In another chapter of the never-ending story of global trade normalization, globalization, protectionism and the world economy, the BBC is reporting that the World Trade Organisation (WTO) has announced that cotton subsidies are illegal and must stop.
I can already hear you, dear reader, saying “so what?”. In fact, there’s a very big “so what” here in the United States because the United States government spends a lot of money subsidizing cotton production. How much? We’re talking billions. Specifically, In 1992, America paid cotton producers $1.62 billion, $2.3 billion in 1999 and $2.06 billion in 2001, according to the U.S. Department of Agriculture.
To put these numbers in context, according to international relief organization Oxfam, the United States spends more on subsidizing its 25,000 cotton farmers than it does in aid to the entire continent of Africa in any given year.
This entire situation came about when Brazil appealed to the WTO about America’s cotton subsidies, claiming that these massive subsidies depress world cotton prices and cause other nations to lose millions of dollars in revenue. The Economist has an interesting story on this particular facet of the situation.
What I want to talk about is the challenge of quotas, tariffs, and subsidies in the global economy, however. In the ideal global economy, every country produces what it can produce better, more efficiently, or more cost effectively than any other nation, and through a global barter system of foreign exchange and shipping, countries purchase what they need by selling what they can produce more efficiently than any other nation. That’s just economics 101.
The challenge, then, is whether free trade works when there are dramatic variations in both the cost of goods, cost of production and cost of living in various places around the world. While my economics professors would like to say that free trade works — through the “invisible hand” of Adam Smith, no doubt — I have to say that the reality of our protectionist societies suggest that it doesn’t work.
If one country says “we want to be protectionist, give our own producers an unfair advantage by subsidizing them or, the flip side of subsidies, levy import tariffs on foreign goods” then things begin to break down. When one of the largest consumers of goods on the planet does this — as we do here in the United States — it not only affects our own economy, but it has devastating impact on other economies around the globe.
And yet, I can’t help wonder what would happen in the long term if we were to drop all agricultural and manufacturing subsidies, limit import tariffs to what a neutral global organization like the World Trade Organisation felt were reasonable and fair (that is, to avoid “dumping”, where foreign nations price goods below fair market value in the interest of changing specific industries) and open ourselves up to the scary but liberating world of global free trade.
After all, when the concern is raised about jobs going overseas, we respond by retraining and reeducating our workforce to become part of an industry where we can excel. When it’s cheaper to buy shirts sewn in Hong Kong than Manhattan, we learn to create another differentiator (often, style, but less often than you think if you were to follow the trail of apparel production back to its sources in Asia and the Pacific Rim).
When industries fall into the mire of commoditization, responding by forcing the industry to not commoditize, or by propping up a specific manufacturer or two just doesn’t work in the long term. People who stitched shirts together in Manhattan were adversely affected by the entry in the apparel market of apparel manufacturing coordination firms like TAL Industries of Hong Kong, but the consumer found that they could purchase a better shirt for less money. The burden was on the New Yorkers to learn how to manage in a new economy that had shifted their job overseas, but of course this is going to happen, and of course it happens in almost all job sectors as time passes because the global economy is fluid, not static.
Consider the case of Chrysler to see what I’m saying here. When Chrysler demanded a $1 billion bailout in 1979 so that it wouldn’t shut down and put thousands of workers on the street, the government complied, subsidizing a car manufacturer who couldn’t compete and succeed on its own abilities. For a few years things at Chrysler went well, with superstar CEO Lee Iacocca at the helm. But then, in an early parallel to ex-HP CEO Carly Fiorina, it became all about Iacocca and not about Chrysler and the company stalled out and is again in financial trouble.
If you believe in a free market economy, where companies succeed or fail based on their ability to maneuver in the ever-changing global economy, where differentiation and the ability to embrace commoditization as an opportunity, not a threat, is tantamount, then you can’t help but also believe in free trade as a necessary adjunct of the free market.
Free trade is what the World Trade Organisation ruling is all about. In a free market economy, cotton would be priced based purely on supply, demand, the cost of production and the cost of distribution. Monkey with that, close our borders, add excessive tariffs or prop up non-competitive producers with multi-billion-dollar subsidies and you’re creating a monolith that is doomed to inevitable failure in the global economy.
The U.S. isn’t alone in its attempts to skew the inevitable result of free trade either. The WTO has ruled against the European Union about sugar subsidies in the last few months, for example. The WTO also isnt’ anti-American, for that matter. Last year it agreed with the United States that Vietnam and China were dumping shrimp on the world market at below market prices, and agreed on import duties of 93-112% for shrimp from those two nations.
The anti-US cotton subsidy WTO ruling will also inevitably affect other crops that the Department of Agriculture subsidizes, including corn and soya beans. The reaction of the Department is predictable, though: “We will study the report carefully and work closely with Congress and our farm community on our next steps,” said Richard Mills.
My hope? That we stop subsidizing noncompetitive crops, fund farmers retooling for crops that they can be more price-competitive with, and by doing so help many third world nations reap a better standard of living and greater love for the democratic nation of America and our brand of freedom too. It’s a strange path, but free trade might well do as much for world peace as all the negotiations and “police actions”, at the cost of retraining citizens rather than sacrificing lives.