L. Neil Smith's
THE LIBERTARIAN ENTERPRISE
Number 270, May 9, 2004
Junk Cotton Farm Subsidies
Special to TLE
The unsurprising yet ludicrous reaction to the World Trade Organization's ruling on U.S. cotton farm subsidies from the busybodies on the steps of Capital Hill clearly typifies the mindset of the U.S. government. When it comes to logic and sound reasoning, the federal beast proves that it possesses neither one of the two attributes nor both.
Brazil, which filed the complaint which was unanimously supported by the global trading body's preliminary decision, asserts that American cotton farm subsidies distort global trade by artificially rolling back international cotton prices and boosting cotton production (which harm their farmers in the process) and violate WTO regulations. U.S. officials denounce the ruling, contending that Brazil, as The New York Times recently noted, is unfair to "single out the United States for its cotton subsidies when other countries have their own unfair trading practices like high tariffs and different scientific standards for agricultural imports." They say that the complainant should resolve the problem via multilateral negotiations in lieu of filing grievances before the WTO.
The ruling no doubt has ignited a firestorm reaching epidemic proportions on a wide political scale. Brazilian President Luiz Inacio Lula da Silva cheered on the WTO decision, opining that American farmers "want to sell all over the world, but are protecting their agricultural interests, many times by giving lavish subsidies." This is also the same politician who wants a Brazilian answer to the United States' own "free trade, but" North American Free Trade Agreement (NAFTA) policysimply designated as the Free Trade Area of the Americas (FTAA). To sum it up, the FTAA is nothing more than a form of protectionism grossly disguised as "free trade," given the fact that it is a tax-funded trading body comprised of 34 nations of the Americas, with the exception of Cuba.
American farmers, who are the proud beneficiaries of the subsidies, are lambasting the WTO ruling, claiming that the decision could have deleterious effects on the future of U.S. agribusiness and farmers nationwide. They say that, without the needed subsidies, they would be unable to compete with nations where the cost of doing business is dramatically cheaper than here. As Paul Betancourt, the owner of the family-run VF Farms in Fresno County, California, told the Sacramento Bee on May 3, "The effect on the California cotton farmer would be devastating." This is the mentality of the U.S. farm machine: "Without our much-beloved welfare plantation, the farming industry will not survive." What utter nonsense!
The White House responds to the matter, promising to protect the interests of the American farm industry. U.S. Trade Representative Robert Zoellick has already put the U.S. cotton growers' minds at ease by noting that he would be filing an appeal against the ruling: the process, he says, could take a number of years. With hypocrisy at our government's service, anything goes.
Let's address the matter raised by Brazil and then concluded by the WTOthat is, the issue of whether U.S. cotton farm subsidies harm the interests of Brazil's farmers and the worldwide cotton market. The fact of the matter is this: Brazil is correct, although it is regrettable and unfortunate that it is more interested in employing political machinations at the expense of its taxpayers and its consumers. It serves the U.S. cotton subsidy machine right by being the recipient of a nasty bludgeoning, even though that criticism comes from an immoral, unnecessary, and unacceptable body such as the WTO. If it further leads to an immediate rescinding of these subsidies, so much the better. It is absolutely ridiculous for the American cotton industry to suggest that it will somehow cease to function without the subsidies or that it will not compete on equal footing with the other nations who have it easier on business costs than we do.
Brazil, on the other hand, might want to eat its words, considering that its own government subsidizes the country's own aircraft industry, which, in turn, has resulted in artificially lower prices and overproduced airplanessubsidies which are unfair to U.S. and Canadian aircraft industries. But that's simply beside the point.
The Bush administration is not free of the blame as well. Thanks to Bush, the U.S. has developed a penchant for regularly displaying its arrogance and hypocrisy to the world, to American taxpayers, and to citizens abroad. Much of those qualities were epitomized in the president's decision to slap tariffsinfuriated the European Union. In response to the administration's move, the European Union threatened to hit the U.S. hard with WTO-approved sanctions, forcing the president and his maniacal cohorts to rescind them. Face itwe are talking about the same regime that has deliberately committed violence to the U.S. Constitution by lending support to a federal amendment to prohibit same-sex marriages, affirming its endorsement of policies smack of protectionism and empire-building, and incarcerating dissident citizens (who are branded "enemy combatants") on an indefinite basis. As vain, smarmy, and pugnacious as the WTO arguments are, the point is that the world of economics is far more well-ordered and balanced than militarism and war are.
The fact of the matter is that U.S. farm policy, whether or not one believes it, has become an economic and political catastrophe in the end. The subsidy itself artificially undercuts the world cotton price and allows farmers to inflate their cotton supplies, even if there is no demand for them. The wealthy farms benefit from this, as they surely reap the profits from the low costs, but the unsubsidized farms find themselves out of luck because of the inflated production costs. They find that they can't afford the high costs of doing business, so they end up going out of business. The subsidy, in effect, acts as a protectionist measure designed to save certain farms and kill many others.
Here's how the subsidy machination works: let's say that Company A manufactures toy guns for $9 and Company B manufactures similar items for $7 and sells them for $6. Consumers are willing to pay $6 for Company A's items, and yet the company is on the verge of insolvency. The government plans to "save" jobs from Company A, guarantees the business a price of $9 per toy gun by promising to make up the difference between the sale price and the floor price. Company A ends up with its guaranteed profit of $9 per toy gun by spiking their toy gun inventories when there is no increase in demand for them, flooding the market and deflating the price to $3. Eventually taxpayers are coerced into paying $6 per toy gun, yet kids are only willing to shell out $3 for those items. As a result, Company B goes out of business.
Although Brazil and the WTO are correct in their critical analysis of U.S. cotton farm subsidies, they are out of line for suggesting that the U.S. is somehow competing unfairly with cotton farmers abroad. Free trade, in real world terms, does not allow for a "level playing field," because it does not exist. What these producers want is the equalization of the costs of production. No seller and no buyer anywhere has the "right" to enjoy the same production costs, nor does anyone have the "right" to compete only against suppliers and buyers who sell and buy at a price to which both parties agree.
The problem is that we don't know what the actual costs would be without the subsidies, because said subsidies distort the market signals needed to convey that information. If the subsidies were to end, we would expect the price to rise, thereby pulling in additional supplies found elsewhere. In this case, the Brazilians might be worse off than ever, but so what? If the subsidies hadn't existed in the first place, we might have been in a position to ascertain what the actual price would have been relative to the supply and demand of cotton. That much is certain when it comes to any unsubsidized product in the marketplace.
Here's another fact that one should try on for size: the 2002 farm bill boosted farm subsidies to approximately $19 billion a year. Politicians, as the very hypocrites that they are, might want to look to themselves for the blame, considering that bailing out American farmers is only done for their own interests, not in the interests of American consumers and consumers abroad. Knowing full well that the U.S. agribusiness has been raking in $12.5 billion in U.S. subsidies between 1999 and 2003, the resentment that has fostered between U.S. and worldwide farmers should not shock anyone. If anything, the United States had it coming, and rightfully so.
Brazil argues that U.S. cotton production could be lowered by 29 percent and American cotton exports could have dropped 41 percent, along with cotton prices being 12.6 percent higher if the subsidies were repealed. Supposedly this would help their cotton industry become more competitive by selling more cotton; however, they sadly fail to understand that higher prices, all things being equal, generate more production from everywhere.
It is true that American farms are receiving a generous sum of $1.6 billion in subsidies annually. But that's because the industry, as inefficient as it is, wants to remain in business, even though the laws of economics say otherwise. If they want to remain in business, they either produce efficiently or employ their entrepreneurial skills in other productive lines of work.
The WTO ruling is definitely a win for U.S. taxpayers, and it certainly does improve the economic prospects for Brazilian citizens, but it is, by no means, a win for true free trade. The reason being is that the WTO wants a competitive environment in which both buyer and seller are footing the bill for the same production costs. But such a place is only mythical in the minds of the WTO and Brazilian bureaucrats who are more interested in politicizing the issue than resolving it in the interests of consumers abroad.
Free trade means that goods and services are exchanged without any political and bureaucratic entanglements appended to them. If rice, corn, sugar, grain, and many other goods from any nation are delivered to our border's door, American consumers should be free to buy them without the U.S. government's permission. Free trade does not maintain that those goods must be grown, harvested, and sold in a "level playing field" with everyone else. If those goods are up for grabs (and they normally are), they should not include the demand for the production costs to be equalized for all buyers and sellers in a competitive free marketplace.
It's time for the U.S. government to junk cotton farm subsidies. That means that our leaders on the steps of Washington should jettison their support for those subsidies and every other subsidy generously provided to select big businesses. That also means that the federal leviathan should steer clear of agribusiness and every other industry in the country and instead concentrate on deregulating businesses and repealing taxes on wealth and all forms of income. They could even help out the economy by repealing all that unconstitutional spending and forgetting about the "balanced budget" racket that simply does nothing to fix the fiscal woes brought upon by the Fed, the U.S. Treasury, and the members of Congress.
It's also time for U.S. producers to become competitive in the free marketplace. They could righteously call for substantial cuts in taxes and regulations (preferably eliminate them!) to make up the loss of subsidies that have furnished them with the lush life in every way possible. Eliminating the command control of the economy by U.S. central planning would bring the producers back on the economic map.
Whatever the outcome turns out to be, they should rightfully put up their "For Sale" signs and move into either other economically justifiable areas of entrepreneurship or other lines of work. Either way, it makes no difference: the free lunch can't be served forever.