Most Americans accept, grudgingly, their government’s heavy subsidy of American farmers. But few know that the U.S. government may soon subsidize Brazilian farmers as well. On June 17, the U.S. Trade Representative’s office formally agreed to pay Brazil almost $150 million a year in “technical assistance” to compensate for the damage our cotton subsidy program has done to Brazilian agriculture.
The government began providing assistance to farmers in 1929 through the Farm Board, created by President Herbert Hoover. The Farm Board set the minimum prices of 80 cents for a bushel of wheat and 20 cents for a pound of cotton. If either commodity fell below these prices, the government promised to pay the Farm Board’s minimum for the goods. In theory, the government was to store these goods until a price increase made it possible to sell them at profit.
This plan failed. Farmers across the country began growing wheat and cotton to take advantage of the guaranteed payments, at the expense of other crops. This strategy provided the farmer with a stable income but it led to huge surpluses. This excess supply ensured that the market price never made it back above the subsidy level. The government was forced to sell its wheat and cotton stores at a huge loss.
The struggling American farmer is long gone. He has been replaced by large and efficient agribusinesses that provide food to a population that has more than doubled in size since the 1930s. In 1930, agricultural production accounted for 20 percent of the American workforce. Yet today, when less than 2 percent of the country is involved in agricultural production, Americans still accept their government’s heavy subsidization of American farms.
The average farm household earns almost $80,000 per year, and government payments mostly go to very wealthy farms. The top 10 percent of subsidy recipients received over 60 percent of total subsidies in 2008. Nonetheless, in 2008 Congress approved the current farm bill, which provides between $10 billion and $30 billion in annual payments.
Angry yet? The story doesn’t end here. The World Trade Organization (WTO), of which the United States is a member, has numerous restrictions on agricultural subsidies. WTO members have pledged to abide by those commitments. Those restrictions are intended to prevent governments from using subsidies to distort global commodity price levels and break trade agreements.
The cotton industry is a major beneficiary of our backward agricultural policies. U.S. cotton subsidies negatively affect cotton producers in other countries. In 2002 Brazil brought this to the WTO’s attention. The WTO consistently ruled in Brazil’s favor, but the U.S. refused to budge. As a result, the WTO granted Brazil “retaliatory rights” against U.S. imports.
This allowed Brazil to tax many American imports and break certain international copyright laws without running afoul of WTO rules.
Yet instead of ending this vicious cycle of protectionism, the United States has offered $147.3 million dollars in annual payments to Brazil until our domestic agriculture policies come in line with WTO commitments. Rather than getting rid of the cotton subsidies, as policymakers could have done in the 2008 farm bill, our country now plans to subsidize both national and foreign cotton production until a new farm bill can be written in 2012
Why hasn’t common sense prevailed? Politics, for one. In 2008 alone, agribusiness spent $34 million dollars lobbying the government. President Obama campaigned on bringing “change” to Washington. If he really wants to enhance America’s standing in the world, he must address the harm our agricultural subsidies cause in many developing countries.
Brian McGraw and Geoffrey Michener are research associates at the Competitive Enterprise Institute.