AGRICULTURAL TRADE AND ITS IMPORTANCE

AGRICULTURAL TRADE AND ITS IMPORTANCE 1. SOME HISTORICAL REFLECTIONS Since the founding of the Common Agricultural Policy (CAP) in 1959, one of the objectives was to increase productivity and the volume of agricultural produce in order to ensure food security in Europe. The instrument used to achieve this objective was the price policy for cereals, beef and dairy coupled with intervention prices and intervention guarantees for farmers. Producers received at least an administered minimum price for their products independent of the prevailing market situation. Internal prices paid to farmers were generally set at a level well above the corresponding world price level. Consequently, this price had to be defended by border measures against competitive imports from the world market. The system of variable levies was imposed which ensured the respect of the so called community preference and which effectively prevented imports to take place. This system was the standard mechanisms for cereals, beef, dairy and sugar. At that time and for all these products, the Union was a net importer and enjoyed certain recognition from trading partners of its need to stimulate internal production against the experiences of food shortages in Europe in the past World War II period. Agricultural products imported from the world market paid and still pay a duty which is a source of funding for the EU Budget under the own resources. The situation, however, changed in the early 70ies. Agriculture Ministers adjusted prices which were already fixed at comparable high levels constantly upwards. The price incentive stimulated agricultural production and intensity of farming in almost all sectors and all over the EU. The initial net importer situation turned into a net exporter situation in the beginning of the 80ies. Europe changed its position as an attractive deficit market into a world market competitor. For cereals, this happened in 1980 and this impacted on two fundamental basics of the CAP: first of all, on the financial aspects because the perceived duties decreased dramatically and, even more important, turned into a financial outflow because resources had to be made available in order to assist EU export to world market. Secondly, our trade position changed dramatically and stimulated a series of bilateral and multilateral trade conflicts with traditional exporters like the US, Australia, Canada and others. At that time, the EU was an important player on the world market for dairy, beef, cereals and even sugar. All these products needed export refunds in order to compensate the difference of high internal prices and the lower world market prices. In the early 90ies the EU paid an annual total of 10 Bill for export subsidies after having this amount steadily increased over a period of 15 years. It should, however, be noted that these practises are covered under GATT art XVI which provides, under the agricultural chapter, a derogation to do so. 2. THE UR AND THE CAP REFORMS IN 1992 The CAP was more and more criticized under the multilateral trading scheme not least for the use of export refunds and the trade distorting effects of the market price policies in place. The EU lost several dispute settlement procedures and the multilateral negotiations under the Uruguay Round (UR) increased the pressure for some reforms. The most critical sectors at that time were 1

cereals and oilseeds not least because of their dominating transatlantic importance. The reforms in 1992 changed the support provided to cereal and beef producers into a system of hectare/headage premia based on historical yields and base area/animals combined with a production control instrument called set aside. Farmers continued to receive most of their assistance but there was no link anymore to current production. This reform helped to conclude the UR and paved the way for the following reforms in 1999 and not least in 2003 and 2004. We have been making changes in the CAP since the early 1990s, designed to discourage overproduction, limit and better control spending, and reduce trade distortion, in particular on the markets of developing countries; and to increase progressively the importance of rural development policies. The most prominent impact has been on export refunds (subsidies). The proportion of our farm (CAP) budget spend on refunds is down from 30% in 1990 to less than 6.5% in 2005 -in money terms, down from 8-10 Bill in 1990-92 to around 3 Bill now-. Graph 8: Evolution of Farm Expenditure - EAGGF Section Guarantee along types of expenditure (Mio ECU / EURO) 60000 50000 40000 30000 20000 10000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Export Subsidies Market Intervention Direct Payments Rural Development Partly reflecting this policy change, the EU share of world markets for the main commodities we produce has dropped sharply over the ten years 1989/91 to 1999/2001. Cuts in our share range from 15% (sugar), through 30-33% (pork, poultry) to 43% (wheat, dairy), up to 55% (beef). In parallel to the discussion in the GATT, the OECD refined its concept of Producer Subsidy Equivalents (PSE). This work was an important building block for the Aggregated Measurement of Support (AMS) used for monitoring the effects of policy changes on support and protection. The AMS is bound under GATT terms and is part of the final act of the Marrakech agreement which concluded the UR. Both instruments, the PSE and the AMS are still used as indicators to measure government support provided to agriculture. Another important result of the UR in agriculture is the so called tariffication. For agricultural products the EU applied a system of variable levies which levied the difference of a low but variable world market price in relation to a fixed but high internal minimum entry price. The 2

amounts levied were therefore not stable and had to be converted into fixed amounts. This was part of the UR agreement which converted all variable levies into so called Tariff Equivalents expressed as fixed duties per tone/hl/animal etc. These amounts can be converted into tariff rates and consequently be negotiated for reductions under the different formulas (flat rates, Swiss formula etc.). 3. THE AGENDA 2000 AND THE REFORMS OF JUNE 2003/04 The EU budget allocated to agriculture is still important. The total amounts have not be reduced and are still supposed to increase mainly as a result of enlargement. However, the relative importance of agriculture on total speeding will further decrease and, even more important, the way the money is spent is totally different. In future, it is less and less about subsidising farm production; more about meeting various important public policy objectives for farming and the countryside. The most prominent are high standards of food safety (notably following the different BSE crisis), increased care for the environment (land for agriculture, land for recreation and land for wildlife), animal welfare and Rural Development. The latter occupies a prominent place in the reform process aiming at to provide those who live in countryside and produce food a similar standard of living to those working in towns and cities. The objective for social equality and cohesion involves some redistribution of financial resources and may be of income. The key to the Rural Development policy is sustainability and quality production at the highest possible standard. As a general principle, these objectives can be summarised as the European Farm Model or as some people call it multifunctionality. Agriculture implies more than the simple function of producing food but to provide public goods for the society as a whole and in return public financial support is granted for these objectives and the EU budget will take care to provide the financial resources. The current discussion on the new Financial Perspectives 2007-13 fully reflects these changes and the Commission proposes to create a unified Rural Development fund worth roughly 10 Bill. In the multilateral context, these changes into Rural Development will further reduce the impact of our domestic policies on trade and make the instruments of the CAP less and less trade distorting and hence the support fully compatible with WTO obligations. The second element of the 2003/04 reforms is breaking the link between farm support and current production. Each individual farm will get an annual payment based on its production in a base period. But will not in future be required to produce the same amount of output in return. EU farmers will earn a big share of the income via farm payment entitlement and the rest is be reconnected to market signals. Farmers are expected to pay more attention to quality and specific production intensity of cultivation, they will reduce the special intensity and step into more quality rather than volume based production. Total production for certain products may indeed fall. The products reformed so far are COP (cereals, protein and oilseed), beef, sheep meat, dairy (all in 2003), cotton, olive oil, hops and tobacco in April 2004 and sugar in 2006. Reform is in progress for fruits and vegetables and wine. 3

In WTO terms, these changes will result in a large proportion of domestic support being transferred in future from the most trade distorting amber box into the less trade distorting blue box and as the single farm payment is concerned even into the non trade distorting green box. 4. THE REFORM EFFECTS ON SUPPORT AND PROTECTION Agricultural structures and production efficiency vary in the world, making some countries more efficient than others. Moreover, agricultural production has a tendency to fluctuate, producing market volatility and market failures. These are justifications for intervention and explain why most countries in the world have taken measures in some form to support the sector and to stabilise their agricultural markets. There are various methods of protection. Much depends on domestic agricultural structures such as the size and efficiency of farms and the availability of finance. In developing countries, where budgets are limited, the use of border protection is a more common policy choice. There are big differences between OECD countries concerning the agricultural structures. If the average farm size is still fairly small in the EU we have to compete with farm structures in the US (ten times as big) or even with Australia where the average farm size is 3000 ha! If it comes to an international comparison between the support provided to farmers the question is not how much is paid (per labour force very close between the US and the EU) but how is this support provided. Does it impact on trade or are the support instruments decoupled from production and trade. This is the big debate in the multilateral context. Evolution of CAP spending along sectors EAGGF Guarantee For all of the above reasons the EU has made a policy choice to provide support for its farmers based on the objective of ensuring a sustainable agriculture in the Community, including not only economic, but social and environmental criteria as well. In 2005, total farm spending amounts to around 48 Bill. It should also be noted that most of the budget support is concentrated on the crop products (cereals, oilseeds, protein crops, sugar, olive oil etc) and that the livestock sector is mainly supported through the system of border protection and to a less extent through direct payments or market intervention. 4

Graph 3: Evolution of CAP spending along sectors EAGGF Guarantee Mio (ECU / EURO) 60,000 50,000 40,000 30,000 20,000 10,000 0 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 2000 2002 2004 Crops Livestock Other expenditure Rural Development This support provided to EU farmers is compatible with the commitment to substantially reducing trade-distorting domestic support, since not all forms of domestic support are trade distorting to the same extent. Trade distorting support has been reduced significantly already and the most recent CAP reforms from June 2003 and April 2004 have still further reduced this to lower levels. In reducing subsidies that are directly linked to production, the EU would pay more for non trade concerns such as maintaining and enhancing the rural environment, while ensuring minimum levels of income for farmers. 35 30 25 Billion euro 20 15 10 5 0 1993 2000 2008 Market measures Coupled direct payments Single farm payment 5

Support to EU farmers will continue to be moved from the most trade distorting amber box into blue box and finally into the green box. Amber box payments contain export subsidies, market intervention, storage and handling costs and the effects of price differential between domestic and world prices. The blue box was created in the reforms of 1992 when the arable crop premium and the headage premium were introduced. Price cuts for cereals and beef were compensated at this time by direct hectare or headage premium which reduced the payments classified as market measures from 32 Bill to 10 Bill at date. In 2004, EU-15 spent roughly 26 Bill in form of coupled direct payments. The CAP reform decisions of 2003/04 introduced the single farm payment which breaks the link between support payments and the current production. These new payments are decoupled and therefore none or only very little trade distorting. According to the WTO-colour nomenclature, the single farm payment is clearly green and therefore not subject of any capping or reduction commitment in the ongoing round of trade negotiations. The United States of America who always claims to be prepared to step out of support for agriculture, also assist their farmers with amounts comparable to those we find in the EU. The difference is not so much the principle of support but the level which is used. Outside the WTO notification, the most widely used indicator to measure support to agriculture is the Producer Support Estimate (PSE) 1 developed by the OECD. Most political arguments as regards the level, the evolution and the effects on trade are derived from this measures which have in itself also some strength but also some basic limitations and weaknesses. These should be derived in a simple but consisted form. 1 Producer Support Estimate (PSE): the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm-gate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income. It includes market price support and budgetary payments, i.e. gross transfers from taxpayers to agricultural producers arising from policy measures based on: current output, area planted/animal numbers, historical entitlements, input use, input constraints, and overall farming income. The %PSE measures the transfers as a share of gross farm receipts. 6