Free Trade in Rhetoric, Not in Practice

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By Martin Khor, Executive Director of the South Centre, Geneva. Originally published in The Star

Western countries commonly proclaim the great benefits of free trade and the evils of protectionism.

In reality, many developed countries practise double standards, insisting on free trade in areas where they are strong, whilst using protectionist measures in sectors where they are weak.

In the worst case, within the same sector they have designed rules that impose liberalisation on developing countries but allow themselves to maintain high protectionism.

An outstanding example is in agriculture, in which the rich counties are not competitive.

If “free trade” were to be practised, a large part of global agricultural trade would be dominated by the more efficient developing countries.

But until today, agricultural trade is dominated instead by the major developed countries.

For many decades they got an exemption for agriculture from trade liberalisation rules.

This exemption ended when the World Trade Organisation (WTO) was crea­ted in 1995 and the rich countries were expected to open their agriculture to global competition.

But in reality, WTO’s agriculture agreement allowed them to have both high tariffs and high subsidies.

The subsidies have enabled far­mers to sell their products at low prices, often below production cost, yet allowed them to get adequate revenues (which include the subsidies) that keep them in business.

This has four negative effects on developing countries.

Firstly, those countries that are agri­­culturally competitive cannot pe­­netrate the rich countries’ markets.

Secondly, the developing countries are deprived of other markets because the United States and Europe can export the same farm products at artificially cheap prices. This is a complaint of African cotton-producing countries.

Thirdly, by exporting a product cheaply, the developed country reduces the demand for a competitor substitute product. If the US did not subsidise its soybean, enabling soybean oil to be cheaper, Malaysian or Indonesian palm oil would have a bigger market.

Fourthly, these cheap products (such as chicken from US and Europe) have entered many deve­loping countries, damaging the livelihoods of their local farmers.

In 2001, the WTO launched a Doha development agenda whose chief goal was to liberalise the agriculture of developed countries.

Much energy was spent over many years to devise methods and formulae to liberalise agricultural trade, and a high degree of consensus was reached.

However, the US, backed by Europe, has now made it clear they do not intend to conclude the Doha Round.

Future WTO negotiations have to be on a new basis, and not based on existing texts.

An article by Chris Horseman in the bulletin Agra Europe (May 12) analysed why the US now cannot accept the existing text.

A reduction in the maximum limit of one type of allowed subsidies (called de minimis) would have pushed the US to increase by 58% another type of disallowed subsidies (known as AMS).

This partly explains “why the US is keen to move away from the formulae on the table and to negotiate a fresh approach,” said the article.

Due to its powerful farm lobbies, the US will not change its domestic policies (embodied in its 2014 Farm Bill) to meet the Doha agenda’s new limits on the allowed amounts of domestic subsidies.

The same article also shows how the European Union has meanwhile changed the types of subsidies it provides, in order to better comply with WTO rules. This also allowed the EU countries to maintain their total domestic subsidies at around €80bil (RM356bil) annually from 2004 to 2013.

Two decades after the WTO was set up, the rich countries have continued the high level of their agricultural protection.

There is little prospect that they will agree to changes in the trading system that will effectively eliminate or reduce the massive subsidies that keep their farming systems afloat.

The poorer countries simply do not have the money to match the subsidies of the rich.

If they want to defend their far­mers and their food security, they can only put up tariffs to levels that keep out the cheap subsidised pro­ducts.

But those developing countries that sign free trade agreements with the US and the EU have to cut their agriculture tariffs to zero or very low levels.

At the same time, at the insistence of developed countries, agricultural subsidies are kept off the FTA agenda. Thus, the rich countries can keep their subsidies and swamp developing countries with their farm products.

The US and EU are also taking protectionist measures in other areas against developing countries.

For example, the US successfully filed a case against India at the WTO, that the latter’s National Solar Mission favours local firms through its domestic content requirements for solar cells and modules.

This kind of objection makes it extra difficult for India or other developing countries to take action against climate change.

The European Parliament recently voted to refuse giving China the status of a market economy in the WTO, although WTO members are obliged to recognise China as a market economy by December 2016, 15 years after it joined the WTO in 2001.

By denying China this status, it is easier for other countries to suc­­­­­­c­e­ed when taking anti-dumping cases against China, and thus to place extra tariffs on Chinese exports.

China and India are fighting back.

India last week announced it will file 16 cases against the US for violating WTO rules when providing subsidies under its renewable energy programmes.

China won a case against the US in the WTO for wrongly imposing countervailing duties against 15 Chinese products including solar panels, steel sinks and thermal paper.

However, the US has not complied with the panel decision to withdraw the duties, and China is now starting action at the WTO to get the US to comply.

It seems impossible to prevent or reduce the rich countries’ high protection of their agriculture. And it also seems they will continue using protectionist measures against products or policies of developing countries.

There is indeed a big gap between the rhetoric and practice of free trade.

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  1. tongorad

    No true scotsman alert.
    Proponents of free trade aren’t being hypocritical with protectionist measures, it’s just that free markets are chimerical.

  2. TomDority

    I wonder if the wording below is correct – how are developing countries more efficient in global agriculture.
    “If “free trade” were to be practised, a large part of global agricultural trade would be dominated by the more efficient developing countries.”

    Secondly, because a subsidy is needed for food production to be profitable in the US… the US must produce to much food….one has to question why famine exists in this world with all this overproduction. ‘All famine is man made’

    Maybe, just maybe… the high cost of production is due to industrialization of farming which, as economic logic would have it….the price should go down per ton of X and, therefore, should not need subsidy. So, if by logic and econ 101 price should be lower then What is causing the US to need a subsidy to Agriculture???? I propose that Wall Street and Big Ag are feeding at the trough of subsidy by the process of Wall Street style “investment” and Big Ag sucking in those subsidy to undermine the small farmer. It is a deliberate undermining of ‘developing countries ability to be food secure in their own lands.
    The subsidy directly supports raising the cost of land, land rent, and all other input cost to produce a ton of X. Big Ag is using proprietary seed not to increase production but, to make overproduction into the subsidy exclusively their own….how can it be a good idea to make seed that produces product that does not produce seed or copyright seed so the next gen can not be planted. How can it be a good idea to subsidize the land cost ‘boom’ that increases Ag production costs.
    How is it legitimate that Haiti – once a food exporter – now relies on imports to feed themselves….their own production was undersold…no longer could they make a living by planting their own food…then the “magic” hand of “free trade” jacked the price of rice to un-affordable levels….starvation and a new market dependency and political disruption.

    The proper definition of a free market is one free from rentiers!!!

  3. a different chris

    Thanks TomDority for a much better view of the subject in 1/2 the words of the full-of-(human waste) dude above.

    Drop US protectionism of our food and we will have less food in an world that cleverly manages to have both starving people and enormous amounts of food wastage.

    >that keep their farming systems afloat.

    Yeah because it will always be easy to get food from 1/2 way around the world. And if something bad happens, we can then just plant our own and… and, uh-oh, you mean it takes 3+ months to get a crop? I guess we can just eat out in the meantime, right?

    And like Tyson et. al. isn’t going to put those “local farmers” under its thrall like – probably worse than – they do ours.

    Then he acts like he cares but he makes no sense:

    “If they want to defend their far­mers and their food security, they can only put up tariffs to levels that keep out the cheap subsidised pro­ducts. But those developing countries that sign free trade agreements with the US and the EU have to cut their agriculture tariffs to zero or very low levels.”

    I don’t think it was, say, the Indian farmers that were behind those “free trade” agreements. Aren’t the agreements the problem, not cutting the one thing the USA apparently provides at subsidy to the world (I’m not backing off the same un-localization of food objections made above, just showing that no matter which lens you look thru the objections are many) .

    So tired of this crap. The world has problems and, continually, the proposed neo-lib solutions almost transparently make things simply worse.

  4. Jerry

    American ag subsidies are so well engineered nowadays as to be nearly invisible even to the farmers. We don’t worry so much about commodity price support levels anymore. We have “insurance!”

    Farmers of the major crops like the soybeans mentioned in the post can use the federal crop insurance program to insure their income will be not too much less than it was last year The policies are cheaper than they should be thanks to the federal subsidy. It’s a bit like the flood insurance that was on TV this week (PBS Frontline) because the insurance companies use government money to pay off any claims.

    These subsidies are legal under WTO because they don’t directly prop up the price of soybeans for farmers, but they still encourage production even when the price of a bushel is declining.

  5. Jerry

    ” the US successfully filed a case against India at the WTO, that the latter’s National Solar Mission favours local firms through its domestic content requirements for solar cells and modules.”

    Meanwhile in the US we subsidize homeowners who install solar panels as I have done. I got tax credits.
    US manufacturers were not directly subsidized, but since I insisted on US-made panels, they were indirectly subsidized.

    Free trade!

  6. JEHR

    In my little corner of the world right now, the small local farmers are preparing their fields for planting of corn, soybeans and various vegetables and preparing the way for crops of fruit (apples, berries, etc.). When I shop, I buy these locally grown foods whenever they are in season. The local strawberries are bright red, ripened just right and very delicious.

    Now in the winter we can buy imported strawberries every month of the year and they are too large, hard as small potatoes and without any taste. Yet, I am astounded that customers buy these flat-tasting so-called “berries.” Strawberries do not ripen after they are picked and they do not last long once they have achieved peak ripeness and taste. Recently, we tried some strawberries that had such a strong taste of “strawberry” about them, that I began to think they had been injected with the odor! Inside, the berries were pale pink without much flavour.

    In my youth, I lived near the Crescent Valley in BC and we visited the orchards there to pick apples, plums, pears, etc. for canning. I have never again enjoyed the full flavours of those fruits when they are available in stores today. These fruits are no longer picked for freshness and flavour but for ease of transportation and longevity.

    So when I think about all that food coming here at all times of the year from other countries, it does not much appeal to me. I am willing to wait until June each year for strawberries and wait until August for local corn both of which taste better than imports. Not long ago, I was surprised to see on our grocery store shelves blueberry jam made in France when our province is itself one huge blueberry field! Something is very wrong with the way globalized trade is conducted.

  7. RBHoughton

    Excellent observations. The Japanese miracle is a case in point.

    Country bombed to smithereeens (excuse me Yves), imperial extension dismantled, vast drop in population, no shipping or aircraft. Then the BoJ creates a socialist economy, encourages the people to be prudent, limits the stock exchange to a 5% annually return, dismantles the zaibatsu controls and transfers all financing to the banks.

    Result unique economic growth for fifty years with foreigners kept out and profits retained internally for re-investment. None of this was due to free trade, indeed every time the west sought to open the Japanese market we were told politely to ‘go away.’

    It seems to be the fact that goverrnments cannot be forced to trade in the way we who control the money supply want them to trade because there is always a reason not to without resorting to tariffs. I suppose it is that realisation that has caused Commerce Department to float these dodgy TTIP and TPP deals on Europe and the Far East.

  8. TheCatSaid

    Here’s to Seed Savers. And small-scale growers of whatever size,

    Years ago I read that a study (maybe UN?) showed that diverse agriculture (mixture of crops & animals) on a smallholding of, say, a few acres was the most productive land use by far. It was more efficient than large-scale farming, with little or no mechanism or artificial inputs required. I wish I knew what that study was.

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