Caught between two fires

The EU and US new export subsidies are bad news, not only for dairy farmers, but for all farmers.
Issue date

- Advertisement -

The EU and US new export subsidies are bad news, not only for dairy farmers, but for all farmers.

Earlier this year the European Union (EU) reintroduced export subsidies for dairy products, which it had abolished in 2006. Developed countries use export subsidies to lower the cost of their expensive products to reigning international price levels.
The main reason for the reintroduction was the decline in world dairy product prices since the end of 2007. The reintroduction wasn’t really a surprise to students of international trade. When the EU announced they’d abolished the export subsidies they were careful to include a statement that it was done with “regard to present conditions”. As soon as conditions changed they rushed back to protection.
On 22 May the US announced they’re reintroducing their Dairy Product Export Incentive Programme (DEIP) for dairy products, last used in 2002. DEIP provides subsidies for exporting milk powder, butter and various cheeses.

US agricultural secretary Tom Vilsack said this programme shows the Obama administration’s continued support for the local dairy industry. He alleged they undertake it while “refraining from protectionist measures”. The EU and US export subsidies were widely criticised by international groups. The Group of 20, a group of countries opposed to all forms of agricultural subsidies, called it “murky protectionism” that will negatively affect unsubsidised farmers in developing countries. The Cairns Group, a group of developed and developing countries, of which Australia is particularly prominent, called it an “unfortunate decision”.

- Advertisement -

 While the US export subsidies comply with commitments made in the Uruguay Round of the World Trade Organisation (WTO) trade talks, the Cairns Group pointed out the US’s actions could prompt other countries to raise their own export subsidies, domestic support and tariffs to the 1994 bound levels. This would seriously harm international trade.

Damage control for South Africa
These export subsidies are obviously of immense interest to milk producers. Their effect on dairy product prices, and thus producer prices, is well-documented. The Organisation for Economic Cooperation and Development (OECD) estimates that lower export subsidies will substantially raise producer prices in non-subsidising countries and lower them in subsidising ones. The new subsidies are also of concern to other industries that aren’t directly affected yet. The EU and US can easily expand their export programmes to include other products. Other countries may follow suit, so we could regress to a more protected trade environment.

The US and EU’s actions to protect their own industries, even in the face of heavy opposition from other countries, shows how developed countries pay lip-service to multilateral commitments but won’t hesitate to protect their own industries.
The WTO’s rule-based multilateral trade environment provides so-called trade remedies, which countries can use to protect against unfair protection. If products are exported at prices substantially lower than prices in the exporting countries, anti-dumping measures are available.

But exporting subsidised products depresses world prices, so that even non-subsidising countries have to export more cheaply. This makes it impossible to prove dumping.Other WTO measures include so-called special safeguards and countervailing duties, but instituting any of these is a very complicated process. Only in a few isolated cases has South Africa managed to prove dumping against exporting countries.

To date, International Trade Administration Commission Of South Africa (ITAC) policy states ordinary import tariffs should be used to protect against normal trade, and may not be used against abnormal trade, like protective measures. But it’s impossible to distinguish the effect of normal market conditions and protective measures on world prices. We ought to use a dispensation where industry can apply for ordinary import tariffs to protect against unfair competition. A new trade and tariff policy for South African agriculture is still being developed, and we need it urgently if we want to protect our local industries against unfair competition from rich developed countries.

South Africa is slipping badly on the international agricultural trade scene. Our imports increase faster than our exports and we export more unprocessed goods and import processed ones. When we export raw materials, we provide jobs for people in the importing countries. With a 20% rate of unemployment we can’t afford this.
The SA motor industry became globally competitive with a mixture of protective and other measures. It’s time for government, processors and agriculture to join hands and develop the various value chains.Dr Koos Coetzee is an agricultural economist for the MPO. All opinions expressed are his own and do not reflect MPO policy.     |fw