Getting creative about subsidies

So, tomorrow a big challenge is before us: Voting by unanimity on questions which are fundamental to the function of the WTO. Before we all despair at the thought of having to negotiate the unanimity, I thought we might try to get a little creative.

From China’s position, agriculture seems to be the most important topic of tomorrow’s discussion. Its population, although growth has slowed, grows significantly in absolute numbers. The disposable income of far the majority of the population is on the rise, which is changing patterns of demand. The average Chinese person is consuming more meat and more consumer electronics than ever before. The problem with meat is that it tends to raise food prices exponentially. For the same caloric value, it is 11 times less efficient to raise livestock in most parts of China than it is to grow rice or wheat. Food prices are on the rise, and what’s worse is that supply can’t keep up. China thus has two dilemmas:

(1)    It depends on imports (which state companies tend to make abroad) from places like Brazil, South Africa and a number of smaller of countries.

(2)    Because supply can’t keep up, there is so much pressure on the price of most agricultural products that it threatens to sustain non-poverty status of many citizens. In other words, incomes don’t rise nearly quickly enough to keep up with food prices. And, since food is hardly consumed only by choice, a larger and larger share of income is spent on food. For some Chinese, it can be bad enough to set them back into poverty.

Inevitably, China seeks two things: to be able to subsidize somehow the price of agricultural products to make it affordable to most if not all Chinese. And, it has to encourage whatever measure increases the capacity of other agricultural economies while prices are kept down.

How do we reconcile this with the interests of other countries in the game?

Allowing China to subsidize its domestic agricultural sector would alleviate some of its problems, but there are a number of reasons why that isn’t the solution in the context of the WTO. Although it would perhaps in principle be a justified subsidy, it undermines the process at the WTO. Domestic subsidies are a little like subsidizing dolphin friendly nets. It’s for a good cause, but it has adverse effects on the competitiveness of foreign producers.

Why not subsidize consumption then? Well, if you’ve ever been to a gas station in Venezuela, you’ll know why. It can go horribly wrong. People consume indiscriminately and consumption raises massively. In Venezuela there’s more oil where it came from, but the potential to expand Chinese agriculture is close to its limit. Improvements in technology have barely kept up with the loss of arable land from environmental problems, and pure mismanagement. Subsidizing consumption only worsens the problem.

What do we do?  I wonder if we could get creative about subsidies. There must be some way to differentiate between different types of subsidies, or capture the effects of subsidies on import prices. Perhaps China could simply subsidize imports up until a certain limit? But, honestly, I can’t even begin to comprehend the economic consequences of such a move. Any thoughts?