Distorting markets, harming farmers

Agricultural subsidies in the United States began during the Great Depression. Combined with complicated regulations to manage over production, the Roosevelt administration’s unprecedented interventions in the agricultural sector were intended to support farmers grappling with the effects of the Dust Bowl, drought, and collapsing commodity prices. Agricultural subsidies, in one form or another, have been with us ever since.

In 2023, the federal government provided about $11 billion in agricultural subsidies. These subsidies distort the domestic market, all but requiring farmers to take them in order to compete and keep their farms afloat. Combined with the high cost of compliance to federal, state, and local regulations on farming, these subsidies push farmers into a stance of dependence on government policy. The fickleness of that policy creates a climate of uncertainty, chilling risk taking in the industry and disproportionately harming small-time farmers and would-be entrepreneurs. In summary, government intervention in the market makes too much depend on the legislative process in Washington, D.C. as politicians and lobbyists hammer out the latest edition of the U.S. Farm Bill every five years or so.

Moreover, U.S. agricultural subsidies are highly concentrated: They increasingly flow to a small number of the largest agribusiness corporations. “Congress delivers the bulk of subsidies to the largest and wealthiest farmers,” concludes a 2023 briefing paper by the Cato Institute. Another report by the American Enterprise Institute estimates that about 70 percent of payments from major subsidy programs flow to the largest 10 percent of farms by sales. According to another analysis by the Environmental Working Group, in an average year, the top 10 percent of recipients (the largest ag corporations) capture about 78 percent of commodity program subsidies, while the top 1 percent receive an outstanding 27 percent. The bottom 80 percent of recipients, meanwhile, together receive about 10 percent of subsidies. Taken together, these facts suggest that agricultural subsidies seldom function as a true “safety net” for small farmers and instead serve the interests of the largest players in the industry.

Tariffs, ‘dumping,’ & international markets

Subsidies do even more harm in international markets, especially for the poor. To fully understand the impact of agricultural policy in developed nations on poor international farmers, it is important to consider a parallel mechanism of distortion: the tariff.

Policymakers pitch tariffs as protection for domestic producers from foreign competition. Tariffs raise the price of imports, theoretically protecting the products of domestic producers from being undercut by cheaper goods of foreign producers. A notable loser of tariff policy is the domestic consumer, who now has access to fewer goods at higher prices.

Tariffs are usually discussed as a defensive tool. Combined with subsidies and aggressive diplomacy, however, they can be employed to prey on foreign markets as well. Exporting subsidized products (with artificially low prices) into foreign markets can a devastating effect on local producers. This dynamic is known as “dumping” or “surplus dumping” in international trade.

Andreas Widmer, assistant professor of entrepreneurship at the Catholic University of America, explains how surplus dumping works in Episode 4 of the PovertyCure series (”Circles of Exchange”). Large domestic agricultural corporations will advocate for tariffs and import duties as protection from foreign competitors, Widmer explains, including from poor countries. They then lobby their government for subsidies so they can produce a surplus. “And guess what they do with the surplus? The surplus goes and is dumped in the poor country,” says Widmer. “So what we end up doing is destroying the local market and destroying the very companies that we first blocked out of our market.”

The United State’s trade relationship with Haiti in the 1990s and 2000s is an infamous example of the harms of surplus dumping. The Clinton administration persuaded the Haitian government to open its market to American rice producers, who subsequently dumped their subsidized surplus into the Haitian market. Haitian rice farmers were wiped out. In a 2010 congressional hearing, Clinton publicly apologized for pressuring Haiti to open its market to subsidized U.S. rice. “It may have been good for some of my farmers in Arkansas, but it has not worked,” Clinton said. “It was a mistake. I have to live every day with the consequences of the lost capacity to produce a rice crop in Haiti to feed those people, because of what I did.”

Trade between countries does not have to happen like this. The concept of “free trade” assumes the open exchange of goods across borders without the distorting effects of tariffs or subsidies. True free trade would allow market forces to dictate prices, allowing different countries and businesses to identify their comparative advantages—to the benefit of each country involved. State-subsidized dumping, with its devastating effect on the local economy, should not be confused with free trade.

Can food aid harm?

Surplus products, encouraged by subsidies, can also enter developing economies as food aid. Emergency food aid provides crucial help to countries in need. Like dumping, however, food aid can have similarly harmful effects on local producers and food sellers, especially when provided outside of time-limited emergencies.

In Episode 1 of the PovertyCure series (”Charity that Hurts”), Peter Greer of HOPE International shares a story illustrating the unintended consequences of food aid. Desiring to help after the Rwandan genocide, a church in Atlanta sent free eggs to a village outside Kigali. Unbeknownst to them, however, their charity destroyed a local farmer’s egg business: The farmer couldn’t compete with free eggs from the United States. The next year, the church turned its attention to another part of the world, leaving the village without a local egg producer. “The desire to help in that community,” Greer said, “actually had a long-term negative impact on that community.”

This dynamic—in which free or cheap food from rich countries crowds out local businesses in poor countries—is repeated at industrial scale with large transfers of non-emergency food aid. Globally, roughly 2 billion people live on about 510 million smallholder farms (defined as less than 5 acres of land). Because extreme poverty remains predominantly rural, many of these households meet the World Bank’s definition of “extreme poverty”—living on less than $3/day. These are the households most vulnerable to the negative effects of food aid and agricultural subsidies in the developed world.

“Agricultural subsidies are a huge distortion for world markets, particularly the poor,” Marcela Escobari, former director of the Harvard University Center for International Development, told PovertyCure. “They happen because local interests want to protect their markets. They do that at the expense of other countries that don’t have the same power to negotiate the bi-lateral agreements with large powers like the U.S.”

Moving from aid to trade

Despite all their demonstrable negative effects, why have U.S. agricultural subsidies persisted and grown since their introduction during the Great Depression? Many fear disaster would result if the U.S. were to wind them down. According to this view, the American farm economy has become absolutely dependent on subsidies. Ending subsidies could cause the whole system to collapse, resulting in unpredictable damage to America’s farmers and the country’s ability to feed itself.

While this is a complex issue, the examples of Australia and New Zealand offer more hopeful prospects for the elimination of subsidies. Both countries have flourishing farming industries after slashing subsidies in the 1970s and 1980s. Each country’s agricultural sector experienced a period of turmoil during which farmers had to adapt. Since that time, however, each country’s farmers have thrived.

In his interview for the PovertyCure series, Doug Seebeck of Partners Worldwide makes the case for removing import duties and tariffs. Trade, he argues, is orders of magnitude more effective than aid in improving the lot of foreign farmers and other producers. African leaders echo the same point throughout the series, arguing that Africans can feed themselves if Western governments and corporations would stop undercutting their markets with free or cheap surplus food.

Tariffs on foreign goods and subsidies for domestic production do great harm—to consumers and farmers alike, in the United States and around the world. The positive benefits of these policies are concentrated among a relatively small number of corporations. For the sake of farmers and consumers of farm products, in both the United States and among its trading partners, policymakers with vision and courage should rethink the status quo. If Westerners truly wish to help struggling farmers in poor nations, it’s time to move from aid to trade.