Subsidy – Government financial assistance to a domestic producer. 2 forms ◦ Agricultural ◦ Non-Agricultural Subsidies given to Boeing and Airbus.
Subsidies can come in many different forms ◦ Cash Grants ◦ Low-Interest Loans ◦ Tax Breaks Main Goal of Subsidies = Lowering Production Costs ◦ Benefit domestic producers in two ways Competing against foreign imports Gaining export markets Exist Mainly in Industrialized Countries ◦ Out of $300 billion, $250 billion spent by 21 developed nations Agriculture is one of the largest beneficiaries in most countries.
Agricultural subsidies tend to protect the inefficient and promote excess production ◦ Allow inefficient farmers to stay in business ◦ Encourage overproduction of subsidized products ◦ Encourage the growth of products that can be grown cheaper elsewhere ◦ Reduce international trade in agricultural products.
First appeared in the U.S. in the 1930’s December 2007 the congress passed bills raising the total annual subsides from $20 billion to $29 billion for next 10 years.
Largest single recipients have been cotton farmers ◦ Receive $5 billion for a crop worth $4 billion Without these subsidies American farmers would not be able to compete in the world markets.
Cost to produce a pound of cotton in the U.S. is 3 times higher than in cotton producing countries By shielding U.S. farmers from international competition, U.S. cotton subsidies result in over production, which depresses the world price for cotton. A global surplus of cotton has driven down the average price per pound from as high as $1.20 in mid-1995 to only $0.65 a pound in mid-2006.
Benin – 95% live on less than $1 a day, a 40% reduction in the price of cotton reduces income to cotton growers by 21% Assumption – U.S. cotton subsidies have contributed to that reduction and therefore data suggests that U.S. subsidies contributed significantly to the economic devastation in poor producing 3 rd world nations The loss suffered by Benin due to low cotton prices caused by U.S. subsidies and excess production exceeded the foreign aid that the country received from the U.S.
Agricultural subsidies play a dual role in international trade. ◦ They are intended to help the industrialized countries compete in foreign markets and gain more exports. ◦ However, agricultural subsidies are nearly eliminating 3rd world markets and pushing 3rd world countries further into poverty.