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Protectionism and Agricultural Price Supports

E.C. Pasour

Dr. Pasour is a professor of economics at North Carolina State University at Raleigh.

Trade is highly important to U.S. agriculture. In recent years, export sales have represented about one- fourth of the total revenue from sales of U.S. farm products. Consequently, there is widespread concern in the agricultural sector about recent losses in markets for farm exports and about the harmful effects of trade barriers imposed by other countries. Exports of U.S. farm products in fiscal 1986 are expected to be less than $28 billion—down about $16 billion from the record high of $44 billion in 1981.

Although U.S. agriculture is generally considered to be a bastion of free enterprise, the reality is quite different. Our domestic agricultural policy has been a perennial albatross in efforts by the United States to liberalize trade. As shown below, there is an inherent contradiction between domestic price supports and free international trade.[1]

Price Supports and GATT

The General Agreement on Tariffs and Trade (GATT) is a multilateral treaty among more than eighty governments (including the United States) established in 1947 to liberalize and expand trade through negotiated reductions in trade barriers. The conflict between U.S. farm programs and free trade, apparent when GATT was formed, led the United States to insist on special treatment for agricultural products. The incompatibility of current farm programs with an open economy can be traced to farm policies instituted during the Roosevelt New Deal era. The Agricultural Adjustment Act of 1933, as amended, requires that the U.S. Government impose quantity restrictions whenever imports would “materially interfere” with the operation of U.S. farm programs.[2] Consequently, agricultural and other “primary products” were not bound in the GATT treaty by the general principles that prohibit import quotas and export subsidies.

It is not difficult to see why price supports for dairy, sugar, peanuts, tobacco, and other U.S. farm products have led to protectionist policies. In recent years, for example, domestic prices of U.S. dairy products frequently have been two to three times world prices. The case of sugar, for which domestic price in mid-1986 was about four times world price, is even more dramatic. Without rigid import controls, consumers would undermine domestic price support programs by substituting lower priced imports for price-supported products including sugar, butter, cheese, and peanuts.

Although GATT permits import restraints for agricultural products, there are limits as to how far countries may legally go in restricting imports to protect domestic farm programs. Not all of the U.S. import restraints on farm products can be explained by the GATT exemption. University of Chicago economist D. Gale Johnson shows that U.S. import restrictions on sugar, dairy, peanuts, and beef products clearly have violated the GATT principle that import quotas should not be used to reduce imports by more than the extent to which domestic production is reduced.[3] Therefore, when measured against the touchstone of free trade, United States trade policies as they affect farm products fall short in both the letter and the spirit of the law.

Export Subsidies

GATT exceptions for agricultural products are also made for export subsidies as long as a subsidy does not result in “more than an equitable share of world export trade in that product.”[4] Even though U.S. agricultural interests are highly critical of subsidized agricultural exports by other countries, especially by members of the European Economic Community (EEC), the United States continues to subsidize the disposal of surplus farm products under the Public Law (PL) 480 (“Food for Peace”) program. For example, about $1.5 billion is budgeted for PL 480 in 1986.

The PL 480 export subsidy program, begun in 1954, was motivated in large measure by the desire to dispose of surplus agricultural products. The program ostensibly has other laudable objectives, including improvement of world diets, promotion of agricultural trade, and “food for peace.” Exports of U.S. farm products have been increased through PL 480 over the years in a variety of ways, including donations of commodities, sales for local currencies, and sales at low interest rates.

The Food for Peace program, however, is not the only type of export subsidy affecting U.S. farm products. A new $2 billion “export enhancement program” was launched in 1985 to run through fiscal 1988. The program is to be targeted to markets taken over by competing nations using “unfair trade practices.” In addition, in an effort to dispose of government stocks of price-supported products, the 1985 farm bill permits farmers to redeem their price-support loans at less than the amount borrowed—another way of using the public purse to drive down price levels in international markets.[5]

The largest amount of expenditures on export subsidies, however, is reserved for the target price method of price supports. In this price support system, farmers receive from the government the difference between the market price and the target price of a product as a “deficiency payment.” This program permits prices received by U.S. farmers for price-supported products to exceed significantly prices in international markets—a poorly disguised export subsidy. It is estimated that these so called “deficiency payments” will total about $10 billion for the 1986 crop year.

Regardless of type, export subsidies are inconsistent with free trade. In the case of agricultural exports, “food aid that preempts the commercial markets of third-country exporters creates an international trade problem and may in the end be deleterious to the interest not only of the international trading community but even of the recipient country itself.”[6]

In view of the United States’ history of subsidizing exports, U.S. criticism of similar policies in other countries rings hollow. Current complaints about protectionist trade policies by other countries are especially hypocritical in view of the increase in direct and indirect export subsidies under the new farm bill. Agricultural interests in the United States have long criticized the EEC for its protectionist farm policies. The new farm bill means that the United States can no longer argue that it is less dependent on export subsidies than the Europeans.[7]

It should be no surprise when other countries institute trade restrictions that are similar to those long used by the United States. Moreover, appeals to Japan, members of the EEC, and other countries to open their markets to U.S. products are unlikely to appear credible as long as protectionist policies are maintained for U.S. agricultural products.

In the public debate over trade policies, the United States frequently is depicted as a free trade island located in a sea of agricultural protectionism. The preceding examples show that there is a wide gap between this image and reality. Furthermore, as competitive pressures intensify in markets for farm products throughout the world, it becomes increasingly important to recognize the problems posed by U.S. domestic agricultural policies in liberalizing and expanding trade.

Implications of Rising Agricultural Productivity

Farm productivity is increasing rapidly throughout much of the world, not only in the United States and the European Economic Community, but also in the developing countries where advances in productivity have been especially pronounced. Dennis Avery, of the U.S. Department of State, finds that during the most recent decade, developing-country farm output rose 38 per cent while that of the developed-country agricultures rose only 15 per cent.[8] As an economic analyst who has followed agricultural progress throughout the world since 1980, Avery concludes that future farm export trade will be “fiercely competitive” throughout the world.[9]

The implications of widespread technological advances in agriculture are straightforward for U.S. farm policy. Rising foreign farm productivity and increasing competition in export markets for U.S. farm products implies a progressively higher price tag for U.S. consumers and taxpayers to maintain current U.S. price support programs. Moreover, to the extent that domestic farm programs raise product prices, they provide an artificial production incentive for farmers in other countries.

The responsiveness of sales to a change in product price generally is higher in international than in domestic markets because there are more close substitutes in world markets. In view of this responsiveness and the importance of exports in the marketing of U.S. farm products, protectionism could mean less revenue for the agricultural sector, even in the short run. Of course, protectionism is harmful to the public at large even when it confers short-run benefits on groups with narrowly focused interests.

Government price support programs for farm products are clearly incompatible with an open economy. It is hypocritical for the United States to criticize other countries for using import controls, export subsidies, and other trade restrictions that this country is also using. The United States acting unilaterally cannot abolish protectionist measures in other countries. Policy-makers can, however, make our domestic farm programs consistent with free trade. The phasing out of domestic price supports that raise U.S. prices above the world level is an important first step in reducing trade restraints and in opening up world markets for U.S. products. Price supports not only are inimical to trade, they do not achieve their objective of increasing the long-run profitability of agriculture.[10] Measures to reduce trade barriers, on the other hand, increase both prosperity and the prospects for peace.[11]

The 1985 farm bill represents a continuation of the failed farm policies of the past, rather than a major change in direction. Farmers will be more dependent on government payments than ever before. Economic pressures may yet, however, bring about a reduction in agricultural trade barriers. Increasing competition in markets for U.S. farm products and budget pressures may force U.S. policymakers to do what they have heretofore been unable or unwilling to do—modify our domestic farm policies to make them compatible with the GATT objective of liberalized trade.

The harmful effects of protectionist policies are well known. The amount of damage varies with the type of trade restriction, but the effect of protectionism is always the same. It prevents farmers, other workers, and consumers throughout the world from reaping the benefits that occur when individuals are permitted to engage in those activities in which they are most productive. []

1.   Some of the points of this paper are discussed in move detail in the author’s paper, “Free Trade’s Price” in Choices. Second Quarter 1986, pp- 33-35.

2.   Kenneth W. Dam, The GATT__- Law and International Economic Organization (Chicago: The University of Chicago Press, 1970).

3.   D. Gale Johnson. “Domestic Agricultural Policy in an International Environment: Effects of other Countries Policies on the United States-“ American Journal of Agricultural Economics 66 (Dec. 1984): pp. 735-744.

4.   Kenneth W. Darn, op. cit., p. 142.

5.   D. Gale Johnson. “U.S. Joins the Agricultural Subsidy Sinners.” The Wall Street Journal. May 7. 1986. p. 30.

6.   Kenneth W. Dam, op. cit., p. 268.

7.   D. Gale Johnson, 1986, op. cit.

8.   Dennis Avery, “Update on Rising World Farm Output.” U.S. Department of State, at the Valley National Bank Agricultural Symposium, Phoenix, Arizona, April 10, 1986, p. 1.

9.   Ibid, p. 7.

10.   D. Gale Johnson, “The Performance of Past Policies: A Critique,” Ch. 2 in Alternative Agricultural and Food Policies and the 1985 Farm Bill, Gordon C. Rausser and K. R. Farrell (eds.) (Berkeley, Cal.: Giannini Foundation, 1985).

11.   Joan Kennedy Taylor (ed.), Free Trade: The Necessary Foundation for World Peace (Irvington-on-Hudson. N.Y.: The Foundation for Economic Education, Inc., 1986).

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