The Day After Russia Attacks
What War in Ukraine Would Look Like—and How America Should Respond
Not for the first time, agricultural trade has become a live and contentious issue in Atlantic relations. Questions of access and protection have been subjects of constant concern to American farmers and traders since the establishment of Europe's Common Agricultural Policy 25 years ago. Now, though, under the pressures of surplus stocks of grain and falling farm incomes, there is a new area of contention-competitive subsidies designed to win or ensure shares in an erratic world market. Months of negotiation have failed to resolve the issue and neither the European Community nor the United States has shown any sign of being ready to sacrifice what both define as legitimate economic interests.
The bilateral relationship between the United States and the European Community has dominated international agricultural trade relations for the last 30 years. European and American attitudes to proposals for the liberalization, regulation or management of key agricultural product markets have determined the role and success of international institutions, and the fate of attempts to reach international agreements on agricultural matters. Domestic policy decisions, taken in Brussels and Washington, have determined not only the state of the world market but have also become important and divisive items on the agenda of trade talks, ministerial meetings, and summits.
The attitudes and policies of the two sides have not remained constant throughout the period; external circumstances as well as the dynamics of the domestic agricultural policies pursued on each side of the Atlantic have shifted the areas of contention. The issues at stake in the current set of bilateral negotiations-initiated after the ministerial meeting of GATT (the General Agreement on Tariffs and Trade) in November 1982 had failed to make any significant progress on agricultural trade matters-are very different from those of a decade or two decades ago.
They are also more serious. Unless those negotiations result in a major shift of policy on one or both sides, along the lines suggested below, even a temporary settlement will leave open the potential for future conflicts-conflicts perhaps inevitable in one form or another given the nature of agricultural policymaking and the lack of concern generally shown for the international or external effects of internal national policies.
At risk in a continued conflict are not just the resources misallocated, but also the cooperative Atlantic trade relations built up gradually over decades. Those good relations, reflecting common interests and not just a balance of advantage, underpin the wider political Alliance-which will itself be weakened if the consensus on trade is unraveled product by product.
The question is not simply whether an open and expensive conflict can be averted in the short term, but whether a longer-term solution can be found. On the evidence of recent history the chances are not good. The current agricultural trade dispute is neither a sudden squall nor solely the product of economic recession. Its origins, and the reasons for the failure to find a solution, can be traced back over several decades.
In the early rounds of GATT negotiations in the late 1940s and early 1950s, agriculture was not a central issue. Only 15 percent of international grain production was traded in 1950. The individual countries which were to become the member states of the European Community pursued generally protectionist policies, but limited technology left them with a significant import requirement-sufficient to satisfy the export capabilities of North American wheat and corn producers. In the United States, less than 20 percent of grain production went for export; exports were always important but had little of the crucial significance they have acquired over the last two decades.
In the early 1950s the central concern of the U.S. agricultural community was to preserve and protect agricultural development and the often hard-pressed American farmer from foreign trade. For years Washington dragged its feet in the face of attempts by GATT and exporting countries such as Australia to liberalize agricultural trade. As a recent study concluded: "The U.S. found itself having to defend its disruptive actions on agricultural import restrictions, disposal of surplus stocks and use of export subsidies"1-all elements of an agricultural policy tailored primarily to domestic farm prices and farm income support, not to trade expansion.
In 1955, after several years during which the United States had been in violation of its GATT obligations because of its domestic policies, the Eisenhower Administration was finally granted a formal waiver of these obligations. Direct support of the U.S. farm sector, under legislation dating back to the 1930s, was made legal, but the opportunity to include agriculture with the other industries covered by the various GATT agreements was lost. The American action confirmed the view that agricultural policy was a matter for domestic decision, not international agreement.
Even then the problem of surplus grain was emerging, and export trade growing. But the balance of interests within the U.S. farm sector was still firmly on the side of those seeking protection.
That balance changed as the Common Agricultural Policy (CAP) of the newly formed European Economic Community (EEC) began to emerge after 1957. American negotiators entered the Kennedy Round trade talks of the 1960s with a nominal commitment to inclusion of agriculture alongside trade in manufactured goods in the GATT agreements, but there remained a degree of ambivalence at the heart of the American position. On the one hand, American producers saw the Europeans institutionalizing measures to protect national markets which their own exports would have difficulty in penetrating. The need for secure and growing commercial exports was increasing, especially for U.S. grain, the output of which grew by 25 percent between 1950 and 1960. From 1954 on, the Eisenhower Administration initiated and steadily expanded the PL480 program which distributed surplus grain on concessional terms to less-developed countries. Though productivity spurred on by technical advance was expanding at unprecedented rates, U.S. farmers were still suffering declining real incomes and were falling further behind their counterparts in industry.
That, though, was only part of the picture. Other U.S. farmers feared liberalization of trade since it posed a direct threat to their own livelihoods. The CAP as set out in the 1958 Stresa conference was by no means the rapacious monster which in U.S. mythology it has since become. "Compared with the widespread use of quantitative trade restrictions in national policies the basic instruments of the CAP looked rather liberal."2 Price levels were not fixed, leaving open the prospect that traditional U.S. markets would not be disturbed. There was some emphasis on structural policy, which it was thought would reduce both the number of farmers and potential output given the right set of support prices. German interests were thought likely to balance out the inevitable pressure from the French for a strongly protectionist agricultural system.
It was only over time that the highly protectionist nature of the CAP became apparent-in particular its system of variable import levies designed to insulate domestic producers from any fluctuations on world markets, and the very high basic support prices established to keep the most marginal producers in business. There were also political factors which softened the U.S. response to the CAP. The establishment of the EEC and the wider ideal of European cooperation were central to U.S. foreign policy objectives, and this tended to outweigh parochial agricultural concerns. The true difficulties which the nature of the CAP and the operation of its mechanisms were going to present to the United States only emerged later.
Within the Community, external protests from America and elsewhere were considered to be a marginal concern. The Community members were still large-scale importers of U.S. grain, were running a substantial deficit with the United States on agriculture trade as a whole, and did not take seriously the possibility that the dynamic effects of the CAP on the European farm sector would radically alter that situation. Disputes such as the "chicken war" in 1962-63-when the substitution of high CAP levies for the lower German tariffs which had existed previously on poultry imports cut the United States out of the market-were treated as minor squabbles. Once the mechanisms of the CAP had been agreed upon, the EEC had difficulty in responding to international challenges. The CAP was not only a major achievement of common action but also part of "an internal bargain, compensating agricultural exporters among member countries for the improved access to their non-agricultural markets which more industrialized countries had gained."3
It was in this context that the Community offered its major concession on the CAP in the early months of the Kennedy Round negotiations. Few Europeans took seriously American calls for fully open access, or for the exposure of agricultural trade practices to the full scrutiny of GATT. American attempts to have import levies converted to fixed tariffs, with the aim of reducing and eliminating those tariffs by the same percentage reductions applied to industrial trade, were regarded as naïve. U.S. hopes of forcing the Europeans to shift the basis of farm support to income supplements, and away from guaranteed prices which acted as incentives to production, were regarded as undue external interference in the domestic affairs of the Community-as well as hypocritical, given the failure of the U.S. government to carry through a similar program at home.
Instead, the Community proposed what it regarded as a practical and politically realistic solution to the dispute, namely a "montant de soutien"-a freezing of all forms of support to producers of particular products, including grains. For the Community the offer was a genuine concession-in that it placed a restriction on measures considered to be essentially matters of internal policy-and at the same time a negotiating device, in that it established the CAP as an accepted and legitimized part of the international trading structure.
The proposal was that the agricultural part of the Kennedy Round negotiations should aim at consolidating all measures of support for agriculture, whatever their form, with an agreement that a ceiling of the total level of support would not be breached. The objective was neither harmonization nor the removal of subsidies, but the limitation of their growth.
To the United States the proposal became acceptable only in retrospect, as the consequences of the CAP on production and trade became obvious. At the time it was seen as an entrenchment of protectionist domestic policies and a step away from, rather than toward, liberalization or open access. The United States instead sought guarantees of access for particular products, including most prominently confirmation that soybeans would not be liable to import tariffs, in line with an agreement originally reached during the earlier Dillon Round of GATT talks.
Eventually, in order to avoid the breakdown of the overall trade talks, the EEC accepted bilateral arrangements with the United States which granted a number of specific tariff and access concessions on priority products. The grain negotiations were transferred from the Kennedy Round negotiations to the International Wheat Council's discussions on an international grain agreement.
Under the pressure of falling world prices, attempts to set an agreed floor price and to determine market shares for the main grain-exporting countries proved unsustainable, even though an initial grains agreement was negotiated and ratified. Disputes over the pricing formula led to a breakdown in discussions and a reversion to the well-established pattern of imperfect competition. The only part of the Grains Agreement which survived was a limited convention on food aid. The failure of the rest of the Agreement, after almost a decade of talks, reinforced the view that grain and agricultural trade in general were immune to the application of international management.
It can be argued that by the early 1970s the United States had adjusted to the CAP-even though it maintained, in common with other exporters, a rhetorical commitment to open access and liberalization. The United States had begun to find new and highly lucrative markets in the Community: for example, exports to the EEC of soybeans, free of duty, had expanded by 50 percent in the decade up to 1970. Agricultural exports to the Community were higher than ever before and with soybeans in particular the United States had found a trade which the CAP, by pricing Europe's indigenous grain at a high level even to its own livestock producers, actually encouraged. EEC support for meat production also encouraged an expansion of European livestock, which, while a source of dismay for the Australians and other meat traders, ensured a stable and growing market for animal feed.
American concern at the absorption of the British market by the Community after 1973, and fears that Australia's and New Zealand's trade would be redirected from Britain to other markets, were mitigated for a time by the belief that British accession would lead to a fundamental alteration of the CAP, or at the least to an adjustment of common price levels downward-a belief justified not least by the commitments of British politicians.
American agricultural exports began to expand rapidly. Enlargement of the world market by Soviet purchases and by the growth of trade with Japan and the developing countries of Southeast Asia in the prosperous days of the early 1970s pushed exports of wheat as a proportion of U.S. production up to 76.8 percent in 1972. Some thought that the circumstances of that period-disappearance of stocks, rising Third World demand and Soviet imports-offered the possibility that the climacteric was past. That perception was not of course shared by all. For parts of the farming industry the development of the CAP and the extension of European self-sufficiency undermined previously secure markets. Therefore, although the Tokyo Declaration of 1973 (the statement of intent opening renewed trade negotiations) made clear the common acceptance of the special status of agriculture, the United States retained the hope that external and internal pressures would force change upon the CAP.
The target for the U.S. negotiators in the Tokyo Round was the widespread use of export subsidies and other non-tariff barriers. The twin aims were to secure existing agreements on access (particularly that relating to soybeans) and to ensure that the output trends of the farm sector under the CAP did not threaten U.S. markets elsewhere. Behind the U.S. stance there was emerging "a changed attitude to export markets-markets which could no longer be taken for granted and were no longer simply dumping grounds."4
The European position was stated in the Council of Ministers Mandate for the Tokyo Round: "The specific objective of the agricultural negotiations should be the expansion of trade in stable world markets, in accordance with existing agricultural policies . . . . by means of appropriate international agreements." In essence, the European approach to the problems of agricultural trade was one of international management, in the interests of supply security and price stability within a limited range, for markets which were proving to be insecure and volatile. The Community emphasized the disruptive effect of the U.S. soybean embargo in 1973 as an example of the instability which agreement on security of supply could mitigate. EEC representatives argued for some form of stock-holding as a means of underpinning the market, and for the isolation of agriculture as a separate subject of negotiation, clearly distinct from the wider discussions of trade policy in the Tokyo Round.
In contrast to the U.S. desire to meet the problem of instability and world food shortage by making the market mechanism work more effectively, the Community favored international trade management-a reflection of its own internal approach to agricultural policy.
From the beginning the Community argued, in the words of the Mandate, that "the CAP's principles and mechanisms should not be called into question and do not constitute a matter for negotiation." It was a point the United States had come to accept as far as the internal workings of the CAP were concerned, though not of course its external effects.
Neither the American characterization of the CAP as "the ultimate in mercantilism" nor the European concern with world food security can be taken entirely at face value. The divergent approaches owed more to immediate interests than to any ideological conflict. The best way to assist U.S. exports was undoubtedly to argue for the abandonment of trade restrictions by importers-while for the EEC any argument which shielded domestic market management against external pressures was to be embraced.
The issue remained unresolved for over six years of negotiations, and was handled in the end only by a vague agreement signed by both sides in order to bring the trade talks to a close. The eventual resolution owed more to exhaustion than to genuine agreement. It left the EEC able to claim that its long-term aim of "legalizing the CAP" had been achieved, and the United States confident that the clauses of the agreement relating to export subsidies would limit the freedom of action of the EEC in attempting to win new markets. The American hope was that this would force the EEC to reform itself as financial pressures became the dominant factor in the calculation. That longstanding U.S. aspiration has yet to be fulfilled.
The key to the Tokyo Round settlement, and to the present disputes, lies in the clause of the 1979 agreement which refers to export subsidies. That clause binds signatories
Not to grant directly or indirectly any export subsidy on certain primary products in a manner which results in the signatory granting such subsidy having more than an equitable share of world export trade in such product, account being taken of the shares of the signatories in trade in the product concerned during a previous representative period, and any special factors which may have affected or may be affecting trade in such product.
More than "an equitable share of world export trade" is defined to include "any case in which the effect of an export subsidy granted by a signatory is to displace the exports of another signatory bearing in mind the developments on world markets."
Although the intention of the clause may appear clear, much scope for disagreement remains. The Community has always regarded export restitutions5 as an integral part of its domestic agricultural policy, a redistribution of EEC income to EEC farmers and not to foreign buyers. The fact that they enable farmers to sell at or below world market prices, and that farmers can rely on the availability of credit, often on terms very favorable to the importing countries, does not in the EEC view constitute a particularly aggressive trading policy but rather normal commercial practice, simply matching the export promotion of other countries, including of course the United States.
The Community has come under constant pressure from those member states with strong agricultural sectors, particularly France, and from the agricultural lobby generally, to develop an explicit export policy. And the demand for a sustained export strategy has grown stronger as the problems of surplus disposal have increased. The French view has been expressed by Henri Nouyrit, the Deputy Director of the French Confederation of Agricultural Cooperatives:
For exports there is no real policy. So called "surpluses" are disposed of as the opportunity arises. There is no plan for exports, no medium term policy. Exports have become a sort of undesirable adjunct to intervention. Financial preoccupations over export restitutions have inhibited a proper commercial policy involving an effort to establish permanent trade flows, to seek out new markets and to develop commercial instruments such as credits and long term contracts.
To an extent the Commission has shifted toward the French position. The notion of long-term contracts and special credit facilities has been floated on a number of occasions. The Commission's Reflections on the CAP, published in 1981, talked openly of pursuing the success of its exports in coming years "by providing the CAP with instruments similar to those enjoyed by major agricultural exporting countries (the United States, Canada, Australia and New Zealand), in particular the ability to conclude long term agreements."
Over the last few months, although Britain and West Germany are reported to be less than fully convinced, the Commission has "coalesced around the proposition that the Community should at least have the instrument [in Community jargon, "framework agreements for multiannual supply"] available."6 Thus, barring another change of policy, we can now expect sales agreements, of three to five years duration, to be signed between the Community and a number of importing countries. From the European point of view at least, it is clear that such a policy would encounter no problem in terms of the Tokyo Round agreement.
In the United States, however, both officials and commentators believed that the Tokyo Round settlement in 1979 marked a firm agreement, with the internal arrangements of the CAP accepted, but the role of subsidized European output on world markets firmly restricted. Their disillusionment explains some of the anger which has crept into the current dispute.
World market conditions have given the argument its new sense of urgency. Since 1980, despite exceptionally large-scale Soviet imports and the development of a regular and apparently secure Chinese market, world prices for grain have continued to fall and stocks, held involuntarily, have continued to accumulate. The U.S. farmer-owned reserve, a temporary stock-holding measure when it was introduced in 1977, has expanded remorselessly to well over 100 million tons at the end of the last crop year. U.S. yields, productivity and total output have continued to grow, but the shortfall of effective demand, in what has become a buyers' market, has both pushed up the cost of government support and left farm incomes falling.
To these problems there has been added, over the last year in particular, a switch in Soviet purchasing patterns away from the United States, and toward "more reliable" suppliers such as Canada and Argentina. This reversal of grain power in retribution for the 1980 partial embargo has persisted despite offers of substantial sales and has left the unfortunate U.S. farmer, once the provider of three-quarters of Soviet needs, no more than a residual source of supply providing no more than a fifth of Soviet requirements over the last year. The new U.S.-Soviet grain agreement negotiated in July 1983 provides little relief. The minimum level of assured purchases by the U.S.S.R. has been increased, but only by three million tons a year.
It is not surprising that the mood of farmers and traders alike is gloomy. In the words of Ted Halow, the executive director of the North American Grain Exporters Association: "The world grain trade is shrinking, the 1970s are behind us, the period of rapid grain expansion is behind us . . . . probably forever."
It is understandable, given this mood, that the United States should have reacted so strongly to the European interpretation of the Tokyo Round agreement and to the drift of European policy. Since the Tokyo Round agreement was signed in 1979, European exports of wheat have risen by over 100 percent. European production has grown while internal consumption is barely rising, generating an increasing surplus volume for export. Though the EEC export trade is still small by American standards, every ton has become a subject of controversy given the condition of the market. Ted Halow's comment that "European farmers are producing not for consumers but for intervention" is difficult to refute. The degree of farm support has been the subject of sustained statistical dispute. While the EEC prefers to talk in terms of support per farmer, since that is the measure which favors its conclusion that European support levels are reasonable and fair, the United States with its larger farms quotes figures on support per unit of output. Numbers games apart, the impact of European support levels on production and exports is not in dispute.
Clearly the absolute level of European support, plus the security of income for each unit of production without limit, has induced added production. Saturation of demand at current price levels has created surpluses which depress world market prices and require disposal. The system of export restitutions has allowed European farmers to export at world market prices-prices which their own production costs could not sustain. The effect of this is not of course limited to the grain market. In 1974, the Community was a major importer of dairy products, sugar and beef. By 1981 it had become the world's largest dairy exporter, number two in world sugar trade and the exporter of over 60,000 tons of beef.
The United States too has supported its producers, though the level of support per unit of output is lower and the blanket guarantee of income given to the European farmers is absent.
U.S. production costs are undoubtedly lower, and on economic criteria of comparative advantage the U.S. case is strong. Such criteria, however, are unlikely to form the basis of any settlement of the current dispute. There may be much justice on the side of the United States, but the complications of the U.S.-European relationship in agricultural matters (and beyond) will make a resolution favorable to the United States more difficult to achieve than the Administration may imagine.
For the last year the dispute has been conducted through rhetoric. On the U.S. side, Assistant Secretary of Agriculture Seeley Lodwick has described the European strategy as "targeting key US markets . . . seeking to shift the cost of domestic programs to other trading countries through unfair competition." Turner Oyloe, the U.S. agricultural attache in London, speaking to the Oxford Farm Conference last year, argued that if the CAP were carried to its logical conclusion, "greenhouses should be installed in Ireland to grow oranges, bananas and coffee." John Block, the Secretary of Agriculture, accused the EEC of "literally stealing markets away from the U.S., Canada, Australia, the developing countries and others in sugar, poultry and wheat." In January of 1983 he was reported to be pressing President Reagan "to fight fire with fire."
The aggressive response from the European side has come mainly from the French. Even as the discussions set up after the GATT ministerial meeting of November 1982 were getting under way, Edith Cresson, then the French Agriculture Minister, accused the United States of "exporting its economic crisis" and said that its new farm policies were "motivated by domestic political concerns." The Commission itself has been less strident but equally unyielding. Its annual review of the agricultural situation in the Community, published at the end of 1982, says:
The Community's relations with its GATT partners in so far as agriculture is concerned were marked by an intensification of the attacks on the CAP. Certain agricultural exporters-in particular the United States-invoked GATT dispute settlement procedures to pillory various aspects of the Common Agricultural Policy. . . . The Community reacted to these attacks with moderation, and a determination to show that it complied scrupulously with GATT rules.
The resurgence of the rhetoric at the beginning of 1983 marked the end of a brief period during which it appeared that an amicable resolution was being sought through negotiations. In advance of the November 1982 GATT meeting, Block emphasized the limited nature of the U.S. challenge: "We don't challenge the CAP-but we do challenge the export subsidies that make it difficult if not impossible to compete." Both Block and William Brock-the President's U.S. Trade Representative-were reported as declaring that there would be "no trade war," and the agreement to initiate bilateral discussions after the Geneva ministerial meeting seemed to confirm the view.
For a brief period the United States appeared to be seeking ways to limit production as its way out of the twin problems of surplus stocks and low income. The payment-in-kind (PIK) scheme, through which the Administration hopes both to reduce stocks and to cut production by inducing farmers to leave up to 25 percent of their land unplanted, was pursued by President Reagan despite an initial failure to win formal congressional support. The scheme was reported to be considered "a supply side solution" by the Administration and an indication that "the President and the Secretary of Agriculture have apparently abandoned hope that export expansion and large-scale sales to the Soviets will absorb the huge American grain surplus."7
It soon became clear, however, that the PIK program was not a complete solution, and that there were many in the U.S. Administration unwilling to see U.S. agriculture absorb all the costs of what they regarded with some justice as unfair European competition. The effect of a 25-percent cutback in production, if sustained over several years, would be harsh on local business in the affected areas and on those major companies whose survival depends on sales of farm equipment, machinery and fertilizer. From the farmers' point of view the scheme offers no major cut in overheads, nor any promise of increased income, and the incentive is for each individual to maximize the benefit to himself by leaving his least productive fields unplanted and by raising the yield from the rest. There is only limited confidence in the trade that the price rises seen on U.S. markets since the scheme was introduced can be sustained. The irony of the fact that a major beneficiary of any rise in prices is the CAP (because of the reduced cost of export restitutions) has not been overlooked.
As the debate on payment in kind proceeded, the advocates of a firm policy against the European Community gathered strength and support. At the beginning of December 1982, Richard Lyng, the Deputy Agriculture Secretary, was reported as saying that his department was "preparing a plan and package in response to the European stance on agricultural subsidies-updating its list of U.S. exports which might be subsidized-chickens, eggs, raisins, wheat flour and pasta." Proposals were put forward for extending the payment-in-kind scheme to exports-granting purchasers additional supplies from existing stocks at discount rates. Senator Jesse Helms, supporting the proposal, told the Senate agriculture committee that "the EEC's right to swing their export subsidy fist ends at Uncle Sam's nose." President Reagan, in a speech to the American Farm Bureau Federation, announced that he was extending the Deputy Agriculture Secretary, was reported as saying that his department was "preparing a plan and package in response to the European stance on agricultural subsidies-updating its list of U.S. exports which might be subsidized-chickens, eggs, raisins, wheat tons of wheat flour to Egypt came as the unsurprising conclusion to this long period of verbal exchanges. Taken alone, the subsidized sale would displace a limited amount of European exports (the Community supplied 600-700 thousand tons of the total Egyptian market of 1.6 million tons last year), but as an example of possible further U.S. action around the world its impact is substantial. Sales of subsidized butter to Egypt are reported to be under consideration, and negotiations on the possibilities for subsidized sales of wheat, maize and other products to a substantial number of markets are under way. They include at least five (Portugal, Yugoslavia, Morocco, Pakistan and Yemen) as well as Egypt which are considered traditional EEC outlets. What remains unclear, however, is the nature of the U.S. strategy and the extent to which it can overcome the weaknesses in the U.S. position.
Leaving aside the legality of American action under GATT rules, a matter which is now the subject of an EEC challenge, a strategy of sustained subsidy of exports raises a number of problems and leaves the key political issue for the U.S. Administration-low farm incomes and the accelerating rate of farm bankruptcies-untouched.
In the tight and controversial U.S. budget situation, the agriculture sector is already a problem. The government's farm price supports were expected to cost $6.5 billion in 1982; their actual cost was twice as great. And the initial estimate of a drop to $1.5 billion in 1983 is now clearly unrealistic; current estimates run as high as $12 billion for the PIK program alone.
In this context, the sale of one million tons of wheat flour to Egypt, even if reports of a discount of $25 per ton below the subsidized EEC prices are correct, is of course well within the means of the U.S. government. However, disposal of even 10 or 20 million tons of the current stocks of over 100 million tons will begin to pose a significant burden. That cost will rise if the proposals now being discussed in the Community for matching subsidies are pursued. There have already been French calls for sales to Egypt to receive a special subsidy, and a special rebate has already been given to the Chinese in order to secure a sale of 600,000 tons of wheat.
Unless subsidies are able to win a significant additional share of the world market for the United States, there would also be balance-of-payment costs from falling real prices. Given the Community's current pricing policy, and the smaller volume involved, the additional input of Community resources required to match U.S. subsidies would be rather small. The cost to both sides would of course increase if the conflict spread to other agricultural products in the dairy sector or elsewhere.
It is the prospect of a lower world price which poses the most serious problem for the advocates of an all-out U.S. export subsidy strategy. Unless production is adjusted downwards (a slow and difficult process given the limitations of the price transmission mechanisms and the strength of national policies), any price fall would clearly damage the interests of U.S. farmers and traders who rely on world market prices. The prospect of a spiral of higher subsidies and falling prices must be a cause of considerable concern to an Administration with a budget deficit of $200 billion and a hostile farm sector whose incomes have fallen by as much as 20 percent in three years, and whose lobby groups are now calling on the Administration not simply to challenge the CAP but to create a structure of agricultural support in the United States along the lines of that in Europe.
It is also clear that some of these potential costs are well perceived by the Administration and that the subsidy for the sale to Egypt may represent a "warning shot" designed to make the European Community reconsider its policies rather than the beginning of a long-term subsidy policy, or part of a well-planned trade offensive.
Moreover, the impact of any such offensive on U.S. exports to Europe may not have been assessed in full. In agricultural trade as a whole the United States has a net surplus with the Community of some $6 billion per year ($7 billion in 1981). Soybean sales alone have sustained and indeed improved the net U.S. trade balance with the Community. Current U.S. action risks retaliation which may well add the cost of lost European markets to the cost of subsidies.
The fact that half of U.S. agricultural exports to the EEC enter the Community duty free has already been noted by the French, who have proposed a ceiling on soybean imports-which are immune from import levies under agreements signed 25 years ago, and which have risen four-fold in volume since then. To the Community as a whole, the imposition of such a levy in breach of past undertakings would be a measure of last resort, or as one commentator put it, "an ultimate deterrent." But its use cannot be ruled out if measures are taken by the United States that appear to be equally outside the existing rules.8
In the medium term, a more likely response would be the use by the Community of its control over the price mechanism to reduce consumption of imported products, such as soybeans, by providing some inducement to European animal feed producers to use some of the current EEC surplus supplies of grain-at present priced out of the market. Poul Dalsager, the EEC agriculture commissioner, has already announced plans to make two to three million tons of surplus cereals available for feeding to livestock at subsidized prices.9 A mixture of the two proposals-a levy on animal feed imports, the proceeds of which would support the use of home grown grain-would reduce the costs and also reduce the volume of surplus grain to be exported (therefore also reducing the burden of export restitutions required). The cost to the Community would depend upon the level of duty set, and the degree of subsidy to animal feed producers to meet all or part of the difference between the cost of current imports and the cost of Community produce. To reluctant governments within the Community, the approach might be presented as a means both of securing the CAP-an important symbol of the Community's existence for all its faults-and of averting a trade war of export subsidies by diverting some currently exported grain back into the Community itself.
There are many possible variations under consideration, including the French idea of a volume limit on soybean imports (with or without a levy). They would all cost the Americans their growing market in the Community and a part of their positive trade balance with Europe. Although current European export markets might be reduced or held static as grain was diverted to internal use, the gain for some U.S. exporters would be matched by the burden of unsold soybean crops.
For the moment, the negotiations begun last December continue, but it is difficult to find one official, European or American, who believes that a resolution is imminent. On the American side, the hope persists that the EEC's budget problems will force a radical change of policy in relation to agriculture. To the European side, American plans-in relation to export subsidies and the payment-in-kind scheme-appear ill defined and uncertain. Both sides harbor the hope that a sudden world shortage of grain will solve the problem, and avert the need to put on the negotiating table the domestic agricultural policies which have created the current difficulties.
All seem to be false hopes. Stocks remain exceptionally high and even the tightening of the markets in recent months will not be sufficient to reduce them to normal levels. The EEC has made repeated assertions of its wish to bring its own prices into line with those prevailing on world markets, but the speed of change has been very slow, and productivity growth has outstripped the very small decline in real prices-with the result that output has continued to rise. The EEC budget ceiling does now pose a problem for the ten member states, but there is no certainty that a reduction in agricultural spending would be the outcome of any agreement on economic restraint. Indeed, there is a good chance that increased spending levels could be agreed upon if it appeared that a slight increase in resources would contribute to a widening of the range of European activity, and to the solution of the separate issues of imbalanced national contributions. No agreement is yet in sight, but it would be wrong for the U.S. Administration to calculate on the basis that one will never be reached.
Equally, it seems unrealistic for Europeans to assume that the U.S. government will absorb all the cost of the downturn in world markets. The fact that under the payment-in-kind scheme the United States is paying its farmers not to produce while output from Canada, Argentina and the EEC is increasing has not gone unnoticed. Many in the Reagan Administration would undoubtedly be happier pursuing an aggressive export policy instead of making such payments. Tempers have not been improved by the negotiations for a new grain agreement with the Soviet Union, which found the United States in the role of supplicant. The terms of that agreement, including a clear guarantee that grain supplies would not be embargoed again under any condition short of war, emphasized the weakness of the U.S. bargaining position.
Neither side can seriously expect world market conditions to solve the problem for them. Wheat stocks, according to the International Wheat Council, are now running at some 170 metric tons,10 and for the year ahead the chances are of increased output in the Soviet Union, Australia, Argentina and other producing countries.
For the moment it may well be that diplomatic concerns take precedence over agricultural issues, and that the grain dispute will be muted as the Alliance concentrates on crucial political and strategic matters, in particular the issue of missile deployment. But the removal of agricultural disputes from the headlines to, say, a bilateral committee charged to research and report, should not be mistaken for a solution. Agricultural trade will return to the agenda again and again until a solution of some permanence is found. Conflict over grain and other agricultural products, particularly dairy produce, will reassert itself even if a temporary ceasefire is pasted together.
Can an acceptable and lasting solution be found? For all the immediate difficulties I believe that the answer is yes. There are many in the EEC who seek a more rational agricultural structure, and who do not wish to see the Community become simply a Farmers Union. In the United States, farm spending is already casting a long and unwanted shadow over the federal budget.
The long-term solution to the common problem lies in a joint agreement on the reduction of subsidies. Washington has already frozen its dairy support levels for four years, and is now proposing the freezing of target prices for grains. The EEC has made gentle cuts through a formula which cuts prices by one percent for every one million tons of production over and above planned levels. Greater reductions, in nominal as well as real terms, will be needed to reduce output given the pressures of technological advance.
A program of such cuts, with eventual stable production targets, should be agreed. So, too, should a strict ceiling on export subsidies, in order to prevent the disruption of the world market and for the purpose of avoiding the gross misallocation of resources which subsidies involve.
Over any interim period some temporary agreement for the allocation of markets may also be necessary-though a full-blown formal agreement is probably unattainable as well as undesirable.
There would be no one clear winner from such a solution. The United States would retain its world markets so long as it could compete with Argentina, Canada and other producers on price and on the security of its supplies. In the EEC, grain production would plateau and lower grain prices might stimulate the use of grain by the neglected indigenous livestock sector. On both sides the direct costs of subsidies and restitutions would be reduced, freeing resources for alternative investment in other agricultural sectors, or in other parts of the rural economy.
Though the importing countries of the world undoubtedly benefit from the subsidies poured into agriculture by the exporters, cheap grain imports have proved a disincentive to the development of production. Given the appropriate response, the reduction of subsidies would have beneficial effects here too.
A move toward such a solution would require from both the European Community and the United States something more than consent to particular sets of figures and timetables. It would need a willingness to see agricultural policy in international and not strictly national terms, and a change of direction against the trend in so many other sectors. There is sadly no sign as yet that any such willingness exists at the political level.
More likely for the foreseeable future is a continuing conflict, with sporadic outbreaks of hostilities. Leaving aside the waste of resources which that implies, the chief concern must be that agricultural disputes, after arguments over steel and the question of East-West trade, will contribute to the undermining of the cooperative trading relationship built up over the last four decades.
In trade matters Europe and America are already beginning to look less like partners and more like adversaries. Disputes over the last few years have had a corrosive effect on the trust which should form the basis of the Alliance. Further disputes, whether conducted through rhetoric, selective statistics, or open measures of economic warfare will do nothing to repair the damage.
1 T. Warley, International Economic Relations of the Western World, Vol. 1, Part 3, London: Royal Institute of International Affairs, 1976.
2 S. Tangermann, "Agricultural Trade Relations between the European Community and Temperate Food Exporting Countries," European Review of Agricultural Economics, 1979.
4 J. Hillman, "Policy Issues Relevant to U.S. Agricultural Trade," in Imperfect Markets in Agricultural Trade, ed. Alex F. McCalla and Timothy Josling, Totowa, N.J.: Allenheld, Osmun & Co., 1981.
5 Export restitutions are payments to producers which allow them to compete on the world market. They now account for 45-50 percent of the EEC farm budget.
6 Financial Times, August 9, 1982.
7 Financial Times, January 6, 1983.
8 In the studiously vague prose of the Commission's 1981 Reflections on the CAP: "The Commission will continue to honour its obligation including those contracted in international organizations but at a time when new restraints must be imposed there must be more vigilance over the import of certain feeding stuffs and similar products. These measures would help to arrest the excessive rise in imports of these substitutes."
9 Financial Times, April 21, 1983.
10 International Wheat Council, Market Report, June 1983.