Tuesday, April 27, 2004

The big international trade news today is the WTO's preliminary ruling for Brazil against US cotton subsidies. Liberal economists across the blogosphere are in rapture.

Not that General Glut supports agricultural subsidies as a general policy. It's just that the elimination of US agricultural subsidies is going to have much less affect on global agricultural prices than your average liberal economist thinks.

The WTO isn't releasing its ruling just yet -- we have to wait until June to really sift through the nitty-gritty. That being said, the New York Times is reporting that, according to the Brazilians,
United States cotton production would have fallen 29 percent and that American cotton exports would have dropped 41 percent. That would have led to a rise in international cotton prices of 12.6 percent, which would have helped Brazil's cotton farmers.
Who knows upon what these estimates are based. Agricultural economist Daryll Ray at the University of Tennessee has a model which suggests the impact is much much less.

Assuming all US marketing loan payments, counter-cyclical program payments and direct payments are eliminated (although assuming environmental and conservation program payments would continue), US cotton production would fall 12% in the first year but quickly stabilize to a net 5-7% reduction in planted acreage -- far from the 29% claimed by Brazil. Moreover, average cotton prices would rise immediately by 12%, but in the medium-term (5-7 years) stabilize at 7-9% higher -- about what the Brazilians claim but without the price increase being sustained.

And cotton and rice are the exceptions to the subsidy-production relationship. While cutting US subsidies on these crops would produce significant (although far from earth-shattering) changes in global production levels, the majority of US agricultural subsidies go to corn, wheat and soybeans, and eliminating their subsidies would have little to no effect on production or prices -- although they would tank US farm income.

While liberal economists rant and rave over direct agricultural subsidies, funny how they never point the finger at the real cause of overproduction -- government subsidized scientific research.

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