Access is the key to trade reform

The spin doc­tors on all sides are “try­ing to hint(Reuters report via Yahoo News)”: at some con­ver­gence on the issue of agri­cul­tur­al trade reform at the Mon­tre­al meet­ing of WTO trade min­is­ters. But the ‘hint’ of flex­i­bil­i­ty in the EU posi­tion is all about par­tial cuts in sub­si­dies for exports and domes­tic pro­duc­ers, not about bring­ing down pro­tec­tion at the border—the reform that mat­ters most. An agree­ment based on cut­ting sub­si­dies will not bring endur­ing reform. Sur­prised? Well read on… Take a high­ly sub­sidised prod­uct like dairy. The Euro­pean union pro­duces about 25% more milk prod­ucts than even its own wealthy con­sumers will buy at the high price at which it is pro­duced. So Europe spends about Z1.5 bil­lion every year to dump part of the sur­plus on export mar­kets and slight­ly less to ‘bribe’ domes­tic users to include more but­ter in the crois­sants and feed more dried milk pow­der to calves. You can see more of this par­tic­u­lar sto­ry on the “Glob­al Dairy Alliance(link to a sto­ry on the GDA website)”: web­site. The export side of these sur­plus dis­pos­al sub­si­dies fre­quent­ly calls the tune on glob­al dairy prices: they depress prices in mar­kets less pro­tect­ed than the EU mar­ket and they pre­vent prices from recov­er­ing from a mar­ket slump. The effect is that pro­duc­tion in those areas of the world where most dairy pro­duc­tion is tak­ing place (about 65% of all cows milk is pro­duced in devel­op­ing coun­tries accord­ing to FAO) has a low­er val­ue. This means low­ered income for poor coun­tries. Sim­ple as that. Now, what hap­pens when the export sub­si­dies are cut? There is much less EU prod­uct on world mar­kets and the price on world mar­ket jumps, at first. But what hap­pens after the price jumps? Sur­prise, sur­prise! Farm­ers almost every­where pro­duce more and the price falls again. Pro­duc­ers who live by mar­ket prices are no bet­ter off than they were before. Con­sumers in pro­tect­ed mar­kets will still be pay­ing too much although domes­tic prices will fall for a short time while some pro­duc­ers in pro­tect­ed mar­kets adjust to slight­ly low­er domes­tic prices by going out of busi­ness. After that, prices in pro­tect­ed mar­kets rise again because bor­der pro­tec­tion is still in place. The Glob­al Dairy Alliance has an eco­nom­ic mod­el of world dairy mar­kets that shows this sor­ry tale in some detail. The GDA site also has a brows­er-based ver­sion of a “presentation(link to the pre­sen­ta­tion on Glob­al Dairy Reform)”: I gave on this last year to a con­fer­ence in Bolivia. The same sto­ry holds true across oth­er com­modi­ties: sug­ar, cot­ton, beef, feed grains… What’s the solu­tion? Open­ing up world mar­kets by reduc­ing bar­ri­ers leads to sus­tained reform because when bar­ri­ers come down the whole world mar­ket grows in size—at the stroke of a pen. More con­sumers can access low­er-priced imports; many of them acu­tal­ly start to con­sume more. The world price ris­es, but con­sumers in pro­tect­ed mar­kets are bet­ter-off because over­all their price has come down. Fur­ther­more, with imports able to com­pete, gov­ern­ments will final­ly have to live up to the hol­low promis­es they made in the last round of nego­ti­a­tions to cut pro­duc­tion sup­port pay­ments to farm­ers: the waste of tax­pay­ers’ funds would be all too clear in com­pet­i­tive mar­kets. Why isn’t this solu­tion being embraced at the Mon­tre­al meet­ing? Because open­ing up mar­kets is pow­er­ful stuff: much more dev­as­tat­ing to the prof­its of pro­tec­tion than cut­ting sub­si­dies. Pro­tect­ed indus­tries in Europe have tried to ensure, as Agri­cul­ture Com­mis­sion­er Fis­chler “admits(link to Reuters report via Yahoo News)”: that Europe has lim­it­ed room to move on mar­ket access. A very small num­ber of devel­op­ing coun­try agri­cul­tur­al groups that have secured pref­er­en­tial access to lim­it­ed shares of the EU mar­ket are wor­ried about los­ing this advan­tage if the EU mar­ket were to be opened up to com­pe­ti­tion. Some of them, too, are now urg­ing their gov­ern­ments to step back from a big change in the reg­u­la­tions that rig world food mar­kets. Watch this space…

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