SPOTLIGHT ON SUBSIDIES

With much of the world turning inwards and the World Trade Organisation (WTO) in a parlous state, it could be tempting to relax New Zealand’s long-term struggle to rid the world of trade-distorting, environmentally harmful and financially wasteful subsidies.  Not so says the Dairy Companies Association of New Zealand (DCANZ) which has commissioned some new research “Levelling the playing field” to examine the impact of agricultural subsidies on global dairy trade.

Doesn’t everyone do it?

Let’s be frank – over the last fifty years one of the big impacts on the environment for New Zealand’s dairy trade has been the pernicious use of subsidies, often by partners in Europe, North America and latterly Asia who have been amongst our closest friends. Subsidies have distorted markets, reduced returns for our industry and held back economic development here in New Zealand.

New Zealand consistently ranks amongst the lowest in the OECD in terms of its support to farmers.  But despite some success at the WTO of reining in export subsidies, we are a long way off dealing once and for all with the subsidies problem. Today the OECD puts support to agriculture at a staggering USD 851 billion per year in 2020-22 across OECD members and major emerging economies.  Spending is growing – and so too is the distortionary effect on trade and markets.

Why this research ?

Dairy is one of the world’s most heavily protected sectors.  And while there is quite a lot of analysis about the role of tariffs in distorting markets and adding costs to trade, understanding of the impact of direct farm spending on global dairy markets is much less well understood.  Hence the focus of the DCANZ multi-year project[1]: it aims to strengthen the evidence base for further reform of trade rules around domestic support, which are largely set through the WTO. 

The centre piece of the project is a Global Dairy Distortions Model. This is an economic model of dairy trade aimed identifying the effects that policies have on dairy production and trade, and quantifying the effects of potential policy changes.  

The model has already shown:

• The impact of a 2020 intervention by the EU in skim milk powder cost New Zealand farmers $44,000 per average sized farm
• Subsidies by OECD members cost New Zealand $66 million each year in lost revenue – about the same as levies of $67 million paid by farmers to Dairy NZ
• The impact of EU subsidies for cheese was an 8 percent suppression in prices.

These are not small numbers and they are all the more serious in view of the highly protected nature of dairy markets around the world.  Some 87% of global consumption of dairy products takes place behind tariffs of 20 percent or more.

What can be done now?

The old adage is relevant: “what gets measured gets done”.  What’s clear is that the overhang of subsidies on global markets still matters,  even for those subsidies we thought were less trade-distorting. That’s the value of this new analytical tool – we can assess what the real world impacts are.  What is also clear is that Government and industry need to work together to continue to press the case, even in this highly contested environment. We should not give up on global rule-making in this space but we need new ideas and new analysis, especially in the context of next year’s WTO Ministerial, to bring these material issues back on the table.

This post was prepared by Stephen Jacobi, Executive Director of the NZ International Business Forum.  They are based on remarks he gave to a DCANZ seminar focused on the research held in Wellington on 5 August 2024.  Further information on the research and model can be found at www.dcanz.com/gddm.

[1] The DCANZ project has been co-funded by the New Zealand Ministry of Primary Industries Sustainable Food and Fibre Futures Fund.  The project and model have been completed by Sense Partners.