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International Trade: The Story of a Subsidy

May 11, 2013 • Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance, Labor, Regulation, Thinking Economically • 358 Views    No Comments

Oddly, some US farm subsidies go to Brazil.

Imagine a safety net when you think of a subsidy. If prices are too low, then growers get money from the federal government. During the 1930s Great Depression, the goal of subsidies was to sustain a farmer’s purchasing power when he had a bad year.

Fast forward to 2013. Because the US is the world’s leading cotton exporter, our farmers depend on the world price. if that price is too low, they get a subsidy.

This is where Brazil enters the picture. Because US subsidies lower production costs, they depress world cotton prices for Brazilian farmers. Complaining to the WTO, a World Trade Organization composed of 151 countries that include the US and Brazil, Brazil said US cotton subsidies violated WTO rules. A WTO panel agreed.

However, Brazil still had a problem. Because WTO decisions are not enforceable and the US Congress was not about to eliminate subsidies voluntarily, the panel’s decision was virtually meaningless. Then though, Brazil threatened retaliatory measures that would include ignoring US pharmaceutical patents and music copyrights. It worked. Faced with WTO condemnation, angry Brazilians, US firms fearing retaliation, and subsidized US farmers, the US government devised a unique solution. As of 2010, through the Brazilian Cotton Institute, we would pay Brazilian farmers $147.3 million every year–$12.275 million monthly–until an acceptable farm bill is passed.

The farm bill is still being debated.

Our bottom line? Subsidies, like tariffs and quotas, are barriers that diminish the efficiencies of free international trade. As barriers, they obstruct David Ricardo’s comparative advantage and the ability of nations to produce goods and services for which they have the lower opportunity cost..

Sources and Resources: NPR’s Planet Money explains the US/Brazil cotton dispute in one wonderful 30 minute podcast. But then, for more of the specifics, I recommend this 2011 report from the Congressional Research Service. To complete the picture, this Slate column provides all you want to know about the Farm Bill that the US Congress is considering. (Econlife looked at the bill’s impact on the dairy industry here.)

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