Warnings of a new world trade war came from New Zealand, where the government cannot compete with EU or US subsidies.
“People need to be reminded that the 1929 share market crash did not directly create the Great Depression but politicians did,” said Philip York of New Zealand’s Federated Farmers.
“Protectionist legislation, like America’s infamous Smoot-Hawley Tariff Act of 1930, became a template for protectionism copied around the world. Maybe we need to send all Euro MPs and their eurocrats some history books.”
Michael Mann, spokesman for the EU’s agricultural directorate, denied that butter mountains would be re-created. “We have a particular situation on the market where prices being received by farmers are particularly low, so there is an automatic mechanism that will come in, in March to buy butter and milk powder to stabilise the price.
“We are not anticipating a return to the old days of butter mountains and milk lakes. This is a temporary crisis situation on the market.”
Britain, which has pushed for subsidies to be scrapped, said that they would nevertheless benefit farmers in Northern Ireland who have been pleading for help to stay solvent.
Elise Ford, Head of Oxfam International’s EU office, said: “With such measures, the European Union is undermining the possibility of finding global solutions to hunger and to make agriculture work for the poor. It can unleash a series of responses from other countries that could be dangerous in the long-term.
Analysis
Agricultural Products have a low price elasticity of demand, so if there is a good harvest supply increases and therefore prices will collapse, farmer’s income will fall and cause many of the farmers will leave the industry.
We can see in the graph that an increase in the amount produced from Q¹ to Q² there is a great decrease in the price from P¹ to P².
The opposite can happen when there is a bad harvest. Consumers would have to pay a higher price for a small quantity of food. To fix this problem the Common Agricultural Policy (CAP) was created by the EU.
The CAP is a maximum price set to protect the consumers from paying a higher price for the product, and a minimum price is set to protect the producer so that the price does not decrease greatly and cause the producers to leave the industry. At the beginning of each period, a target price is set for each dairy product.
The short run is a period in time where one or more factors of production are fixed in amount and the supply curves are vertical because in the short run the supply is fixed. There reaches a point where a farmer can no longer produce anymore as they no longer have any more land. In the case of a glut (over production), the supply curve will shift to the right causing the price to decrease, here the government will buy and store some of this surplus decreasing supply and thus increasing price so that the surpass the minimum price protecting the producer. This gives rise to the milk lakes and the butter mountains mentioned in the article.
In the case of under production the supply curve will shift to the left causing the prices to increase, here the government will release the stock that was bought from previous gluts increasing supply and consequently decreasing the price so that it does not exceed the maximum price protecting the consumers.
The government keeps subsidising farmers through minimum prices so that they do not leave the industry. As a result of the minimum prices the farmers keep producing more, and the government has no choice but to buy this surplus so that prices do not collapse. There will be a point, like the 1970’s and 1980’s which is mentioned in the article, where the government has to get rid of all the surplus by selling it on the world market which would caused world dairy prices to plummet; this would be bad for the poorer countries as they are less efficient and have to sell at higher prices to cover their costs, thus their produce will not be sold. The CAP is a form of Protectionist legislation and thus protects the EU agricultural market, but causes problems to the producers in less economically developed countries (LEDC’s). The EU also taxes imports from non EU countries through the Common External tariff, making them more expensive and less attractive to consumers, which again causes problems for LCD’s, affecting their standard of living.
A way of fixing this crisis is by doing nothing. Free trade is a policy that allows traders to act and transact without the interference of the government, allowing traders to have mutual gain from interactions with goods and services, produced according to the law of comparative advantage, which refers to the ability of a person or country to produce a good at a lower opportunity cost than other people or country. The law will allow every country to specialise in producing a particular good or service, in which they have a comparative advantage, which is better for LEDC’s. Free trade policies will also reflect true demand and supply making it produce at the social optimum output which is where the country is productively and allocatively efficient, whereas the CAP changes supply and artificially manipulates price. Though there are many disadvantages to Free Trade it is said that the benefits far outweigh the costs.
There is a current deregulation in the world market and whilst the EU make polite noises about fair trade it is unlikely to reverse the current situation as it could lead to a large fall in EU agriculture output and hence can greatly increase unemployment. I think that free trade is the best option as it will maximise output throughout the world and possibly increase the income per person in the world, which could then increase the standard of living.