Tag Archives: Dumping

US Farm subsidies and EU dump cost New Zealand farmers

Donald Trump’s subsidies to US farmers (see below) could be above what is allowed under international trade rules and it has been suggested that subsidies in 2020 will make up 36% of farm incomes.

US farm subsidies

  • 2018 – US$12bn
  • 2019 – US$16bn

This year US farm incomes are set to drop 15% even after the payment of subsidies and billions of dollars have been set aside to assist the farming sector. New Zealand officials are concerned that the subsidies given to US farmers will exceed the US$19billion which is the WTO’s limit. They want formal notification of payments in 2020 and how the US plans to reduce this assistance to farmers. The EU, China, India and China are asking similar questions of the US.

Source: Tutor2u

Subsidies distort trade and entice farmers to keep producing even though prices are falling – see graph . This output tends to be inefficiently produced and would not be competitive in a normal market free of subsidies.What the subsidies did in New Zealand was to encourage people to develop land that was not really suitable for any agricultural use. However as they got a subsidy from the government efficiency or quality didn’t feature as a major factor in maintaining competitiveness. With subsidies prices take longer to recover their former levels while excess supply is worked through as was the case in 2018 and 2019 when the EU dumped subsidised skim milk powder on the global market. But the support package to the US farmers is very significant and has the potential to negatively impact those countries that have unsubsidised farmers.

The Dairy Companies Association of NZ’s (DCANZ) executive director Kimberly Crewther says while other countries had propped up their farmers since the start of the pandemic the US was “way out in front” with the size of its support programmes. 
That was concerning given the growth trajectory the US dairy industry was currently on.
“They have the potential to become the world’s largest dairy exporter, but that is going to come at a high cost to unsubsidised producers and not just exporters like NZ if that growth is coming from subsidies,” she said.

EU dumping has NZ Farmers lose $500m
The dumping of subsidised skim milk powder (SMP) by the EU in 2018 is estimated to have cost New Zealand farmers $500m. In 2016 the EU moved nearly 25% of its production into storage before dumping it on the market in 2018 and 2019 at discounted prices. The purchasing of SMP by the EU was done with the intention of putting a floor price under the low EU farm gate milk prices.
EU stocks – 378,000 tonnes in 2017 – 16% of global supply. Release of stocks onto the market had the estimated impact on prices:

World Price

Source: Tutor2u
  • 2018 – SMP prices down by 3.6%
  • 2019 – SMP prices down by 8.7%

US farm gate prices

  • 2018 – SMP prices down by 1.7%
  • 2019 – SMP prices down by 3.9%

The cost to NZ farmers is estimated at 30c per kg of milk solids in 2018 or 4.7% of the payout. The Eu was able to undercut competitors and increase its share of of the global SMP market from 30.6% in 2016 to 42.3% in 2019. New Zealand’s share fell from 23.5% to 16.3% over the same period.

Source: Farmers Weekly – November 9, 2020

NZ Farmers seek anti-dumping tariff on potatoes

This is a very good example of barriers to trade – CIE AS Level Unit 4 and NCEA Level 2. There has been a lot of publicity about potatoes being imported from Holland and Belgium at a price below that of New Zealand farmers. Pw represents the price which dumped items are imported into a domestic economy which is below the domestic market price.

Source: Tutor2u

European farmers have traditionally been receiving subsidies from their governments which means they can drive down export prices. Dumping margins are currently between 95 to 151%.

(Domestic value − Export Price) ÷ Export Price x 100 = % Margin of Dumping

Domestic value: The normal value is generally the selling price of the good in the country where it was produced.

Export price: The export price is generally the exporter’s selling price reduced by any export charges that are included in the price, such as freight and insurance.

These margins are expected to increase with price undercutting for the NZ industry of between 18% and 38%.

The absence of a tariff will see NZ potato processors being forced to cut production and demand for potatoes from NZ growers would drop leading to higher unemployment in the industry. The imposition of an anti-dumping duty on dumped imports of frozen potato products, would help to maintain demand for New Zealand grown potatoes, and ensure the continuity of employment and business in the growing sector.  A duty would mean that the potato growers would experience the same market conditions, including competition between themselves and fluctuations in market prices, as they did before the dumping occurred. 

The value of exports of potatoes and potato products from New Zealand grew from $93 million in the year to March 2010 to $128 million in 2020; an increase of 38 percent. During the same period, the value of imports of these products increased from $47 million to $60 million; an increase of 28 percent.

Effects on consumers
It should be noted that there is no guarantee that the benefit of lower prices will be passed on to consumers.  It is probable that any advantage of low prices to consumers will not endure.  Dumping occurs because overseas producers have a glut of produce or a collapse in demand in their own markets, and both these conditions are unlikely to be sustained.  Accordingly, a longer term consequence for consumers is that they could face higher prices if New Zealand based processors and growers are forced out of business by the dumping.

Effects on employment
At the national level, potato growing and processing is a relatively small industry, but it still directly and indirectly provides employment for almost 5,000 people.  Potatoes are one of the few crops grown outside, produced in most regions of New Zealand and harvested all year round.  The industry is therefore an important provider of widely distributed and stable employment.

The Paradox of Aid – dumping in developing countries.

Although a few years old now the video below is a good example of dumping – where the exporting country is able to lower its prices below that of the domestic price in the market it is selling into. Useful to show when teaching barriers to trade.

The U.S. spends approximately $37 billion dollars a year on foreign aid – just under 1% of our federal budget. “The Foreign Aid Paradox” zeroes in on food aid to Haiti and how it affects American farming and shipping interests as well as Haiti’s own agricultural markets. The fact that the US dump rice exports on the Haitian market below the equilibrium price severely affects the revenue of local farmers. Should there be a trade-not-aid strategy for developing countries? Below is a very good video from wetheeconomy

The trade-not-aid strategy is based on the idea that if developing countries were able to trade more freely with wealthy countries, they would have more reliable incomes and they would be much less dependent on external aid to carry out development projects. International trade would raise incomes and living standards as poor countries would be able to export their way to economic development by selling their products to rich countries eager to buy their goods.

Source: http://www.globalization101.org/trade-not-aid/