Tuesday, October 16, 2007

Throwing Out the Baby With the Bath Water, or, Cotton Subsidies Down For The Count

As everyone except three guys on the rapidly shrinking Greenland icecap know, cotton farmers in the U.S. got clobbered by the WTO at the behest of Brazil and several smaller African countries.

The gist of the complaint that the cotton producers lodged with the WTO was that subsidies to American farmers amounted to trade distorting devices that kept world prices for cotton artificially low and thereby damaged the ability of other countries to compete on the world market.

Of course, if that were true, China, Brazil and India would have long since gotten out of the business of producing cotton, but they didn't. In case you haven't been looking, China is the world's largest producer of cotton, Brazil's number 5, India is number 3, and Pakistan is number 4. The U.S. is second.

All of which means that the future of agribusiness and industrial cotton in those countries never really was all that bad to begin with.

But nevermind. Reality always comes in last in disputes such as these.

What Brazil objected to is that much American cotton was exported, and if the WTO precedent holds up, we may see similar results for other commodity crops produced in the midwest, including corn, rice, soy, and wheat.

What folks in other parts of the world may not fully appreciate while they're fixing to toss out the baby with the bathwater is that, at least with commodity crops. price supports to U.S. farmers have had the effect of steadying international prices for those items. By putting a floor underneath commodity prices, and being big enough to swing world markets, a benefit has inured to world commodity producers without any burden that I know of.

I remember having a discussion with an Indian colleague in which he described the plight of India's small farmers who are under enormous pressure that is taking a toll on them that the rest of the world should be outraged about. You can read about it here. I explained how farm subsidies in the U.S. underwrote the price that the Indian farmer would get when he hauled his grain to the elevator.

My colleague said "Oh, but that's not how it happens with these fellows. Usually they're deep in debt to the village moneylender because of the dowry they have to pay to marry off a daughter, and their production is rather small. So they have to sell their crop to middlemen who are usually-you guessed it-the village moneylender, who then collects and trucks the crop and sells it at the world price."

My argument then and now was "That sounds like an argument for the fundamental need for credit reform, agricultural policy reform, and land reform in every farming village in India and not an argument against American farm subsidies."

Although I'm not exactly a fan of his, Dean Kleckner has a good op ed piece in the International Herald Tribune that is well worth reading on this general subject.


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