Teaching Comparative

A long, complex post on international trade

Apologies for the length of this essay. It is a complex topic. It may be so complex that the explanation of the politics doesn't fit into an introductory semester course in comparative politics. (Sometimes you just have to say, "Believe me. That's how it is.") But it's probably something we should know as teachers.

On Tuesday morning, Rebecca Small posed these questions:

"The protests in Mexico over food prices has caused me to
wonder - what do the terms of NAFTA forbid when it comes to
subsidizing food prices? I know the government had to end its
subsidies on tortillas in 1999. But the US subsidizes our
agricultural products, how can we do that if we are part of NAFTA?
And what if anything can Pres. Calderon do about rising food prices?"

I was stumped by all of them, even though I'd written about the protests last week.


That afternoon, I saw this article in the International Herald Tribune WTO's 150 members to meet amid uncertainty about the U.S.

"Two weeks after world powers pledged to re-energize global free trade talks, the WTO's 150 members meet Wednesday...

"But much hinges on two major decisions pending in just one country: the United States, where Congress will debate whether to extend President George W. Bush's authority to agree on trade deals and whether to adopt a new farm bill that has received a lukewarm response from major trading partners such as Brazil and Europe...

"One of the main stumbling blocks has been the level of U.S. government subsidies paid out to American farmers. Poorer nations contend the handouts prevent them from selling their farm goods and developing their economies. The 27-nation EU and other competitors say they cannot significantly open their lucrative markets to American beef, poultry and other exports until the subsidies are reduced..."


So, I asked myself, what's with the coexistence of these subsidies and the free trade mandates included with GATT, WTO, and NAFTA?

It turns out that the treaties make significant distinctions between tariffs, non-tariff barriers to trade, and subsidies. I had blithely assumed that while different, tariffs, regulations, and subsidies were all barriers to trade. Shows you how much I know. It turns out that there are also important differences between subsidies for domestic products and subsidies for exports.

Tariffs are taxes on goods imported. Non-tariff barriers include things like rules requiring dolphin-safe nets to catch tuna or requiring that imports be done only by companies owned by citizens of the importing country. Subsidies are government payments to producers which are meant to lower the market cost of final products or guarantee a desired level of production.

Consider this information from the U.S. Department of Agriculture: FACT SHEET: North American Free Trade Agreement (NAFTA)

"Under NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated.  In addition, many tariffs were eliminated immediately, with others being phased out over 5 to 15 years...

"Under NAFTA, all non-tariff measures affecting agricultural trade between the United States and Mexico were eliminated on Jan. 1, 1994.  These barriers, including Mexico's import licensing system (which had been the largest single barrier to U.S. agricultural sales), were converted to either tariff-rate quotas or ordinary tariffs.
 
"All agricultural tariffs between Mexico and the United States will be eliminated. Many were immediately eliminated and others were to be phased out over transition periods..."


So, tariffs and non-tariff obstacles are no longer big issues among the NAFTA partners. Subsidies are another, more complicated matter. The DOA Fact Sheet continues:

"The three NAFTA countries work toward the elimination of export subsidies worldwide.  The United States and Canada will be allowed to provide export subsidies into the Mexican market to counter subsidized exports from other countries...

"Under NAFTA, the parties should endeavor to move toward domestic support policies that have minimal trade or production distorting effects..."

Subsidy elimination, then is a goal, but subsidies are allowed under some circumstances. The U.S. is very generous in its subsidies to American farmers. Why then did Zedillo's government eliminate subsidies for tortillas in Mexico in '99?

The stated reasons were that factory-made tortillas, bought by the middle class in super markets, were being subsidized as well as the "tortillerias" product, where most of the poor shopped. And the government needed to reduce spending in the face of lower oil prices. (See also: Tortilla Price Hike Hits Mexico's Poorest, from the Washington Post, 12 January 1999)

So, how do the U.S. and the EU persuade their trading partners to accept the large subsidies paid to their farmers? Well, besides the obvious lure of their huge and rich markets?

Consider this report by Peter Gal from the Public Law Research Institue at the Hastings College of Law: Public Law Research Institute Report: NAFTA's Relationship to State Support of Industries and Export Subsidies

"... the General Agreement on Tariffs and Trade (GATT), which excludes direct subsidy to industries before the export stage. The main exception [under NAFTA]... is the... explicit allowance of such domestic support in the agricultural sector...

"NAFTA and the Administrative Action Statement explicitly discuss and allow support of domestic agricultural enterprises.

"NAFTA parties may utilize export subsidies against competition from non-NAFTA countries. NAFTA parties may introduce an export subsidy on exports of an agricultural good to another NAFTA country... Each party maintains its right to apply countervailing duties to subsidized agricultural imports from any source, including NAFTA parties... While no changes in domestic agricultural subsidies are required of any of the NAFTA countries, the Agreement does require participants to endeavor to move toward domestic policies that have 'minimum or no trade distorting or production effects.'...

"Agricultural Export subsidy programs have provided an important tool to maintain and expand exports of U.S. agricultural commodities. Currently, there are export subsidy programs to promote exports to Mexico of many U.S. agricultural commodities, including the export enhancement program, the dairy export incentive program and the cottonseed oil and sunflower seed oil assistance programs.

"The Secretary of Agriculture will aggressively use the agricultural export subsidy programs with respect to exports to Mexico as appropriate to help U.S. producers compete against subsidized products from other countries...

"But while agricultural subsidies are allowed under NAFTA... they seem to be strongly disfavored... The Parties to NAFTA agree that 'their primary goal with respect to agricultural subsidies is to achieve, on a global basis, the elimination of all subsidies which distort agricultural trade, and the Parties agree to work together to achieve this goal, including through multilateral trade negotiations such as the Uruguay Round.'..."

So, subsidies are allowed for products for domestic consumption and to match the competition of subsidies from countries outside the treaty. They are even allowed to promote exports to Mexico. But they're not desireable, according to the treaties. But, politically they are desireable. I'd guess those subsidies are political minefields. Think about how difficult it is to reduce agricultural subsidies in the US. (And watch the arguments in Congress during the next several months.)

And tortilla subsidies? Well, perhaps it's true that Mexico can't afford them. Perhaps it's true that a general subsidy benefits many who don't need the benefit. Perhaps the subsidies give advantages to small-scale, inefficient producers, and the elimination of subsidies offer benfits to large corporations. And perhaps what's really important is the rising demand for corn brought about by ethanol production in the USA.

Labels: economics, Mexico, NAFTA

posted by Ken Wedding @ 9:12 AM