The European Commission has announced that the EU will re-impose tariffs on imports of cereals (durum wheat, high quality common wheat, rice, sorghum and corn) before the market intervention mechanism opens on November 1 because of the recent sharp drop in wheat prices. In late June of this year the Commission suspended tariffs for the 2008/09 marketing year that began on July 1. Under WTO rules the EU has the right to re-impose applied tariffs.

The EU Commission first suspended import tariffs beginning January 1, 2008 as livestock producers faced record feed costs after two years of below average cereal harvests. Production in 2008 is estimated at 309 million metric tons (MMT), up 19 percent from 2007, and supplies are expected to be ample for domestic and export needs. Without the re-imposition of tariffs EU imports were expected to decline in the 2008/09 marketing year.

Changes in EU trade had a major impact on world grain markets in the 2006/07 and 2007/08 marketing years. According to USDA Foreign Agricultural Service (FAS) estimates almost half of the wheat consumed in the EU is fed to livestock. The decline in wheat production in 2006/07 and 2007/08 led to a sharp rise in wheat and coarse grains (mostly corn) imports from an average of 9.8 MMT in 2004/05 and 2005/06 to 13.1 MMT in 2006/07 and 26.7 MMT in 2007/08. EU exports declined from an average of 19.8 MMT in 2004/05 and 2005/06 to 16.8 MMT by 2007/08. That is a shift of almost 20 MMT in net imports, and that change accounted for 8.3 percent of world trade in wheat and course grains in 2007/08 and 83 percent of the 23.8 MMT increase in world trade to 242.2 MMT in 2007/08. EU exports are projected at 24.2 MMT in 2008/09 with imports at 8.3 MMT, a shift from a net 10 MMT imports to a net 16 MMT exports for a total of 26 MMT change in trade as total world trade in wheat and coarse grains declines by 10 MMT.

The bottom line is that the EU protects its cereal markets when world supplies are high and market prices are low and drops its import tariffs and draws on world supplies to the maximum extent possible when domestic supplies are short. After market prices decline for a couple of months, but remain at high levels compared to average prices of just a few years ago, the EU re-imposes tariffs on cereals to protect its domestic farm programs.

This analysis should not be viewed as overly harsh on the EU programs. The EU is doing what it is allowed to do under the current WTO rules, and EU programs are much more open and less market disruptive than they were 10 and 20 years ago. The EU was also willing to make substantial changes in the Doha Round of WTO trade talks that fizzled out this summer. It does point out the need to include domestic supply management programs in WTO discussions. Until bound tariff rates are reduced substantially, there must be constraints on the ability of major countries to shift the cost of variations in domestic production to other countries. This year the EU will account for 17 percent of world wheat and coarse grain production, 16 percent of consumption, 3.6 percent of imports and 10.4 percent of exports.

The EU Commission decision to re-impose import tariffs on cereals coincided with the Commission’s release of a “Green Paper” on how European farmers can do more with the high quality food they produce to blunt the competition from lower cost imported products from developing countries. The Commission will accept input from stakeholders until the end of this year and release a report by May of next year. Any legislative changes would come later in 2009 or 2010.

Quality trumping price on food items is not a new concept, and it would seem that recent issues like melamine in Chinese milk products would make food quality and safety easy winners. Suggestions in the paper are the same or similar to ideas used in the past as barriers to trade such as geographical indicators, aesthetic standards, country of origin labeling and organic standards that can all be used to restrict imports when domestic supplies are large and let in supplies when products are in short supply. Newer ideas on the list include agricultural sustainability, climate change and animal welfare.

All of these actions protect EU producers and reduce the opportunities for EU consumers to have access to a wider array of products at a reasonable price. Trade policy should be just the opposite. Consumers have the right to reject imported products and only buy domestic for whatever reason. It is the role of marketing to convince consumers of the benefits of domestic products.

EU agricultural trade policy is being increasingly drawn into the debate over the future of the EU’s Common Agricultural Policy (CAP) that drives policy throughout the 27 member countries. Funding for CAP is guaranteed through 2013, but the program has been undergoing a mid-term “Health Check” led by the current Commissioner for Agricultural and Rural Development Mariann Fischer Boel who would like to see more funding shifted from direct payments to producers to funding for rural development. The Health Check effort and the EU agricultural position in the Doha trade talks have caused a push back by politicians more interested in having payments directed to farmers and keeping out import competition. The assumption is that less money will be available for CAP after 2013, and it will be distributed someway other than on historical payments from the 1980s.
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The current CAP commodity programs and the recent EU agricultural trade policy reforms in the Doha trade talks may be the highpoint of the shift to more open EU agricultural trade. Trade policy may be more driven by the current economic downturn and positioning for the new CAP policy to be debated in 2011 or 2012.