Agricultural Subsidies in the West

This paper discusses agricultural subsidies in the United States and the European Community, and their effects on trade between the two trading areas. In this respect, the paper provides a brief overview of the European and U.S. agricultural policies and discusses subsidies in both trading areas and their effects on mutual trade.

Countries engage in international trade because it is a mutually beneficial process. At the macro level, national welfare increases. At the micro level, individual exporters earn profits, provide an additional source of employment, and supply convertible foreign exchange which is used to pay for imported goods and services.

In terms of national welfare and economic common sense, imports are the ultimate rationale for trade. By definition, a good is unlikely to be imported unless it meets at least one of three criteria: (1) it is cheaper than domestically produced counterparts; (2) it is of better quality than its domestic competition; or (3) it is either unavailable or in short supply in the domestic market.

Obtaining goods from abroad at cheaper prices increases consumers' buying power, and, as a consequence, real incomes rise. This in turn means an increased standard of living in the importing country. High tariffs and other barriers to imports increase costs to consumers, lower real incomes, and reduce their freedom at the marketplace. One of the major sources of price disciplines and incentives for innovation by domestic industry i

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out intervening directly in commodity markets. The 1977 Food Bill reportedly based target prices on the cost of production, a difficult task since major components of the cost of production, notably land rents, themselves depend on products' prices. Difficulties associated with the setting of target prices continued to plague the writing of the 1981 and 1985 farm bills. Other important components of the U.S. agricultural policy during the past several decades have been the continuing support of public sector research and development as well as agricultural development. As U.S. export market shares declined in the early 1980s, foreign agricultural assistance for agricultural research became controversial. While not fundamentally different from previous farm legislation, the 1985 farm bill differed from its predecessors of the 1960s and 1970s in its conservation provisions. It created the Conservation Reserve Program, whose goal was to remove from production land that was highly erodible, estimated to be as much as 10 percent of total cropland. Moreover, the 1985 legislation made compliance with land conservation provisions of the bill a requirement for continued participation in commodity programs. In 1987, some 6 perc

Category: Economics - A