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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