Abolishing agricultural subsidies in Western countries: the self-interested case

The case for abolishing agricultural subsidies on the grounds that they are unjust and hugely damaging to developing countries is well documented. One can also make the case in environmental terms, citing the damaging effects of artificially increasing production. And even if we treat the developed world as fundamentally self interested, the current regime of subsidy and protectionism clearly does not make sense.

Free trade in agricultural products first and foremost benefits Western countries themselves. It is not a concession to developing countries or the World Trade Organization. The current costs of subsidies and protectionism are extensive and include higher taxes and much higher food prices. In the long run, Western farmers are also damaged. Barriers to imports disrupt the price signals guiding investment decisions and as a result may discourage the diversification of production into higher-value-added items. Higher prices of particular agricultural products also discourage domestic consumption and may encourage the use of lower-priced substitutes, undermining the protected sectors’ own domestic market share.

It is perhaps the impact on the developing world that is of most concern, however. The dumping of subsidy-funded crop surpluses, sold at prices below production costs, inhibits the growth of agriculture in poor countries. Protectionist measures such as import quotas and tariffs also mean that countries are prevented from exploiting their comparative advantage. At the same time, Western governments are spending huge sums on foreign aid intended to produce the economic development that their own trade policies are undermining. Without these damaging policies, expenditure on aid could be slashed. Moreover, increased growth in the developing world would produce positive trade opportunities for Western economies. It has been estimated that freeing all agricultural merchandise trade and eliminating agricultural subsidies would increase “global income” by nearly $300 billion a year by 2015.

The UK alone spends £5.9 billion per annum on agriculture, forestry and fisheries. The EU allocates 31% of its budget to agricultural support under the Common Agricultural Policy (CAP), set to total around €43.8 billion in 2010. On top of the direct taxpayer-funded subsidy, the CAP costs UK consumers over £10 billion per year as a result of higher food prices. The abolition of agricultural subsidies and trade barriers would therefore lead to huge savings, both immediate – in terms of reduced agricultural subsidy expenditures and lower prices - and long term, due to decreased aid to developing countries. The continued commitment of Western governments to protectionist policies that are nationally and globally damaging is indefensible.

There are lots of things wrong with CAP, but it is a subsidy to farmers and keeps prices lower – without it food prices would go up and become much more volatile. This might return European consumers to the pre war uncertainty.There hasn’t been an abolition of food tariffs because of the strength of farming lobby groups, especially in France. The removal of trade barriers would lead to a net loss of jobs in Europe as the agricultural industry is labour intensive (Europe’s comparative advantage is in services) So how much is a persons livelihood worth?

Removing trade barriers and letting African produce into Europe would make us vulnerable to the volatility in Africa. While they may initially outcompete European farmers, driving them out of business, as soon as their is a crisis prices will go up and become higher. The advantage of CAP and food over-production is it offers farmers the price stability that is necessary to keep long-term production [and prices] low.Removing only trade barriers would be a second best solution.

Ben – nonsense. The CAP promotes higher prices, as do the tariffs. The removal of trade barriers would allow labour to be allocated to more productive areas and the reduction of food prices would allow money to be spent on other areas leading to an increase in jobs overall in the economy. That’s the £300bn increase per annum in the global economy. How can this be bad?
I don’t see how ‘volatility in Africa’ would affect the EU. We buy products from many areas, not just Africa, and reducing trade barriers would increase the amount of agricultural production worldwide, thus mitigating against a crisis in any one area. This is exactly what happened in the 19th century. There are no advantages

…to food over-production as this is simply a waste of resources (and creates dumping which destroys LDC’s agriculture). Without agricultural subsidies the market would respond efficiently to supply and demand leading to fewer shortages and far lower costs! Other industries function perfectly well without subsidies, and we experience no sudden fluctuations and shortages – why is food any different? Food subsidies/tariffs benefit a few (largely French) EU farmers to the cost of all consumers in the EU and to producers and consumers in the LDCs.

Ben – food prices would depend on world prices and not on “volatility in Africa”. CAP is, indeed, a remarkable scheme that manages to raise the price of food whilst at the same time reducing domestic supply. I think you fall into lump of labour fallacy at the end but, even so, is agriculture really more labour intensive than services?

As Sir Alan Herbert famously said in one of his election manifestos, ‘I know nothing about agriculture.’The lesson I learn from the CAP is: Once politicians interfere in the market it is difficult politically to withdraw. And withdrawal itself may do harm.At one time a government scheme (TOPS) subsidised the MBA course at Cranfield (it hadn’t been foreseen that our one year course would fall within it!). So many students accepted the subsidy. Then the government withdrew the subsidy at short notice. Luckily our course was robust enough to survive; but no thanks to ‘well-meaning’ government interference. We’d have been better off without the government scheme at all.

The food business is not like others. You cannot ramp production up in a short time. You cannot grow more wheat in year x than was planted the year before.A beef animal takes 2-3 years to reach maturity. It is well know that food supply, and prices, are inherently cyclical, prone to booms and busts.And given our ultra-urbanised society, do we really want to run the risk of food shortages?
But you say,there’s always food in Tescos and we can always get more from abroad. But what if you can’t? Anyone under the age of 60 will know nothing of food shortages. The CAP has ensured plentiful food supplies for 60 years, at a not exorbitant price per head. Why fix something that ain’t broke?

Jim – A minor point, haven’t been in the CAP for 60 years, which implies we must have had stable and secure food supplies before then. More importantly, the best means of securing supply is to have diversity of supply from overseas. If we relied solely on British and EU food supplies we’d be most at risk from fluctuations in prices and our diversity of food would be extremely limited. The food supply issues of both world wars were related to…those wars! Do you really envisage a major attack on world trade routes sufficient to cut all food supplies? No I don’t, so we have no cause for the extremely expensive autarkic policy of self-sufficiency. The word autarky, of course, comes from Germany

…which, having to rely largely on domestic production was unable to access overseas markets and therefore starved in submission. Why is the word ersatz also German? Don’t accuse others of having no awareness of history when your’s is questionable. The little issue of who might attack the trade routes needs to be raised. The USA? Hmmm… Back in the real world you fail to observe that the CAP raises food prices, but also reduces our ability to use resources more productively in other areas. By destroying LDC’s agriculture it also hampers our ability to ensure diversity of supply, thus endagering food supplies. These costs are exhorbitant per head!

…and lastly, the whole reason for a proper price mechanism is that it signals that supply and demand are changing. Interfering with those signals (by CAP and subsidies) means that surpluses and shortages are more likely. Did c19th Britain have food shortages in conditions of free trade? No. It had supply diversity, cheap food and economic growth. In the case of a supply shortage (unlikely in a global market, more likely in a regional one) prices will rise in the short term, so less will be consumed and there will be less waste etc. In the slightly longer term, with constant demand, more food will be produced, so all those acres of currently fallow land, forests etc will be ploughed up…

@Whig:The UK has had agricultural subsidies since the 1947 Agriculture Act. Prior to entry into the EEC (and joining the CAP) we had our own system of siubsidies to encourage production. So we have had 60+ years of subsidised food.
You also misunderstand the current form of the CAP – the price for grain/meat/milk is set in the marketplace, the subsidy is not coupled to any production. It enables a farm to remain in production when it would (at current price levels) go bust. So the subsidy actually reduces prices, because it keeps production higher than it would be otherwise, and reduces our dependence on imports (which may or may not be good thing, depending on your viewpoint of course).

Jim – I am surprised that you think that in other businesses you can just ramp up production in a short time. It takes decades to increase the suppply of transport services through new infrastructure etc and you cannot increase the supply of (say) cars overnight. Of course, we do not see wild fluctuations in car prices because prices are depend on world supply and demand conditions and not just British conditions. This all goes to show the advantages of the diversification that comes from trade.

Jim – I agree. The small margins most farmers operate on would make them very susceptible to competition.In most industries new competition is great but in farming the risks of shortages and seasonal variattions are a dangerous risk. CAP gives food security to Europe.Philip – of course food prices depend on world prices but these can also be volatile. However, I agree that most CAP subsidies actually end up going to large capital intensive French farms which perhaps aren’t more labour intensive than services.

Ben – no, competition would mean that farms would have to be more efficient, outcompete each other, and this would lower the prices of food production so consumers would have to pay less. The idea that farming is different is simply special pleading, all industries operate on small margins – by preserving inefficient production you are merely driving up costs and mis-allocating resources. The threat to world food supplies is not a free market, which doesn’t exist anyway, it is government interference in markets which distort them and cause perverse and inefficient behaviour.

Even if CAP gives food security to Europe, why does Europe have the right to create insecurity in others’ food markets? However, it doesn’t create security (do I need to say this again?) because by relying more on one market we reduce the diversity and therefore the security of supply!! If we relied on, say, Russia for all our energy and Russia suddenly stopped producing oil we’d be in trouble. So why would we do the same for food? Likewise, if we relied on the UK (which would be inefficient and mean destroying most of the UK’s forests – and do you want to grow bananas here too?) and there was a sudden drought, what would happen. Diversity = Security!

Jim – and 60 years of agricultural misallocation, costs to consumers and harm to global development! I was thinking of the c19 where markets were freed and, surprise surprise, food got cheaper, supply diversified and everyone was better off.
Er…no the CAP increases food prices: http://www.taxpayersalliance.com/CAP.pdf
which is linked in the article. Unless the authors are ‘misunderstanding’ the CAP as well? Perhaps you could explain their statistics to them and to me? I fail to see the benefits of reducing ‘dependence’ on imports. It neither ensures greater security, reduces costs or promotes economic gain by comparative advantage. We learnt this 150 years ago!

Whig – CAP lowers prices on the long run by reducing volatility: I don’t disagree that competition lowers prices in general, but farming’s dependence on weather and other random factors means CAP offers farmers the security to stay in the industry in the long term.Diversity and interdependence doesn’t equate to security and peace – those dynamics can operate in the other direction. Dependence can foster suspicion in states (consider oil producing countries and the US). By and large I believe most EU policies are warped by interest groups and trade barriers should be removed but I’m sorry if we cant reach an agreement on this.

To all – As Jim has already pointed out, agricultural products generally are exposed to an information uncertainty issue of future market prices as production suffers from long time lags (although in crops, effective rotation and fertilisers can reduce these times). Fact of the matter is, CAP removes this problem of uncertainty. This then allows prudent planning, and allows effective forecasting etc for farmers. Which stabilises an inherently unstable market (as Kaldor showed with cobweb theory)Philip – There is surely some ability to ramp up production in the short term, due to the existence of spare capacity. Also, the car market and agricultural commodities are fundamentally different in their arrangement, I think a comparison of the two is perhaps too broad. World supply can be dramatically effected at rapid speed to the ever present force of the weather. Quantity variation in agriculture is potentially massive, where as prices in commodities such as metals (that car manufacturers will be concerned with) are mainly manipulated by demand, supply is only a factor is the long-term scheme of things. CAP is very detrimental to producers from outside the EU, but from an insular perspective I believe it has been a beneficial scheme.
CAP is easy to criticise as the costs are simple to quantify. But how do you begin to quantify the benefits of stable prices for European consumers? As the benefits can’t be quantified in an equally effective manner the critics are able to gain a vocal upper-hand.

OK so now the argument is about price stability. So could you prove to us that, as a result of the CAP, prices have been more stable (as opposed to a simple assertion of ‘fact’) as a result? If you can do that, can you please suggest to whom price stability is beneficial? So beneficial that it’s worth the easily quantifiable costs to everyone else!? And could you also explain why sophisticated agricultural futures markets developed over 100 years ago to mitigate against the price volatility that you assert exists without the CAP? Kaldor’s model is extremely contentious, even in updated form. The idea that the instability of the market cannot be solved by spontaneous initiative of those…

… concerned with it, rather than at the bureaucratically calculated artificial prices of the CAP is highly debatable. The CAP has also created the problem that its inevitable withdrawal will create price instability because self-correcting measures have been destroyed. A classic of how government action causes the effects it claims to avoid! Further, not being able to quantify the supposed benefits (which are contentious anyway) is a strong argument against the CAP because it shows that any argument for the CAP is therefore based on simple assertion! Although, as the CAP is still extant, I’d query who has the ‘upper-hand’?

If price stability was so important, private mechanisms would develop. But price stability and profit stability are not the same thing, of course (when prices go down, supply is normally greater). I am afraid that there are few economic mechanisms that one could develop that simultaneously raise prices to consumers, costs taxpayers’ money and encourage over-production and intensive production. It also encourages production of those products to which CAP applies and thus undermines diversity (and bio-diversity for that matter).

You should all look into the case of New Zealand and see how well their farmers did after they removed all farming/agricultural subsidies. They flourished and everyone thought they would fail. They got off their lazy butts and worked hard to figure out how to stay ahead.

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