Tuesday’s newspaper juxtaposed one headline, “U.S., EU move closer on trade” with another, “Game theory yields economics Nobel.” The two stories are more connected than they might appear. Nobel winner Tom Schelling’s insights on the dynamics of negotiation should make us skeptical about the recent U.S. proposal for agricultural subsidy cuts.
Schelling’s Nobel citation emphasizes his application of game theory to nuclear strategy, but he has also explored issues such as global climate change, racial discrimination and health care.
Farm subsidies and trade negotiations have a mixed history. After the General Agreement on Tariffs and Trade was formed more than five decades ago, the United States insisted on excluding agriculture from its rules. But in the Uruguay Round of negotiations that created the World Trade Organization in the late 1980s and early 1990s, the United States insisted agriculture be included.
Economists know that subsidies for production or export distort world trade and waste resources just as much as tariffs and trade quotas do. The United States, the European Union and Japan not only limit imports that compete with their own farm products but also give large farm subsidies that boost domestic production and depress agricultural prices worldwide.
Besides wasting resources and transferring money from poorer to richer households in their countries, the farm programs of rich nations make it harder for countries like Brazil, Thailand and Australia to export agricultural products.
In past trade negotiations, rich industrialized nations insisted that other countries remove trade barriers on services and manufactured goods. Now, nations that don’t subsidize their farmers but do depend on agricultural exports demand that the U.S., EU and Japan cut any subsidies that distort trade.
These nations profess a willingness to cut, but, as during Cold War diplomacy, only if the others guarantee they will make even deeper cuts.
On its face, the U.S. proposal this week marks a bold willingness to turn reversal from policies our nation has followed for 70 years. But if we borrow Schelling’s insights from analyzing nuclear strategies, would we find this proposal to be a credible one? And are statements by EU leaders offering similar reductions believable?
Unfortunately, they are not. The U.S. House of Representatives is dominated by Republicans from Southern and Western states that benefit disproportionately from existing subsidies. President Bush, mired in low poll ratings, will not take bold action to implement cuts.
The EU is also unlikely to make dramatic cuts. Germany and France have weak, struggling governments. New members with large farm sectors, like Poland and Hungary, don’t want the subsidy punch bowl overturned just as they join the party.
U.S. Trade Representative Rob Portman’s offer may be sincere, but the U.S. position is about as credible as a $3 bill. Don’t expect the latest round to go anywhere.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.