Published: The Financial Express, July 07, 2003
By Pradeep S Mehta
Why the euphoria over the decision to reform the much debated Common Agricultural Policy (CAP) of the European Union? It is but a blip in trade semantics. Perhaps the decision to decouple subsidies from production would act as a disincentive for EU farmers to over-produce.
But, whether it will curb the trade-distorting effects is a million dollar question. Farm subisidies is one among a few contentious issues, acting as a logjam in the Doha Round of trade negotiations. The reform decision was adopted by EU farm ministers at Luxembourg on June 26.
The world heaved a sigh of relief in the hope that it would help move the ongoing deadlock in the negotiations. Said Dr Supachai Panitchpakdi, Director General of WTO: “The EU has done a great deal to move the process forward”. This is probably a politically correct statement for the WTO head to make, though his feelings are not shared widely. More on that later.
This small step is but one of the three main pillars of the required reform in agriculture i.e., trade-distorting domestic subsidies. The other two — and certainly the more critical — are: export subsidies and tariff barriers.
The proposal is to take out $50 billion from the left pocket and put it into the right one, i.e., take it out from direct production subsidy and give it to the same farmers as income support.
However, there’s a catch here. Production-based subisidies will continue to be paid for as much as 25% of the EU’s cereal crops and 40% of its beef production. These two products are of greater interest to poor countries as well as the Cairns Group (alliance of developed and developing country agricultural exporters).
Further, overall support given to EU farmers might not reduce significantly, leading to continued over-production and dumping of surpluses in developing countries.
Export subsidies depress prices and do not allow exports from the poor countries to be competitive, in third countries as well as in the EU. On the other hand, high protective tariffs restrict exports into the EU.
Thus, agriculture in poor countries suffer and hinders development and poverty-reduction efforts. EU consumers also suffer because they pay high prices for agricultural goods. Thus, it’s a lose-lose situation for everyone. The only winners are a few rich farmers in the EU.
In a 1992 study, the European Commission found that 80% of the subsidies went to 20% of farmers. The British Sunday Times reported that Queen Elizabeth is to receive GBP220,000 for her Sandringham Estate, while her daughter, Anne, is to receive GBP 400,000 over five years for her Gatcombe Park farm. Even Arab princes are cashing in, reported the paper. Saudi Prince Khalid Abdullah al-Saud claimed GBP120,000 in 1995 for his country estate in Kent. The situation hasn’t changed much after a decade, and a proposal to address this creamy layer does not seem to have been taken up seriously.
Be that as it may, agricultural support in other rich countries is equally scandalous and thus distorting development in the poor world. The US is the second biggest subsidiser in absolute terms, though as a percentage of farm incomes, Switzerland, Norway, South Korea and Japan beat the EU and US. On the other hand, the US has cleverly hidden most of its subsidies under permissible heads in the WTO agreement on agriculture. The OECD in December, 2001 reported the total subsidy figures (see table).
In responding to the EU farm minister’s decision, US officials reacted that the overhaul doesn’t go far enough, rejecting the proposition that the US is now obligated to overhaul its own farm policy (as reported byThe Wall Street Journal). Even the US farm groups joined the chorus and charged the EU for not travelling the whole distance, calling the EU move “minimal reform”.
If one reads the reactions carefully, one can see that the euphoria maybe short-lived. Agriculture has always been the most contentious issue between the two trading giants, and has been either a deal-maker or a deal-breaker in trade negotiations. On the three issues of liberalisation in agriculture, the US stand appears to be much more clear than the EU’s. It has indicated its willingness to eliminate export subsidies and cut tariffs to bring them down to a peak of 25%.
A main cause for the US’ dismay is access into EU markets is more important than subsidies also. Notwithstanding the stand-off on GMOs, the US farm lobby would like to see tariff barriers brought down. This is vital for the success of farm talks at the WTO, and thus the US and the Cairns Group are putting emphasis on this.
The battle is not over yet, and the ball may be thrown back into the EU’s court. If the EU is able to convince the US to reduce its own subsidies, then the Doha round may be able to move forward with less hiccups. As in any similar situation, other countries also have a stake, and how they see the situation will also be of consequence in the forward movement of the Doha agenda. In sum, things are still muddled and not so straightforward in this complex scenario. As far as the EU is concerned, there is clearly a huge task before Franz Fischler, the EU farm supremo. In order to deliver, he has not only to deal with recalcitrant member states (France, Spain and Italy), but also European farm lobbies (like COPA). It was perhaps too early for him to have uncorked the bottle of champagne at Luxembourg.