When the international price of cotton and sugar is raised, why should we be pleased?
Listener: 31 July 2004.

Keywords: Globalisation & Trade;

As unlikely as it may seem, cotton and sugar are playing a vital role in New Zealand’s economic prospects. A World Trade Organisation panel has just found in favour of a Brazilian – and others – complaint that the US is subsidising or “dumping” its exports of cotton. The panel concluded that the US action depresses international cotton prices, so other cotton exporters are getting lower than free – or fair – market prices. It rules that the dumping must stop.

The US is appealing the decision, but most observers expect it to lose. It has a record of going to the last court of appeal, and then caving in when it loses there, as it did over its illegal hike in the tariff on our lamb. This enables its trade negotiators to say to their farmers that they did their best, although I suspect the diplomats will be happy to lose in the wider interests of US trade strategy.

The Brazilians have a similar claim against European Union sugar exports. Although the WTO decision has yet to be made, everyone expects the same conclusion: that the EU is dumping its sugar surplus on world markets, depressing prices, and it should desist, too. Ending the dumping will raise international prices of cotton and sugar. Although Third World producers will be better off, New Zealand consumers will have to pay more. Why should we be pleased?

The point is the principle: rich countries in particular are not allowed to subsidise their own producers, and then dump surpluses from overproduction into world markets, depressing the returns of unsubsidised producers. That principle applies to all farm exports, including dairy products. So New Zealand dairy farmers will be better off with the ending of dumping and their gains, spread through the rest of the economy, will be considerably greater than any consumer losses. A rule of thumb is that every dollar we get from higher export prices relative to import prices adds three dollars to national spending in the long run.

The EU as good as conceded that it is going to lose the sugar case, when its Trade Commissioner, Pascal Lamy, announced that the EU will support steps in the Doha Round trade negotiations to eliminate subsiding of exports, providing others do the same. The US, the other big player in the negotiations, welcomed the proposal. Its trade negotiators already support the elimination of dumping. But never forget that – as in the EU – US farmers are divided, since some, such as cotton producers, benefit from the dumping, while others suffer. In contrast, dumping is an unmitigated disaster for New Zealand farmers, because we do not do any ourselves.

The EU is similarly conflicted. Many of its members are tired of subsidising others’ farmers, and especially nervous given that some of the countries that joined last May have large – and largely inefficient – farm sectors. On the other hand, France, a net beneficiary of the EU’s Common Agricultural Policy, protested against Lamy’s announcement. However, the EU has been reforming its agricultural subsidies to align more closely its producer prices with those in the international markets, so the internal consequences of their ending dumping may not be large.

There was a cheer when Lamy made the announcement, because the Doha Round, which aims to reduce trade interventions, seemed to have got stuck over agriculture protection. Both the Europeans and the Americans want a major decision by early August, because of elections later in the year.

Any agreement will only offer a general framework, and there will be much work to be done on details. So when and if success is announced, don’t expect immediate benefits. Even after the final settlement a year and more later, the new policies will phase in. More-over, the EU, US and Japan are unlikely to remove all the barricades defending their domestic food markets from New Zealand (and other) competition – not this time round, anyway. But eliminating dumping into third markets will boost our dairy industry, while products such as fish and timber will get better access and prices, too. The benefits will flow through to all of us, although consumers of cotton and sugar will have to take a small downside.