American Subsidy Madness

US policymakers and pundits often like to gripe about the abundance of market-distorting, anti-competitive Chinese industrial subsidies, and they certainly have a point.  But US calls for China and other countries to reduce or eliminate these subsidies likely fall on deaf ears for one very big reason....

Well, make that 100 billion reasons:

The federal government will spend almost $100 billion on corporate welfare in fiscal 2012. That includes direct and indirect subsidies to small businesses, large corporations, and industry organizations. These subsidies are handed out from programs in many departments, including the departments of Agriculture, Commerce, Energy, and Housing and Urban Development.

Oof.  That's from a brand new and very depressing Cato Institute study which provides topline numbers on US business subsidies for FY 2012.  After detailing the myriad economic and social reasons why such subsidies are a very bad idea, the paper rightly concludes:

Americans are sick and tired of "crony capitalism," and the way to solve the problem is to eliminate business subsidy programs.

Corporate welfare doesn't aid economic growth and it is an affront to America's constitutional principles of limited government and equality under the law. Policymakers should therefore scour the budget for business subsidies to eliminate. Budget experts and policymakers may differ on exactly which programs represent unjustified corporate welfare, but this study provides a menu of about $100 billion in programs to terminate.

Of course, not all of the programs identified by the new Cato study violate global trade rules and thus expose US exports to anti-subsidy measures (via WTO dispute settlement or national countervailing duty laws), but a bunch of them do.  As I noted a few days ago, US green energy exports are increasingly subject to countervailing duties in foreign markets due to state and federal subsidies, and I've repeatedly documented the abject ridiculousness that is current US policy regarding cotton subsidies.  On the latter score, you may recall that Brazil challenged US cotton subsidies at the WTO, and after winning the dispute was authorized to impose $300 billion worth of retaliation against US exports or intellectual property rights because the Bush and Obama administrations refused to comply.  However, Brazil never retaliated because, instead of reforming the program, the United States agreed to provide $140 million in new subsidies to Brazilian - yes, Brazilian - cotton farmers.

Congress (including the Republican-controlled House of Representatives) has flatly refused to reform our WTO-illegal cotton subsidies, and now has proposed a new Farm Bill that has the Brazilian government, well, extremely concerned:

Brazil's retaliation is being held off by a "framework agreement" that was negotiated by American and Brazilian officials in the spring of 2010. Among other things, the US agreed to tweak one of its most egregious subsidy programmes and donate nearly $150m every year to support Brazilian cotton farmers. Both sides agreed that the framework deal would hold until this year, when the next farm bill would be negotiated. Only then, the US officials said, would they have the chance to make far-reaching reforms to American cotton subsidies.

Fast-forward two years, and the 2012 farm bill is quickly taking shape. But will the new law do anything to bring US cotton subsidies in line with WTO rules?

If you ask Brazil, the answer is a resounding no. The new programmes under discussion "are not enough to satisfy Brazil's concerns", said Roberto Azevêdo, Brazil's ambassador to the WTO. Some of the proposed policies "would leave Brazilian farmers worse off than they are now", he says.

Both the House of Representatives and Senate versions of the bill include the stacked income protection programme – known as Stax – which was designed by the National Cotton Council, a lobby group for cotton farmers. Stax is effectively a crop insurance policy for cotton growers; it guarantees that farmers' incomes will not fall below the revenues expected in their regions. That is precisely what Brazil does not like.

"In our view, no farm programme can be WTO-compliant and cover 'shallow losses' – thereby insulating farmers from market forces – to the extent foreseen in the [Stax programme]," Azevêdo said in a letter to Congress in January...

While the US dallies, cotton farmers overseas are still struggling to compete with artificially cheap American exports. That is happening not only in Brazil, but also in poorer cotton-producing countries such as Burkina Faso, Mali, Benin and Chad. "Those are the big losers," said Azevêdo. "Their treasuries cannot compete with the US funds."

So what will happen if the 2012 farm bill is just like the previous one? Officials in Brasilia are weighing up whether to use their right to cross-retaliate. If they do – and they pull it off – then Brazil could set an important precedent for other countries that are looking to get the attention of the world's biggest national economy.

"[The Americans] seem to only engage when intellectual property comes into play," Azevêdo said.

Brazil recently told the WTO that it is ready to retaliate if the new Farm Bill takes effect, but it looks like a one-year extension of the current Farm Bill is now more likely than any new Farm Bill.  Thus, that sweet, sweet American hush money will continue to flow south, much to the detriment of poor cotton farmers around the world, particularly in Africa.

And speaking of poor African farmers, CQ reports today that New Jersey Senator Bob Menendez is preventing House and Senate consideration of the African Growth and Opportunity Act because of - you guessed it - cotton subsidies:

The bill would extend for three years preferential treatment of garments produced in Africa under the African Growth and Opportunity Act, or AGOA (PL 106-200), while adding South Sudan to that program. It also would modify language in the free-trade agreement with the Dominican Republic and Central America, and would renew for one year the import restrictions on Myanmar, formerly known as Burma, imposed by a 2003 law (PL 108-61).

Robert Menendez, D-N.J., has also placed a hold on the bill. He made clear in an interview last week that he would support the trade bill only if it moves with his legislation to reauthorize a cotton trust fund for American-based shirt manufacturers, a program that expired in 2009.

“I have no problem with [AGOA], but I have to have the cotton trust fund as part of the deal,” Menendez said, shortly before the Finance Committee approved his bill along with the trade package....

[Delaware Sen. Chris] Coons said there is “a moral argument here for not holding hostage the jobs of thousands of women in developing countries” such as Lesotho and Swaziland, two of the sub-Saharan countries that benefit under the current program allowing for duty-free exports to the United States of garments made from fabric produced in Third World countries.

Apparently Sen. Menendez cares more about funneling $16 million per year to his New Jersey constituents than poor African farmers and manufacturers.  But, hey, who knows?  Maybe the Senator will offer a "Brazilian-style" compromise and propose bribing the Africans instead of giving up his ridiculous subsidy demands.

(I know, I know: don't give them any more bright ideas.)