Protectionism in agriculture and the food production industries

All industrialized countries continue to protect their agricultural sectors against competitive imports through domestic production support programmes and trade measures that have not only restricted the access of foreign suppliers to their markets, but have also generated large surpluses of such products as sugar, meat, cereals and dairy products.

A broad indicator of the levels of protection granted by governments to different food products is the divergence between domestic and world prices. These price gaps are assumed to reflect cumulative and interactive tariff and non-tariff barriers, price supports, and various special programmes and stabilization measures.

A study by the FAO of figures covering five years (1977-1982) considered the ratio of domestic producer to international prices. Nine commodities were covered in the EEC/EU, the USA and Japan. A ratio higher than 1.0 indicated that world export prices were higher than domestic farm support prices, as a result of 'ad valorem' tariff equivalents. In other words, commodities with high ratios were selling at a premium in the export market, or there were very low domestic support levels. From the EEC/EU, all commodities studied except pork and rice (wheat, barley, maize, soybeans, butter, beef and sugar) had ranges from 1.1 to 1.6. From the USA all grains were less than 1.0; butter was 1.6 (beef, pork and sugar did not figure in the export market). From Japan, however, wheat, barley and soybeans ranged from 3.9 to 4.6, sugar was 3.0, and butter 3.2. Beef was 2.3 and only pork showed higher domestic prices.

There are wide differences in the prices paid to farmers in the EEC/EU, Japan and the USA, partly reflecting the entirely different agricultural environment and cost structures in these countries. Prices for cereals in the USA in 1980 and 1981 were on average 50% to 75% lower than those paid in the EEC/EU and about one-seventh of those paid in Japan. Unlike the EEC/EU and Japan, the USA farm support prices for cereals and soybeans were also well below world export prices. In addition there are fundamental differences in the techniques of supporting farm incomes. In the USA, direct intervention in cereal market prices is comparatively minimal and, in periods of tight supply, its producer support has been restricted to sporadic deficiency and disaster payments. Recently, however, considerable government resources have been allocated in the form of farm lending through the Commodity Credit Corporation (CCC). Between 1981/82 and 1982/83, the levels of price support for wheat rose by 25%, for maize by 15%, and for rice by 14%. While such price increases were insufficient to offset the declining trend in farm incomes they contributed to the building up of stocks of cereals and dairy products. As regards sugar, the US Government has periodically operated price support measures through loan or purchase programmes. The differential between the world price and the domestic price for raw sugar averaged 15 cents per pound in the third quarter of 1982. With the fall in world sugar prices the USA government increased import fees in April 1982. When this proved insufficient to raise internal prices to the market stabilization level, it resorted to import quotas.

Farm support operations in the EEC/EU are carried out through a system of guaranteed prices covering a large proportion (about three-quarters in recent years) of the Community's total agricultural production, and a system of variable import levies. By incorporating a variable charge into the delivered price of imports from third countries, the levies maintain foreign prices at or above those received by domestic producers. It has been estimated that for nine main agricultural products of the Community, the additional nominal protection from levies is 45%, over three times the average tariff rate of 14%. By January 1983, import levies for wheat represented about 55% of the support (intervention) price for bread wheat and levies for coarse grain about 55 to 60% of the intervention price. Levies for cereals, in particular wheat and barley, rose sharply in 1982, reflecting the decline in international prices. The effects of these mechanisms, insulating farmers from international competition, are reflected by the high levels of support prices granted by the Community in relation to international prices. High prices and relatively stable domestic demand have resulted in increasing overproduction of a number of commodities including wheat, sugar, dairy products, beef and veal. While the Community remains a net agricultural importer, it has also become the second largest agricultural exporter after the USA.

In Japan, farm support is provided through payments from tax and government bond revenues, through public corporations and through income transfers from consumers who pay prices often several times higher than world market prices. About half of the subsidy expenditure is related to the rice programme, under which about half of the country's rice crop is purchased at supported prices and then resold to wholesalers at a loss. However, other agricultural products, including soybeans and wheat, benefit from the government's efforts to move away from overdependence on rice. For livestock products, the profits from the sale of imported beef for which a quota system is applied provide subsidies and low interest loans to livestock producers. They also subsidize the storage of surplus production. A similar system is operated on the sales of imported wheat, barley and rice, the benefits of which are being used to help finance cereal subsidy programmes. When added together the effects of the different programmes on domestic prices are considerable. Japan supports its food production at higher levels than any other major importing country, while still leaving scope for imports. However, some levelling off in support prices has recently taken place, reflecting budgetary strains, supply/demand adjustments, and the decline in international prices.

Within the OECD countries, agricultural protectionism costs consumers and taxpayers around $150 billion annually, more than double what farmers in these countries gain.15 Current policies grossly distort world agricultural trade patterns, sacrificing static gains from trade of roughly $70 billion annually in the OECD countries alone.16 In addition, lower world prices depress returns to developing country and other exporting country producers, inhibit badly needed investments in agriculture in those countries, and result in the spread of low-yielding farming and ranching into ecologically vulnerable tropical forests.

U.S. protectionism against sugar imports is equivalent to a subsidy to U.S producers of 60-79 percent, and a tax on U.S. consumers of 43-59 percent. The industry in the U.S. is highly concentrated. Thus, the largest 1 percent of producers obtain 58 percent of all producer benefits – more than a million dollars per producer per year – and the largest 10 percent obtain more than 80 percent. Large producers also benefit from subsidized irrigation and flood control works. The welfare cost to U.S. consumers has been estimated in various studies to fall between 1 and 4 billion dollars per year. The overall economic loss, net of benefits to U.S. producers, probably lies between 100 million and 1 billion dollars per year. The sugar protection program is a highly inefficient means of transferring income to large U.S. growers and processors from sugar producers in low-income countries and average U.S. consumers.