Why Does the US Support the Three Farm Laws?

On February 4, the US State Department exhorted India to resolve differences with the farmers protesting against the Farm Laws through dialogue. State Department spokesperson Ned Price emphasised: “We recognise that peaceful protests are a hallmark of any thriving democracy and note that the Indian Supreme Court has stated the same.”

However, the statement was accompanied by a clarification. Talking about the three farm laws, Price added, “In general, the US welcomes steps that would improve the efficiency of India’s markets and attract greater investment.”

US support for the three laws is hardly surprising. Over the years the country has been pushing for market-based reforms in agriculture. In a recent meeting of the Committee on Agriculture (CoA) of the World Trade Organisation (WTO) held in October 2020, the US, European Union (EU) and Canada questioned India’s agricultural practices. They complained that India’s trade practices were not transparent enough and sought more data pertaining to the trade of agricultural goods.

India’s long-standing concern at the WTO has been the US’ attack on the farm subsidies offered by India to its farmers in the form of market price support – Minimum Support Price (MSP) and input subsidies on fertilisers, seeds and so on. In May 2018, the US had questioned the compatibility of India’s agricultural subsidies framework with the Agreement on Agriculture (AoA) at the WTO.

The AoA was brought into force by the WTO in 1995 as “a framework for the long-term reform of agricultural trade and domestic policies.” It aims to establish “a fairer trading system that will increase market access and improve the livelihoods of farmers around the world.” Bishwajit Dhar, Professor at Centre for Economic Studies and Planning, School of Social Sciences, at JNU, highlighted that the AoA was crafted primarily by the US and members of EU to serve their interests while developing countries like India were reduced to mere bystanders.

The US’ primary contention at the WTO in May 2018 was that the market price support offered by India for rice has consistently been above 70% of the value of agricultural production since 2010-11 and above 60% for wheat during the same period. This is a problem because the AoA via a de minimis provision imposes a limit of 10% on subsidies classified as ‘trade-distorting’ on developing countries (for developed countries, this limit is five per cent). Under the AoA subsidy regime, subsidies are classified as ‘trade distorting’ and ‘non-trade distorting’.

The charges made by the US have been challenged by prominent economists on two grounds. Firstly, it has been argued that the estimates presented by the US at WTO misrepresent the reality. Secondly, deciphering the motivations behind the classification of subsidies as ‘trade-distorting’ and ‘non-trade distorting’, economists argue that this classification has been made solely to benefit developed countries. Before delving deeper into this, let us take a look at veracity of the US’ claim that subsidies granted by India for rice and wheat have been above 70% and 60% of the value of agricultural production since 2010-11 respectively.

Under the AoA framework, subsidies granted by WTO members are calculated with reference to international prices, which are assumed to be competitive prices. The market price support provided by a country on a particular crop is the difference between the current MSP on a particular crop and its External Reference Price (ERP) from the year 1986-88. ERP refers to the international price of a particular commodity during 1986-88. In defiance of economic logic, the ERP from more than 30 years ago is being applied without any adjustments for rise in costs. India and other developing countries have been contending that either the base year determining the ERP should be brought down or that the ERP should be adjusted for inflation. But both these arguments have been rejected by the US.

The US’ estimates have been challenged on two more grounds. While calculating the MPS offered, the US takes into consideration the entire annual output of wheat and rice rather than the quantities procured. Secondly, it calculated India’s market price support in Indian Rupees while it has been reporting the same in US dollars. As a result, figures presented by India are much smaller owing to the consistent depreciation of its currency.

It should be noted that a very large share of area under cultivation in India grows rice and wheat. These two are also the most procured crops and fetch maximum market price or MSP under the public procurement system.

Now, coming to the classification of subsidies under AoA. The subsidies classified as ‘trade-distorting’ include market price support such as MSP and input subsidies offered by developing countries to its farming community. On the other hand, subsidies classified as ‘non-trade distorting’ or ‘minimally-trade distorting’ include subsidies such as direct benefit transfers (DBT), cash transfers and direct income support offered by developed countries to its farmers. It is pertinent to note that while the AoA imposes no limits on the latter, the former form of subsidies has to be limited to 10% of the value of agricultural production.

It is easier for the advanced industrial countries to shift their agricultural subsidies to cash transfers given that less than five per cent of its workforce is engaged in agricultural activities, contributing less than four per cent of GDP. In the US’ case these ratios are even lower. However, developing countries such as India which are still dominated by agriculture cannot implement cash transfers meaningfully to their farmers.

Arguing that the provisions of the AoA have been deliberately formulated to the sole benefit of advanced countries, noted economist Utsa Patnaik writes: “advanced countries continued to operate the most highly subsidized state managed agricultural system in the world. The countries of the industrial North ensured that they could continue to subsidize their own crops heavily by simply defining direct cash transfers to farmers (Emphasis in original) under many different heads, as ‘non trade-distorting’ and outside reduction commitments, so that they could increase such transfers at will. On the other hand market price support (Emphasis in original) such as the system of Minimum Support Prices operated in India and other developing countries and the meagre subsidies this entailed, were defined by them as ‘trade distorting’ and subject to reduction.”

Between the years 1995 and 2015, the farm subsidies provided by the US to its farmers has increased from $61 billion to $139 billion, an increase of nearly 128%. About 88% of these subsidies are the ones classified as ‘non-trade distorting’.

While continuing to subsidise its corporate agriculture to capture global markets, the US and other developed countries have been targeting subsidies that India grants to small and marginal farmers of the country. Even at the prevailing rates the MSP regime has been unsuccessful in rescuing the overwhelming majority of small and marginal farmers from economic distress and indebtedness. This is the reason that the farmers agitating outside Delhi have been unwavering in their demand for a legal guarantee assuring MSP for their crops.

The dwindling down of the public procurement system and MSP will have two impacts. One, incentives for farmers to continue to engage in agriculture will go down; two, food security programmes be adversely affected. As a result the Indian market will be opened for giant agri-businesses from US and Europe.

Dhar explains: “If a country like India adds to the global demand and if the demand exceeds the supply, prices will go through the roof. This will benefit the US and EU on two counts. They will not have to give subsidies as the higher prices will sustain the increased cost of production and the market will be able to support agriculture in advanced countries; they will get a large market in India. Quite obviously, one can see why the US is so interested in these laws (the three farm laws passed by India in 2020). They want these reforms; they want the government of India to adopt a hands-off policy.”

However, the withdrawal of assured prices and input subsidies will translate into a complete economic collapse of the Indian farming community dominated by small and marginal farmers. Further, the withdrawal of the public procurement system will have a direct impact on food security in India.

In recent years, the WTO and advanced capitalist countries have been asserting pressure on developing countries to withdraw their public-stock holding system and subsidies on agriculture and food. This is a part of the drive by advanced capitalist countries to get access to new markets which began after they lost their export markets with the collapse of the Soviet Union and a decline in its population’s consumption level between 1990-1996.

First discussed during the Uruguay Round of negotiations on multilateral trade (1986-1993), the AoA came into force in January 1995. The new markets presented by developing countries will allow the multinational agri-business corporations in the US and EU to offload their grain surpluses at their desired prices. Once the public procurement and stock-holding systems of developing countries are compromised, these countries will be left with no option but to be import dependent for food grains. At the same time, there has been international policy thrust towards shifting cultivation on agricultural lands in tropical regions away from food grains to commercial and cash crops, which cannot be grown in advanced capitalist countries.

The writer is an author and a researcher with Tricontinental: Institute of Social Research. The views are personal.