Forum for the Future of Agriculture 2015 – Remarks on EU agricultural trade policy

The 8th Forum for the Future of Agriculture (FFA2015) was held yesterday in Brussels. This annual meeting, organised jointly by the European Landowners’ Association and Syngenta, attracts around 1400 participants and has established itself as one of the principal fora for debate on the future of agricultural policy. What makes the event interesting is that it attracts a good number of participants from among farmers and the agri-business sector while also being open to environmental NGOs and others critical of current agricultural practices.

The theme for yesterday’s meeting was the UN Sustainable Development Goals and possible implications for EU agriculture, with contributions from both Commissioners Hogan (Agriculture) and Vella (Environment, Maritime Affairs and Fisheries). Sessions explored issues ranging from global food security (do we really need to produce more food?), developing a sustainable agriculture (is organic the only legitimate solution?), implications of the circular economy concept for jobs and growth (is there more to this concept than simply pricing in the value of externalities?) and a final session on agricultural trade policy, competitiveness and growth (in which TTIP took centre stage), in which I participated as a panellist.

For those interested, videos of the presentations and debate can be watched at the following URL.

I reproduce below an extended version of my remarks on the role of agricultural trade policy in the context of European competitiveness.

The (lack of) importance of agricultural trade

Passions are often aroused by discussions of agricultural trade and further agricultural trade liberalisation by the EU, but it is worthwhile to remember Benjamin Franklin’s dictum that “No nation was ever ruined by trade”. It is true that the EU is both world’s largest importer and exporter of agri-food products, but this is mainly because of its size. The comparison greatly overstates the role of trade as either a source of supply or a market outlet for EU agriculture and the food industry.

Of the total supply of primary agricultural products on the EU market, around 11% are imported (a proportion of these are non-competitive imports of tropical fruits and beverages) and just 4% are exported, given that most agricultural products have to undergo at least some minimal processing before they can be traded.

But even for food, drink and tobacco products, imports account for only between 5-7% of total supply on the EU market and exports outside the EU take up just 7% of the total output of the food, drink and tobacco sector in 2011, according to Eurostat supply and use tables. Of course, if intra-EU exports are also taken into account, the importance of trade increases substantially, with around 40% of food, drink and tobacco output exported either to other member states or outside the EU. Furthermore, future demand growth in the EU will be relatively slow, so the export market is more important in incremental terms than these average figures suggest.

Agri-food trade is also of limited importance in the context of overall EU trade, accounting for around 6% of total EU merchandise imports and exports. EU trade policy is, rightly, more focused on what will happen if trade barriers are reduced for the 94% of non-agricultural merchandise trade as well as for services, although because of its particular characteristics agricultural issues loom larger in trade negotiations than the economic importance of the sector would warrant.

Nonetheless, agricultural trade is important in ways beyond its size in quantitative terms. The EU is a net importer of raw agricultural commodities, and a net exporter of processed foodstuffs. Trade thus allows the food sector to specialise in higher value commodities, increasing the returns received by farmers. Trade allows consumers to benefit from lower prices and a wider range of food commodities. Imports increase the level of competition on food and input markets and help to control market power which is an important policy concern. Trade also helps to drive productivity growth. But trade openness means that agricultural markets are vulnerable to imported price volatility, even as trade helps to stabilise prices in the face of domestic shocks.

The EU thus has a strong interest in international trade rules which limit arbitrary interventions in agricultural markets and which facilitate trade flows in line with countries’ different comparative advantages under conditions of fair competition.

Conclude the Doha Round

For this reason, the EU has been a strong supporter of multilateral rules to govern international agricultural trade. Agreement on disciplines on agricultural support and protectionism was an important achievement of the GATT Uruguay Round. However, it was recognised at the time that the Uruguay Round established a framework but that further efforts would be needed to lower agricultural trade barriers.

There are those who argue that agriculture should not be subject to multilateral trade rules because of its exceptional character. The experience of the 1980s with export subsidies is a convincing counter-argument. US and EU taxpayers competed to finance extravagant export subsidies which mainly resulted in lower world market prices and were of little benefit to farmers on either side of the Atlantic but which did enormous damage to developing country farmers.

WTO rules do not prevent countries pursuing farm policy objectives but encourage the use of policy measures and instruments which do not distort trade and thus undermine the farm policy objectives of other countries. The need for such common disciplines was again underlined by the way unilateral action by countries to restrict exports exacerbated the food price spikes in 2008 and 2011. We also now observe significant growth in trade-distorting agricultural support in some emerging economies which in some cases now exceeds levels in the developed countries.

WTO members made considerable progress towards a draft set of modalities by 2008 when negotiations broke down. These draft modalities would help to redress some of the imbalance in commitments between developed and developing countries that resulted from the Uruguay Round as well as delivering an important boost to developing countries’ trade. One can see the outlines of a Doha deal if the political will were there to reach it, but among important trading countries, including both the United States as well as some of the bigger emerging economies, this seems not be to the case.

Despite the intensive efforts of the current Director-General, WTO members are not likely to meet their self-imposed deadline of the end of July to agree a work programme to complete the Doha talks. Whether agreement can be reached by the end of this year, when also a solution is due to the issue raised by India of the treatment of minimum support prices when procuring public stocks for food security purposes, is a moot point.

In an optimistic scenario, successful outcomes in the other two sets of major international negotiations this autumn and winter, namely, the September United Nations session to agree a set of Sustainable Development Goals to 2030 and the climate change agreement negotiations in Paris in December this year, might help to reignite a forward momentum also in the Doha talks. But I am not convinced that some of the major players are yet ready to make the necessary concessions to successfully conclude a deal.

EU agricultural policy and development

Despite the lack of progress at Doha, the successive reforms of the Common Agricultural Policy have greatly reduced the EU’s distortionary impact on world markets. Export refunds will now be used only in situations of market crisis and practically have not been applied in recent years. Direct payments are now largely decoupled although with some back-sliding in the recent 2013 CAP reform.

Tariff barriers remain high, although the EU grants extensive preferences for low-income African and least-developed countries through duty-free and quota-free access under the Everything but Arms and Economic Partnership Agreements.

A recent study for DG AGRI showed that these preferences are effective. Imports from these countries are greater than they would have been without these preferences. Nonetheless, the share of EU imports of these preferred countries has continued to fall. Trade preferences are not sufficient to make up for more fundamental supply side structural problems which limit the export capacity of these countries. Supporting investment in trade facilitation and encouraging private investment to link farmers in these countries to global supply chains can do more to assist their exports than preferences as such.

Regional trade agreements – the TTIP

With multilateral negotiations stalled, the EU has actively pursued regional trade agreements in recent years, including the TTIP agreement with the United States. From the EU perspective, TTIP is seen as a potential stimulus for an EU economy still stuck in crisis mode and as a way of avoiding loss of market share if the Trans-Pacific Partnership comes into being. Although the US is the EU’s largest single trade partner in agriculture, overall trade flows are still limited, with 13% of EU food exports going to US and 8% of its imports coming from there. Trade on both sides is impeded by both tariffs but particularly non-tariff measures and addressing food and agricultural trade irritants will have political significance for final approval.

A European Parliament study showed that trade gains from the elimination of tariffs would be rather minor, but that larger gains could be achieved if regulatory and administrative barriers are addressed simultaneously (there is a useful summary of its findings in an interview with the principal author of this study, Professor Jean-Christophe Bureau. See also my presentation to an IATRC conference last June on EU perspectives on the role of food and agriculture in the TTIP negotiations). The largest export gains for the EU would be in red meat, sugar, white meat and dairy. The largest export gains for the US would be in the same sectors but from a much smaller base, with impacts signalled especially for the suckler cow sector, ethanol, poultry and cereals. Overall agricultural value added in either region would change very little, mainly because trade is small in relation to domestic production in both regions.

However, the difficulties of reducing the importance of non-tariff measures to agricultural trade should not be underestimated. Non-tariff measures may add greatly to trade costs, but are often introduced to address market failures and externalities, to protect the environment or consumer or animal or plant health and safety. As one example, implementation of the US legal mandate to introduce 100% scanning of all containers bound for US ports, now postponed again to 2016, is estimated to add 10% to trade costs of all US imports, a much higher figure than average US tariffs.

The US and EU share a basic mandate to achieve a high level of food safety and consumer protection in the EU General Food Law 2002 and the US Food Safety Modernization Act 2011. Both laws contain many similarities in approach, but cultural, political and institutional differences between the US and EU result in different perceptions of risk and thus different regulatory outcomes.

The long history of trying to encourage regulatory cooperation between the two regions has had only limited success. In 1995 the New Transatlantic Agenda formalised regulatory cooperation agreements in most areas of economic activity. A Joint EU-US Action Plan was agreed outlining over 150 specific areas of cooperation. Guidelines for Regulatory Cooperation and Transparency were agreed in 2002 to encourage US and EU agencies to consult each other on a regular basis. A Roadmap for EU-US regulatory Cooperation and Transparency was agreed in 2004. In 2005 a High-Level Regulatory Cooperation Forum was set up. It’s not for want of trying that regulatory barriers remain so important in agricultural trade.

Our experience in eliminating non-tariff barriers to trade within the EU single market suggests that a very high level of political cohesion is necessary for success. Even leaving aside high-profile issues such as hormone use in beef production, beta agonists, pathogen reduction treatments and biotechnology, this fundamental level of political cohesion is not shared by the US and the EU.

There is of course value in trying to remove regulatory differences where this can be done. Successes in the agri-food area include a Veterinary Equivalence Agreement (1998), a Wine Agreement (2006) and the Organic Equivalence Agreement (2012).

The European Commission over-sold the significance of the agreement in the initial stages (talk of creating a single market between the US and the EU was way over the top and rightly gave rise to warning signals amongst civil society groups and the wider public). This led to an equally frenzied opposition reaction which has also tilted at windwills. The Commission has since backtracked and made clear that EU standards in the sensitive areas mentioned above will not be changed.

A TTIP agreement which would help to reduce the costs of trading between the US and the EU is desirable and should be welcomed, but unrealistically high expectations of what might be achievable in TTIP should be avoided. It is likely that, if the negotiators were to agree a text, this would be approved by Council and Parliament. It is much less clear if there is the same eagerness on the US side.

This post was written by Alan Matthews.

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