Agricultural subsidy distortions must be addressed

Share This Post

As the world’s Trade Ministers head to a WTO meeting in Abu Dhabi, the Dairy Companies Association of New Zealand (DCANZ) is calling for an immediate capping of agricultural subsidies and urgency in reducing them to prevent and correct production and trade distortion.

DCANZ’s call is informed by recent global dairy market distortions modelling that show farm subsidies are having a significant negative effect on dairy markets.

“The overall message is that farm subsidies are materially distorting agricultural trade and they are a beggar-thy-neighbour approach to policy,” says DCANZ Executive Director, Kimberly Crewther.

According to the OECD, annual support by its members alone to their agriculture sectors is estimated at an eye-watering $817 billion annually.  Concerningly the trend for agricultural subsidies is upward.

The specific modelling work indicates that a 50% reduction of European Union farm subsidies would increase factory gate cheese prices for non-EU producers by 2.4% and international trade values for non-EU exporters by 8%.  Producer prices within the EU would also increase by 3.9% and EU exports by 3%.

These results are by no means unique to EU dairy subsidies.   This dynamic is universal.

These dairy-specific modelling results add support to other global studies in highlighting the benefits of reducing trade-distorting support.   When introducing the latest OECD Agricultural Policy Monitoring and Evaluation Report, OECD Secretary-General Mathias Cormann acknowledged that “such measures alter trade, investment and the location of production, undermining both the value of market access and the benefits of competitive markets and open trade”.  Importantly he also warned that they can be harmful for the environment.

Crewther says the can has been kicked down the road for too long on addressing the trade-distorting impacts of agricultural subsidies.

“Agricultural subsidies need to be a central focus of the Ministerial Conference discussions, and there needs to be clear movement forward”.

DCANZ is concerned that WTO Ministers not tackling the issue of subsidy distortion of markets would amount to them deciding not to progress the action within their ambit to achieve UN Sustainable Development Goal 2: End hunger, achieve food security and improve nutrition, and promote sustainable agriculture.    Implementing target 2b refers to correcting and preventing restrictions and distortions in world agricultural markets.

“The Sustainable Development goals and their associated implementing targets recognise that undistorted agricultural trade is part of the solution to sustainable nutrition,” says Crewther.

“Taking concrete steps to evolve and strengthen the WTO agricultural subsidy rules must be a priority”.

All countries benefit from a multilateral rules-based trading system that avoids the negative economic, environmental, and food security impacts of market distortions.  The WTO Agreement on Agriculture and the subsequent Nairobi agreement to end export subsidies were major steps forward that delivered significant value.  However, studies that show that the use of subsidies is materially suppressing markets and harming the interests of other producers highlight that more is needed.

The Global Dairy Distortions Model has been developed by economic consultancy, Sense Partners, in conjunction with DCANZ.  It aims to better understand the impacts of subsidies on global dairy markets and provide an evidence-based contribution to international policy discussions.

The model is used to consider specific dairy subsidy-related questions, drawing on countries’ own data and that of the OECD.  A first case study confirmed that no form of direct farm subsidy can be considered minimally trade distorting upon dairy markets and that those contained in the WTO amber and blue box classifications are most distorting.  The second analysis showed substantial distortion of the global cheese market resulting from the cumulative effect of EU farm subsidies.  The results are publicly available on the DCANZ website (Subsidies and Dairy Trade | DCANZ).  Further case studies will be undertaken to continue building the global picture.