U.S. farm policy is the center of attention as the WTO trade policy debate drags on. If the talks finally get serious, the EU’s Common Agricultural Policy (CAP) will share some of the spotlight. In August of this year the Australian Bureau of Agricultural and Resource Economics (ABARE) released “The European Union’s Common Agricultural Policy: A Stocktake of Reforms” that assessed the EU’s efforts to reform trade distorting agricultural subsidies.

That an ABARE report would be skeptical of EU reforms is not surprising. The Australian government has long complained about U.S. and EU domestic farm policies. The analysis focuses on the key impact of domestic subsidies, “To be minimally distorting to production, consumption, trade and prices, changing from current coupled payments or price support to decoupled support needs to be almost identical in its effects to the complete removal of the coupled payments.” That is a tough test for the CAP and U.S. policies.

The CAP is rooted in the Treaty of Rome that created what was then called the European Community (EC). Agricultural policy was to increase productivity, ensure a fair standard of living, stabilize markets and ensure the food supply at reasonable prices. The guiding principles for creating the CAP in the early 1960s were free internal trade within the then six countries, preference for products from member countries and joint financial responsibility. The EC market was insulated from the international market.

The CAP ran into budget problems in the early 1980s as agriculture achieved its goal of increased productivity at a time of depressed world demand. In the first half of the 1980s agriculture accounted for 70 percent of the EC’s budget. The crisis was solved by increasing taxes and limiting spending on the CAP to 74 percent of the increase in gross national income of the EC. The budget crisis led to the 1992 MacSherry reforms which involved “progressively replacing the established high insulated internal prices by support prices closer to world market levels.” Producers were increasingly support by direct payments. The changes set the stage for agreement on agricultural issues in the Uruguay Round of trade negotiations in 1993. The current Single Payment Scheme was proposed in 2003 and begun in 2005.

The EU is the largest importer of agricultural products and a major exporter. Recent EU Commission projections to 2013 expect changes in trade:

  • wheat exports will double from the low levels in 2004-2005,
  • net exports of pig and poultry meats and net imports of sheep meat will remain unchanged,
  • net exports of cheese will remain relatively constant, but net exports of butter and skim milk powder will decline markedly,
  • the EU will be a net importer of sugar after being a net exporter, and
    net imports of beef will continue to increase.

These changes have to be viewed as positive compared to policies of the past 40 years. The EU will still be a substantial exporter, but the sugar, meat and dairy trade will be much improved as a result of the reforms.

The EU will still have a major impact on the cheese market because EU production is large in relation to international trade. A 5 percent increase in EU cheese production with no change in domestic demand would result in a 30 percent increase in internationally traded supplies and depress world cheese prices. Distillation into alcohol is used to remove 15 percent of the EU’s wine production each year. The EU Commission has struggled to arrive at a program that will permanently reduce surplus production. Import programs continue to provide preferential treatment to selected suppliers, even though they are high priced suppliers. Aid through trade preferences is economically inefficient and rewards poor choices on resource allocation.

As noted earlier, the decoupled payment program, the Single Payment Scheme, continues to be troubling. The authors stated, “there is considerable doubt about the extent to which various aspects of EU reforms will actually deliver reduced market distortions.” Questions are raised about the decoupled payments meeting WTO green box requirements that the payment not be linked to the land farmed in a given year. The larger issue is whether the current payment system actually results in less production that would have occurred if the pre-1992 programs were still in place.

Under true decoupling, producer and consumer decisions would respond to domestic prices determined by world market forces. Consumer prices now come closer to reflecting world market prices, but the cost of programs has been shifted to taxpayers by making direct payments to replace the producer benefits that were provided by market interventions. If producers believe direct payments will continue into the indefinite future if they continue to grow crops, the payments are not decoupled from production. If payments do influence production, then they are not minimally trade distorting.

If EU programs are to be minimally trade distorting, they also must address tariffs and reduce the number of special safeguards. Under the Uruguay Round Agreement the EU has special safeguards on 662 tariff lines, roughly one third of the agricultural tariff lines. Meat and offal have 192 safeguards, followed by cereals and products with 156 and dairy with 151. In the current talks the EU has asked for 8 percent of the tariff lines, roughly160 lines, to be labeled as “sensitive products” with less than the normal reduction in tariffs and continuation of special safeguards.

The real issue is how to define programs as minimally trade distorting. The current rules identify certain programs that qualify. The Australians believe the payments continue to result in unacceptable trade distortions.