The main changes include:
- The replacement of the firm commitment to have a uniform payment per hectare across all land and member states by 2029 in the regulation itself, to an aspirational commitment in the preambular material that member states will work towards this goal in the next financial perspectives period.
- The possibility for Member States to modulate up to 10%, rather than 5%, of their Pillar 1 envelope to enhance their Pillar 2 funds.
- The decision to let the sugar quota regime end in 2015 and not provide a further year extension as initially foreseen.
- Despite the abolition of axes in Pillar 2 rural development programming, member states will be required to use at least 25% of their envelope for issues relating to land management and fighting climate change.
- The inclusion of net ceilings as well as national ceilings for each member state, thus indicating the relative importance of the amounts modulated to Pillar 2 through capping (overall, just 0.4% of the €42 billion in direct payments will be affected).
- The need for a beneficiary of the new allocation of entitlements in 2014 to have owned at least one entitlement in 2011 (a specific provision intended to try to prevent speculation in land in Ireland).

The negativity in the reactions to the Commission’s proposals has been quite striking, even given the issues at stake. It was clear that this CAP reform would always be a conservative one, and would thus fall short of the recommendations of more radical critics of the CAP. But Euractiv’s reporting noted that “absolutely no one, except for the European Sugar Users association (CIUS), seems happy with the Commission’s legal proposal to reform the CAP, presented on 12 October.”

Now these reactions may all be just negotiating tactics, but they must be a disappointment to the Commission all the same. Given the huge effort that went into the consultation process, both before the release of the Commission’s Communication in November 2010 and in the course of the impact assessment, and given the various leaks of the proposals which would have made it easy for member states and others to influence the process at an early stage, one wonders if the Commission has seriously misjudged the mood of decision-makers? What happens to the proposals now in the Parliament and in the Council of Ministers will decide.

The first thoughts of the Ministers in reaction to the proposals can be viewed in the videocasting of yesterday’s meeting of the Council of Agricultural Ministers (Commissioner Ciolos takes the floor to introduce the debate 15 mins into the video, the language can be chosen from the bar underneath the video).

According to Eckhard Deutscher, Chair of the OECD Development Assistance Committee (DAC) and another participant in the same meeting,

“The biggest challenge the EU’s development aspirations are facing is the lack of policy coherence. The trade, development, agriculture and environmental policies are simply out of sync with regard to developing countries.”

Eveline Herfkens, Founder of the UN Millennium Campaign, pulled no punches,

“An unreformed European agriculture policy will continue to hamper the EU’s and other donors’ efforts to eradicate poverty and will perpetuate human suffering.”

European countries lead the world as donors of development aid, but for decades the EU has pursued agriculture policies which have had the reverse effect – whether it’s trade barriers that make it harder for developing countries to export farm produce to Europe or subsidies that encourage European farmers to overproduce, driving prices down and undercutting unsubsidised farmers in poorer countries.

In the first few years of the last decade, the Make Trade Fair campaign made the weather in the debate over reform of the CAP, perhaps supplanting the environmental critique as the most politically salient attack on the policy. The decoupling of support in the Fischler reforms theoretically broke the link between farm subsidies and over-production although there are those who say that any farm subsidy has an impact on production. At the Hong Kong WTO ministerial in December 2005 the EU offered to end all export subsidies by 2013 if other countries reduced their supports to exporters.

It’s possible that United Nations Development Programme’s annual report for 2005  represents the high-water mark of the influence of the development advocates on thinking about agriculture policy:

“When it comes to world agricultural trade, market success is determined not by comparative advantage, but by comparative access to subsidies—an area in which producers in poor countries are unable to compete. High levels of agricultural support translate into higher output, fewer imports and more exports than would otherwise be the case. That support helps to explain why industrial countries continue to dominate world agricultural trade.”

The global food price spike of 2007-08 presented a problem for the development critique of farm subsidies. Suddenly, the problem for developing countries was not low commodity prices but high commodity prices. Backers of a production-boosting farm policies in rich countries were quick to jump on this turnaround, arguing that European and American farmers had a moral duty to ‘feed the world’ and that the CAP should underpin this aim.

A more subtle analysis would argue that developing country farmers have suffered as a consequence of the CAP for decades, and that it is precisely because of the chronically retarded state of agricultural development in many developing countries that food prices spiked and the effects were so damaging. A rapid supply response was just not possible because developing countries lack capital for agricultural investment, skills, market structures and so on. These are not things that can be built overnight. It could be added that biofuel subsidies and mandates contributed to the food price spikes by increasing demand for food crops like corn and oilseeds that are used to make biofuels.

The extent to which the CAP continues to cause harm to developing countries is the subject of an ongoing research by Alan Matthews, a contributor to this blog, and I’m told his findings will be published in a book in September 2010. As for the future of the CAP, there seems to be no guarantee that we are safe from a return to the production-boosting paradigm of the past. Momagri, a shadowy French farm lobbying organisation, is just one influential voice pushing for just such a change of direction. The United Nations Millenium Campaign has stepped into the debate on the future of the CAP at a critical time. It remains to be seen whether other development advocates and influential NGOs like Oxfam will rejoin the fray.

Photo credit: Quarsan – Flickr Creative Commons

The book features chapters from many of the leading lights of in agriculture and trade economics including David Orden, Alan Swinbank, Tim Josling, Harry de Gorter, David Blandford. NGOs analysis are also among the contributors including Ariel Brunner of BirdLife International, an occasional contributor to this blog, Teresa Cavero of Oxfam-Intermon and Carlos Galperín of the Argentinian think tank Centro de Economía Internacional. There are also chapters by Pedro de Camargo Neto, a former trade negotiator for Brazil, and Ann Tutwiler, who was appointed to the Obama Administration in the US earlier in the year with special responsibility for trade and development in Africa. It’s an impressive cast list. One of the book’s contributors, Vincent Chatellier, explains out the kind of subsidies that can qualify for the green box:

Within the green box, there are two types of subsidy. The first relates to public service programmes. This consists mainly of general services such as research, training, dissemination, and inspection (health, safety, quality control and normalisation), sales, promotion and infrastructural services. Domestic food aid or the stockpiling of foodstuffs for purposes of food security also falls into this category. The second concerns direct payments to producers. Article 6, Annex 2 of the URAA (box 1) sets out the conditions that govern the allocation of decoupled income support to the green box. It specifies that these subsidies should not be linked to either production, or factors of production (land and livestock), nor even to an objective price. This applies mainly to income guarantee and security measures (natural disasters, State contribution to crop insurance, etc.) ; to structural adjustment measures (farmers’ retirement schemes, withdrawal of land from production, investment grants) ; and environmental protection programmes.

According to countries’ latest official reports to the WTO, the US provided $76 billion in green box payments in 2007 – over nine-tenths of its total spending – while the EU notified €48 billion ($91 billion) in 2005 , or around half of all support provided by the bloc. The book is the first ever attempt to look at green box support from a ’sustainable development’ viewpoint, examining how payments affect economic, social and environmental progress in both the developed and developing world.

The EU’s embrace of the green box is the legacy of Franz Fischler, whose major reform of the CAP was agreed in 2003 and from 2005 shifted the bulk of taxpayer support for farmers into the green box by maintaining exactly the same distribution of farm subsidy payments as previously but decoupled from current production levels. The G20 grouping of agriculture-oriented developing countries has been quick to argue that, green box or not, the EU’s new decoupled supports could not be non-distorting, as the sheer scale of the payments would insulate farmers against fluctuations in price, provide additional finance for investment. They repeated their refrain, ‘Developing world farmers can compete with farmers in the EU and the US, but we can’t compete with their finance ministries.’

I have always understood that the green colour of the green box comes from the Green means Go of a traffic light (as opposed to the red and amber boxes that are subject to strict limits). But for some, and particularly those politicians who advocate these payments, the hue of the green box owes something to its environmental credentials. In a thorough analysis of the EU situation, Ariel Brunner and Harry Huyton show this argument to be false. They argue that “abuse of the green box is damaging the reputation of agricultural support, which can deliver genuine social and environmental benefits” and that while the current green box rules allow for abuse they mitigate against the kind of environmental support measures that are needed to reverse biodiversity decline.

Brunner and Huyton argue that the single payment scheme, which accounts for the bulk of the CAP’s direct payments to farmers, is not about maintaining environmental, food safety, animal and plant health, and animal welfare standards but about improving farmer incomes. They give a startling example. On the RSPB’s 181-ha arable farm in Cambridgeshire, England it was calculated that the costs of implementing cross-compliance were approximately €75 compared to €27,000 received in direct payments.

Meanwhile, WTO rules on what qualifies for the green box rules out certain agri-environment programmes that seek to pay farmers to enter ‘contracts’ in which they agree to meet specific standards of environmentally-friendly land management. Steenblik and Tsai make a similar point in their chapter on the environment and the green box. This observation leads Brunner and Huyton to argue for a change to the green box rules that would have a profound impact on the measures that are currently designated as green box:

A second fundamental requirement should be introduced, in addition to the current requirement that green box support has no, or at most minimal, trade-distorting effects on production. This should require green box support to be targeted specifically at delivering environmental and social benefits, i.e. “public” benefits that are not already delivered by the market.

This would, at a stroke, disqualify measures that are primarily ‘income support’ policies from the green box and bring the WTO rules into service of BirdLife’s notion of ‘public money for public goods’.

Elsewhere in the book, Carlos Galperín and Ivana Doporto Miguez address the question of whether there is a cumulative effect of green box subsidies when it comes to distorting trade. Taking the reader step-by-step through the micro-economics of farm level production decisions in response to different kinds of subsidies, they show that decoupled support does not impact on short term production decisions, but it does impact on long term decisions about whether to stay in farming or not, and thus favours those farmers in countries with generous income support policies, making life harder for farmers in the developing world where governments are not rich enough to pay similar aids.

Galperín and Doporto Miguez discuss solutions capping green box payments, limiting the overal size of the green box and limiting green box payments to producers not in receipt of support that is designated in any of the other boxes. The fact that they don’t come down in favour of any particular solution to the problem of accumulation of green box supports and the impact on production decisions reveals how far we are from reaching an agreement at the WTO on the subject. The authors concede this is likely to be a subject for negotiations after conclusion, or abandonment, of the current Doha Round. The editors of the book provide a handy table showing the negotiating positions of the various actors at the WTO on key green box issues (see below).

There is plenty more in this book to digest and debate, far more than can be covered in a single blog post but it is clear that the current and future status of the WTO green box is incredibly significant – both for patterns of international trade and for agriculture and environment policies. The book can be ordered here and for those that can’t afford the £80 price tag or want a shorter read there is a 16 page breifing note from International Centre for Trade and Sustainable Development, the NGO that provided the impetus for the book.

For one thing, whether higher food commodity prices should be taken as a sign of food insecurity or not is itself a moot point, and one which is being debated between Homi Kharas (Brookings Institute) and Joachim von Braun (International Food Policy Research Institute) on the Economist.com website under the proposition “There is an upside for humanity in the rise of food prices” (you can cast your vote before the debate closes Friday 8 August; when I posted this blog 56% were in favour and 44% against the proposition).

One  of the issues in this debate is whether higher food prices are likely to alleviate or push  people into poverty. The issue is very topical because of the views of the World Bank and others that the recent spike in food prices has reversed much of the progress in reducing poverty which is one of the key Millennium Development Goals.

This is partly an issue of the speed at which prices change (a point which von Braun makes eloquently in the Economist debate) and partly an issue whether the poor are net food sellers or net food buyers. The view has got around that more poor households in developing countries are net food buyers than are net food sellers, and thus that higher food prices increase the likelihood of poverty.

This view is challenged in a recent Policy Outlook by Sandra Polaski of the Carnegie Endowment for International Peace. While careful to point out that generalisations in this area are unlikely to be valid, she quotes a number of important studies which conclude that higher food prices have been responsible for lifting more people out of poverty than pulling them into it. In India, for example, which is home to the largest number of poor people in the world, a decline in the world price of rice would result in real income losses for 78% of all households and the distributional impact would be regressive (i.e. the consequences of higher world rice prices would be the opposite of these results).

This issue clearly warrants further investigation before we rush  off and conclude that a production-oriented CAP is needed in the future to address problems of world food insecurity.

Today’s Commission press release states:

“The fund would be worth €1 billion and would operate for two years, 2008 and 2009. This money would be in addition to existing development funds and would be taken from unused money from the European Union’s agricultural budget. It would be provided to developing countries which are most in need, based on a set of objective criteria. The facility would give priority to supply-side measures, improving access to farm inputs such as fertilisers and seed, possibly through credit, and to safety net measures aimed at improving productive capacity in agriculture. The support would be paid via international organisations, including regional organisations.”

Last week European Voice reported that German Chancellor Angela Merkel and her farms minister Horst Seehofer were voicing concerns about the plan. Some have said that Merkel’s concerns relate to the the principle of spending EU money (much of which is contributed by German taxpayers) on purposes other than those originally budgeted.

Seehofer, whose ministry frequently appears to be a wholly-owned subsidiary of the German farm unions, would probably rather keep the money in the farm budget, as would a number of farm ministers from the CEEC member states who made a statement demanding that any underspend in the CAP budget be used to top-up farm subsidies in their countries. To her credit, Commission Fischer Boel has roundly rebuffed these demands.

Meanwhile, it seems that vanity is to be clouding the judgment of some MEPs. Jutta Haug, the German social democrat MEP, who is responsible for drafting the Parliament’s position on the 2009 Budget, said it was important that the EU claimed credit for any additional funding. “We’re the biggest aid donor but we don’t have the visibility”, she said, according to European Voice. The Commission proposal gives examples on how it would want to channel the money through the international agencies with the greatest expertise in the field:

“Assistance channelled through International Organisations could for instance apply to FAO (emergency input delivery programme), IFAD (e.g. rural finance), UNICEF (child nutrition, nutritional safety nets), WFP (humanitarian food assistance, transitional safety nets), the ICRC (food assistance) and the World Bank (market-based risk management, safety nets).”

Ms Haug’s notion that getting good PR is more important than feeding the world’s hungry shows just how out of touch some MEPs can be. Surely the most important consideration is how to get the job done, not who gets the credit.

Breakdown by import regime

Eurostat now classifies EU external trade by the nature of the import regime (MFN or preferential) under which a particular product is imported. The table below shows the data for agricultural imports (defined as products in the HS tariff classification chapters 1 through 24) for the latest year 2007. All food and agricultural imports in that year amounted to €87.7 billion. Of that total, 55.6% entered under MFN tariffs, 42.0% under a preferential regime, and the remaining 2.4% could not be classified.

More significantly, of the 55.6% which entered under MFN tariffs, 32.9% entered duty-free (because the MFN tariff was zero), 22.2% entered under a positive MFN tariff and the remaining 0.6% could not be classified. The big categories of duty-free MFN imports included animal fodder, oilseeds, tropical beverages and cereals. Products where imports faced positive tariffs included fruits, meat, animal fats, fish and cereals.

Preferential trade regimes

The remaining 42% of food imports came from countries eligible for a preferential tariff. Eurostat does not distinguish further which preferential regime was used. All developing countries are eligible for the Generalised System of Preferences, although agricultural preferences under the GSP are limited (for example, in the case of CAP products protected by mixed tariffs, i.e. a tariff with both an ad valorem and a specific component, the GSP preference usually covers only the ad valorem element which is usually the least important).

But other developing countries can export to the EU under more favourable terms. The 50 Least Developed Countries have duty-free access under the EU’s Everything But Arms scheme since 2001 (with transitional exceptions for sugar and rice), while African, Caribbean and Pacific countries in 2007 had more generous access terms under the Cotonou Agreement (in 2008, the majority of these countries too are able to export duty-free to the EU under the terms of the Economic Partnership Agreements they signed with the EU at the end of 2007). Other developing countries benefit from easier access to the EU under various free trade agreements, including some Mediterranean countries, Chile, South Africa, Mexico and countries of the Andean Pact.

Preferential trade

Not all exports from countries eligible for preferential access make use of the preferential trade regime. It costs money and time to become familiar with the terms of preferential trade agreements and not all exports meet the strict rules of origin which the EU applies. So of the 42% of exports from countries eligible for preferential treatment, 6.6% entered under positive MFN tariffs. While some of these may be processed food products which did not meet the EU’s rules of origin, it is likely that in most cases the applicable MFN tariffs were less than 5%, so it did not pay the exporter to apply for preferential status.

Of the remainder, 21.4% of total agricultural imports entered duty-free under preferential arrangements of one kind or another, while the remaining 11.4% entered under a positive but preferential tariff.

In total, in 2007 54.5% of the EU’s food and agricultural imports entered duty-free, 40.1% faced import tariffs and the remainder could not be classified.

These figures flatter the EU to the extent that the MFN tariffs in force may be prohibitive, so that the value of imports is kept low. Sugar is a good example. Thus the protective effect of the EU’s external trade regime for food products is greater than these figures indicate.

Trade negotiations and preferences

However, the importance of preferential access to the EU market for many developing countries has complicated the Doha Round negotiations on market access. Preferential access is only valuable to the extent that it gives the beneficiary a significant margin of preference over other exporters. Thus, those developing countries with preferential access are loathe to see significant tariff reductions by the EU because they would lead to the erosion of the value of their preferences.

COPA-COGECA among other farm groups makes use of this argument to challenge Commissioner Mandelson’s claim that a successful outcome of the Doha Round would benefit developing countries. The poorest developing countries indeed have little to gain from the agricultural negotiations (though not all rich countries grant preferential access to the same extent as the EU, and for some commodities, such as cotton, they would gain from disciplines on trade-distorting subsidies rather than more liberal market access). For some countries, preference erosion could even leave them worse off.

Reform of the EU’s agricultural trade regime in the Doha Round will lead to both winners and losers among its trading partners. The EU must be conscious of the need to look after the losers, especially those poorer developing countries often dependent on one or two export commodities with preferential market access.

Amid all the debate over the current ‘global food crisis’ one thing that analysts agree on is that the best chance for increasing world food production is to tackle the low productivity of many developing country farm sectors through investment in irrigation, micro-credit, provision of fertlisers, agronomic advice and research into new strains of crops resistant to drought, flooding and other climatic challenges.

Funding this second ‘green revolution’ is difficult at a time when the world’s biggest economies are close to recession, tax revenues are down and organisations like the UN World Food Programme and other aid agencies are having a hard time just standing still and meet the growing needs of the world’s hungry, as food prices continue to rise.

The figures involved are significant. Of the 53 billion euros spent on the CAP each year, and a ‘development fund’ of around 500 million to 1 billion euros is conceivable, according to Commissioner Fischer Boel. The prospect of the CAP’s ‘spare change’ being devoted to this noble cause has been widely welcomed, and is proving a bit of a PR coup for the beleaguered Commission which has been on the back foot over the Irish No vote on the Lisbon treaty and is reaping the hurricane of its unduly enthusiastic support for biofuels.

The proposal is not guaranteed success as many EU farm ministers would rather like to keep the money for their own farmers. Last week Ministers from the CEEC countries that joined the EU in 2004 and 2007 wrote asking Commissioner Fischer Boel to use the money for their farmers instead (direct payments in the CEEC countries are less than in the EU-15, although they are ramping up to parity by 2013). French farms miniser Michel Barnier has suggested using the money to help EU farmers become energy efficient. Quite how that squares with President Sarkozy’s call for an EU-wide cut on VAT on fuel is not immediately apparent. One must assume that like Walt Whitman, the French government is broad enough to contradict itself.

At the informal Agriculture Council meeting in Maribor, Slovenia, last month, we witnessed the extraordinary spectacle of EU farm ministers arguing that giving farmers more money is not the solution. Of course, when EU farmers are in trouble, the solution according to farm ministers is always to give them more money. When the question is how to help developing country farmers, according to the very same ministers, the solutions are not to be found in handouts, but in ‘capacity building’ and the like. The hypocrisy of these clowns is breathtaking.

So far, Fischer Boel has roundly rebuffed such calls, and appears committed to the development fund idea. This is one to watch with interest.

You can read a transcript of Zoellick’s press briefing here, and the analysis note which includes a discussion of the policy options available to address the problem of food affordability in developing countries.

I will turn to what the end of the era of cheap food means for the CAP in a forthcoming blog post.