The end of export subsidies

First of two parts

From the perspective of global powers that insist on imposing on economies like ours the globalization paradigm as defined through the various World Trade Organization (WTO) agreements, the Asia Pacific Economic Cooperation (Apec) summits, and even by the latest Western-initiated Trans-Pacific Partnership (TPP) Agreement, the objective of trade growth has consistently been central. In their detail, the centrality of increased trade is likewise found and all throughout there can be no debating that the motherhood sentiments are beneficial to all. 

For a country like the Philippines, membership in such economic associations is seen as necessary, as all offer the opening up of large markets for our products as well as the access to funds greatly needed by an economy typically short on cash and even shorter on local investment capacities. It is these that have convinced our local leaders to spend greatly, not simply to join such global associations but more important, for those seeking economic credibility and a chance to showcase these, to go so far as to host their periodic summits and conferences.

Never mind the immediate costs forever irrecoverable. And never mind the deeper hidden costs that gnaw at our distinctive weaknesses and perpetuate our economy on the far side of inclusive growth.

On that last aspect, allow us to cite a recent development on the world economic stage that will greatly impact on our economy as it removes protective barriers put up against the aberrations of globalization and the real inequities that it has produced for developing economies.

In Kenya a few days ago, the members of the WTO, including the Philippines, agreed to the complete the removal of export subsidies. The initiative was the result of pressures that the United States and the European Union have been exerting on all their trading partners, especially those like ours, where from their point of view, export subsidies are forms of restrictive trade.

By definition, export subsidies are forms of assistance that a domestic government might grant to certain of its local sectors that in its view require support so that its products and services may have certain advantages when traded globally. In effect these forms of assistance cover the difference in values of a given product or service where there are disparities between its domestic costs and prices arrayed against its international costs and price.

At first blush the impact of the removal of export subsidies on the domestic economy appears negative, as exporters will necessarily have to compete on the global stage. This is easy to understand in the case of the Philippines. How, indeed, can a Filipino farmer compete with the state-of-the-art farming techniques and sciences applied by large, well-funded and conglomerate corporate farms in a developed country without export subsidies to even out the value differentials?

Large corporate farms in developed economies would be producing at far more price-competitive bases; they would be more efficient; they would enjoy economies of scale; and lastly, they would have higher profit margins compared to the same produced domestically by farmers without subsidy support, in deep debt and dreadfully undercapitalized.

In a global market, the products of the developed economy would be more marketable, given the price maneuvering room that its lower production costs afford it.

Now compare those products with the same kind produced in a developing economy where no such technologies are applied. If only to compete, products produced by the weaker economy would compel the kind of subsidy now being taken away. Such seems to make a valid case for retaining subsidies in contradiction to the WTO’s initiative for subsidy removal.

Next week we will see whether this is, indeed, the case or whether there are hidden social and economic costs to export subsidies borne by the exporting economy that actually compel its complete removal as the WTO requires.