The unfairness of subsidies in international trade

By Sir Ronald Sanders

Sir Ronald SandersAmid trade quarrels between the US and the European Union (EU) that caused the World Trade Organisation (WTO) to miss a deadline for restarting stalled global trade negotiations, nine Caribbean Community and Common Market (CARICOM) countries have petitioned the WTO to extend their export subsidy programmes to the year 2018 saying that they are “of great importance” to their economic and financial needs.

In a joint communication presented on April 25th to the WTO’s Committee on Subsidies and Countervailing Measures, each of the 9 countries gave a list of their subsidy programmes with fiscal incentives (concessions on corporate taxes and import duties) being common to all.

The nine CARICOM countries are: Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Jamaica, St Kitts-Nevis, St Lucia and St Vincent and the Grenadines.

Pointing out that they account “for a miniscule share of total world trade”, the nine CARICOM countries, along with six others, including the Dominican Republic, argued that they need to continue to subsidise investment to “benefit from the positive aspects of international liberalisation”.

The WTO Committee decided that the request for an extension will be considered in October this year.

The CARICOM countries are relying on a section of the Agreement on Subsidies and Countervailing Measures which recognises that “subsidies may play an important role in economic development programmes of developing country members”.

Whether they will get the extension in October is left to be seen, but really it should be automatic.  Who, but the most hard-line, would argue that these small islands do not need to subsidise investment?  They are obviously physically isolated, face high transportation costs for imports, and are restricted from concessionary financing from international financial institutions.  If their governments do not offer incentives for investment, they would get very little and certainly not enough to support their development needs including providing new employment.

In the meantime, they can breathe a sigh of relief that the United States and the EU failed to narrow their differences over agricultural subsidies so as to allow negotiations to proceed on April 30th for new global trade rules at the WTO. Mr Pascal Lamy, the Director-General of the WTO, was forced to announce that differences were too wide to risk calling the meeting.

It is pretty certain that had the US and the EU settled their disagreements, they would have acted together to agree deals with large developing countries, and small economies would have faced even more requirements to end their limited subsidies and open still further their already open markets to the goods and services of the industrialised nations.

Despite meetings over the last three months between the US, EU and a few large developing counties – India and Brazil in particular –  the WTO negotiations have been stalled since last December’s meeting of trade ministers in Hong Kong.

Throughout the Hong Kong meeting, the US and EU were vocal in their criticism of each other. Their disagreement stems from their rivalry to sell their agricultural products in each other’s markets and globally.

For decades, both the US and the EU have subsidised their farmers to the tune of US$1 billion a day to the detriment of the farming communities of developing countries.  Their agricultural exports bear little relation to the costs of production, and contribute to the inability of the farmers in developing countries to compete in the global market.  Little wonder, therefore, that poverty in agricultural communities in developing countries has increased.

To save the WTO ministerial meeting in Hong Kong last December, the EU’s Trade Commissioner, Peter Mandelson, announced that the EU had decided to phase out its agricultural subsidies by the year 2013.  He did so at the last minute and on a signal from a EU Heads of Government conference that bitterly debated the issue and ended with a compromise chiefly between France, which wanted to keep the subsidies, and Britain which urged their elimination.

In any event, the US, Brazil, Australia and others wanted the EU subsidies gone by 2010 so they were not exactly thrilled by the EU announcement which, as it turned out, was not unconditional –   the EU stated that its elimination of subsidies was subject to an end to US food aid and export credits.

For its part, the US Trade Representative’s Office, then headed by Robert Portman, pointed out that EU agricultural subsidies are three times the level given by the US to its farmers.

Now, the quarrel over reducing farm subsidies has been caught up in mid-term elections for the US Congress.  Both Republicans and Democrats are far from anxious to tell the farming communities that they will support any plans to cut subsidies.

Equally, in the EU, while the declaration has been made that agricultural subsidies will be phased out by 2013, no country – particularly France – has made an effort to reduce subsidies in any way.

So, local political survival is now determining international action.  And, in these circumstances the world is unlikely to see any real movement in the WTO negotiations for more trade rules until the US mid-term elections for Congress are over.

All of this puts into perspective the plea to the WTO by nine small CARICOM countries for their limited subsidies (none of which is agricultural) to continue until 2018, and underscores that in today’s international trade, like international politics, powerful countries continue to assert their own interests while weak states remain at their mercy.

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(The writer is a business executive and former Caribbean diplomat who publishes widely on small states in the global community)