South-Western College Publishing - Economics  
Subsidies Sink Trade Talks
Topic International Trade
Key Words Subsidies, Trade Barriers and Trade Agreements
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Reference ID: A165420454

News Story The U.S. and the European Union wants reductions in manufacturing and services barriers so more U.S. goods can flow into developing countries. These barriers include tariffs and quotas on American goods and services, effectively making their prices higher and restricting their sales to developing nations.

India and Brazil, representing the many developing nations around the world, want U.S. subsides of agricultural commodities reduced substantially. On the other side of the Doha round are the United States and the European Union. These four entities are referred to as the G4. The small group was assembled to iron out serious differences before returning to the entire membership of the World Trade Organization, a group of 150 countries.

Failure by the negotiators to compromise has led to a deadlock and no progress on an effort to increase world trade. The so called Doha round of negotiations has been going on since 2001 without reaching its goal of lowering trade barriers around the world and increasing free trade.

India and Brazil rejected American and European offers, saying they were not sufficient to warrant opening the developing countries markets to more imports of the industrialized nation’s goods and services. The developing nation’s are claiming that rich country’s subsides serve to distort trade in commodities like cotton, sugar, and corn.

The economic argument is that developing countries usually have a competitive advantage in labor intensive goods such as agricultural products and can produce them relatively cheaper than industrialized nations. However, if the industrialized nations subsidize domestic producers, their products can be priced competitively on the world market. Free trade, that is trade without trade barriers, would move demand to those countries which produce the crops more cheaply.

As reported by Kamal Nath, the Indian trade minister, the U.S. offer to cap its domestic agricultural subsides at $17 billion was well above the $11 billion that American farmers are now receiving. Mr. Nath said that the U.S. offer had “no logic or equity,” a point echoed by his Brazilian counterpart, Celso Amorim.

“It was useless to continue the discussion on the basis of the numbers put on the table,” Mr. Amorin said.

United States officials, on the other hand, claimed both India and Brazil came to the meeting and offered no flexibility in the discussions. “Large economies like Brazil and India should not stand in the way of progress for smaller, poor developing nations, but that appears t be what happened in Germany this week,” said Tony Fratto, a White House spokesman.

“They adopted that attitude from the beginning and it cast a chill over the entire week of the discussions” said Mike Johanns, the secretary of agriculture.

Questions
Discussion Questions:
1. Visit http://www.investordictionary.com/definition/subsidy.aspx and summarize what you read into a short definition of subsidy.
2. Discuss how a tariff on imported goods makes the import more expensive and supports a higher level of sales for domestic production of the same good.
Multiple Choice/True False Questions:
1. A tariff can be considered a tax on exported goods.
  1. True
  2. False
2. A subsidy is a payment to domestic producers to support the production of goods and services.
  1. True
  2. False
Source Carter Dougherty, “Once Again, Trade Effort Stumbles on Subsidies,” The New York Times Online, June 22, 2007.
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