The European Union is reintroducing agricultural subsidies for dairy producers in response to tumbling dairy prices on world markets. EU subsidies, long a thorn in the side of trade negotiators and American farmers, were discontinued for dairy farmers in 2007 following a price run-up, but the subsidies are now returning.

Agriculture as a sector, and even individual producers, generally do best in an environment of free trade – no tariffs, no export or import barriers, no production subsidies. The lower the barriers to trade, the more efficiently the market works in giving producers the proper incentives to grow the right crop for their geography, climate, and economic situation. However, that pro-trade policy only works for one country if other countries are similarly committed. It’s a bit like being in a crowded movie theater – if everyone sits down, then everyone can see and enjoy the movie. But if the people in the front row stand up, then the people behind them have to stand up in order to see – a process that ends up with the whole theater crowd standing up.

In the case of the EU subsidies, the irony is that while the subsidy is a response to low market prices, the result of the subsidy will be to perpetuate that low price. EU dairy farmers, with a guaranteed subsidy check in their pockets, will be able to undercut other producers on price, driving the market equilibrium price down even further. Making things worse, it is possible that other nations, particularly the United States, will introduce subsidies of their own to protect their domestic dairy industries. When everyone in the theater is standing up, nobody’s view is improved – and everyone is working harder for the same outcome.