We know from our class discussions that export subsidies cause losses in consumption and production efficiencies for small countries, and for large countries, they cause both losses in addition to losses in tax revenue for the government. When looking at the recent U.S. dairy export subsidies, numerous member countries of the World Trade Organization claimed that the subsidies were a 'dangerous retreat' into protectionism and that they would cause subsidy wars. Well, the term 'subsidy war' is not very accurate because unlike a trade war with an optimal tariff, no terms-of-trade benefits are realized by any countries after export subsidies are put in place. Thus, assuming the member countries in the WTO understand the negative consequences of an export subsidy for the U.S. , they would have less of an incentive to engage in more retaliatory subsidies against the subsidizing country than it would in a trade war with an optimal tariff. This is mainly because with partial equilibrium, an export subsidy would hurt the U.S. more than it hurts each of the small WTO countries. Thus, even though the dairy subsidy makes everyone worse off, it would actually make the small countries relatively better off than the U.S.. In criticism of the dairy subsidy, Peter Grey, Australia's WTO ambassador, said "Subsidy wars only drive prices even lower, thereby delaying economic recovery further. They punish those trying to compete without the help of subsidies, and particularly damage unsubsidized farmers in the developing countries, jeopardizing their agricultural production, food security and their most competitive export sectors". Grey is right about subsidies delaying economic recovery further, and yes, subsidies (or 'subsidy wars') do drive down the world price, but only when a large country implements them. However, domestic prices rise above the world price by the amount of the subsidy, so Grey is only partially correct about subsidy 'wars'.
At the heart of the U.S. dairy subsidies is the Dairy Export Incentive Program. The DEIP was designed within the Department of Agriculture (USDA) to help dairy producers sell at prevailing world prices by giving cash handouts to producers as bonuses. These bonuses for the dairy producers would have been beneficial in any way other than in the form of export subsidies. Thus, in the case of dairy export subsidies, or any other subsidies for that matter, government handouts, contrary to popular belief, do not improve welfare, and they do not even improve the welfare of the producers at the government's expense/demise, but they are lose-lose situations for everyone involved. I can't think of any other instance where a bonus could actually HURT you, wow. So why did the European Union do the same thing in implementing dairy export subsidies? Perhaps because officials within its CAP (Common Agricultural Policy) felt pinched by the weakening demand for dairy and because the debt crisis was heating up. What Europe's CAP has essentially done is disproportionately put an excessive amount of attention towards the dairy sector while diverting more attention away from other sectors like pork and sugar beets. Even with all this new popularity, ironically enough, European dairy farmers aren't happy for the most part because the subsidies didn't help enough and in part because of milk production limits contained within the dairy subsidy rules. All in all, the U.S. and European dairy export subsidies have limited the options that producers and consumers have in terms of maximizing their welfare and they have allowed U.S. and European governments to distort how competitive dairy producers really are.
Sources researched:
http://en.mercopress.com/2009/05/28/us
http://www.fas.usda.gov/excredits/deip/deip-new.asp
http://online.wsj.com/article/SB125594282440993761.html
No comments:
Post a Comment