The Wall Street Journal-20080212-Politics - Economics- High Food Prices Stir Movement on Tariffs

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Politics & Economics: High Food Prices Stir Movement on Tariffs

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BRUSSELS -- The world's scramble for affordable food is tearing at the patchwork of agricultural tariffs that governments have long used to control trade -- and offering a glimmer of hope to those trying to kick-start a stalled global trade deal.

Some countries are slashing import duties to attract staples like wheat, rice and cooking oil. Europe, traditionally the world's most outspoken advocate of protected food markets, recently removed cereal- import duties for the first time. Others -- notably China -- are raising export duties to keep domestic markets well stocked.

So far, the situation hasn't forced a rethinking of subsidies that farmers in the developed world receive. But some say that is an inevitable consequence of higher global food prices. "The market situation now means there's less pressure on farmers," says Peter Mandelson, the European Union's trade commissioner.

Mr. Mandelson and other top trade officials, including U.S. Trade Representative Susan Schwab, recently agreed to meet in Geneva before June. It will be their first summit at the World Trade Organization's headquarters in nearly two years.

The WTO's 151 members have been negotiating a new global treaty since 2001. The so-called Doha round of talks aims to give developing countries full access to Western food markets in exchange for allowing wealthier countries to sell services like banking, insurance and construction more easily across the globe. Talks have foundered over the refusal of the EU and U.S. to cut their lavish farm subsidies.

With today's high food prices, however, "there's much less of a need for protectionism than when we started in 2001," said Mr. Mandelson.

A global trade deal remains a long shot. The U.S. Congress is currently drafting a farm bill that doesn't envision cuts in subsidies. And France remains a bulwark of protectionism. "We'll need to see a long period of high prices before we reduce subsidies," Michel Barnier, the French agriculture minister, said in an interview.

In the meantime, nations are doing what they have to do in order to stay fed.

Last month, China's Ministry of Finance announced it was setting export tariffs on 57 food commodities in the range of 5% to 25%. The decision sparked concern about China's future exports. U.S. corn futures quickly leapt to an 11-year high.

China has traditionally been a big corn exporter. But as Chinese people consume more of their own crop, exports dropped to 4.5 million metric tons over the first nine months of last year, from 7.1 million tons in 2005. That number is expected to drop again this year.

India, like other developing nations, has suffered cooking-oil shortages as the budding biofuels industry uses more palm oil. India cut its import tariff on palm oil five times last year, bringing the levy down to 45% from 88%. "It was the only way they could make cooking oil affordable," says David Laborde, an analyst at the Washington-based International Food Policy Research Institute. India last year also banned milk-powder exports.

Food prices aren't just a problem in Asia. The United Nations' global food-inflation index found that food prices rose 40% last year. A host of countries, including traditional food-export powerhouses Russia, Argentina and Kazakhstan, have moved to restrict their exports by setting new export tariffs on cereals.

The WTO has no rule against export tariffs. Although the tariffs are opposed by the U.S. and EU, poorer countries depend on them as a revenue source, taxing commodities such as gold, oil and diamonds.

Meanwhile, Western countries are dropping import barriers. A bad harvest in France and the demand for biofuels meant Europe was short of cereal crops last year. In the first nine months of the year, it imported 2.8 million metric tons of corn from Brazil, up from 117,000 over the same time period in 2005. To increase yield, the EU also scrapped a rule requiring farmers to set aside 10% of their land to lie fallow.

That wasn't enough. Last month, the EU took the unprecedented step of eliminating tariffs on all cereal imports. Officially, the tariff suspension is temporary, but EU officials say they expect it to become permanent. Prices, they believe, will remain high. "We've never been so dependent on imports," says an EU official.

The EU's open market is expected to draw a huge inflow of corn this year, to nine million tons from three million tons last year, and sorghum, to four million tons from 400,000 tons last year.

"It's a new world, and we need free trade," says Jurjen Ronner, a buyer for De Heus Beheer, a Dutch company that is one of the world's biggest animal-feed producers. Mr. Ronner is purchasing Thai tapioca and U.S. sorghum to replace a decline in domestic wheat production.

Other countries, including Brazil, South Korea, Nigeria and Russia, are also cutting import tariffs. The U.S. Agriculture Department expects South Korea to buy an additional three million tons of corn from the U.S. in 2008.

Nigeria reduced its import tariff on rice last year to 2.7% from 100%. "In some countries, the government is acting simply to feed people adequately," says Sorin Vasloban, a broker at Paris-based cereal trader Plantureux SAS.

The U.S., the world's biggest producer, has no import tariffs on cereals, although it does have a levy on most ethanol imports, which it has no plans to remove.

Economists say reducing import tariffs is a better incentive for producers than erecting barriers to exports. "Taxing exports means there's less incentive for farmers to produce more, which is what the world needs right now," says Mr. Laborde of the food-policy institute.

Manipulating tariffs to meet market demands isn't new. In the early 1970s, the Soviet Union suffered from shortages of soybeans, wheat and other crops. Western powers set stiff export tariffs or quotas to stop Moscow from buying up too much production. After World War II, weakened European powers protected their battered farm sector with import tariffs and subsidies.

If food prices fall sharply, the global shift on tariffs could reverse. The U.N. and other agencies forecast that prices will remain high, although this year better weather is expected to boost production in Europe and Australia.

"Trade and trade policy are adjusting to a simple fact," says Michael Mann, the EU's agricultural spokesman. "We used to have too much food, and now we have too little."

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Lauren Etter in Chicago contributed to this article.