The Pandemic Depression
The Global Economy Will Never Be the Same
Buffeted by drought and protectionism, agriculture is emerging as a key issue in the politics of international trade. Because international agriculture cannot be divorced from domestic farm programs, foreign trade officials and others in the diplomatic community are being forced to confront issues beyond their normal purview. "I sit there talking about soybeans," lamented Italian Foreign Minister Guilio Andreotti during an interminable debate with his European partners, "and I don’t even know what the miserable things look like."
The complex nature of agricultural protectionism has long served as a barrier to popular and political understanding—a state of affairs useful to the special interests that benefit the most from this protection. The inconsistencies, inefficiencies and inequities that riddle farm policies have usually been of interest only to a relatively small group of specialists. As President Kennedy reputedly told his principal agricultural policy adviser: "I don’t want to hear about agriculture from anyone but you. . . . Come to think of it, I don’t want to hear about it from you either."
As long as the costs of farm programs were low and foreign markets for surpluses were growing, politicians and economists could afford these short attention spans. But in the mid-1980s budget costs for agriculture rose dramatically in both the United States and Europe. Shrinking foreign demand led to falling farm incomes, yet price support programs continued to pay farmers far more than the market for their products. In recent years on each side of the Atlantic these costs soared to over $25 billion annually, but even such massive programs have failed to prevent a record number of farm bankruptcies. In a desperate attempt to unload surplus production, export subsidies have been used to dump grain and other agricultural commodities on the world market, lowering prices and threatening a global trade war.
The parties to the General Agreement on Tariffs and Trade have begun to debate the farm trade issue as part of a broad effort to reform the global trading system. As the GATT discussions of farm trade accelerate, it is clear that agriculture must now take a central place in U.S. foreign trade policy; reform in agricultural policies can be the stimulus for broader trade liberalization and reform. If farm policy is to be liberal, rather than protectionist, it must reflect greater market orientation both at home and abroad, and reduce the distortions that now separate the domestic from the global markets. Renewing growth through trade, important to the industrialized economies, is even more important to developing countries, where agriculture remains the foundation of economic progress.
Success in this effort will require broader understanding of the domestic causes of agricultural trade distortion. It will require the political courage to discard some of the myths that have protected ineffective and obsolete policies. It will require coordinated, multilateral efforts to rationalize domestic agricultural policies through international agreements. Otherwise, agricultural trade disputes may lead to increased global protectionism and stagnating growth.
Until the most recent round of GATT talks, launched at Punta del Este, Uruguay, in September 1986, farm programs had been treated as a notable exception under trade rules, largely at the insistence of the United States, the European Community and Japan. So special was the case of agriculture that it largely escaped the discipline of the basic principles upon which GATT was founded in 1947. The Uruguay Round, the eighth multilateral trade negotiation since World War II, is the first to take direct aim at the thorny agricultural trade barriers stemming from domestic farm policies. In so doing, it is confronting the legacy of failure in previous rounds. Despite various attempts to bring agricultural trade under GATT rules, since World War II this trade has become more discriminatory, less transparent, less bound, and less subject to multilateral dispute settlement. Restrictions and special waivers for agricultural trade (notably import fees and quotas granted to the United States) make U.S. arguments for liberalization in other areas of GATT more difficult.
But the United States is hardly alone. Other contracting parties to GATT employ a wide array of non-tariff barriers for agriculture that are neither transparent nor widely understood. The European Community’s Common Agricultural Policy (CAP) permits EC members to replace national tariffs with common border measures, notably "variable levies" on non-EC imports, to help shore up domestic prices in what was until the 1970s a large net agricultural importing region of the world. With continued economic expansion and increasingly generous farm subsidies, however, Europe has emerged as a major agricultural exporter, and export subsidies ("restitutions") are used to dispose of its mounting surpluses. Japan, concerned for its rice producers, has also maintained a complex set of customs duties, import quotas and other border measures, including direct government payments to producers and a wide array of other domestic subsidies.
While the United States, Japan and the EC argue for agricultural protectionism on behalf of their farmers, they nonetheless continue to seek to enlarge the scope and level of world trade. This contradiction is often skillfully exploited in GATT by developing countries, such as India and Brazil, which want greater access to U.S. markets yet wish to protect certain economic sectors of their own from foreign competition. The consultation and dispute settlement process in GATT is weak; parties in conflict have often reverted to bilateral retaliation because they have failed to gain satisfactory settlement under the system of GATT panels established for that purpose.
In the face of increasing cynicism over the capacity of GATT to resolve these issues successfully, the United States launched in July 1987 a make-or-break proposition for international agricultural policy reform. The proposal startled many weary trade negotiators by calling boldly for GATT’s contracting parties to eliminate all trade-distorting forms of domestic support to farmers over a period of ten years.
This proposal, which has gained measured bipartisan support in the United States, indicated U.S. resolve to stop treating agriculture as a special case if other contracting parties would do likewise. While careful provision was made to allow direct payments to farmers as a "safety net," all forms of support that encourage production in excess of market demand would be eliminated. In essence, the proposal would shift the objective of agricultural policy from supporting farm prices to supporting farm income, untying payments from specific crops. Payments to farmers would be unrelated to planting requirements, and hence "decoupled" from production. Farmers could still receive direct income support, but would be free to grow whatever crops were in demand.
While roundly condemned as unrealistic in the EC and Japan, the proposal gave courage to and was endorsed in principle by a variety of exporters and importers for whom the U.S.-European Community subsidy wars of the mid-1980s had brought nothing but low prices and stagnant demand. It strengthened a diverse confederation known as the Cairns Group (led by Canada, Australia and New Zealand), which had been a key force in bringing agriculture into the Uruguay Round. It also stimulated the EC and Japan to develop their own proposals (essentially defending the status quo while admitting the necessity of short-term relief) and helped other countries to develop more comprehensive agricultural policy options. All these proposals are now on the table at GATT in Geneva.
In December 1988 trade ministers will meet in Montreal for a midterm review of progress in the Uruguay Round, setting the tone and direction for the subsequent negotiating process. Pressure is growing to go beyond general proposals at Montreal and commit to actual liberalization measures as a "down payment" on the final agreement hoped for in 1990. Yet conflicting European and U.S. political pressures are also mounting. The French presidential election has led to a new left-center coalition whose attitude toward trade liberalization is uncertain. The U.S. election process leads both Republicans and Democrats to seek to protect themselves from charges of "appeasement" to foreign interests. Despite the need for reform, few American politicians will call for reduced subsidies in an election year, especially under current drought conditions. Foreign governments will also be inclined to wait until after the election before negotiating seriously.
Added to these political obstacles are a number of economic factors. First, U.S. negotiators confront a Europe seemingly able to finance a continuation of the status quo. The European Community’s budget compromise on agricultural spending reached in February 1988 offers no real prospects for reduced export subsidies or enhanced budget discipline—a leading West German agricultural economist dismissed the compromise as "a drop of water on a hot stone." The arrangement nonetheless allows the EC to avoid reforming the CAP for several more years and to demand "credit" in GATT for what are essentially cosmetic, short-term efforts to decrease agricultural production.
Second, the U.S. drought allows a temporary respite from the pressure of chronic surpluses and provides a potential windfall for European producers. Longer-term global supplies are not vulnerable to the U.S. drought, since bumper crops may occur in other parts of the world; it is the soil and water conditions giving rise to the drought that pose more serious threats to long-run productivity.
The next administration will thus inherit a set of political and economic problems with interlocking domestic and foreign elements. The chairman of the Senate Agriculture Committee, Patrick Leahy (D-Vt.), has emphasized that if progress in the Uruguay Round is not forthcoming, the House and Senate are prepared to draft a highly protectionist farm bill in 1990, the effect of which would be to renew the subsidy wars of the 1980s. It is the midterm review in Montreal that will provide Congress its first clear signal whether progress is achievable. The opportunity now exists to evaluate and appraise the remarkable assault on agricultural protectionism that has been proposed in Geneva, to determine why this battle should be fought, and whether it will be won.
Why has agriculture been a special case, immune for so long from the liberalization that has been applied to other sectors under GATT? The traditional claim is that food and fiber production is too important to be left to market forces, that without substantial government manipulation the system would fail. There is also a strong emotional bond between farmers and society as a whole. The political influence of farm groups and broader concerns with "food security" are often used to argue that artificial price supports and self-sufficiency are preferable to the caprice of markets and international trade. Yet few argue that current programs need no improvement. When grain production in the United States, Europe and Japan in 1985 built world stocks to almost twice the levels of consumption, government encouragement to grow crops was seen as excessive.
Many compassionate citizens point to the plight of heavily indebted small farmers as justification for additional government price supports. The record of over fifty years of such transfers demonstrates, however, that domestic farm programs based on guaranteed prices paid on a per-acre basis are increasingly skewed toward large farmers, who are then in a stronger position to gobble up their neighbors.
When payments are made on the basis of acres in production, as they are in both the United States and under the European CAP, there is a powerful incentive to acquire and plant more acres. The bigger the farm, the bigger the payment. Ironically, the evidence suggests that these payments are extremely regressive, and hardly salvation for the "family farm." Government price supports have speeded the demise of smaller farming operations and thus decreased rural employment.
These programs have also reduced the level of diversification typical of traditional agriculture. American farmers are paid by the government to produce a selected number of "supported" commodities, including rice, cotton, corn, wheat, soybeans, barley, oats, dairy products and tobacco. Roughly 80 percent of these payments are made to fewer than 20 percent of the nation’s farmers. These farmers respond rationally to the incentives provided by price guarantees in relatively few commodities: they specialize in the supported crops. Often they produce little else, since specialized agriculture with government price guarantees is nearly always preferable to diversification. In contrast, the uncertainty of the market would demand diversification to assure survival. "Program crops" are produced intensively, utilizing large quantities of pesticides, fertilizer and other inputs. This intensive production is expensive to the farmer and encourages the accumulation of debt to purchase additional land, irrigation and other equipment, as well as fertilizer and chemicals. It is also expensive to society, since it encourages cultivation practices that lead to erosion and chemical pollution of lakes, streams and the underground water of local communities, and to excessive water use contributing to drought.
Many of the program crops are already in excess supply and cannot be profitably sold. Hence the government stands ready to acquire them in lieu of repayment of loans taken out (at subsidized interest) in order to plant them in the first place. After surrendering these crops to government storage, farmers receive a "deficiency payment" for their effort. In recent years market prices have been so weak that huge quantities of program commodities have entered government warehouses, and deficiency payments have accounted for a larger and larger share of net farm income. The Department of Agriculture reports that total government payments as a percentage of net farm income from all sources rose from six percent in 1980, to 26 percent in 1984, and to 31.5 percent in 1986.
For many individual farmers the percentage is much higher, making them utterly dependent on a system that continues to reward the production of commodities that nobody wants. Total U.S. agricultural program spending in 1986 exceeded $25 billion, up almost eightfold from the highest level achieved in the 1970s. This year, large payments will likely be made as drought relief, with or without a harvest. It is little wonder that many farmers cynically refer to "farming the government" as more profitable than plowing their fields.
While different in design, the EC’s Common Agricultural Policy has the same effect. By paying prices far higher than world market levels and allowing European farmers to sell surpluses to the EC, the CAP has led to the accumulation of staggering quantities of agricultural commodities. A particularly absurd result of these policies is the recent EC purchase of surplus low-grade butter, which is then disposed of by feeding it to calves.
In both the United States and Europe, a major aspect of "farming the government" involves being paid not to farm at all. Programs have evolved that require farmers growing crops that are in surplus to remove from production a proportion of their acreage planted in order to receive a deficiency payment. These "set asides" amount to an attempt to hit the production control brakes while simultaneously stepping on the price support accelerator. Farmers respond rationally, by diverting those acres that are least productive. As a result, the brakes slip. Experience has shown that from two to three acres must be moved out of production in order to reduce output by the yield of an "average" acre. Acres left in production, meanwhile, are farmed more intensively than ever, raising both yields and the level of environmental damage. Proposals to make such programs mandatory, in effect shutting down millions of acres of productive land, have recently been endorsed by "supply control" advocates both in the United States and Europe, although the failed record of existing programs raises major questions about the wisdom of artificial supply restraints, especially in the face of this year’s short crop.
Spurred on by supports for some commodities that are as much as four times world prices, EC and American farmers have accounted for the lion’s share of surplus production, and will continue to do so as long as support prices exceed market prices. At the end of 1987 EC stockpiles held over one million metric tons of surplus butter, 708,000 tons of skimmed milk powder, 725,000 tons of beef and more than ten million tons of cereals. The Commodity Credit Corporation, the U.S. Department of Agriculture’s surplus purchaser, held three billion bushels of grain and paid $2.5 billion in annual storage fees alone on another 2.3 billion bushels held on farms.
These data do not reflect the losses of other trading nations due to the price and income effects of current policies on world markets. Taxpayers everywhere pay the high price of agricultural support programs, although relatively cheap food is some compensation. The biggest losers have been poor farmers in developing countries, where earnings have been driven to new lows by the subsidy wars of the developed countries. Poorer countries cannot afford to insulate their farmers from world markets to the extent possible in richer, more industrialized nations. Instead, many insulate urban elites by keeping food prices artificially low. Even if subsidized, developing country farmers bear the brunt of world agricultural price swings.
It is currently estimated that liberalized agricultural trade would yield a ten-percent increase in world farm prices, leading to farm income gains of $26 billion in developing countries. Because of dramatic increases in agricultural protection during the 1980s, the real effects on developing countries of liberalization in the Uruguay Round could be more than double those resulting from a similar liberalization a decade earlier.
Agricultural development in the Third World, the objective of billions of dollars in foreign aid, is thus deeply undercut by export subsidies and the dumping of surpluses. Reflecting domestic policy, foreign agricultural policies have pursued contradictory objectives, promoting development and dependency at the same time. The only unambiguous winners have been grain importers, notably the Soviet Union, who have played the Western allies off against each other to receive absurdly low subsidized prices. So cheap is the grain bought by the Soviets that they purchase more than they need and then "donate" it to poor countries, making the United States seem niggardly in the bargain.
In the face of these failures, the case for greater market orientation is strong. Yet a move toward a more market-oriented agricultural policy does not mean that farm income would have to be abandoned as an objective. Rather than the indirect object of price supports coupled to specific crops, farm income would become the direct object of agricultural policies.
The key is the phased elimination of programs that pay farmers to plant (or not plant) specific crops, and the substitution of direct income supports targeted to relatively low-income farmers. Interestingly, this is one aspect of the drought relief package fashioned in Congress over the summer. Drought relief payments will be a percentage of income foregone due to crop loss, with some restrictions designed to target them to low-income producers. These payments are, in effect, income supports decoupled from production. In this sense, they clearly establish the principle of decoupling as practicable, and should be built upon, rather than considered a one-time election-year handout. In any event, it is increasingly clear that farm income security cannot be accomplished through price supports that create incentives to plant too many acres of too few varieties of crops.
Despite the dubious achievements of present farm programs, domestic political pressures have been insufficient to force needed changes. While the general public remains largely unaware of the failure of farm programs (and often assumes that farm bankruptcies result from too little in the way of price supports), large payments to large producers continue to ensure well-organized lobbying and campaign contribution efforts. The lobbies defending these programs, organized commodity by commodity, are tenaciously attached in Washington to the subcommittees that determine the levels of price support. As commodity-specific lobbies have gained influence, the older, general farm organizations have declined. As long as farm policy is formulated on a commodity-by-commodity basis, rather than as across-the-board farm income payments, the subcommittee system will assure congressional pressure to keep these prices high. Price support programs appeal to the local politics of congressional districts dependent on particular crops, rather than on broader policy and trade objectives.
Breaking this hold on the public purse would be an important consequence of direct income supports paid to farm families now being called for in GATT. Such a program would also restore some of the influence of general farm organizations with broad-based interests. Although direct income supports could initially be as expensive as current programs, they would at least be transparent. This would allow taxpayers and farmers to decide more openly what level of aid they favor, and to convey this message to Congress.
While often criticized as no more than "welfare," direct payments are clearly superior to the current system, which is worse than welfare in the sense that the biggest farms get the biggest payments. Some urban members of Congress have gone further, asking whether farmers deserve government payments simply because they are farmers (as opposed to, say, grocers) and arguing that the long-term objective should be to pay farm families, not because they farm, but because they are poor. Even in the short run, the "welfare" tag need not stick to direct payments. There is no reason, for example, that farm income supports should not be tied to increased obligations to improve the rural environment, converting a one-way payment into an exchange of income security for a variety of needed social and environmental benefits. In addition to benefiting the non-farm public, improvements in soil and water conservation, wildlife habitat and rural infrastructure would yield direct economic benefits to farmers, who have suffered the brunt of rural environmental pollution, lost economic opportunities and infrastructure declines brought on by specialized production and eroding rural tax bases. This relationship is particularly significant in Europe, where environmental damages and rural unemployment resulting from farming specialized crops are major political issues.
In sum, price support programs are disguised transfers that protect domestic agricultural constituencies from market forces with little scrutiny from taxpayers, and even less regard for their environmental and global trade effects. Their domestic failings aside, it is these global effects that have emerged to take center stage in GATT.
American agriculture is, and will remain, heavily dependent on exports. The advantages of U.S. agriculture are enormous, but not so great that they cannot be squandered through misdirected policies. North America is one of the world’s great breadbaskets, united by temperate climates, rich soils and advanced farm skills and technology. Vernon Ruttan, a foremost authority, describes American agriculture as "one of the nation’s last indisputable world-class industries." While a few might argue that government price supports have made it so, the underlying causes are rapid productivity gains fueled by public- and private-sector research. Over the last 25 years, productivity gains greater than in any other sector of comparable size have made U.S. farm goods highly competitive in foreign markets.
These markets, especially in developing countries, increasingly support prosperity in the Farm Belt. From 1962 to 1971 an average of 49.5 percent of U.S. wheat, 13.0 percent of U.S. corn, and 31.1 percent of U.S. soybeans flowed into the global market. From 1971 to 1983, these proportions increased to 58.4 percent for wheat, 27.0 percent for corn and 39.4 percent for soybeans. The acreage planted in these crops increased 54 percent between 1970 and 1981.
Beginning in 1980, however, foreign demand for grain crops began a steep decline. As foreign demand declined, land, machinery and other fixed investments could not be removed from production as rapidly as they had been brought on line. Instead, they fell in price, setting off a commodity and land market bust that matched the boom of the 1970s. Thus came the "farm crisis" of the 1980s. Without the export market, the sickening skid in prices of farmland over the last few years would have been even worse. Both in the U.S. Farm Belt and in less-developed countries around the world, bank loans made on the basis of commodities price bullishness turned sour. Barbara Insel, writing in these pages in 1985, deplored a "world awash in grain" and raised the disconcerting possibility that an agricultural production deluge might swamp the United States in its own abundance.
In the face of this overproduction, both the United States and European Community turned to export subsidies as a way of ridding themselves of unwanted surpluses, setting in motion a subsidy war that lowered grain prices worldwide. Urban elites of the developing economies, accustomed to subsidized food, received low prices at the expense of rural producers. The overproduction of the developed world flowed at subsidy onto world markets, keeping prices low and destroying the incentives of poor farmers in the Third World.
While global surpluses resulting from high price supports have been unprecedented in the last several years, acreage retirements and other government policies have attempted to restrict production artificially. Now, in the face of drought, these restrictions make a short crop even more problematic. It is clear that instability in global agricultural markets is only partly the result of natural supply interruptions, and is primarily the consequence of government price-support and supply-control policies and shifts in demand.
The perception of senseless waste surrounding agricultural policy is now widespread, and has led to the major assault on agricultural protectionism in the Uruguay Round. The conclusion has been forced on major agricultural traders that the sector can no longer be granted special dispensation. If the reform effort fails, there are powerful political interests on both sides of the Atlantic prepared to take up positions for a long, costly and ultimately dangerous agricultural subsidy war.
What direction will agricultural reform in GATT take, if it takes any at all? As negotiators prepare for the December meeting in Montreal, the broad outlines of the debate are now emerging. Despite the advantages of liberalization, some countries and interests will continue to seek a system of managed agricultural trade, analogous to domestic attempts to manipulate supply and demand artificially. In contrast, U.S. negotiators have argued that the global agricultural economy is too complex to be managed, and that the rules and disciplines of GATT should be extended to allow greater market orientation in agriculture.
The U.S. proposal advocates eliminating all tariff and non-tariff barriers over a ten-year period, including trade-distorting health and sanitary measures, all export subsidies and all domestic measures that affect trade. Only food aid and decoupled domestic programs with minimum effects on output would be permitted by the end of this period. This is clearly the loudest call for liberalization, and represents a major change from the way agricultural trade (especially American and European) is currently conducted. The U.S. proposal carries the advantage of consistency and high purpose, but makes clear how illiberal the past and current policies of the United States and many of its trading partners have been. Despite its effectiveness as an opening gambit, its distance from current reality has not been lost on current beneficiaries of farm programs, or on our negotiating partners. It is now time for the United States to move beyond high principles to develop specific policy innovations and options.
The Cairns Group proposal (and a separate but essentially similar proposal by Canada) also reflects a resolve to move radically toward greater market orientation in agriculture. The Cairns Group is notable for including exporters, importers, developed and developing countries: Australia, New Zealand, Canada, Argentina, Uruguay, Brazil, Thailand, Hungary, Chile, Colombia, Indonesia, Malaysia and the Philippines. Like the United States, this group calls for eventual elimination of all domestic subsidies and border measures with trade distorting effects. Unlike the U.S. proposal, however, it has called for a set of early relief measures representing a "down payment" on the eventual package. While its implementation schedule is more explicit than the U.S. proposal’s, its objectives are similarly liberal: a new framework of GATT rules that would eliminate all import and export restrictions and all domestic subsidies with an impact on trade. Only measures for infrastructure improvement, disaster relief and decoupled direct income support to farmers and consumers would be allowed.
At the other pole of the debate, the European Community focuses heavily on short-term multilateral actions to correct oversupply in commodities such as sugar, dairy products and cereals, where its own price supports are highest. Reflecting its desire to maintain the CAP in essentially its present form (including its system of export subsidies and price supports), the EC proposal envisages one-year "emergency" commitments to reduce cereals prices, sugar exports and production in other surplus sectors, followed by longer-term measures in which protection for some sectors (notably those "miserable" soybeans) might actually be increased.
From the U.S. perspective, the EC proposal offers little in the way of liberalization, and could easily lead to more restrictive trade. American critics noted that the proposal mistakes surpluses as the problem, rather than as a symptom of underlying price support at too high levels. The essential philosophy of the EC proposal is managed trade, in which the divorce of domestic and international prices underlying the CAP is accommodated by the rest of the world. The CAP itself, often pointed to by the EC as its greatest achievement in market integration, comes in for no major reform. While this vision of trade reform has the virtue of realism, in the sense that it departs little from business as usual, it has been roundly condemned by both the United States and the Cairns Group, as well as by developing countries that foresee a "managed" solution as primarily beneficial to the industrialized exporters.
The fourth major proposal tabled in Geneva comes from Japan. While not a participant in the export subsidy wars, Japan occupies a uniquely protectionist niche in the world market for rice and other agricultural commodities. The Japanese have clearly opposed greater market orientation in practice, if not in principle. Part of the Japanese approach has been to emphasize the noneconomic objectives of farm policies, including rural employment, environmental quality and "food security." This last point is of particular importance in the context of Japanese attitudes to dependence on foreign suppliers of food and feed. Japanese officials often cite as evidence of the untrustworthiness of foreign suppliers the experience of 1973, when the Nixon Administration embargoed shipments of U.S. soybeans in the face of a short crop and skyrocketing U.S. prices. It would appear that the Japanese will require a GATT agreement guaranteeing contracted-for shipments in exchange for concessions on American demands, which so far have met considerable resistance.
Clearly, the distance between these positions is great. There will be a strong tendency at Montreal to wait and see what a new American administration will bring. But there are important reasons why the basic U.S. approach to agricultural trade reform, worked out in bipartisan discussion with commodity and congressional interests, should not be greatly altered, regardless of the election outcome. Rather, this approach should be made more specific. These reasons have been noted publicly by both Democratic and Republican leaders.
First is the ineffectiveness and cost of current policies, which have accounted for two-thirds of the total expenditures of the European Community operating budget, and over one-sixth of the U.S. budget deficit. While these costs have moderated somewhat, they remain the object of public criticism for the unfairness with which program benefits are distributed, in addition to their adverse employment and environmental impacts.
Second is the central role of the U.S. agricultural proposal to U.S. strategy in the Uruguay Round as a whole, which has 14 other negotiating areas linked, in one way or another, to agriculture. The United States is pushing reforms in GATT affecting areas such as services, intellectual property rights, and the capacity of the GATT system to resolve disputes—worth literally trillions of dollars in U.S. business. Trade-offs between agriculture and these other areas are crucial to the ultimate package that the United States takes away from the bargaining table. The United States has drawn the attention of other GATT parties to the need to remove the waivers and exceptions behind which American agricultural interests have sought protection in the past, assuming these parties are prepared to offer significant concessions of their own. It will not be allowed to back down from this position at the Montreal meeting or afterward without major negotiating losses.
A new American administration will not be able to avoid the foreign and domestic problems of agriculture. The new president will find agriculture a linchpin in a round of multilateral trade talks in progress, the failure of which would have global economic implications. There are, moreover, a wide range of domestic agricultural interests for whom the U.S. proposal offers the hope of a dynamic and diversified agriculture less dependent on government price supports. The U.S. proposal has been endorsed by a wide range of domestic farm groups, on the assumption that other GATT members will reform their agriculture in tandem with the United States.
The assault on agricultural protectionism faces long odds. The interaction of multilateral trade negotiations and domestic policies can lead to mutually reinforcing reforms. But a reverse dynamic—toward less liberal trade and greater protectionism—is also possible if progress appears stalled. Here the distance between the U.S. and European proposals in GATT looms as a major challenge for the new administration, as well as for the December meeting in Montreal.
Yet there remain specific areas in which discussion and progress is ultimately possible, especially if the Montreal session can focus clearly on guiding principles for reform.
First, direct payments to farmers will remain the principal alternative to current policies, although movement in this direction will be difficult. In order to make it operational, decoupled policy alternatives must be clarified so that negotiators and affected farmers understand what such an approach would mean. From the negotiators’ perspective, decoupling is a matter of degree, since some programs distort planting decisions more than others. The key negotiating objective from this perspective should be the phased elimination of those measures with the greatest distorting effects on trade, and the substitution of direct income supports in their place.
From the farmers’ perspective, decoupling will mean greater reliance on market prices and the search for a profitable mix of crops, independent of government price supports. Direct payments that provide enhanced income security will be accompanied by prices which may in fact be higher and more stable than under current programs. The overall effect will be to enhance diversified cropping mixes, creating demand for research into new crop alternatives and widening the base of agricultural productivity gains. Apart from these domestic program changes, the impact on trade of all agricultural policies must be ordered, allowing acceptable bounds to be established as a basis for the phased elimination of the most distorting measures.
A second guiding principle is that social welfare objectives of agricultural policies should be a part of the discussion in GATT. These may appear tangential, but can be crucial to selling policy reforms to domestic interests. In the United States the agriculture committees of Congress must be able to convince their constituents (both commodity and consumer groups) that the United States has gotten a "fair deal" in GATT. If this deal involves direct income supports to farmers, then the approach must find acceptance with farmers and the non-farm public alike. Linking agricultural reforms to environmental and rural employment objectives can not only enhance their attractiveness, but their impact on rural development and revitalization. Similar programs can assist European and even Japanese politicians to sell direct income supports to farmers. Nor can the issue of food security be sidestepped, especially in Japan. It will be important to guarantee supplies to major importers as part of a final agreement, consistent with the rules of GATT.
Third, the developing countries must be convinced that agricultural trade reforms are in their interest. Despite the advantages of liberalization, many of these Third World producers remain skeptical. Insofar as possible, these governments can be encouraged by the promise of market access. If necessary, special and differential treatment for developing countries is allowed under GATT rules. But there are real risks in this approach. If these countries are exempted from GATT disciplines in agriculture, then why should the United States, the European Community and Japan trouble with multilateral negotiations at all? In this respect, short-term gains for developing countries may wind up as long-term losses, as the major players move outside of GATT to conduct negotiations, closing off market access. In addition, if Third World states are allowed to continue agricultural pricing policies that have been criticized by the International Monetary Fund and World Bank, GATT will have undercut these other multilateral institutions.
On the other hand, a real opportunity exists to bring the developing countries into the same framework of increased market orientation as the developed countries (albeit in different ways). The role of GATT in improving the developing countries’ market mechanisms may be even more important to growth in world trade than reforms in the agricultural economies of the developed world. Removing government disincentives to production designed to favor urban elites, especially in Africa, would be worth billions of dollars in foreign development aid.
Given the entrenched interests and the profound difficulties facing agricultural policies, however, the temptation to blame foreign governments for failed domestic policies remains strong. Negotiators in both the United States and the European Community can engage in recriminatory charges and counter-charges, followed by renewed subsidy wars, without serious short-term losses in domestic political terms. Similarly, Japanese policymakers can continue erroneously to tout self-sufficiency as the only road to food security, using their previous experiences with embargoes as examples of the perfidy of foreign suppliers. Net importers in the developing countries can rally their constituents by laying the blame (with reason) for low agricultural prices on the industrialized countries, yet failing to acknowledge that a wide variety of distortions in their own economies discriminate against farmers and in favor of urban elites.
The historical record of multilateral diplomacy is a checkered one. Yet it is GATT that provides the only current hope in forcing reforms, if all parties continue to support the process. Whether the assault on agricultural protectionism will succeed in the Uruguay Round will depend less on diplomatic skill than political courage. The myths surrounding current agricultural programs must be cast aside, and replaced by realistic policies that assure income security without locking in signals that distort markets and destroy the incentives of farmers around the world to produce what is in fact scarce. Political courage may be the scarcest commodity of all.