Free trade nations

With slowing growth in the BRICS and the underwhelming recovery in the U.S., many nations around the world are looking to free trade. Australia, among others, has been negotiating agreements with Asia, forming the Trans-Pacific Partnership. In the meantime, the World Trade Organisation’s Doha Round has successfully agreed on its first multi-lateral trade agreement after more than a decade of failed negotiations. The enthusiasm for free trade is a positive sign. Many of the most heavily trade protected industries have become grossly inefficient and generate severe market distortions. Agriculture is a well known example. For decades many parts of agriculture in most large economies have been cut off from the benefits of trade by harmful protectionism.

Farming in the EU

One of the most spectacular failures of market intervention undoubtedly is the European Union’s Common Agriculture Policy, commonly known as CAP. Beginning in 1962 the impetus of the policy was a set of price floors for agriculture products, supported by purchasing surplus output and imposing tariffs on imports. However, over time the EU has amassed vast stock piles of food, as prices declined. In response the EU decided to introduce export subsidies to farmers to prevent further stockpiling.

Even though the policy has received widespread criticism both within Europe and abroad, lobby groups and highly organised protestors, sometimes creative (see above picture), have managed to keep the policy alive. Many foreign food exporting nations have complained the subsidies encourage European farmers to export excessive amounts of food, putting downward pressure on foreign food prices. However, the greatest losses are created within Europe. In 2013 direct farmer payments and rural support cost 57.7 billion euros out of a total EU budget of 132.8 billion euros. This is almost half of the EU’s budget and has previously taken up to 87%. Alarmingly, farming only accounts for 1.6% of GDP in the EU.[1]

The worst aspect of the policy is that it engenders inefficient farming practices, dissuading many of the smaller farmers from innovating or improving their methods. Clearly the opportunity cost of the policy is alarmingly high. It’s difficult to overlook the more fruitful ways the money could be spent. Instead of providing direct payments, the EU could commission research in agriculture aimed at improving crop yields and developing new technologies and farming methods. Even better the EU could subsidise more promising infant industries, such as high-tech manufacturing, that are more likely to attract younger workers.

Trade in the future

Fortunately the situation is not so bleak. The EU has begun to modestly scale back the size of the grants to farmers. It appears others are following. Japan’s Prime Minister Shinzo Abe has announced the repeal of generous subsidies to rice farmers. After decades of protection through the gentan system, rice farming has become one of the most inefficient parts of the Japanese economy. 72% of Japanese rice farmers work on one hectare or less and yields per hectare are more than 50% less than in the US.[2]

The move is a gesture of Japan’s good will for ongoing Trans-Pacific Partnership negotiations. Many of the participating nations are pushing to finalise a TPP agreement in the near future. By aiming to put together last minute deals, many agreements are likely to avoid tackling the most politically sensitive forms of trade protectionism. This problem was clear in the WTO’s Doha Round negotiations. As negotiators rushed to put together a tenuous agreement, India managed to obtain indefinite concessions for food subsidies by threatening to derail negotiations. Even so, the negotiations are a promising sign that further progress will be made in the future.

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