Chapter 3 – Trade Policy and Trade Agreements
3.4 Agricultural subsidy policy
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deteriorating. International Journal of Recent Trends in Science and Technology advocates the concepts of green innovation and circular economy. The concept of circular economy is deeply embedded in the sustainable industrial development. The introduction of green innovation technology from product design improves resource productivity and eliminates waste. Use resources efficiently and reduce environmental impact. Economic development uses innovation, employment, and distribution of a new model of circular economy to drive industrial competitiveness, allow the sustainable development of economic industries that recycle resources and protect the environment. For example, turning agriculture into a business with business opportunities and sustainable development, reversing the effects of dependence on subsidies, and promoting the transformation and development of agriculture, enhancing quality of smart agriculture, strengthening the value of agricultural innovation and integrate them into the economic system where they can benefit from its cyclical services.
3.4 Agricultural subsidy policy
In the middle of the era of globalization, this generation is the era of economic globalization, where economic development is capital-driven. Globalization of capital has a series of concepts such as methods used in trading across borders and use of tariffs. This issue has become the concern of most people and businesses in the world, so countries around the world have been paying attention to the negotiations on trade issues of the WTO ―Doha Development Round‖, but the negotiations of achieving a global consensus on reducing or eliminating trade barriers among countries have failed after many years. Therefore, the free trade agreements such as ―Bilateral Trade Agreements‖ and ―Regional Trade Agreements‖
have been rapidly developed in recent years instead, which not only damaged the prestige and
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legitimacy of the WTO trade dispute settlement mechanism, but even triggered trade wars and global trade war in some cases.
The global spread of the COVID-19 in 2020 has exposed the world to a crisis of economic recession. Many countries have suffered social and unemployment problems. People in developing countries and least developed countries have even been subject to risks of the most basic livelihood security. The World Bank estimated that if the Doha Round is successfully negotiated, the global trade liberalization will result in a world total income of US$287 billion in 2015, to which US$86 billion would be placed received by developing countries and may assist the 68 million people out of poverty, where US$54 billion of US$86 billion would be gained by the agricultural sector,108 which is in line with the objectives of the WTO. However, for the developed countries, the threat of unemployment and loss of the economic markets is of great impact to their own countries.
Furthermore, as for the main agricultural products that the people eat and drink, the price and supply of products in the market are moving toward the same direction, for example, the producer decides how much a certain agricultural product is produced, in addition to taking into account the price, cost, technology, and so on for the agricultural products. If the market price is good, the farmer would increase the supply, and if the price is not, there will naturally be less production, and this works accordingly to the law of supply and demand. The price of a product has a reverse relationship with the quantity demanded; if the income and other prices remain the same, cheaper products would be consumed more following the law of demand.
However, if largest producing countries do not abide by WTO rules, create a fairer trading environment, promote global economic development, especially for the poorer countries, and do not guide resources and allocate them according to the price – the market can naturally
108 Anderson et al. (2005). Global Impacts of Doha Trade Reform Scenarios on Poverty, pp. 11-12.
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reconcile both, the supply and demand, to achieve a more effective allocation of resources in the market.
The reactionary economies all over the world have severely criticized the fact that globalization is actually global economic imperialism dominated by the United States and European countries. In the process of globalization, capital and labor have been allowed to flow across borders, forming a global competitive environment. Whether within a country or between countries, globalization has widened the gap between the rich and the poor.
Individuals or countries with the basic skills and conditions for global survival are the winners, enjoying the advantages of accumulating wealth. Farmers in developing and least developed countries rely on the crops they grow for food and clothing, and sell the remaining agricultural goods to make money to support their families, but if the market price is manipulated, there is no way for them to survive, increasing the likelihood of falling into extreme poverty.
The U.S. is a large economy, and farmers can receive large subsidies to produce when main agricultural products receive a loss in price. Just like the agricultural subsidy program initiated under Trump administration, the amount in 2019 is as high as US$16 billion to assist American farmers affected by the US-China trade war.109 In order to receive the incentives of such treatment, local farmers deliberately plant crops with higher amount of subsidies such as soybeans. In 2018, the U.S area of soybean cultivation reached 36.2 million hectares, accounting for 35 percent of global production, and exports accounted for 47 percent of total output. Soybean is the largest source of animal feed and the second largest source of vegetable oil in the world. About two-thirds of the total soybean output is refined into soybean oil and animal feeds.
109 Trump administration unveils details of $16 billion aid package for farmers hurt by trade war. Retrieved June 2020.
https://www.cnbc.com/2019/07/25/trump-unveils-16-billion-aid-for-farmers-hurt-by-china-trade-war.html
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When thinking about global trade flows in the era of globalization, the economy is the larger community of this world. In accordance with to the law of supply and demand in the market, the increased output of specific crops will result in lowering their prices globally.
Farmers do not grow crops according to the market demand, but look at the government subsidy policy, which disrupts the market mechanism and has an adverse effect. As far as the U.S. is concerned, the reason farmers need assistance is because Trump imposed additional tariffs on Chinese imports, officially raising the US$34 billion worth of Chinese goods exported to the U.S. to total cost of US$50 billion from increase of the original 10 percent tariff rates to 25 percent in response to China raising its tariffs to the same amount.110 Both, the U.S.
and China violated WTO rules, and countermeasures made in China to greatly reduce the U.S.
imports of soybean will also affect American farmers. The losers of this trade war are the average consumers in the U.S. and China since companies will need to transfer goods at additional costs to the consumers, which also disrupt the global supply chain.
The U.S. agricultural production subsidies are trade distorting domestic support, which include the Aggregate Measurement of Support (AMS), blue box subsidies, and micro subsidies as per WTO‘s Agreement on Agriculture (AoA) to provide domestic support to farmers. Members of EU and developing country members want the U.S. to reduce subsidies – the total amount of US$20 billion.111 The United States rejected the request since the tariffs on agricultural products have not been significantly reduced, so that it could export its products in
110 China announces retaliatory tariffs on $34 billion worth of US goods, including agriculture products.
Retrieved June 2020.
https://www.cnbc.com/2018/06/15/china-announces-retaliatory-tariffs-on-34-billion-worth-of-us-goods-includin g-agriculture-products.html
111 Agricultural Subsidies. Downsizing the Federal Government. Retrieved June 2020.
https://www.downsizinggovernment.org/agriculture/subsidies#:~:text=The%20federal%20government%20spen ds%20more,wheat%2C%20cotton%2C%20and%20rice.
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bulk, plus the reduction in agricultural subsidies would reduce the income of farmers and the export output of the nation.
Similarly, the massive subsidies for rice in the U.S. each year not only distort rice production and trade, but even dump massive exports into international markets in disguise, harming the rice industries of developing countries that do not have enjoy any form of subsidies from the local government. The 2008 Farm Bill, from 2008 to 2012, continued to implement various subsidies for the production or export of agricultural products such as rice in WTO negotiations for further agricultural liberalization. In 2018, U.S. Congress passed an US$867 billion farm bill.112 Some subsidies may violate the U.S. commitment to WTO, since these production subsidies will suppress international agricultural product prices through various export promotion methods, thereby hurting the interests of developing countries that rely on agricultural product exports. For example, in 2005 and 2008, Brazil complained to the WTO that the U.S. cotton subsidies violated relevant WTO regulations, which is why most developing countries insisted that the U.S. must first significantly reduce agricultural production subsidies during the agricultural negotiations in Doha Round and demanded the right to implement the Special Safeguard Mechanism (SSM).
All countries stand from the perspective of its own national interests in trade negotiations, especially in WTO Doha Round negotiations, and compare who gets the larger benefits and who is the bigger winner. Although the United States is not a major rice producer in the world, its output accounts for only 1.5 to 2 percent of the total production output of the world, but its exports account for an important position in the global trade of rice, so its production subsidies have a considerable impact on the price of rice in international markets. Rice is a global crop,
112 Congress just passed an $867 billion farm bill. Retrieved June 2020.
https://www.washingtonpost.com/business/2018/12/11/congresss-billion-farm-bill-is-out-heres-whats-it/
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and more than half of the world's population eats rice. Rice earns about 1 billion to US$1.5 billion annually for American farmers, and rice exports are crucial to American rice producers.
The rice production in the U.S. is still not self-sufficient since imports of rice to the country over the years increased: 119,000 tons in 2013, 126,000 tons in 2014, 131,000 tons in 2015, 144,000 tons in 2016, 138,000 tons in 2017, and imports are still growing.
The U.S. rice subsidy policy will affect Nicaragua under the CAFTA-DR since the import tariffs of rice in Nicaragua from the U.S. are reduced to zero until 2023. The cheap rice imported from the U.S. will trade through the free trade zones duty-free, and is expected to continue to grow. In 2004, the CAFTA-DR agreements signed by five Central American countries and the Dominican Republic, allowed the U.S. to win over the regional markets for dumping agricultural products. As tariffs fell, more than 17,000 Nicaraguan rice farmers faced the impact of the massive influx of U.S. rice, which is heavily subsidized by its government, into their markets. In 2003, the U.S. government invested US$1.3 billion in the rice production sector, while the rice production cost reached US$1.8 billion, indicating that at least 72 percent of the U.S. rice production cost was actually paid by the state. The cost of planting and milling white rice is 415 US dollars, and it is dumped in the export market at 274 US dollars per ton, making the export price 34 percent lower than its actual cost, affecting the international price of rice where only the U.S. can afford to continue to use this method.
The annual domestic rice consumption in Nicaragua is more than 6 million quintals (one quintal = 100 kg.) in 2017, the average domestic annual output of rice is about 4 million quintals, and about 2 million quintals imported from the United States, according to The Minister of Development Industry and Commerce (MIFIC) in Nicaragua.113 In 2019, the
113 Nicaragua produces 75 percent of the rice consumed. Retrieved June 2020.
1)https://www.elnuevodiario.com.ni/economia/383350-estamos-produciendo-70-consumo-nacional-arroz/
2)http://laprensa.com.ni/2017/03/04/economia/2192602-se-produce-75-ciento-del-arroz-se-consume
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production of rice reached 5.5 million quintals, where 7 million quintals of rice are being consumed, according to the minister of MIFIC Orlando Solórzano114. The Nicaraguan free market mechanism does allow the exports of rice to neighboring countries, but under specific regulation that only permits licensed exporters to export rice. Honduras, Guatemala and Costa Rica purchase rice from Nicaragua because its price is cheaper in comparison to that of neighboring countries, to which profits can be made by reselling them. Plus, the sales volume of rice is not large, so the government is not worried about it affecting the domestic supply and demand in Central American markets.115 For that reason, Nicaragua provides tax-free incentives and coordinating the supply chain of rice producers to rice milling plants to make the price of rice in Nicaragua cheaper than other Central American countries.