Developing country impacts of the next CAP reform

I would like to use this post to draw attention to a recent paper which I wrote for the International Centre for Sustainable Trade and Development which examined how developing countries might be affected by the Commission’s proposals for CAP reform set out in the November 2010 communication. One of the positive features in the communication (and in the accompanying consultation paper for the impact assessment) is the explicit recognition that there is an obligation to consider the impacts on developing countries under the EU’s Policy Coherence for Development commitment.

The next CAP reform will be politically very contentious because it will affect the distribution of payments (both direct payments and rural development payments) between the Member States. However, I argue in this paper that this internal debate has very limited significance for the EU’s trading partners. The important issues for third countries are proposed changes to (a) market management instruments and (b) the scale and design of direct payments, including rural development measures.

But the Commission Communication has very little to say on market management and market access issues. For example, it is disappointing that the Communication fails to give a clear commitment to phasing out the use of export subsidies after 2013. The Commission sees this as an integral part of the Doha Round negotiations which, like improvements in market access, should wait until there is a successful outcome to the Doha Round.

The main action will be the removal of quotas on milk production after 2015 which will lead to increased production of dairy products and a lower internal EU price. This will tend to keep global dairy products prices below the level they would otherwise reach. Recent trends in EU milk production indicate that quotas are no longer a binding constraint on milk output in an increasing number of Member States, so the impact of their removal will have an even smaller effect than might have been envisaged some years ago. The possible removal of sugar quotas after 2015 also needs to be kept in mind, given its greater ramifications for developing countries both as exporters and importers.

Many developing countries have raised concerns that the sheer scale of direct payments to EU farmers, including decoupled income support payments, could cause more than minimal trade distortion as required for Green Box eligibility under WTO rules. EU figures show that the share of direct payments and total subsidies in agricultural factor income is 28% and 40% respectively for the EU-27, suggesting that much EU agricultural production would not be economically sustainable, at least with current farm structures, in the absence of this support.

The proposed reform will influence this concern in two ways, by altering both the composition of Green Box expenditures and their scale. The targeting and greening of direct payments proposed in the communication could shift direct payments from decoupled income support to environmental and regional assistance programmes which would reduce concerns about their trade-distorting impacts. Although it is unclear how a redefined direct payment would be classified in WTO terms until the precise details are determined, in principle attaching additional conditions or greater targeting to the receipt of direct payments will always lower their trade-distorting impact.

These composition effects will be less important than the decisions made about the overall budget envelope to be made available for the CAP and how this is divided between direct payments and rural development payments, and in turn how the direct payments envelope is divided between the basic income payment, the green payment and the natural handicaps payment. These parameters will not be decided until the very end of the negotiation processes involving both the future of the CAP and the future of the EU budget, and thus will not be known for some time.

While it is understandable that developing countries are suspicious of the apparent ‘box-shifting’ resulting from the redesign of EU agricultural subsidies, in practice this is very much a secondary issue. The explicit intention of defining different boxes was to encourage countries to move from more trade distorting forms of support to less trade distorting forms. We already see that the EU has moved from a net exporter status of particular products to a net importer status as a result, e.g. in sugar, beef and poultrymeat.

The key barriers to developing country exports remain the high tariffs on imports and the continued resort to export subsidies. To tackle these, agreement is needed in the Doha Round trade negotiations. Compared to the potential gains on offer to competitive developing country exporters from a significant reduction in EU trade barriers, the redesign of direct payments which is the focus of the November 2010 Communication is mostly a sideshow.

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4 Responses to “Developing country impacts of the next CAP reform”

  1. Christophe Bureau →
    February 6, 2011 at 10:16 #

    Hi Alan.

    Your final paragraph is a bit puzzling, and does not seem to correspond the content of your ICTSD paper. I agree that the redesign of direct payments will not change much for DCs (presenters at FAO seminar at the end of 2009 largely concluded that these payments had little impact on DCs anyhow. A book edited by the ICTSD in 2010 did not seem to agree, but in my humble opinion this book is not the best work commissioned by the otherwise excellent ICTSD). “Real” DCs (I am talking about poor countries, not BRICs) are hardly affected by EU “high tariffs” because of the numerous preferences that you mention. Basically only non-LDC Asian countries face high EU tariffs, and not even on their main exports (palm oil, cassava, etc.). We just cannot find any exporter in our surveys in Africa including Maghreb that complains about EU tariffs, for example. And if you look at the EU tariff structure, the tariff escalation that has often been denounced by NGOs is largely a myth. Many tariffs on processed products actually reflect the tariff on sugar content, and often not all of it, meaning that tariff de-escalation is more common than escalation.

    It is hard to believe that recent export subsidies have had a large effect either : export subsidies on dairy in 2009 were very limited and most these “real” DCs are structurally net importers. The EU subsidised pigmeat in 2007, but it had little impact either apparently (the only poor country where the EU shipped subsidized pigmeat exports seem to have been Angola, and it was apparently mostly designed to staff working on oil rigs… I doubt that Yemen and Mauritania’s pork producers suffered a lot either). Regarding poultry, the limited subsidized export were a drop in the ocean compared to the unsubsidized by-products that are exported by the US, with a depreciated currency.

    I tend to believe that the only “ag” policy that has a significant impact on poor countries is now the biofuel one. The surge in vegetable oil prices affects very significantly some consumers, for example in Middle East. It is directly caused by the EU biodiesel policy. The “giant sucking sound” of European cars in the rapeseed oil market has led the food industry everywhere to turn to more palm and soybean oil. The effect on wheat prices of the EU ethanol policy is limited but we do for vegetable oil what the US do for grains.

    Of course in this complex world, the EU and US biofuel policies have mixed effects. They drive world prices up which is bad for DC consumers. The lack of flexibility of the quantitative targets in both the EU and US rigidifies demand and fuels price volatility, again hurting DC consumers. But on the other hand, if the US and EU dumped on the world markets (as they used to do in the 1980s) the amount of corn, wheat and oilseeds they now channel into their biofuel sector, this would be much worse for DC producers.

  2. Deborah Mallender →
    February 6, 2011 at 11:50 #

    Hello All

    I respond to these postings in general and the response below attempts to strip out exclusive language for good reason. As way of introduction mine is a background of Geography, Economics, Law and Education with a good knowledge of the practicals of farming.

    What is never taken into account when considering agricultural Economics is the high cost of land, insurance, standards of operations and utility overheads found in European countries. As someone who has lived both in the Middle East and N America these facts are stark.

    It simply would not be possible for farming to take place amongst the majority of farmer producers in Britain without providing a level playing field. Many of the overheads are directly as a result of EU legislation. (I exclude multinational companies masquerading as farmer producers for a moment)

    This country has to feed 65 million and growing potentially without recourse to other volatile markets internationally. That population unless anyone has missed something recently is a mixture of all races and this has its own effect on the population rise. Reasons connected with war, lack of democracy and economic problems fuel this movement.

    This is not the time to miss the obvious in the pursuit of goals simply based on statistical evidence. As always much information is lost depending on what is measured and what is left out. Much information is missed and this needs to accounted for in policy decisions in terms of what don’t we know. Contingency models are essential.

    The bio fuels argument played out is of crucial importance for food prices as we see more land supporting fuel crops than food crops. How exactly are we calculating what is a Public Good? (reference to thematic working group 3 )

    Reportedly we burnt 1 million tonnes of wheat last year which presumably was fed into the national grid. When farmers in Britain request product from their wind turbines is fed into the national grid they are told there is simply no spare capacity on the grid to take this power.

    Again what is being missed out of the equation when we consider the question of food production?

    We must challenge the information provided simply by statistics.

    Far more information by way of case studies is required coupled with other Qualitative research methods.

    Deborah Mallender

  3. Alan Matthews →
    February 7, 2011 at 10:09 #

    @JC

    Your comment is well-taken. I agree with you that Europe’s CAP is no longer a significant trade barrier for poor developing countries, and I have just completed a paper which makes this point for Africa which I hope to link to shortly.

    Furthermore, using standard income-weighted welfare measures, many poor developing countries would probably be made worse off by a further CAP reform (though not necessarily by a reform of OECD agricultural policies more generally – the EU is rather unique in the extent of its agricultural trade preferences for poor developing countries). If, in addition, we introduce a group-weighted welfare measure and take into account the flip-flop in preferences that occurred among international agencies and development NGOs around the time of the 2007-08 food price spike from a farmer-biased welfare concern to a consumer-biased welfare concern, then the apparent welfare effects of further CAP reform would be even more negative for poor developing countries.

    Nonetheless, the CAP continues to influence and distort world market prices for a limited number of commodities where protection remains high. My point in the last paragraph of my post was to highlight that (a) trade measures rather than direct payments are a much more important source of distortions, and thus (b) from the point of view of competitive developing country exporters (and here I had in mind specifically the non-LDC Asian (and Latin American) exporters), the Commission Communication which is almost entirely concerned with the redesign of direct payments is merely a sideshow.

    I agree that the comment was not sufficiently nuanced and thanks for the opportunity to clarify this.

    My view is that the main cost of the EU’s remaining agricultural trade barriers is the message it sends to trading partners (and particularly developing countries) that trade policy interventions are legitimate and necessary and indeed essential to manage the political economy of agricultural adjustment. If the EU, with its vast resources and relatively small agricultural sector, cannot do without market management measures for income support and stabilisation purposes, this legitimises the desire of developing countries to hold on to their trade barriers which are increasingly the main source of distortions for other developing countries.

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