Farmers in the Developing World

TWF trade-agriculture-1

U.S. agricultural trade policies are sorely in need of reform. Between 1986 and 2006, the government spent nearly half a trillion dollars on U.S. farm programs. (Over the same period, the 15 countries of the European Union spent well over a trillion dollars in support of their farmers.) Farm payments shield U.S. farmers from loss during periods when prices for basic commodities such as rice, corn, wheat, and soybeans are low. This protection allows farmers to continue planting even when it would otherwise be unprofitable, leading to large surpluses and an increase in U.S. exports. However, both of these reduce prices in world markets.

Farmers in the developing world simply cannot compete against heavily subsidized U.S. farmers. Cotton is a good example of a crop where smallholder farmers in developing countries have been harmed. In West Africa, smallholder farmers grow cotton for local, regional, and global markets. The region would benefit from prices that are higher and more stable. But cotton prices remain low compared to the early and mid-1990s, partly because heavily subsidized U.S. cotton farmers are able to sell their product at an artificially low price. Between 2001 and 2003, the U.S. government spent some $7.2 billion supporting U.S. cotton farmers. These trade-distorting payments cost farmers in Mali, Burkina Faso, Benin, and Chad $400 million in lost revenues over the same period. In addition to subsidies, barriers to market access such as tariffs conflict with development goals. Tariffs in the United States and other high-income countries have been lowered for manufactured goods, a move that has helped fuel the growth of manufacturing sectors in countries such as China, Vietnam, and Bangladesh. But tariffs on agricultural products are still four to seven times higher than those on manufactured goods. Tariffs hit developing countries particularly hard. A study that examined the average tariff applied to U.S. imports from Ethiopia, Tanzania, Guatemala, Namibia, and Thailand found that all of these countries paid higher average tariffs than France, Germany, and the United Kingdom. Yet it is developing countries rather than industrialized countries that could benefit most from greater access to U.S. markets.

Besides high tariffs on agricultural products, another serious problem for developing countries is known as tariff escalation—increasing tariff rates as products become more highly processed. An example is soybeans. Unprocessed soybeans can enter the United States duty free, but there is a 20 percent tariff on soybean oil. Many other crops grown in developing countries, cocoa and sugar among them, face higher tariffs in their processed forms. Tariff escalation discourages entrepreneurs in developing countries from producing and exporting value-added products like chocolates.

In 2001, the World Trade Organization (WTO) launched a new round of trade negotiations, often referred to as the Doha Round. Recognizing that “international trade can play a major role in the promotion of economic development and the alleviation of poverty,” WTO members, the United States among them, agreed to place trade and development “at the heart of the [Doha] work program.” Developing countries stand to benefit from a successful conclusion to the Doha Round, with one study suggesting up to $30 billion in gains. Most of the gains would go to a small number of countries, notably India and China, but other countries, including the world’s least developed countries (LDCs), would also gain, particularly if Doha were expanded to grant them unlimited access to developed-country markets. The International Food Policy Research Institute estimates that an ambitious trade deal that includes broad market access could generate $7 billion in real income gains for the 32 LDCs, mostly from increased exports of agricultural products.

Seven years into the Doha Round, WTO-member countries have been unable to reach a deal to better align trade and development strategies. As of this writing, the negotiations have stopped and the round is on hold. The disagreements are about agriculture, the area most important to developing countries. The United States and EU countries will not reform their protectionist policies until developing countries relax barriers to their markets; meanwhile, developing countries want to see reforms in the United States and European Union before they comply with these demands for market access. In the words of one WTO ambassador from a developing country, a satisfactory agreement will require a “hard-headed fairness” that balances the interests of developed countries with the needs of developing ones.

Reducing poverty depends on improving opportunities for small-scale farmers to sell their products at a fair price, so it is crucial to have fair global agricultural trade rules. Nearly three-fourths of all people living in extreme poverty live in the rural areas of developing countries and work primarily in agriculture. Completing a trade deal would demonstrate that developed countries are committed to the overall development of poor countries—beyond just providing aid. Reforming U.S. agricultural trade policies alone will not guarantee that poor countries achieve the MDGs, but it would remove an important stumbling block to the negotiations and make a deal more likely. U.S. leadership is critical in pushing for a successful conclusion to the Doha Round.