A Win-Win Bargain

As presently structured, the global trading system frequently pits the working poor in the developed and developing worlds against one another. The subsidies that help sustain the livelihoods of American farmers have a direct, adverse effect on the ability of farmers in the world's poorest countries to compete on the global market.

The conventional wisdom holds that the phaseout of subsidies paid to American farmers will automatically lead to a fair market price for poor farmers in the developing world. But farm commodity prices are notoriously volatile, and there is a better way to achieve a win-win solution: By reducing export subsidies and increasing investment in the production of energy crops, the United States can lay the groundwork for a grand bargain that would allow American farmers to increase domestic income while expanding the market in other agricultural goods for farmers from poor countries.

Even with the expansion of global trade, 54 countries are poorer today than they were 15 years ago. Poverty levels in Africa have increased by 43 percent over the last decade, and almost half of the world's people live on less than $2 per day.

It is both ironic and tragic that changes to U.S. trade policy that favor the developing world are often opposed by farm interests on the grounds that they hurt U.S. producers. The irony is that by promoting development through increasing trade and better terms of trade, the United States can help to increase the purchasing power of the world's poor, and thus pave the way for increased market demand for American goods and services in the future. The tragedy is that this argument pits producers at home and abroad against one another, when in fact they aspire to the same goals -- and face some of the same challenges.

Farmers are famously vulnerable to prices beyond their control while their costs are fixed. Like farmers everywhere, American producers need dynamic public policies to increase and secure the prosperity of their operations. Unfortunately, U.S. farm subsidies, with their production-related incentives, generate often perverse market conditions for U.S. farmers. Even though the United States Department of Agriculture forecasts near record-level production of corn and soybeans in 2005, the glut of commodities on the market caused by payment incentives is depressing prices below domestic operating costs. As a result, farm subsidies paid out in 2005 will increase more than 60 percent from 2004, and will likely exceed the 2000 record of $22.9 billion.

However, just 10 percent of commodity farmers collect more than 70 percent of the payments. Record subsidy payments will do nothing for the 60 percent of farming households that lose money on their agricultural operations and must rely on off-farm income for survival. Without crop diversification and the reduction of production-related subsidies, American farmers will continue to suffer from the economic downturns created, in part, by the United States' own policies.

By investing in biofuels derived from plants and agricultural waste, the United States can develop a cleaner, more sustainable alternative to oil and revive a flagging domestic agricultural sector. At the community level, farmers that produce dedicated energy crops can grow both their own incomes and their own supply of affordable energy. At the national level, the production of biofuels will generate new industries, new technologies, and new markets, all while reducing energy expenditures and paving the way for developing countries to put their resources into real, meaningful development.

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How to achieve this bargain? One way is to take a new tack on trade. The latest in a string of trade negotiations, the Doha Round of trade talks was launched with a commitment by the world's richest nations to make development a centerpiece of trade and reform the trading system to enable poorer countries to make real gains, particularly in areas of relative competitive strength, like agriculture, which sustains 70 percent of the rural poor in developing countries. But the Doha Round is stalled, as both sides are dug in. The United States and Europe refuse to cut agricultural subsidies until poor nations further open markets to manufacturing exports.

A World Bank study recently noted that the sheer size of agricultural subsidies relative to the size of the market has the effect of rewarding noncompetitive producers and wreaking havoc on small economies that are heavily dependent on the export of only a few crops. For example, the combined value of U.S. and European Union cotton subsidies is $4.4 billion -- in a global cotton market valued at $20 billion.

In West Africa, cotton was introduced at the dawn of independence in the 1960s and initially paved the way to relative wealth, fetching such a high price on the world market that it came to be known as “white gold.” Entire economies were turned over to cotton production, and today cotton is the primary source of national income for countries like Benin, Mali, Burkina Faso, and Chad. Yet, this same white gold today drives economic decline. Over time, the heavily subsidized cotton sector in the United States has displaced the smaller and more fragile economies of West Africa by triggering overproduction and, with it, a dramatic fall in the international price of cotton. West African cotton producers earn an average of just $400 per year.

Taken alone, a reduction in export subsidies by the developed world is insufficient to ensure that the world's poorest citizens see real and sustainable benefits from globalization. Yet by combining subsidy reduction with investments in alternative energy at home and abroad, the United States can make a shift in subsidy policy more politically acceptable and lead the way to a more equitable global future.

Although the we have only four percent of the world's population, we account for a quarter of global petroleum demand, making the United States the most profligate oil consumer on the planet. Our oil dependence is draining the federal budget, corrupting the global environment, contributing to high energy prices, and skewing our foreign policy.

The developing world's dependence on oil, meanwhile, fuels rampant poverty. The doubling of the price of oil over the last two years has had a disproportionate impact on the world's poorest countries, 38 of which are net importers and 25 of which import all of their oil. Three-quarters of the countries considered to be performing well enough economically to qualify for international debt relief, meanwhile, are net oil importers; some allocate as much as 5 percent of their gross domestic product to cover oil imports.

But it is the developing world that is leading the way to a new, renewable energy future, with Brazil, a rising agricultural superpower, in the lead. Over the past 30 years, Brazil has turned its rich supply of sugarcane into ethanol, thereby creating both fuel and jobs. Today, the majority of Brazilian drivers fill up with a gasoline blend that is 25 percent ethanol, while a growing number of cars on the road run on pure ethanol. The economic impact has been substantial: Between 1975 and 2000, Brazil's ethanol use saved the country $43.5 billion worth of oil imports and created one million new jobs for its citizens.

Last year, the Rocky Mountain Institute and the Natural Resources Defense Council released studies that demonstrated how biofuels, coupled with strong efficiency and smart-growth policies, could dramatically reduce, if not eliminate, the United States' need for oil. By dramatically increasing investment in the research, development, and deployment components of a large-scale agriculture-based energy sector, and by providing the incentives and risk-management tools that can support the transition to new crops, the U.S. government and private sector could, as Brazil has done, transform our energy landscape and the lives of America's small farmers. And by developing a new competitive edge and creating new domestic markets for American farmers, we could free up other commodity markets to the developing world and help to ensure that the world's poorest farmers can fairly compete.

Ensuring that the 2007 federal farm bill includes robust provisions for domestic energy production, capitalized in part by reductions in export subsidies, will aid farmers at home and abroad. But more is needed to extend the promise of renewable energy -- and with it, the escape from poverty -- to the world's poorest farmers.

First, we must rapidly scale up our investments in research and development, and fully fund and disseminate these advances in technology throughout the developing world. Second, we can target our development aid. The United States, along with other members of the G8, provides debt relief to countries that meet a designated set of performance standards. The savings are then invested in critical social sectors, including health and education. If we allowed the savings to also be invested in the development and deployment of biofuels, those countries would be able to ensure increased incomes for their agricultural producers and reduce their cost of oil imports.

Like any country, the United States can and should pursue its own economic interests in defining the terms of world trade. But our own prosperity, security, and moral credibility depend on a world united behind common principles and a global order that affords a majority of the world's people the right to live in dignity, earn a living wage, and offer better lives to their children.

Here is an opportunity to truly think globally and act locally. By investing in the potential of our own domestic agricultural sector to produce alternative energy, the United States can create new markets, increase farm income, and offer rural America something better than just a safety net: a competitive edge. In so doing, the United States can take the first step in a strategy designed to offer farmers in the developing world something better: the chance to compete in a fair market.

Gayle Smith is a senior fellow at the Center for American Progress. Previously, she was a special assistant to President Clinton, and held senior posts at the National Security Council and the U.S. Agency for International Development, and in 2005 directed the Global Poverty track of Clinton's Global Initiative. Smith was based in Africa for almost 20 years as a journalist.

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