Don't cry for Doha

Well, the Doha trade talks have collapsed--yet again!  So what happens next?

Actually, not much. There was not a whole lot at stake to begin with for poor nations as a whole. (Cotton is a somewhat big deal for West Africa, but pretty much everything else is a mixed bag.) And if the taxpayers and consumers of the U.S. and EU want to reap the considerable benefits of reducing farm supports, they can surely do that on their own without having to be bribed by increased market access abroad.  So don't listen to trade officials and editorialists who will bemoan the huge downside risks. 

(Sample non-sequitur from the New York Times the other day: "Locking in lower farm subsidies would encourage direly needed agricultural investment in Africa and in poor nations that are struggling with soaring food prices."  Hello?  Lower farm subsidies will mean even higher world prices...)

So hang tight. Panicky statements about dire consequences and protectionist spirals will be more damaging than the actual effects of the collapse of the trade talks. The only thing we have to fear is fear itself.

Comments

[CL]

Dear Professor Rodrik,
I do not follow the logic of your "Hello?". Yes, lower farm subsidies will mean higher prices (as well as more market access for African farmers), which is precisely why agricultural investment in Africa would become more profitable in the long run.
Of course the short term effects of higher prices are painfully felt by net importers, but they only got into this position where they have to import food because of low prices.

[Anh Tran]

Dear Dani,

I really don't understand why you seem to turn a blind eye toward farm subsidies. They have to be condemed from theoretical, emperical, and moral perspectives.

On the theoretical ground, they distort trade by not allowing those African countries to focus on producing the product they have a comparative advantage. On emperical ground, you can go to Oxfam website and see they list all sort of terrible consequences faced by African cotton farmers as a result of U.S. subsidies. On moral ground, we should not subsidizing rich and big U.S. agribusinesses at the expense of the world poor. This just ain't right.

[Tebow15]

It seems there are 3 general views on rich country ag subsidies:

1) They're bad. They harm poor country farmers.
2) They're good. They benefit poor country urbanites.
3) It's largely a wash, so let's relegate the issue.

Would it be wrong to say you subscribe to #3?

[Keith]

A collection of anecdotes from Oxfam is pretty shaky "empirical ground."

[Lowrie Glasgow]

Domestic food security has a card on the table . The recent export restrictions on rice are to be noted.

[Lowrie Glasgow]

http://www.nytimes.com/2008/07/31/business/worldbusiness/31trade.html?hp

As above.

[Derek Headey]

More trade liberalization in agriculture may not be a solution to the current crisis in the short run, but one of the reasons we have food crises and food insecurity are government induced distortions in international agricultural trade. Any subsidies which distort the signals of comparative advantage must be costly. Moreover, trade distortions are one of the reasons why world agriculture has relied on Second Best buffer stocks to stabilize prices rather than free trade, and shrinking stocks are a primary cause of the current and 1974 crises. Similarly, new and old distortions in rice markets have clearly contributed to escalating rice prices, just as removing some of these distortions has helped solve the problem (e.g. Japan exporting some of its rice stocks - see http://www.cgdev.org/content/general/detail/16028). Maybe we need more studies showing the effect of Doha-type trade liberalization on food security, and not just growth.

[Erik]

My understanding is that lower rich country ag subsidies would allow poor country food producers to reach new markets, get better prices for their food, and spur development, ultimately leading to higher overall food output. Am I understanding that correctly?

Erik Knechtel

[hari]

Dani - don't be too happy...yet. Because they're going to fix the deadlock one way or other, me thinks.

EU/Mandelson has gone on record US Rep was irredentist & responsible for breakdown because she wanted access for US agi-exports to India and China.

[save_the_rustbelt]

When our children got out of control we made them take a "time out."

As someone who works in Michigan and Ohio, the trade system needs a timeout.

EPI says Ohio and Michigan have lost 180,000 manufacturing jobs JUST due to the trade deficit with China, with no real replacements ('cept Wal-Mart of course).

Both Ohio and Michigan are pivital to the election, so we shall see what the political parties come up with.

[Walt French]

Re: "Hello?"

US subsidies keep prices of US-produced cotton & sugar lower than what producers in Africa (cotton) or the Caribbean (sugar) can meet. This in turn limits them from exploiting their natural advantages in these crops for badly-need grains and other foodstuffs that have skyrocketed in price lately.

In this way, US consumers pay extra to help starve our would-be trade partners.

Negotiations usually need to emphasize win-win solutions, and apparently simple moral considerations are not enough for us to give the worst-off nations a chance at getting onto the first rung of the development ladder. Beats me why the US and Europe want desperately poor nations on their doorsteps, in exchange for which we mis-allocate resources in our own countries and line the pockets of a few vested interests.

[wjd123]

Helping economic man do his thing isn't necessarly a good thing when it leads to amorality and anarchy.

In so far as economic man is a utility maximizer he is amoral man. He takes responsibility for nothing. Morality, the rules and regulations governing economic man, is outside the economic sphere. Considering the amorality of economic man and the morality that rules and regulations try to enforce on the economic sphere, I find the rules and regulations governing the WTO very strange rules indeed.

It's rules don't try to keep economic man in check but keep in check the moral sphere from interfering with economic man. That is what keeping tariffs at bay does, it allows economic man to do his utility maximizing thing more freely. As such, keeping tariffs at bay is a morality destroying device in so far as economic man in his utility seeking can play off against each other the political economies governing nations.

The WTO facilitates a race to the bottom. The bottom of what? The bottom of the economic morality, rules and regulations, governing political economies. It is delivering social man into an amoral world. As such it's a world of anarchy, and not an ordered world. I'm not sad to see the WTO fail.

[RKimble]

Two points:

(i) lower rich country farm subsidies will indeed raise world prices, with the obvious effects of better incentives for poor country producers and lower welfare for poor country consumers; (ii) much of the crisis among West African cotton growers is NOT due to the US subsidies, but to the WA link to the Euro, which (because world cotton prices are quoted in US$) means that the WA local currency price (known as the CFA franc) has fallen substantially as the Euro has risen against the dollar. Getting rid of the US farm subsidies will not compensate the WA farmers for their exchange rate losses.

[Tord Steiro]

There are two probable fallacies to the idea that free trade in foodstuffs will help poor farmers that I miss in this debate:

1. First, poor farmers in developing countries may not respond very well to price incentives. Elisabeth Sadoulet and Alain de Janvry have, in a multitude of papers, demonstrated the effects of missing or imperfect markets on supply responses from farmers in developing countries. These responses are not always as expected, and sometimes the direct opposite - higher prices can even reduce output! There is no guarantee that higher food prices will increase food supply from poor farmers, at least not in the short to medium term.

2. As we see today, several democratic poor net food exporters are voluntarily imposing export tariffs or even export bans on foodcrops. This also implies that selling food, even if the farmers are capable to respond to higher prices, may not be the panacea for a healthy economy that some people in the West appears to believe.

Food is a special case commodity, since we all need to eat. The interventions of international demand in local or national markets can have broader effects no politician can turn a blind eye to. we don't have famine in democracies!

Non-food crops, on the other hand, is a different case. The supply response to increased international demand is unimportant, since the absence of these crops will not make anyone starve, and will anyway, in one war or another, make sure the poor farmers are better off.

Hence, the case for liberalisation of non-foods are much stronger than the liberalisation of food, and the whining about hurting the poor farmers because of high tariffs and subsidies on foodstuffs in the West is missing the point. It is crops like cotton, sugar, tobacco, coffee, cocoa, and so on that should be the main priority, if the economic conditions of poor farmers mattered.

[ID4D]

http://www.ideas4development.org/what-consequences-in-case-of-a-failure-of-the-doha-round/en/
Here is a video of Jean-Michel Severino, CEO of the French Development Agency, speaking about what might be the consequences of the Doha failure on the development point of view. Pascal Lamy is also member of the blog ideas4development, he should be writing about Doha in a few weeks when he will have take the time to reflect on Geneva's collapse.

[Armando]

Tord Steiro,
very interesting observation.
May you indicate the papers where de Janvry and Sadoulet treat this problem?
Thank you.

[Aparicio Caicedo]

When I loose my patience, and feel that there are no more original scholar that do not repeat all the sacred dogmas they read on the books and articles, you come in the right moment and give me some hope. Great article, finally somebody describing things as what they really are and not as what they should be.

[Tord Steiro]

@Armando
I appreciate your response!

There exist an extensive literature on agricultural household models. The classical article is Alain de Janvry, Marcel Fafchamps and Elisabeth Sadoulet's "Peasant Household Behaviour with Missing Markets: Some Paradoxes Explained" from 1991, which can be found here: http://www.jstor.org/sici?sici=0013-0133(199111)101%3A409%3C1400%3APHBWMM%3E2.0.CO%3B2-5&cookieSet=1 (I think it's gated)

A more recent overview is Edward Taylor and Irma Adelman's: "Agricultural Household Models: Genesis, Evolution, and Extension" from 2003, which can be found here: http://www.springerlink.com/content/n42170n55234u418/fulltext.pdf (also gated, I think).

The conclusion from "Transactions Costs and Agricultural Household Supply Response", written by Nigel Key, Elisabeth Sadoulet, and Alain de Janvry is also revealing: "Given that transactions costs affect market participation, price policies will have very different behavioral and welfare implications for different subsectors of the farm population. In addition, aggregate supply will respond to changes in the transactions cost structure through its effect on market participation. Policies that reduce transactions costs are consequently important complements to price policies in affecting supply response."

The paper can be found here: http://www3.interscience.wiley.com/cgi-bin/fulltext/119000936/PDFSTART (also gated)

I hope you will manage to get access ti the papers.

[DK]

Poverty stricken countries are in need of help, but not this way. Many people are receiving education in the United States, but none of this is working. What's the problem? Find out by reading this book I found last week, excerpts can be found at humanrethink.net

[Jose Porfiro]

Mr. Rodrik,

It is a good view.
These subsidies will be for a certain time due the political power of farmers.

[raivo pommer-]

Raivo Pommer
raimo1@hot.ee

US Vertpapieren

Die amerikanische Regierung wird in dieser Woche ihren Plan vorlegen, wie Banken und andere Marktakteure von jenen giftigen Wertpapieren und faulen Krediten befreit werden sollen, die seit Monaten den Kreditkanal an Haushalte und Unternehmen verstopfen. Womöglich schon an diesem Montag werde Finanzminister Tim Geithner Einzelheiten zum Kauf fauler Hypothekendarlehen und damit verbundener Wertpapiere für bis zu eine Billion Dollar bekanntgeben, hieß es am Wochenende in Washington.

Berichten zufolge wird die Regierung eine neue Investmentgesellschaft mit dem Namen „Public Investment Corporation“ gründen. Sie soll mit einem Startkapital von 75 bis 100 Milliarden Dollar ausgestattet werden, die aus dem im vergangenen Oktober beschlossenen Rettungspaket für das Finanzsystem kommen sollen. Die Gesellschaft, die eine Reihe von Investmentfonds auflegen wird, soll eng an das Finanzministerium und an die staatliche Einlagensicherungsgesellschaft, die Federal Deposit Insurance Corporation (FDIC), angebunden sein. Ziel des Plans ist es, nach Möglichkeit auch privates Kapital zum Kauf der problematischen Wertpapiere und Kredite zu mobilisieren. Um privaten Investoren Anreize hierfür zu geben, will die Regierung nicht nur finanzielle Zuschüsse, sondern auch Ausfallgarantien geben. Die FDIC würde dann einen Teil der möglichen Verluste übernehmen. Die Schaffung dieser öffentlich-privaten Partnerschaft, die Geithner vor einigen Wochen in Aussicht gestellt hatte, ist aber nur ein Element des Vorhabens.

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