‘Subsidies and Trade Barriers’. Available from:

<http://www.copenhagenconsensus.com/Files/Filer/CC/Papers/Subsidies_ and_Trade_ Barriers_140504.pdf>

Food First (2005), ‘U.S. Farm Subsidies and the Farm Economy: Myths, Realities, Alternatives’.

Available from <http://www.foodfirst.org/files/pdf/backgrounders/subsidies.pdf>

The Heritage Foundation (2007), ‘How Farm Subsidies Harm Taxpayers, Consumers, and Farmers’. Available from < http://www.heritage.org/research/reports/2007/06/how-farm-subsidies-harm-taxpayers-consumers-and-farmers-too>

Centre for Trade Policy Studies (2006), ‘Six Reasons to Kill Farm Subsidies and Trade Barriers’. Available from <http://www.freetrade.org/node/493>

The Fair Trade Times (2010), ‘Fair traders must oppose farm subsidies’. Available from < http://fairtradetimes.com/2010/11/23/fair-traders-must-oppose-farm-subsidies/>

AFTER DEBATE

STUDENT ID: 3475001

STUDENT NAME: DIVIGA VIJULAN HARRIS

ISSUE: “Unless the EU and USA take steps to cut subsidies to agricultural farmers soon, a number of efficient agricultural exporting countries in Africa and Latin America will take legal action against them on farm subsidies.”

The motion of argument is against the key issue; Now-a-days every country is spending large proportion of their revenue for agriculture subsidies, thereby decreasing the dependence of food imports from other countries. So the agricultural farmers in the developing countries feel that they lose the economy as they were unable to compete globally. This argument is descriptively focusing on ‘the impact of agriculture subsidies on the welfare globally and the agriculture globalization is producing good effects on the farmers economy of the developed nations (USA and EU).’

Agriculture subsidies act as an effective way for accelerating the agriculture sector. To maintain the supremacy of the developed countries (US and EU), these subsidies became a tool. It determines the livelihood of the farmers, encouraged overproduction with depression in prices. This made the developed countries good competitive in the market globally. In developed nations, 80% of farmers receive subsidies from the Government for increase in production and inflated consumer prices.

The combination of target prices, deficiency payments, and mandatory acreage reduction are some of the other methods adopted by the Government to subsidize the agricultural commodities. These approaches are used for US gain crops mainly for corn and wheat. Here, the government set a target price for the good. The Government makes the deficient payments if the price of the goods falls below the target price. In mandatory acreage reduction program, a specific part of the production land is taken out by the farmers for price stability.

The main aim of WTO Agriculture Agreement was enhancing market oriented agriculture trade by removing the trade distortions. During WTO Uruguay Round (1986 to 1994) of negotiations on agriculture, developed nations took an oath to reduce the subsidies by 25%. But, these developed countries have reneged on the agreement on Agriculture and increased the subsidies rather instead of reducing it. In 1996, the Doha round have been initiated to straighten the curves in trade by reducing the trade barriers. The WTO Agriculture Agreement is currently under review and reform to bring significant reduction in subsidies that lead to overproduction and distortion of trade. In the early 20th Century, Organization for Economic Co-operation and Development (OECD) countries have supported the farmers by providing the subsidies of $320 billion a year (1986-1988 average) and $330 billion a year (1999-2001 average).

The query in the debate was, ‘Does the Subsidies improves global welfare?’ From the analysis, I feel that the government provides payments for encouraging farmers to produce more yield of crop that brings better production in marginal lands and also improve the sustainability of agricultural practices. In order to compete in market globally by increasing the production rate, the farmers in developed countries uses large amount of chemical inputs which may lead to ‘dead zones’. Thus agriculture subsidies in developed nations improves the global welfare and the subsidizing country potentially experience welfare gains as a result of the subsidized exports.

The question which was raised in the debate was, ‘Will the subsidized products affect the fair price?’ I argued that encouraging Agricultural Subsidies leads to overproduction of crops in developed countries. Dumping of excessive agricultural in the global market direct to less selling prices low than the cost of production. This tends to a positive impact as the consumers uses agricultural commodities at lower prices. Cotton is subsidized in U.S., hence the farmers reduce the fair price. From the research, it is found the key statistics is, if US subsidies was removed, the world price of corn to rise 9% to 10%, the world price of wheat to rise 6% to 8%, and the world price of rice to rise 4% to 6%. This is due to decrease in U.S. production under a free trade option. In the international market, each tonne of wheat and sugar is sold at an average price of 40%., that is, it is sold 60% below the production cost.

I suggest and recommend that these developing countries must unite together and work with co operation for the cause of scaling down the agricultural subsidies, analyse their negative impacts occurring due to the subsidies and dilate it to a minimum.

 I conclude the facts that, subsidies can maintain low prices for specific commodities, which lead consumer to buy those choices of products. Subsidies leads farmers to spend more on new technologies then produce more commodities and supply in the domestic market at low price, thereby avoiding consumers to relay much on the imported goods from other countries.

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