Research desk responds: How the U.S. distorts the playing field

By Dylan Matthews

Andrew36 asks:

We often hear from businesses and members of government saying that other countries, specifically China, should be on a level playing field in trade and business. This includes currency manipulation, subsidies, lax safety standards, etc. I've always wondered, does the US play on a level playing field? Surely there are advantages in the dollar being the reserve currency. And our farm subsidies surely make our huge farm exports artificially competitive against the agricultural goods of developing countries, which they routinely complain about in international bodies.

Since the U.S. has so many policies distorting international trade, I'll focus on Andrew36's two examples: agricultural subsidies and the dollar's status as a reserve currency. The Organization for Economic Co-operation and Development keeps numbers on all of its members' agricultural supports; here is how U.S. figures have changed since 1986. The "Total Support Estimate" includes all subsidies, while the "Producer Support Estimate" focuses on direct aid to suppliers, the "Consumer Support Estimate" focuses on subsidies given to buyers, and "General Services Support Estimate" includes such things as research and development, agricultural infrastructure support and other general investments in the agricultural industry.

While subsidies have stabilized in the past few years around $100 billion a year -- a huge number, given that agriculture (not including things like cotton and tobacco) only accounted for $136 billion of GDP in 2009 -- the composition has changed, with general support and consumer subsidies gaining ground and producer subsidies falling. This level of spending, as many have pointed out, artificially lowers the price of U.S. agricultural goods, driving up U.S. exports while undermining (PDF) developing countries' attempts to export food products, which is one of the only industries many of them have.

The use of the dollar as a reserve currency in other countries, interestingly enough, actually hurts U.S. exports. A recent McKinsey report found that, while reserve status helps the U.S. economy in other ways, it results in a loss of $45 to $85 billion in U.S. exports every year. This is because, as this graph from the report shows, a strong dollar is correlated with expensive goods and, thus, lower exports: