Trading Essay

1628 Words Jan 9th, 2016 7 Pages
Case study (2)
Agricultural Subsidies and Development
For decades the rich countries of the developed world have lavished subsidies on their farmers, typically guaranteeing them a minimum price for the products they produce. The aim has been to protect farmers in the developed world from the potentially devastating effects of low commodity prices. Although they are small in numbers, farmers tend to be politically active, and winning their support is important for many politicians. The politicians often claim that their motive is to preserve a historic rural lifestyle, and they see subsidies as a way of achieving that goal. This logic has resulted in financial support estimated to exceed $300 billion a year for farmers in rich nations.
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Subsidies made up a remarkable 68 percent of its farm economy. Iceland was at 67 percent and Norway at 64 percent. European Union subsidies equaled 32 percent of that trading block’s farm economy, while the United States figure was 16 percent. One consequence of such subsidies is to create surplus production. That surplus is sold on world markets, where the extra supply depresses prices, making it much harder for producers in the developing world to sell their output at a profit. For example, EU subsidies to sugar beet producers amount to more than $4,000 an acre. With a minimum price guarantee that exceeds their costs of production, EU farmers plant more sugar beets than the EU market can absorb. The surplus, some 6 million tons per year, is dumped on the world market, where it depresses world prices. Estimates suggest that if the EU stopped dumping its surplus production on world markets, sugar prices would increase by 20 percent. That would make a big difference for developing nations such as South Africa, which exports roughly half of its 2.6 million tons of annual sugar production. With a 20 percent rise in world prices, the South African economy would reap about $40 million more from sugar exports. American subsidies to cotton farmers have a similar effect. Brazilian officials contend that by creating surplus production in the United States that is then dumped on the world market, U.S. cotton subsidies have depressed world prices for

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