THE GLOBAL ECONOMY

Global Agricultural Protection

Insights

What Has Happened?

Despite the forces of globalisation gaining momentum in recent decades, one particular sector has not been as responsive to this substantive global convergence; the global agricultural industry. Despite the gradual breakdown of global trade barriers including the average tariff falling from 8.5% in 1994 to2.5% in 2017, the agricultural industry is still largely protected through subsidies. There are some key policies throughout the world that elucidate and display this reality.

 

The European Union has developed what has become a notorious “CommonAgricultural Policy” (CAP). This policy is valued at 38% of their discretionary budget and is predicated upon ensuring that agricultural product consumption is provided for in totality by ‘domestic production’, that is within the EU area.This policy has significantly supressed agricultural prices, which has artificially boosted the competitiveness of the EU agricultural industry.

Common Agricultural Policy Expenditure

Another policy that catalyses a similar effect is the export enhancement program of the US. This program involves government incentives particular industries within the US one of such being the agricultural industry. These have in the past taken the form of subsidies yet again encouraging domestic production and impeding the ability of less developing market industries to export into these economies.

 

In order to breakdown these barriers the WTO brought forth the DOHA rounds (development rounds) with an agenda to remove the provision of these protection barriers or at best limit the magnitude at which they come at effect. These rounds were partially successful as global agricultural protection has reduced – however, they do remain in effect until today.

 

To display the lack of success of these rounds see the following quotes:

 

“The US was unwilling to accept, or indeed to acknowledge, the flexibility being shown by others in the room and as a result felt unable to show any flexibility on the issue of farm subsidies.”

EU Trade Commissioner Peter Mandelson

 

“We took seriously the admonition of the leaders of the G8 Summit in St Petersburg, but unfortunately the promises of flexibility and market access coming from St Petersburg did not materialise in Geneva. Unless we figure out how to move forward from here, we will have missed a unique opportunity to help developing countries and to spur economic growth."

US Trade Representative Susan Schwab

Syllabus Links

Tariffs

Global agricultural protection is predominantly enforced through government subsidies within industries. Subsidies refer to a cash payment by the government to a particular industry in order to facilitate increased production levels and lower prices simultaneously.

Subsidy Diagram

 

As indicated above, the per unit value of a subsidy is the vertical distance between the shift in supply curves, in effect reducing prices and increasing output. The total value of the subsidy is the per unit value multiplied by the quantity produced at the new equilibrium.

 

Within this context, agricultural subsidies are utilised by governments to boost international competitiveness and could be a means ensuring that economies are operating self-sufficiently. Through this, agricultural subsidies allow these industries to operate domestically which keeps jobs within the economy in turn, decreasing structural employment.

World Trade Organisation

 

The unsuccessful attempts to break down agricultural barriers throughout the DOHA rounds (development rounds) sheds light upon a significant limitation of international organisations. Ultimately these bodies operate under international law which is not a requirement nor necessary for countries to abide by or follow. These organisations have to some extent in the past been effective in facilitating change through their influential charisma and endowments. However, the lack of influence of the WTO in breaking down agricultural barriers throughout the 00’s epitomises how multilateral cooperation and rationale is not a given.

Allocation of Global Resources

 

One limitation of a subsidy is that capital that is allocated to industries that otherwise would have been inefficient. The principle of allocative efficiency, that is, allocating resources to the most efficient industries, suggests that gross world product and a globalised economy currently endures subdued growth due to an insufficient allocation of resources. In the context of agriculture, capital would be more efficiently allocated to developing countries who hold a non-artificial competitive advantage in the global marketplace.

Reduction in Aggregate Supply

Developing Economies

 

Artificially lower prices as a result of subsidies increase the difficulty of agricultural sectors within developing economies to export into these developed markets. It is crucial to note that the primary exporting industries of developing economies is the agricultural, thus due to the positive correlation between economic growth and development is integral that these economies are able to export to as many global markets as possible.Increased export sales will facilitate increased growth via increased injections into these economies. This will boost GDP per capita measurements, allowing individuals to better access healthcare and education which will in turn increase the Human Development index, a reflection of increasing quality of life and economic development.

Economists apply this frame of analysis to the African continent and the lack of export opportunity agricultural protection creates. This notion is elucidated through the juxtaposition of Sub-Saharan Africa's average growth rate of 5.1% between 2000-2010 with that of China at 10.1% in the same period. This illuminates how the deregulation of manufacturing industries globally provided China with greater export markets and in turn greater opportunity to grow - an outcome that the African continent has not experienced, arguably due to global agricultural protection.

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Reference List

https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/cap-expenditure-graph1_en.pdf

https://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS

https://www.wto.org/english/tratop_e/dda_e/dda_e.htm

https://simonhedlin.com/2012/04/17/linear-projection-of-europes-spending-on-the-common-agricultural-policy-cap/

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=ZG-CN