TABLE OF CONTENTS
[4-A] ~ Trade Subsidies and Tariffs ~
[4-B] ~ Price Supports ~
[4-C] ~ Fiscal Incentives for Foreign Direct Investments ~
[4-D] ~ Monopolies ~
NOTE: The notation (Rcgd) signifies that the indicated text has been incorporated into the website document "Globalization: The Convergence Issue"

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SECTION [4-A] ~ Trade Subsidies and Tariffs ~

The US government keeps the US cotton industry alive by giving US$1 billion/ year in subsidies to 25,000 cotton-producing farmers (Inter Press Service, "For African Cotton Farmers, more crops Equals Less Pay," (8/15/06)).

In a 152-page report released in late June of 2006, the UN Development Program (UNDP) disputes the US position that removing trade barriers is the surest way to reduce poverty. Instead the UN advises poor Asian countries to do what Japan and South Korea did successfully in the 1970s and 1980s: protect key industries temporarily with tariffs before exposing them to foreign competition (06W2) ((Rcgd) - Section (4-C) and also in the part on Cambodia).

The UNDP says Asia's poorest countries have been left behind even as trade has exploded across the region. From 1980 to 2000, tariffs fell from an average 34% to 8% in East Asia and the Pacific, and from 60% to 18% in South Asia. As tariffs came down, trade boomed - rising from 45% of Asia-Pacific economic activity in 1990 to 81% by 2003. The region now accounts for about 30% of world exports, a figure the UNDP believes could hit 50% within a decade. But across Asia, job growth fell from 337 million in the 1980s to 176 million in the 1990s, not even enough to keep up with population growth. Increasingly, the UNDP says, expanding trade is creating jobs for skilled laborers, not for uneducated rural Asians who can no longer make a living on the farm. This is partly because these farms, in a globalized environment, must compete in a global marketplace with the heavily subsidized agricultural products of developed nations. The UNDP now urges poor Asian countries to impose tariffs on farm imports to protect their own farmers (often 70% or more of the economies of poor Asian countries) and food supplies (06W2) ((Rcgd) - Section (4-C) and also in the part on Cambodia).

Before it joined the WTO in 2004, impoverished Cambodians agreed to expose its farmers to more competition that the wealthy EU and the US were willing to accept for theirs - even though more than 80% of Cambodians live on farms (06W2).

European Union Agricultural Subsidies budgeted for 2004-06 for new EU members in billions of US$ (European Commission data) (John W. Miller, "Estonia Warms to EU, Its Subsidies", Wall Street Journal (12/14/04) p. A3.).
Poland 6.14; Hungary 1.96; Czech Rep. 1.48; Lithuania 0.96; Slovakia 0,83; Slovenia 0.53; Latvia 0.53; Estonia 0.33; Cyprus 0.15; Malta 0.04.

Compare Senegal to South Korea. Both countries had a GDP per capita of US$ 230 in 1960. South Korea is now a hi-tech leader supplying components for America's computer industry and sees a per-capita GDP of $US 8910. Senegal, on the other hand, has barely improved, with GPD per capita now at US$ 260. Blighted by debt, conflict and unfavorable geography, Africa's future seems to be at a disadvantage compared to East Asia. While South Korea was allowed to protect its infant industries from being overwhelmed by more mature competitors, Africa is being required to open up its markets by the International Monetary Fund and the World Bank (02U1) ((02U3) in Globalization document.) (Rcgd) in Part [4C15]

Domestic support of Agriculture in 1996 (in US$ million (03S4)) (Obsolete data?) {w25}

Sources: WTO. 2001a. WTO agriculture negotiations: the issues and where we are now. Background Paper by the Secretariat. 18 May 2001. Geneva.

The overall level of "support" (subsidies) to OECD agriculture has not declined since the Agreement on Agriculture came into force (03S4). The basic case for multilateral trade liberalization rests on the potential for large global welfare gains. A study (01B1) (Brown, Deardorff and Stern) estimated global cumulative welfare gains from comprehensive trade liberalization (agriculture, manufactures, services) at US$1900 billion over ten years. The World Bank estimates that global gains from comprehensive trade reform could amount to US$830 billion and that low- and middle-income countries would benefit by US$540 billion. All estimates include both static and various forms of dynamic gains17 (01W2) (World Bank, 2001c). Out of the US$832 million of welfare gains from comprehensive trade liberalization as estimated by the World Bank (see above), agriculture would account for US$587 billion. Of this latter amount, US$390 billion would accrue to low- and middle-income countries, where much of this would come from a liberalization of the nonagricultural sectors in developing countries (01W2) (World Bank, 2001c, p. 171).

ABARE has analyzed the impacts of agricultural trade liberalization (02A2) (ABARE, 2001). This analysis found that a further 50% reduction in agricultural support levels would create a static US$53 billion increase in global GDP in 2010. Some US$40 billion of this would accrue to developed countries. Full liberalization of agriculture and manufacturing would boost global GDP by US$94 billion, with developing countries capturing most of the increment and about half the total. If dynamic gains are incorporated, global GDP would increase by US$123 billion relative to the base case, with more than half these gains going to developing countries (03S4).

The results of a study by Anderson (00A1) (Anderson et al.) are summarized in Table 9.4 in original document. The study suggests that if all agricultural protection and trade barriers were removed globally, the world as a whole could expect an annual welfare gain of about US$165 billion (in constant 1995 US$). The gains could be significantly higher if reforms were extended to include freer trade in services and manufacturing as well as a liberalization of investment flows. But the results also show that the benefits of freer trade in agriculture would largely accrue to the developed countries. In fact, if reforms are limited to the developed countries, more than 90% of the additional welfare gains will remain within the group of high-income (OECD) countries (00A1).

USDA has analyzed the potential impacts of further liberalization of agriculture (01U4) (USDA, 2001d). For a complete removal of subsidies and tariff barriers, the USDA study assesses global welfare gains at US$56 billion annually. This total entails both static (US$31 billion) and dynamic welfare gains (US$25 billion). The static benefit would accrue almost entirely to developed countries (US$28.5 billion of the total of US$31 billion) while developing countries are expected to share in a larger part of the dynamic gains (03S4) (US$21 billion out of the total of US$25 billion).(These additional gains are assumed to emerge from "increased savings and investment as policy distortions are removed, and from the opportunities for increased productivity that are linked to more open economies" (01U4) (USDA, 2001d, p. 6). This means that the gains would only be forthcoming if developing countries embark on domestic policy reform as well.)

Developing countries typically also have high bound tariffs on agricultural goods, at 68% on average, but their applied tariffs are often much lower (03S4).

Average import tariffs on manufactured goods fell from 40% to 4% over the four decades of trade negotiations under the General Agreement on Tariffs and Trade (GATT) (96A1) (Abreu, 1996).

Industrialized country subsidies and protectionist policies cost $26 billion annually in lost agricultural and agro-industrial income, and displace about $40 billion of net agricultural exports per year from developing countries. Policies of European Union countries cause over 50% those displacement effects; somewhat less than a third are due to US policies; Japan and other high-income Asian countries cause another 10% (03D3).

IFPRI research indicates that, for Sub-Saharan Africa alone, liberalization of agricultural policies in industrialized countries would add $2 billion dollars annually in agricultural and agro-industrial income (03D3).

OECD countries spent $311 billion to support (subsidize) agriculture in 2001 (03D3).

Average unweighted applied tariff rates for selected countries for all goods in 2001 (Wall Street Journal (9/10/03)) {w20}

The EU, Japan, Switzerland and Norway heavily subsidize their farm sectors (03M1). This practice is probably quite defensible. Farms in the EU, Japan and Norway are operated with an eye toward sustainability of their outputs. Most of their agricultural competitors do not. Sustainability costs money (For details, see this author's analysis of the sustainability of the global outputs of food, wood and freshwater found on this same website.) So forcing farmers to compete directly with farms in North America, Australia, and the developing world where sustainability considerations are largely, if not totally, ignored would have serious repercussions, suggestive of a "race to the bottom" in terms of global agricultural sustainability. (Rcgd) (in Part [3C1] on "Protectionism")

The maximum tariff allowed by the WTO is 40% (02W2) (Rcgd).

Indonesia's garment manufacturers face stiff competition from China in both export markets and in home markets. Indonesia's trade minister is proposing to raise tariffs on garment imports to 40% - the maximum possible under WTO rules - from 15-20% (02W2).

Clothing and textile concerns in the Caribbean, Central America and Africa all have special deals with the US regarding tariffs (02M1).

Global average agricultural tariff: 62% (02M1) (Rcgd).

Globally, the average tariff is close to 40% (02M1). Comments: This figure is probably just on manufactured goods, since global average agricultural tariffs are about 62% (02M1).

India's average tariff is more than 30% (02M1).

Both the US and Europe have overall tariffs that average less than 5% (02M1).

US tariffs on imported trucks can be as high as 25% (02P2).

Duties on apparel imports into the US from poor countries, including Bangladesh and India, can be as high as 40% (02P2).

Average US tariff on industrial and consumer goods is about 4% (02P2).

The average global tariff in 2001 on the almost $4.5 trillion in globally traded manufactured goods was 5%, i.e. $225 billion in duties (02P2).

US tariffs of manufactured goods imports: $18 billion/ year (02P2).

The 144 members of the WTO impose a total of $225 billion/ year in tariffs on all manufactured goods (02P2). (Rcgd)

A tax shelter created in 1971 to redress the US trade deficit allows thousands of exporters of US goods to reduce their income taxes by funneling overseas profits through "foreign sales corporations" - off-shore subsidiaries, usually in tax havens. A WTO appellate body ruled (2/00) that it was an illegal export subsidy (value: over $4 billion) distorting world trade. Stuart Eizenstat, deputy secretary of the treasury argues, "Every country has the right to determine its own tax structure". Comments: Does every country also have the right, therefore, to determine its own environmental laws? (Geoff Winestock, John D. McKinnon, Wall Street Journal (9/29/00)).

Markets in China for most of the products the US sells are obstructed by tariffs and other restrictions (00K1).

Japanese trade barriers cost Japanese consumers $75 - $110 billion in 1989 according to estimates by the Institute for International Economics. Japanese trade barriers were the equivalent of 270% tariffs on food and beverages, 100% on textiles and light industries, and 130% for chemicals. Formal tariffs are a tiny proportion of the actual level of trade protection. The institute said that Japanese trade barriers were at least as high in 1994 as they were in 1989 (Wall Street Journal (12/15/94)).

India provides tax exemptions to exporters, and subsidizes technology parks (94C1).

In July, 1999, the US imposed a 100% tariff on $117 million worth of European Union imports into the US. This was in retaliation for the EU's refusal to revoke a ban on the importation of meats treated with growth hormones - a refusal that defied a WTO ruling that the ban was an unfair barrier to US and Canadian beef exports (99H1).

Go to top of this Section 4-A - Trade Subsidies and Tariffs
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The European Union, in 2008, doled out more than 50 billion Euros ($71 billion) in "agricultural aid." Much of it goes to interests other than farmers. In 2009, all 27 nations of the EU were forced to disclose how they distribute the money from farm subsidies. The effect on global trade is to depress world food prices and to undercut poor farmers outside Europe. The old farm subsidy program encouraged over-production of food. The EU authorities hope to end this program by 2013. The EU pays out more than 50% of its annual budget (about 53 billion Euros) in "farm" subsidies -four times as much as the US. These subsidies cost each European Union citizen about 110 Euros per year. Individual EU families are paying double for their food - one for their higher prices in the stores, and then again for the taxes they pay out for subsidies (09C1).

Public support (subsidies) per full-time farmer per year (2001) (as measured by gross transfers from consumers and taxpayers to support agricultural production (03M1). Switzerland-$27,000: Japan-$23,000: US-$20,000: EU-$16,000: Canada-$9,000: Australia-$2,000

Many poor countries complain that their rich counterparts spend $1 billion/ day on trade-distorting subsidies (in agriculture?) (03M1)

Date: 2/19/03 The full report can be viewed at http://www.tradeobservatory.org
Mark Ritchie, Sophia Murphy and Mary Beth Lake, "US Dumping on World Agricultural Markets: Can Trade Rules Help Farmers?", by looks at the cost of production of corn, soybeans, cotton, wheat and rice, and compares the cost to the price at which these commodities are sold on international markets. In all cases, the commodities were sold below the cost of production a practice known as export dumping. Moreover, the document details how the dumping begins right here at home, at the farm gate, where farmers are selling their crops for prices up to 40% below their cost of production. (Continued below).

The report analyzed costs for five US grown commodities using data from the US Department of Agriculture (USDA) and the Organization for Economic Cooperation and Development (OECD) to compare the cost of production with farm gate and export price. (Continued below).

Levels of "dumping" by the US hover around 40% for wheat, between 25-30% for corn (maize) and levels have risen steadily over the past four years for soybeans, to nearly 30%. These percentages means that wheat, for example, is selling for 40% less than it costs to produce. For cotton, the level of "dumping" for 2001 rose to 57%, and for rice it has stabilized at around 20%. (Continued below).

The report found that the structural price depression caused by agricultural dumping has two major effects on developing countries whose farmers produce competing products. First, below-cost imports drive developing country farmers out of their local markets. This is happening around the world, in places as far apart as Jamaica, Burkina Faso and the Philippines. Secondly, farmers who sell their products to exporters find their global market share undermined by the lower-cost competition. (Continued below).

The damage of "dumping" is not confined to other countries, according to the report. The nearly $1 billion discount documented in this report for exported wheat, for example, comes out of the pockets of US producers. The steady erosion of independent family farms, the near-necessity of off-farm income to ensure a farm family can stay on the land, and the decline in net farm income, all point to the cost of policies that facilitate the sale of commodities at less than cost of production prices. (Continued below)

The report found that after many years of accepting agricultural "dumping," a few countries have begun to respond with investigations into whether some US agricultural exports are dumped. Brazil is considering a case against US cotton before the WTO. (Continued below).

Candy manufacturers in Mexico and Canada pay world rates for raw sugar - about half of the taxpayer-supported price in the US (Joel Millman, Wall Street Journal (2/13/02)).

Go to top of this Section [4-B] ~ Price Supports ~ Go to Table of Contents of this Chapter 4 -Deviations from Free Trade ~
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In the second half of the 1990s, the governments of Rio Grande do Sul and Bahia in Brazil gave General Motors and Ford financial packages worth US$3 billion to locate factories in their states (01H1) (Hanson, 2001).

Many more companies may be able to emulate Rupert Murdoch's News Corporation, which has earned profits of US$2.3 billion in Britain since 1987 but paid no corporation tax there. (The Economist, "Globalization and Tax." (1/29/00) p. 5).

Multinational corporations are likely to be more sensitive to tax (fiscal) incentives, because they are better able to exploit them by transferring their activities from one country to another (03M4).

In Tunisia, relatively successful in attracting foreign direct investment, the fiscal costs associated with the incentive regime amounted to almost 20% of total private investment in 2001. In 1996 Alabama paid Mercedes Benz US$200,000 per employee, while Germany paid Dow Chemical US$3,400,000/ employee (98M1) (Moran).

Tax holidays are among the most widely used incentives, especially in developing countries. In 1995, according to the UNCTAD (UN Conference on Trade And Development) (95U1) (UNCTAD). As many as 67 countries offered tax holidays. Countries may end up in a bidding war, favoring multinational firms at the expense of the state and the welfare of its citizens (03M4).

In 1985-94 foreign direct investment grew more than fivefold in tax havens in the Caribbean and South Pacific. Countries that have become tax havens generally suppress all direct income taxes and rely on indirect consumption and employment taxes (03M4).

As more and more governments have tried to attract multinational companies and enhance the associated technology spillovers, fiscal incentives have become a global phenomenon (03M4):
Tax holidays
Import duty exemptions
Investment allowances
Accelerated depreciation.

Go to top of this Section [4-C] ~ Fiscal Incentives for Foreign Direct Investments ~
Go to top of this Chapter 4 ~ Deviations from Free Trade ~

Global food companies are aggravating poverty in developing countries by dominating markets, buying up seed firms and forcing down prices for staple goods including tea, coffee, milk, bananas and wheat (05V1).
Some 30 companies now account for one third of the world's processed food; five companies control 75% of the international grain trade; and six companies manage 75% of the global pesticide market. Two companies dominate sales of half the world's bananas, three trade 85% of the world's tea, and one, Wal-mart, now controls 40% of Mexico's retail food sector. Monsanto controls 91% of the global GM seed market. Nestle, Monsanto, Unilever, Tesco, Wal-mart, Bayer and Cargill are all said to have expanded hugely in size, power and influence in the past decade directly because of the trade liberalization policies being advanced by the US, Britain and other G8 countries. "A wave of mergers and business alliances has concentrated market power in very few hands. The companies are accused of shutting local companies out of the market, driving down prices, setting international and domestic trade rules to suit themselves, imposing tough standards that poor farmers cannot meet, and charging consumers more. Agri-food companies paid 85% of all recent fines imposed on global cartels. Three of them paid $500 million to settle price-fixing lawsuits (05V1).

The ActionAid report (05V1) argues that many food companies are wealthier than the countries in which they do their business. Nestle recorded profits greater than Ghana's GDP in 2002; Unilever profits were a third larger than the national income of Mozambique, and Wal-mart profits are bigger than the economies of both countries combined. The companies are also said to be taking advantage of the collapse in farm prices. Prices for coffee, cocoa, rice, palm oil and sugar have fallen by more than 50% in the past 20 years. The report feeds into growing calls for the regulation of multinational food companies. A coalition of the largest international environmental, trade and human rights groups, including Greenpeace, Friends of the Earth, Amnesty, Via Campesina and Focus on the Global South, said they would be working together to press for corporate accountability (05V1).

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