Coordinate Trade Policy with Development Assistance: When Aligned, They Increase the Benefits of Both

Rwanda provides an inspiring example of how smallholder farmers in developing countries can compete in global markets. Rwanda produces some of the highest quality coffee in the world. A winner of international competitions, Rwandan coffee is virtually guaranteed a spot on menus in Starbucks and other upscale coffee shops around the world.

Less than two decades after the country was left in ruins by war and genocide, Rwanda is developing rapidly thanks in part to gains from international trade. Coffee exports have created jobs in rural areas and raised farmer incomes. In 2006, USAID reported, “50,000 households have seen their incomes from coffee production double.”¹ Thousands of jobs have been created in coffee-washing facilities alone.² During the global recession, coffee provided Rwanda with a valuable cushion against declines in its other exports.

The Rwandan coffee sector was struggling as recently as 10 years ago. Its miraculous turnaround owes much to the technical support provided by USAID and other donors.³ Another element in its recent success is that Rwandan coffee beans can enter the U.S. market duty-free under the African Growth and Opportunity Act (AGOA), which provides duty-free, quota-free access to U.S. markets for certain African products. AGOA has helped other African countries break into the U.S. market with a range of products, from teas to fruits to seafood and more.⁴

In contrast to Rwanda’s success, countries like Cambodia and Bangladesh are disadvantaged by another U.S. trade policy—high tariffs on labor-intensive goods classified “sensitive.” These products include textiles, apparel, and footwear—precisely the kinds of goods in which many developing countries are competitive.⁵ Two of the poorest countries in Asia, Cambodia and Bangladesh produce high-quality garments that would be competitive in the U.S. market if they did not face steep tariffs. (See Figure 3.4). Both countries are recipients of U.S. foreign assistance, some of it designed, ironically, to improve manufacturing capacity. In 2006, the two received $125 million in foreign assistance but paid $850 million in import duties.⁶

This lack of attention to how foreign assistance interacts with trade policy also hurts producers and consumers in the United States. Unfortunately, U.S. trade policies produce more cases like Cambodia and Bangladesh than like Rwanda. Altogether, products from the least developed countries of the world amount to less than 1 percent of non-petroleum imports into the United States.⁷

When conflicting policies lead to slower economic growth in developing countries, U.S. businesses are denied larger markets for their exports and consumers have fewer choices of products. President Obama has said he wants to double U.S. exports over the next five years.⁸ The majority of potential new customers for U.S products live in the developing world. “If people living in developing countries truly start benefiting from the global economy, demand for American products will grow dramatically,” says William Lane, director of government affairs for Caterpillar, Inc.⁹ The United States can help developing countries gain ground in the global economy by opening its markets to a wider variety of products. Extending full market access to all developing countries would increase their exports, which in turn would create jobs and lead to higher incomes.

Another U.S. trade policy that works against the goals of development assistance is tariff escalation (tariff rates increase for products that are more highly processed). For example, unprocessed soybeans can enter the United States duty-free, but there is a 22.5 percent tariff on soybean oil.¹⁰ Cocoa faces higher tariffs in processed forms, discouraging entrepreneurs in developing countries from producing and exporting value-added products like chocolates. In general, tariff escalation policies undermine the idea of developing the manufacturing sectors of developing countries.

U.S. agricultural subsidies are another major stumbling block to a more coherent approach to trade and development. The federal government protects U.S. farmers from losses during periods when prices for commodities such as rice, corn, wheat, and soybeans are low. The problem is that this protection enables or even encourages farmers to continue planting and growing certain crops even when it would be unprofitable—leading to large surpluses that are then dumped into export markets. This depresses prices, hurting farmers in the developing world and slowing progress toward reducing poverty and meeting other development assistance objectives.

In recent years, the global prices of food commodities have been historically high, which reduces the effect of U.S. agricultural subsidies. But the lack of investment in agriculture in the past, combined with trade-distorting subsidies, prevented most farmers in developing countries from benefiting from these higher food prices to raise their incomes. The rising food prices were accompanied by rising prices for inputs like fertilizer, so the majority could not grow more crops and sell them when their prices were high.

Cotton is the largest cash crop in West Africa, but farmers there find it hard to compete against the heavily subsidized U.S. cotton producers. Without the U.S. subsidies, African farmers would enjoy a comparative advantage.

U.S. agricultural policies continue to protect domestic cotton producers and harm poor farmers in developing countries, particularly in West Africa, whose largest cash crop is cotton. Total direct support from the U.S. government to U.S. cotton producers tripled from 2007–2008 to 2008–2009.¹¹ A study by the International Center for Trade and Sustainable Development (ICTSD) found if the United States had eliminated cotton subsidies from 1998–2007, the global price of cotton would have risen by 6 percent.¹² The subsidies cost cotton farmers in West Africa hundreds of millions of dollars in lost income. In 2008, the World Trade Organization (WTO) ruled that U.S. subsidies to cotton farmers were illegal, finding in favor of the complaint filed by Brazil. But the U.S. farm lobby and their supporters in Congress refused to give any ground in the 2008 farm bill. In the meantime, the United States and Brazil have worked out an interim compromise which includes a $147.3 million payment to Brazil to not act on its win.¹³ There could be other WTO challenges based on the trade-distorting effects of U.S. policies.¹⁴

U.S. agriculture stands to gain if agricultural subsidies are phased out. In the 2007 Hunger Report, Healthy Food, Farms and Families, Bread for the World Institute commissioned a study by the International Food Policy Research Institute to model the effects of reducing poverty in developing countries on U.S agricultural exports. The data inputs used in the model were time-sensitive, but the conclusions remain relevant. The study showed that U.S. agricultural producers stand to benefit from poverty reduction in developing countries. The fastest way to reduce poverty in the developing world is to raise the incomes of smallholder farmers. Smallholder farmers are net food buyers. As their household income rises, they are able to diversify their diets and include foods that are not produced domestically. Thus, the purchasing power created by reducing poverty gives U.S. producers an opportunity to expand into new markets.

Smallholder farmers in Cambodia plowing fields with oxen. Read more about Cambodia in chapter two.

Reforming U.S. agricultural policies would create some much-needed momentum to restart the Doha Round of trade negotiations. Recognizing that “international trade can play a major role in the promotion of economic development and the alleviation of poverty,” WTO members (including the United States) agreed to place trade and development “at the heart of the [Doha] work program.”¹⁵ Developing countries stand to benefit from a successful conclusion to the Doha Round, with one study suggesting up to $30 billion in gains.¹⁶ However, the negotiations stalled in July 2008 and have been deadlocked since. The disagreements concern agriculture, the area most important to developing countries.

Issues