Your Guide to Reading Between the Tines

Myopia in Mercatus Study: The Real Cost of Free Trade

I promised I’d hold off on a full analysis of the policy primer, “Yes, We Have No Bananas: A Critique of the ‘Food Miles’ Perspective” until I had done all the backtracking to do it up right, but it turns out that this project is big enough that it’s best handled in several installments.  Today, I’d like to welcome you to the first.  One of the major concerns of the authors of policy primer, Pierre Desrochers and Hiroko Shimizu, is how local food movements might adversely impact free trade and developing nations.  To that end, it’s worth taking a look at how free trade has itself affected developing nations.

Throughout the policy primer, the authors take more than a few swipes at local food enthusiasts.  One of the most interesting for me is the authors’ claim that locavores have a “romanticized” notion of eating local–which, by the way, they characterize as “subsistence farming.”  This is a misuse of the term.   “Subsistence farming” refers to farming in which the farmers raise just enough for their families and any federal dues with little or nothing left over. If in doubt, consult the Encyclopedia Britannica or the Merriam-Webster Dictionary, for starters. In fact, you’ll find that a secondary definition describes subsistence farming as “farming or a system of farming that produces a minimum and often inadequate return to the farmer.”  Since one of the major objectives of the Eat Local movement is to encourage local farms, keep local farms in business, and provide farmers with a living wage, painting local food production as “subsistence farming” is a gross miscategorization. The locavore movement does not advocate a return to subsistence farming; rather it advocates a re-valuation of the work farmers do and the importance of a healthy food source close to where you live.

Now, back to that romanticized notion locavores have about “subsistence farming.”  I am a realist, and I believe that romanticization can be dangerous.  That belief is exactly why I was disturbed by the thorough extent to which this policy primer romanticized the effects of food imports and exports, NAFTA, and the World Bank on impoverished countries.  The Mercatus study authors seem to present food importing and exporting as an economic panacea, a developmental cure-all for nations in the process of industrializing.

Let’s start with one example of such policies: the impact of NAFTA on Mexico, specifically relating to the agricultural sector.

In late January and early February of 2007, you may have heard about how Mexican citizens protesting the cost of corn flooded the streets.  In three short months, the price of corn in Mexico increased over 400%, putting corn out of the reach of many and threatening malnutrition, starvation, and a flood of preventable problems.

Fingers immediately pointed to biofuels.  With US land diverted to growing corn for ethanol, the price of grains shot up, and corn was particularly affected.  As a result, the formerly cheap imports of US corn suddenly became prohibitively expensive in the Mexican marketplace.  However, Mexico is center of origin for corn; that is, corn was first cultivated in Mexico.  The creation myth of the Maya, an indigenous group encompassing many different tribes in modern-day Mexico, Guatemala, Belize, and Honduras, tells how humans were born of corn.  Raising, processing, and consuming corn has been essential to the long history of Mexico.  How, then, did Mexico become so vulnerable to fluctuations in the US market?  What happened to their own culture of corn?

In the 1980s, deeply indebted to international commercial banks, Mexico borrowed money from the World Bank and the International Monetary Fund (IMF).  The World Bank leveraged the situation to their advantage, forcing Mexico to agree to a number of structural adjustment programs, or measures designed to eliminate what they perceived as “barriers to economic efficiency.”  Out went state credit, government-subsidized agricultural inputs, price supports, state marketing boards and extension services.  Cue shaky footing for peasant farmers.  Then, in 1994, NAFTA went into effect.  Highly subsidized US corn was allowed to flood the Mexican market free of import tariffs.   Mexican corn prices took a dive, corn production was completely destabilized, and Mexico became a net food importer.

Walden Bello elaborates what happened next in “Manufacturing a Food Crisis,” an article in the May 15th edition of The Nation:

With the shutting down of the state marketing agency for corn, distribution of US corn imports and Mexican grain has come to be monopolized by a few transnational traders, like US-owned Cargill and partly US-owned Maseca, operating on both sides of the border. This has given them tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over. At the same time, monopoly control of domestic trade has ensured that a rise in international corn prices does not translate into significantly higher prices paid to small producers.

It has become increasingly difficult for Mexican corn farmers to avoid the fate of many of their fellow corn cultivators and other smallholders in sectors such as rice, beef, poultry and pork, who have gone under because of the advantages conferred by NAFTA on subsidized US producers. According to a 2003 Carnegie Endowment report, imports of US agricultural products threw at least 1.3 million farmers out of work–many of whom have since found their way to the United States.

You can read Bello’s full article to see how World Bank and IMF policies have played out in other arenas as well.

While the authors of the Mercatus study emphasize that “most subsidies are [...] harmful to both the environment and the economy” (claiming 55% of agricultural subsidies have “negative impacts on both the economy and the environment”), they ignore the fact that subsidies are not the beginning and the end of the problems with existing free trade systems.  Other practices besides subsidies can hide the true costs of production and negatively impact quality of life.  For example, a central idea in the study is that food should be produced where it is most efficient to do so (that is, where the necessary inputs are smallest and least expensive).  I’m not going to argue their contention that it makes sense to produce individual crops where they grow well; it does.  However, not all reasons for low-cost crops are so sensible or benign as the fact that they are suited to the land and climate.  For example, there are more lax restrictions on toxic pesticides in certain areas that reduce crop losses (increasing profit) while poisoning workers.  US-owned banana king Dole knows about that, having faced a string of lawsuits since the 1980s in Latin America, the Philippines, and Africa after continuing to use pesticide DBCP for decades after it was linked to health problems as far back as the 1950s. Even after the DBCP was banned in the U.S. in 1979 after causing sterility in both lab animals and three dozen workers in a California chemical plant, both Dole and Chiquita continued to use them outside US borders until the mid ’80s.  After all, they boosted harvest weight by 20%.  Money is a powerful motivator.

Understanding the factors that reduce the monetary costs of production is key to formulating a healthy, ethical, and sustainable food policy, something the Mercatus study authors failed to do.  Simply put, looking at the ledger at the end of the day is not an adequate means to assess the real costs of production.

So why aren’t more economists considering these factors when making policy recommendations?  It goes deep—a key factor is the fundamental set of assumptions on which modern free trade arguments are based.  Ha-Joon Chang, an economics professor at the University of Cambridge and the author of the recent book Bad Samaritans, has criticized the Hecksher-Ohlin-Samuelson theory (HOS theory) which forms the base for free trade arguments.  At its heart, the theory assumes that certain countries have a comparative advantage in producing certain products.  They may be richer in capital (including mineral resources, arable land, infrastructure, or the like) or labor, but they supposedly have some advantage.  By encouraging each region to specialize in the area where they have a relative advantage, they will most likely take a rational approach and do so.  Through international trade, they will import to compensate for the industries in which they are at a relative disadvantage when compared to other countries.  The major pitfall of this HOS theory is that it assumes that the capital and labor made available when one type of production ends will be efficiently absorbed into the new area of production.  Unfortunately, specialized machinery is usually not transferable, nor are specialized skills and training.  Buildings sit empty, machinery goes to waste, and former employees remain unemployed or wind up in low-skill jobs that do not use their existing skills and knowledge.  To put it in terms of agriculture, if a number of small family farms shut down across a developing country as that country moves toward becoming a net food importer while devoting former farmland to, say, ecotourism or exotic flower farming, the farmers displaced cannot immediately pick up work the next day leading adventure tours or farming exotic flowers. Much of their machinery or working animals are useless in the new industry, silos may sit empty, and their skill sets may be poorly matched to the new job market.  Although free trade economists may argue that such sacrifices are necessary for the overall gain, the problem with this scenario is that the gains of the “winners” may be equal to or less than the losses suffered by the “losers.”  While most developed nations have programs such as unemployment benefits, job retraining programs, and health care, such programs are typically weaker to nonexistent in developing countries, putting their residents at special risk in the massive push towards free trade.  For these reasons, Chang emphasizes the importance of strategies that most developed nations themselves have historically used to gradually transition toward free trade, including  governmental supports, protections, and subsidies to ensure long-term economic health.  Ultimately, he paints trade liberalization as the outcome—not the cause—of economic development.

When considering how complex a true assessment of the costs of production is, how labor and capital often cannot be seamlessly reabsorbed into production, and the potential consequences for immediate trade liberalization, the picture is much less clear than the authors of “Yes, We Have No Bananas” would have us believe.  In short, attacking local food movements because they pose barriers to the economic development of poorer nations requires a dangerously oversimplified view of both economics and local food movements.

Coming up in the next few days: stay tuned for information on exactly how local food movements do approach and contribute to the ideas of economic efficiency in food production.  Despite what authors Desrochers and Shimizu might have you believe, it’s not a foreign concept to locavores.

3 comments

3 Comments so far

  1. Pierre Desrochers December 8th, 2008 7:35 am

    Hi,

    Thanks for going through the trouble of doing this and coming up with such thoughtful arguments. Would you be interested in a more formal exchange (don’t know what form it would take)? It could be interesting…

    Pierre Desrochers (co-author of the Mercatus paper)

  2. Caitlin D. December 8th, 2008 9:55 am

    Thanks for the in-depth analysis of this article! I posted a few of my basic arguments with it on one of your earlier posts, but it’s nice to get such detailed information to back up what I had assumed. :) The article was just plain too simple!!

  3. [...] Okay, folks.  After a reprieve, it’s time to revisit Mercatus Policy Primer No 8:  “Yes, We have No Bananas: A Critique of the ‘Food Miles’ Perspective.”  I had promised a look at how local food movements take into account questions of efficiency, economic … [...]

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