Barack Obama’s policies in most areas of importance are well known. As a candidate, President-elect and President Mr Obama’s policy positions have been the subject of extended scrutiny. Most readers of this article could make an educated guess at where he stands on health, Iraq, the financial crisis and many other fields. There is one area that remains unclear despite the many hours of public airtime: the new President’s attitude to free trade.

US voters did not make trade policy a major election issue, but they should find the ambiguity troubling. The rest of the world should be frightened. Protectionist winds swirl in the wake of the credit crisis. The poorest citizens of the world have the most to lose if Mr Obama succumbs to these winds. For too long they have been holding their collective breath on the US’s attitude to trade – particularly on the critically important issue of agricultural subsidies.

In this article I consider two issues. First, I revisit the well known, but sadly still contentious arguments in favor of freeing trade in agricultural produce. Second, I examine what can be gleaned about Mr Obama’s attitude to trade policy from his public statements.

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The arguments in favor of reducing agricultural subsidies are not new. They are worth revisiting only because they are apparently controversial. Agricultural subsidies have been the major stumbling block to agreement by the EU and the US in the Doha trade round of the World Trade Organization negotiations. That the issue remains outstanding after almost a decade of negotiations is a disgrace. There is no sound justification for the present high levels of subsidies in the EU and the US. The continued delay in reducing them has terrible human consequences.

The issue, in brief, is that the US and EU presently provide enormous levels of direct financial support for farmers of certain types of agricultural produce. The effect of this support is to allow the farmers to sell produce at a lower price than they could if not for the subsidy. Ostensibly, this is done to “protect” farmers from the threat of foreign imports.

This support is objectionable on a number of grounds. Foremost is the toll it takes on developing countries. Agricultural production is an area in which poor countries have a competitive advantage over developed countries through the lower costs of land and labor. Agriculture is not as well trodden a route to prosperity as manufacturing, but it has the potential to lift millions out of poverty. This potential is destroyed by subsidies.

The subsidies on the agricultural produce of the EU and the US leave farmers in developing countries struggling to compete. Those farmers find no market for their exported produce, despite being able to produce better or equivalent quality goods at a lower cost than their competitors in the developing world. Subsidized crops are “dumped” into agricultural markets in developing countries, destroying the local farmers ability to compete in domestic markets.

Oxfam estimates that restrictive trade measures imposed by developed countries on the agricultural sector cost developing countries $20bn per year. This is the equivalent of 40 percent of the total value of all aid to those countries. The poorest citizens usually dominate the agricultural sector in developing countries. The vulnerable suffer the most. The loss in income is more damaging than an identical amount of aid, since it destroys a pathway to longer term prosperity.

To put this in context, a report for the United Nations notes that in 2001 a pound of cotton cost 21 US cents to produce in Burkina Faso and 73 US cents to produce in the US. The level of US subsidies exceeded 52 cents per pound, meaning that per pound the US tax payer payed a subsidy greater than the value of the cotton itself. Unsurprisingly, producers in Burkina Faso producers were unable to compete and reportedly left unable to put their children in school or pay for food or health services.

Such a policy could only be justified if there were a powerful countervailing policy imperative that outweighed the human suffering. No such imperative exists. The benefits to the subsidising country are largely illusory.

The cost to the taxpayer in the subsidizing country is significant. Depending on how it is calculated, between $7 billion and $40 billion was spent by the US on agricultural subsidies in 2007. Enormous sums are distributed with little regard to the actual conditions faced by farmers. To put it lightly, it is to be doubted that this is the best use of this money.

Even aside from the amount paid in taxes, agricultural subsidies cost the US consumer in higher food prices; on one estimate an additional $12 billion per annum. If subsidies were removed prices would fall as more competitors – from developing countries – entered the market. Higher food prices impact on poorer households more, meaning that the subsidies act as a form of regressive taxation.

Subsidies tend to encourage the production of certain types of crops irrespective of whether the available land is suitable. More suitable crops may be overlooked if they are unsubsidized, even though they would otherwise be more profitable. This misuse of land results in a lower level of overall production than would otherwise occur, which in turn drives up costs. It is also linked to environmental damage.

Supporters of subsidies typically defend them on the basis of self-sufficiency. There is a sensible point that a country should avoid becoming entirely dependent on a foreign economy for something as a vital as basic food staples. This ensures that the local economy isn’t suddenly crippled because of a drought or civil unrest on the other side of the world. Hence, it is said, subsidies are necessary to ensure a strong domestic production of vital crops.

The difficulty with this argument is that the reasoning behind self-sufficiency is self-defeating. One effect of subsidies is to crush producers of agricultural produce in developing countries by undercutting them in the market. By limiting the number of major producers to a few areas, the effects of a geographically confined calamity such as drought are magnified. If the subsidies were removed a larger number of producers could enter the market, the sources of essential goods would diversify and the risk of a localized calamity would be limited.

Even if self-sufficiency was seen as essential, the present level of subsidy in the EU and the US far exceeds what the argument can support. There is no way that a desire for self-sufficiency can justify the present practice of subsiding farmers to overproduce crops, which are then dumped into developing markets below cost. In order to be self-sufficient a country needs to ensure that its domestic producers of vital products are able to compete in the domestic market and hold a non-negligible share of sales. It doesn’t need to shatter foreign economies.

The case for eliminating subsidies is not simply theory. New Zealand provides a striking practical example. In 1984 New Zealand had higher levels of agricultural subsidies than the US does today and an economy five times more dependent on agriculture. It also had a government with the courage to eliminate subsidies overnight. It hasn’t looked back; after some initial grumbling the agricultural sector has expanded and productivity has skyrocketed.

The case for the rest of the developed world following New Zealand’s example is potent. It does not appear to have compelled the governments of the US and the EU. It is hoped this another area to which Mr Obama can bring change.

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At the time of writing this article, Mr Obama’s attitude to free trade is difficult to assess. Looking back over Mr Obama’s time in the spotlight, statements can be found both that superficially appear to support free trade and that appear to oppose it. On closer scrutiny, the statements reveal little. Commitments that look like they exemplify a particular view of trade policy are actually justified on some other basis. There are numerous examples. For the sake of brevity I will give just three.

First, Mr Obama has committed to capping subsidies to farmers at $250 000. This might be seen as step towards liberalizing trade, albeit a limited one affecting only 12% of farmers. On examination, the cap is explained as a measure to limit subsidy abuse, not the subsidies themselves. The effect on trade is only incidental.

Second, Mr Obama opposes free trade agreements negotiated by the Bush administration with Colombia, Panama and South Korea. This appears to be a protectionist sentiment. Yet the objection is apparently grounded in the mechanics of the agreements, rather than economic principle. In the case of the Korea deal it is said to be because it “does not do a good enough job of ensuring that U.S. products have effective access”.

Third, and most contentious, is Mr Obama’s suggestion that NAFTA needs to be renegotiated. On the campaign trail Mr Obama was accused of “playing to xenophobia about foreign workers, and stoking protectionist sentiments” and being “the most protectionist candidate that the Democratic Party has ever fielded”. This is wild overstatement. Mr Obama’s issue with NAFTA is ostensibly the enforcement of environmental and labor protection mechanisms – not the agreement itself. It is probably true that this position makes him more protectionist than ardent free-trader John McCain. It is arguable that negotiating a large and complex treaty for an incremental improvement in industrial conditions is odd risk to take. It isn’t illuminating in assessing Mr Obama’s broader attitude to trade.

In the specific context of the Doha Trade Round of the World Trade Organization Mr Obama’s advisors are reported as saying that the new President wants “a successful end to [the] long-running world trade talk”. This is hardly a surprise. So does everyone else. The unknown is what Mr Obama will regard as a success.

Mr Obama did not engage with the issue of trade in his inauguration speech. He did say this: “To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds.” If Mr Obama is sincere in this commitment, then he would do well to define success in the Doha round as a substantial reduction in subsidies to farmers in both the US and the EU.

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