In late October the EU offered a second comprehensive proposal for WTO trade policy reforms. The proposal and official EU statements give a clear picture of what is needed to work toward a WTO agreement on agricultural issues over the next twelve months. Compared to the results of the Uruguay round of negotiations that ended in 1994, there has been a sea change in the bargaining position of the EU.
The EU Common Agricultural Policy (CAP) before the mid-1990s focused on production to meet domestic needs. High import tariffs kept many food products out of the region unless there was a temporary shortage. High support prices encouraged excess production which was exported by using subsidies. Preferential access was provided for certain products like sugar from developing countries. When exporting surpluses was not possible, internal stocks increased and production restrictions were imposed. The EU has spent the last 15 years unwinding the old CAP.
The changes can be seen in the proposed reductions of agricultural import tariffs from an average of 23 percent to 12 percent, a 46 percent reduction. A 12 percent average would have been unthinkable 15 years ago. The average U.S. rate is now 12 percent. The EU suggests four bans of tariffs, with tariffs in the highest ban cut by 60 percent, the next ban cut by 50 percent and the two lowest bans cut by 45 percent and 35 percent. No tariff would be higher than 100 percent, reducing their highest tariffs by more than 50 percent. The proposal would allow 8 percent of the tariff lines to be labeled as “sensitive” and have higher tariffs. Tariff rate quotas would be expanded for sensitive products so market access would be increased. Despite the changes of the last 15 years, the EU continues to hold onto a few remnants of its old managed trade philosophy.
The U.S. has proposed four bands of tariffs with a cut of 90 percent at the top end of the highest tariff ban and a 55 percent cut for the lowest tariffs. The highest tariff for non-sensitive products would be 75 percent, and only one percent of the products could be classified as sensitive.
The EU has gone further on export subsidies by agreeing to eliminate them over six years if other countries do also. The U.S. export credit programs and food aid programs are considered by the EU as export subsidies. The U.S. has agreed to limit export credit programs to six months at commercial rates. Making changes in the U.S. food aid programs are much more contentious. The EU has also proposed that Canada, Australia and New Zealand make further changes in monopoly state trading enterprises (STEs).
The EU has included in its latest proposal a list of trade-offs that must be part of a final trade pact. Discipline in U.S. trade distorting domestic support programs is at the top of the list. The counter cyclical payment programs for grains, cotton and oilseeds are a key issue. The U.S. has proposed that they be moved to the blue box of trade distorting programs and capped at 2.5 percent of the value of total U.S. production, roughly $5 billion per year. Comments by EU officials acknowledge that limits on amber box programs proposed by the U.S. could reduce spending under the marketing loan program.
The EU also wants recognition of what are called Geographical Indicators for foods grown in certain areas in the EU, such as Parmesan cheese and Parma ham. This has been a contentious issue for the U.S., Canada, Australia and other countries that have used the names to identify similar products. EU officials have repeatedly stated this must be part of any trade deal.
On non-agricultural issues, the EU wants a formula for cuts on applied tariffs on industrial products in developing countries. The developed countries already have industrial product tariffs that average only 4 percent. The EU notes that industrial products account for 85 percent of EU trade and for 75 percent of trade for developing countries. The EU also wants market access of services like banking, transportation and communications. Developing countries need these services to enhance development, and the EU has expertise in those areas.
The EU focus on industrial tariffs and services is recognition of the fact that, as with the U.S., a trade agreement needs benefits for businesses outside of agriculture if it is to be accepted back home. Those benefits are needed to offset the costs of agricultural trade policy changes.
Exempting the 50 poorest countries from making any tariff reductions for this round and allowing tariff free access to developed country markets continues to be an EU priority. They also want other provisions of a Trade Related Assistance package to help lesser developed countries participate in trade.
The EU has stated that this proposal is its “bottom line” offer for the negotiations, but it is not the end of negotiations. The proposal includes the seeds of an agreement on agricultural issues.
On tariff issues the final agreement may be midway between the U.S. and the EU positions. U.S. food aid programs and state trading enterprises in other countries are not deal-breaker issues for the EU and accommodations will be reached. Not requiring the least developed countries to make reductions in tariffs is bad economic policy, but is not likely to prevent an agreement. The U.S. counter cyclical payments have been at risk since the start of negotiations. The geographical indicators may be the hardest of all to reach consensus on, but is an issue that the EU negotiators will need success on to sell the agreement back home.