U.S. unprepared to limit swings in food prices

by Kevin P. Gallagher

The Globalist

The United States has left the world’s poor at the global trade negotiating table.

After more than a decade in gridlock, world trade negotiators had high hopes of closing a final deal at the World Trade Organization (WTO), which is to hold a ministerial in Bali, Indonesia, Dec. 6-13.

But the U.S. is not prepared to let developing countries protect their poor from the harmful swings in world food prices. That is all the more unfortunate as these price swings are increasingly caused by U.S. policy in the first place.

Now, negotiations have collapsed. This is all the more regrettable not only because the WTO serves as a global rules-based system where nation-states monitor each other’s policies to make sure they are not too trade-distorting.

More specifically, the WTO can also be praised for helping to prevent nations from putting up major protectionist barriers in the wake of the global financial crisis.

The new director general of the WTO, Brazil’s Roberto Azevedo, was trying to seek this momentum by moving forward to declare a pivotal victory for the WTO. His proposal had two main components: First, agree on a deal to streamline global customs rules; and second, allow developing countries to buffer their poor from volatile food prices until a more comprehensive deal on food and agriculture could be reached in a future round of negotiation.

The reasoning behind this package was sound. Food price volatility has wracked the world’s poor in recent years.

A global food price spike in 2007-08 triggered the Arab Spring movement and took a bite out of the food budgets of the world’s poorest urban consumers. Low prices a decade earlier had squeezed many small farmers off the land who today comprise much of the urban poor.

Much of this upward pressure on food prices can be traced back to the U.S. The U.S. is home to massive subsidies to its agricultural sector, the World Bank estimates that these cost poor countries $12 billion on an annual basis.

What’s more, the U.S. financial industry “financialized” food by creating commodity index funds that speculators have feasted on since the global financial crisis. The Dodd-Frank bill the financial reform legislation in the U.S. was to put limits on such speculation.

However, big U.S. agribusinesses are trying to see to it that such limits are dropped from the rule-making.

So it does not come as a real surprise that it was the U.S. that rejected a proposal by India and other countries to buffer their poor farmers and consumers from food price swings. The U.S. government claimed that measures to protect farmers and consumers from food price volatility were a violation of WTO rules.

Instead, the U.S. offered a peace clause whereby the U.S. and other nations would not file claims against poor countries for these measures for three to four years.

The U.S. claimed that allowing India to support farmers and consumers who live on less than $1.25 a day from food price volatility would distort global markets. That claim is jarring to the world’s poor.

Given that it takes three to four years to settle a dispute in the WTO, a three-to-four-year grace period adds little benefit. Moreover, agreeing to a peace clause would essentially make poor countries admit that their measures are in violation of WTO rules, which shouldn’t be the case.

The United Nations’ Special Rapporteur for food has just noted how the WTO is incompatible with food security measures. It is a scandal that the world’s countries had a golden opportunity to fix a fundamental distortion in the global trading system that causes impoverishment — and that the U.S. has flatly blocked it at the WTO.

By dumping the WTO unless it accedes in full to U.S. demands, the U.S., despite all its rhetoric in favor of multilateral approaches, makes plain its intention to focus on trade treaties like the Trans-Pacific Partnership.

In such deals structured by the U.S., food is largely off the negotiating table. This further underscores that regional trade deals distort the world economy and put developing countries at an unfair negotiating disadvantage relative to the U.S.

The WTO, with its one-country-one vote negotiating structure, can yield far more equal outcomes. There will be a last chance to salvage global trade talks in Bali. The U.S. should do right by the world’s poor and grant them food security.

Kevin P. Gallagher, a regular contributor to The Globalist, is a professor at Boston University and author of the new book “The Clash of Globalizations: Essays on Trade and Development Policy.” © 2013 The Globalist

  • Brett Williams

    Food security is a function of wealth available to buy food and the price of food.

    A policy under which a government buys food at above world prices and makes a financial loss by selling them below world prices makes a country poorer not richer – thereby reducing its food security. A policy under which a government taxes the purchase of food from foreign suppliers makes a country poorer not richer – thereby reducing its food security.

    There are ways to reduce fluctuations in prices. One good way is to have an open world trading system with high volumes traded internationally. This is helped if countries reduce import barriers to food. Unfortunately it is the same countries now seeking to be able to make a loss trading their farmers crops that refused to make any significant reductions in their import duties in the WTO negotiations.

    The WTO rules leave a lot of room for governments to deal with consumers: there are no WTO rules which restrict Member governments from giving cash or food to consumers.

    The WTO rules leave a lot of room for how governments can deal with agricultural producers too – governments may pay farmers income supplements or for retired farmers, they may pay pensions, they may choose to pay farmers for other tasks (eg., for contributing to public goods), WTO rules allow a government to respond to an increase in world prices by dropping their bound customs duty to a lower applied rate; WTO rules allow all Members to pay non-product specific subsidies linked to production of up to 10% of value and allow Members to pay product specific subsidies linked to production up to 10% of value.

    There are no WTO rules that restrain governments from adopting policies that make it easier for people to shift their skills from one occupation to another: like education, or vocational education, health services, or public transport.

    There are no WTO rules that prevent governments from diversifying their sources of imports. There are no WTO rules that prevent governments from maintaining food stocks either on a natioinal basis or in partnership with other countries.

    The WTO rules can play an very important role here. They can protect citizens from their politicians. In the absence of WTO rules, politicians would adopt welfare diminishing policies – Why ? because there are votes in giving wealth to producers who are having trouble competing in the face of world prices.

    Surely the WTO rules are doing just what they should be doing – providing a disincentive to Indian politicians to adopt welfare diminishing policy. India has a poverty problem. By adopting poor policies based on this food security argument, it will increase its poverty problem and cause greater food insecurity.

    A better way for India to deal with its poverty problem would be for it to engage in WTO negotiations to reduce import duties – help the process under which countries offer each other reductions in import duties instead of trying to argue that it is a special case that can stand outside the negotiation. One of the things that can make that process of negotiating reductions in import duties unworkable is if there are no constraints on a country with one hand reducing its import duty and with the other hand increase its production subsidy on the same product.

    Brett Williams
    Brett G Williams Law Office – Specialist in International Regulation of Trade