Efficiency of Farm Programs and Their Trade-Distorting Effects

Government intervention in product and factor markets generally leads to trade distortions. Conventional measures of government intervention, such as the Producer Subsidy Equivalent and the Nominal Rate of Protection, are often used to compare the effects of alternative policies on trade. This chapter demonstrates that the size of a trade distortion is often not closely linked to the level of producer support or protection but is closely related to a more fundamental variable—the economic efficiency of a government program. The trade-distorting policies can generally be ranked; the least efficient policies are the most trade distorting, and the most efficient policies are the least trade-distorting. An empirical examination of several important policies in Canada and the United States reveals that the efficiency criteria we propose can consistently rank policies according to their trade-distorting effects whereas more conventional measures, such as the Producer Subsidy Equivalent and Nominal Rate of Production, often fail to measure trade distortions.