All this week on Table Talk, we are discussing government support and subsidies.
Amidst recent news on additional NSW drought funding support package as well as Trump’s $12b package of emergency aid for farmers hit by trade tariffs, we thought it might be a good time to discuss and unpack the topic agricultural support and subsidies.
Today, we start by defining subsidies and the different forms they can take.
What is a subsidy?
The World Trade Organization defines a subsidy as a financial contribution by a government or any public body that confers a benefit to an entity in its territory (Hoda and Ahuja, 2005).
What are the ‘three pillars’ of support?
As noted by the OECD, Government’s have a large portfolio of measures at their disposal – they can raise domestic prices by intervening directly in markets or by limiting imports through tariffs or other border measures. They can provide subsidies to reduce farmers’ input costs; or they can provide payments to farmers on the basis of farm output, area, animal numbers, or as a top-up to farmers income. Payments may be conditional on specific production practices, for example, to achieve environmental protection objectives.
The three main pillars of support are:
- Market access: includes taxes on imports (tariffs), or restrictions on access to a country’s market that limits competition.
- Domestic support: includes market price supports, taxpayer funded outlays to supplement farmer income, subsidies to increase prices received, providing services for free that other’s pay for, or input-cost reductions.
- Export subsidies: includes payments contingent on products being exported. They are also generated when a guaranteed minimum price in a country creates an oversupply than can be consumed domestically.
Examples of each include:
- Market access: such as support to Chinese farmers through tariffs, tariff rate quotes and state trading.
- Domestic support: such as the Farm Household Allowance scheme in Australia or Drought/Disaster payments/support.
- Export subsidies: for example, in the US, cotton farmers are paid to grow more cotton and subsidies buyers to buy it.
Do subsidies distort markets?
Export subsidies can include direct payments, low cost export loans, floor prices, and tax benefits (such as duty-free import of equipment) and are considered as one of the most distorting elements of agricultural trade. They distort market prices and they lead to higher than market prices and surplus production in exporting countries and lower prices and less production in importing countries. The OECD notes that most countries provide support to their producers through these such measures that are most distorting to production and trade.
As stated in The Conversation, “Subsidies in relation to protectionism or trade barrier that make agricultural products artificially competitive against imports/exports in an attempt to distort domestic or international markets, has not been a policy position of Australian Governments for many years now.” Subsidies for production or inputs distort the allocation of resources and farming decisions with a loss of national income.
Less distorting forms of support include two broad forms of payments: 1) payments based on on-farm investments or on 2) variable inputs. As noted by the OECD, such payments accounts for more than 70% of producer support in Chile and Kazakhstan, more than 60% in South Africa and 41% in Australia.
What are the “boxes”?
In WTO language, domestic support subsidies in general are identified by “boxes”, which help to define further the conversation above:
- GREEN: Permitted. In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion. They have to be government-funded (not by charging consumers higher prices) and must not involve price support. They tend to be programmes that are not targeted at particular products, and include direct income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include environmental protection and regional development programmes.
- BLUE: This is the “amber box with conditions” — conditions designed to reduce distortion.
- AMBER: Slow down. Nearly all domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box. Thirty-two WTO members have commitments to reduce their trade-distorting domestic supports in the Amber Box
- Are Australian producers the least subsidised in the world? (2/3)
- Is there global agreement to reduce export subsidies? (3/3)