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Fair Trade Advocates Say Open Markets Could Shatter Small Farms

Part Two of Three on the CAFTA Clash

by Michelle Chen

The Central American Free Trade Agreement would spread the effects of unequally subsidized agribusiness onto freshly opened markets in Latin America, while enhancing the impact NAFTA had on small farmers in the US.

Part I in this series, "Proposal to Open Central American Markets Spurs Debate Over Free Trade," appeared on Friday, May 20. Part III, "Labor Fears Free Trade Deal Will Prompt ‘Downward Spiral’," appeared May 25.

May 23, 2005 – A proposed trade agreement that would dismantle barriers shielding US, Central American and Dominican farmers in the global marketplace, has become a focal point in the controversy over international agricultural trade, and fair trade advocates are warning Congress that the accord could render the free market system even more volatile and less equitable.

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Under the Dominican Republic-Central American Free Trade Agreement (CAFTA) the agricultural sectors of the US, El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica, and the Dominican Republic would be stripped of tariffs and similar trade protections. In the view of the opposition, this policy, now awaiting full ratification by the US and three other member countries, would perpetuate a trend in US farm policy that has fattened multinational agriculture organizations and starved smaller farms across the world.

"[CAFTA] is going to be a disaster for farmers, in particular in the other member countries," predicted Robert Scott, director of international programs at the Economic Policy Institute (EPI), a progressive think tank that analyzes how free trade agreements disrupt rural economies.

Rallying in support of the agreement are agricultural industry groups such as the American Farm Bureau Federation, which called CAFTA a "win-win for agriculture" and projected the policy could yield a net economic gain of $1.35 billion by 2024, including an added $47 million in beef exports and $62 million in wheat exports.

Fair trade advocates argue that unrestricted free markets, rather than lifting farmers out of poverty, have plunged them deeper into financial insecurity.

But critics charge that any gains under CAFTA would go to large agribusinesses at the expense of smaller producers. They also cast doubt on the optimistic export estimates, noting that economies of Central America and the Dominican Republic are simply too small to consume a great amount of US exports; the size of their combined economy, according to federal government estimates, is less than two percent that of the US.

Fair trade advocates argue that unrestricted free markets, rather than lifting farmers out of poverty, have plunged them deeper into financial insecurity. The watchdog group Public Citizen pointed out that under the North American Free Trade Agreement – a precursor to CAFTA that involved the US, Mexico and Canada – both US net exports and crop prices for major commodities declined.

That change was paralleled by losses to Mexican farmers on a much greater scale. The decline of Mexican agriculture under NAFTA, reported Public Citizen, displaced some 1.5 million peasant farmers stimulating an exodus to urban areas as well as undocumented migration to the US.

According to Dennis Olson, director of the Trade and Agriculture Project at the research organization Institute for Agriculture and Trade Policy, "[T]he whole theme of exporting our way to prosperity has been a colossal failure."

Advocates Say Rush to Export Leaves Behind Small U.S. Farmers

Detractors of the free trade model say that small-scale farmers are already experiencing a slow death under established free trade policies, and CAFTA would provide more opportunities for large corporations to swallow small US farmers and to destroy the rural sectors of poorer countries.

In the mid-1990s, the federal government realigned its agricultural policy to complement the promotion of export-oriented foreign trade. Intending to revitalize the sector and boost the competitive advantage of US growers, Congress retooled farm subsidy programs to push US commodities onto the international market.

But since the policies went into effect, small- and medium-scale farming in the US has been steadily evaporating. According to Public Citizen, from 1995 to 2002, more than 38,000 small farms shut down, and overall net farm income dropped by 16 percent. Meanwhile, multinational agribusiness corporations, controlling the bulk of commodity markets like corn and beef, saw their profits surge.

Government data reveals that the federal support structure for domestic agriculture already tends to favor multinational agricultural businesses. The Environmental Working Group, a watchdog organization, reported that between 1995 and 2003, the top 10 percent of agricultural producers received more than 70 percent of government subsidies, and agribusiness behemoths like Cargill and Riceland Foods received handouts ranging up to $500 million.

According to the Institute for Agriculture and Trade Policy’s (IATP) economic forecast, the US rural sector’s biggest casualty under CAFTA would be the sugar industry, which supports 146,000 jobs, in large part tied to unions or cooperative farms. To CAFTA opponents, sugar farmers represent both free trade’s victims as well as a dying industry model that prioritizes smaller producers.

The US sugar industry, which is one of the world’s largest in terms of both imports and production, maintains a supply-demand balance through a special price regulation system that limits imports and withholds a certain volume of sugar from the domestic market. Once sugar imports reach a certain "trigger level," however, Congress can respond to market demand by removing the supply controls that buoy prices.

The US Trade Representative’s office pointed out that CAFTA sugar imports would reach only 1.7 percent of total US consumption, phased in over 15 years -- the equivalent of "one and a half teaspoons per week per American." But according to the IATP’s analysis, this increase amounts to about 150,000 tons of additional sugar, which, combined with rising imports under existing and pending trade agreements, could push the industry toward price decontrol, subsequently diluting the market potentially destroying 80 percent of domestic production. Once the price-control system unravels, IATP argued, sugar might follow other US commodities in becoming beholden to massive government subsidies, which in turn further disrupt world markets.

This cascade of deregulation catalyzed by CAFTA could essentially, in Olson’s words, transform a system "now costing the taxpayers nothing to administer… into a multibillion dollar subsidy program that’s already being heavily criticized, both at home and abroad."

The IATP study also found that in recent years, prices for sugar-based foods have increased, even as sugar prices have declined. The price drop, Olson observed, "does not get passed through to consumers. It gets sucked up by these multinational companies who just pocket the difference."

In Olson’s view, the economic gains promised by CAFTA would fail to materialize not only for domestic sugar farmers and consumers, but also for Central American farmers --the most needy of CAFTA’s supposed beneficiaries. He believes the official barriers to the US sugar market would be replaced by a fierce global price war, in which most CAFTA member countries would find themselves unable to compete against established sugar exporters like Brazil.

"If you dismantle the sugar program and leave it wide open to free trade liberalization," said Olson, "then a lot of the poorest sugar exporting countries will not be able to get any access… to the US market. And so, why is that a good development policy?"

Agribusiness Clashes with Fair Trade Models

The most intense criticism of CAFTA’s impact on rural economies is that the gutting of the US sugar system, along with the deregulation of exports in general, would encourage heavily subsidized US agribusinesses to flood foreign markets and wipe out local farmers.

In the international community, advocates for the trade rights of developing countries argue that subsidies under free trade policies have led to the glutting -- or "dumping" -- of surplus commodities onto foreign markets, which enables US mass-producers to vastly undersell farmers in poorer countries. Critics say the practice destroys the livelihoods of rural communities.

Scott of the EPI commented that although the Central American and Dominican markets are smaller than Mexico’s, where NAFTA exports contributed to the collapse of domestic corn farming, "The major grain trading companies are going to stand to gain a lot on increased exports.… Those are the people who won under NAFTA. They’re the people who are going to win under CAFTA."

CAFTA includes some provisions for incremental adjustment toward full-blown free trade, such as phase-in periods for tariff eliminations and safeguards for so-called "sensitive crops," protected because of their special value to local populations. But considering that similar provisions under NAFTA failed to protect Mexican farmers from economic devastation, critics doubt such measures would help farmers in the poorer CAFTA member countries.

Compared with the impact on the US, potential economic disruption under CAFTA would be more severe for Central American and Dominican farmers because they constitute a relatively large -- and relatively poor -- portion of their national populations. Rural regions encompass an estimated 60 percent of the poor in Central America, and 42 percent in the Dominican Republic, according to the data from the World Bank and the International Center for Tropical Agriculture, a Latin-American research and development institute.

A study by Oxfam America, an international humanitarian organization, revealed that dumped goods have already begun choking local farmers in Central America: as a result of removing rice tariffs in 1991, rice imports washed out more than 85 percent of domestic production in Honduras and pushed 23,000 farmers out of business over the next decade. During this crisis, reported Oxfam, rice prices for consumers increased and the country became even more dependent on US imports.

Stephanie Weinberg, a trade policy advisor with Oxfam America, said that in order to advance themselves, poor countries require not unbridled free trade, but instead, "the opportunity to develop their own industry, their own processes, their own agriculture, so that they can supply domestically, as well as increase their exports."

The opposition to CAFTA overlaps with a push for the reform of US agricultural and trade policies. Fair trade advocates hope a rejection of the agreement by Congress could spark interest in alternative models, like the sugar market framework, that are focused less on international price manipulation and more on income supports for local, smaller-scale farming enterprises.

Weinberg stressed that trade policies that allow poorer countries to strengthen local agriculture would not be a rejection of trade itself, but a response to the economic imbalances ingrained in the current market structure.

Olson believes the economic force with the most potential to spoil the fruits of trade for independent farmers is the corporations at the helm of globalized agriculture. "Farmers don’t export, and countries don’t export," he reflected. "Multinational agribusiness cartels export … and everybody else looses in this policy."

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Michelle Chen is a staff journalist.

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