The G20 Cannes Summit, despite being side-tracked by the continuing eurozone crisis, did address other issues of importance to the global economy. In the section of its final communiqué on trade, the heads of state reaffirmed their ritualistic commitment to the Doha Round mandate. However, they went on to note that “It is clear that we will not complete the [Doha Development Agenda] if we continue to conduct negotiations as we have in the past.” Instead, they called for “fresh, credible approaches to furthering negotiations, including the issues of concern for Least Developed Countries and, where they can bear fruit, the remaining elements of the DDA mandate” to be pursued in 2012.

However, as the preparations for the forthcoming WTO Ministerial Council on 15-17 December rachet up in Geneva, there is little evidence that the same countries are ready to reach agreement on a common approach to the next steps to rescue the Doha Round.

The EU has proposed a three-prong strategy, including a more ambitious negotiating agenda to expand the range of issues being discussed at Geneva to include climate change, investment, competition, and food security; not walking away from the gains made to date on the Doha negotiating agenda; and focusing on early deliverables for the least developed countries, including progress on duty-free access and trade facilitation. These proposals have met with a frosty reception so far particularly from the emerging economies.

New Commission study on Doha impacts

The EU’s DG Trade has now released a new study of the likely gains from a Doha Round agreement undertaken by the French research institute CEPII (Centre d’Etudes Prospectives et d’Informations Internationales). While the report is intended to underline the potential gains to the global economy from concluding an agreement on the basis of the draft modalities proposed by the respective Chairs in April 2011, it also highlights some of the reasons why agreement is difficult.

The study examines three sets of scenarios. The first is a conventional liberalisation of agricultural and non-agricultural tariffs (goods trade), complemented by some modest liberalisation of services. The second scenario, called the central scenario in the report, models the impact of additionally including trade facilitation in the agreement. Indeed, the main message of the report is the importance of reducing the transactions costs of trade, particularly to developing countries. In a third set of scenarios, the additional effects of including sectoral agreements on chemicals, electronic products and machinery as well as environmental goods are added to the central scenario.

The study represents the state-of-the-art modelling of trade liberalisation in a computable general equilibrium framework. It is based on a dynamic version of the MIRAGE model which takes into account imperfect competition in manufacturing sectors as well as elastic land supply functions. The study pays particular attention to modelling tariff liberalisation at a very disaggregated level (the HS6 tariff line) in order to properly capture the complexity of the draft modalities as well as to correctly identify differences in tariff regimes (e.g., MFN vs preferential) that apply to individual exporter-importer trade flows.

Winners and losers

The high-powered modelling does not fundamentally change the conclusions of a series of recent studies of trade liberalisation that the global gains from further conventional trade liberalisation appear to be relatively modest. The report estimates a $US70bn world Gross Domestic Product (GDP) long run gain when agriculture and industry are liberalised, and a further $US85bn gain when a 3% reduction in protection for services is added to certain services sectors. Calculation of the gains associated with trade facilitation suggests roughly a doubling of the expected gains ($US152bn); while improving port efficiency adds another $US35bn (all figures are reported in 2004 prices relative to 2025 economic values).

Some commentators explain the low estimated gains from further conventional trade liberalisation by arguing that the modelling misses out on important channels whereby trade can positively impact on economic growth and welfare (for example, by encouraging faster rates of productivity growth). It is also evident the losses to the global economy would be substantially higher if a failure to agree on further liberalisation actually led to backsliding on previous commitments and to the growth of trade protectionism (the bicycle theory of trade liberalisation).

Nonetheless, the relatively modest gains to be achieved from further conventional trade liberalisation (due to the previous success of the GATT and WTO in reducing particularly non-agricultural tariffs) may help to explain the reluctance of governments to make the final political push for an agreement. This reluctance is reinforced by the fact that governments are able to reap a significant part of the gains from multilateral liberalisation through bilateral deals (as in the recent EU-South Korea free trade agreement) even if these are not fully optimal and carry risks for the governance of the multilateral trade regime.

These difficulties are compounded by the asymmetric distribution of the gains, with some regions actually losing out from further conventional trade liberalisation. Outcomes for some important players in the negotiations are shown in the table below.

In dollar terms, the main beneficiaries of liberalisation are China and the EU. The EU and China reap each 22% of world GDP long-term gains from a goods-and-services scenario. US gains are less spectacular (7% of world gains) compared to its relative size in the world economy. Three regions suffer small losses: the Caribbean, Mexico (not shown) and the Sub-Saharan countries. However, in two of these regions (Caribbean and Sub-Saharan Africa) trade facilitation makes it possible to reap gains from this Round.

In welfare terms (which in addition to GDP changes also takes account of terms of trade effects), a number of developing country regions (Caribbean, North Africa and sub-Saharan Africa) lose from a goods-and-services scenario. This reflects partly the effects of preference erosion (all three regions benefit at present from significant preferential access to the markets of the United States and the EU) and, in the case of Sub-Saharan Africa, the fact that the various flexibilities and exemptions in the draft modalities mean that they undertake little liberalisation themselves and thus cannot benefit from the allocative efficiency gains which would result.

In two of these regions gains from trade facilitation would be sufficient to reverse these losses. But arguably these trade facilitation gains do not depend on concluding a Doha Round agreement and could be achieved through the enhanced ‘Aid for Trade’ programmes to which donor countries have already agreed.

Impacts on EU agriculture

Readers of this blog will be interested in what the study has to say about the impacts of a multilateral deal for EU agriculture. A word of warning: global models of the kind used in this study are useful in giving broad-brush impressions of the overall scale of changes and welfare gains from further liberalisation, but become less reliable if attention is focused on the results for particular sectors or particular countries, simply because much relevant institutional detail in terms of policies must be left out.

In agriculture, the study projects that two main beneficiaries of the DDA in terms of exports are the EU (+$US9.8 bn) and Australia and New Zealand (+$US8.3bn), with Brazil also gaining from agriculture in this Round (+$US 6.7 bn).

However, in terms of overall agricultural value added, Australia and New Zealand benefit the most from increased exports (+6.9%), followed by Argentina, Canada and Brazil (3.4%, 3.3% and 4.2% increases, respectively). Japan experiences a significant decrease in agricultural value added of -3.8% while, due to their very strong initial protection, the EFTA countries face the strongest reduction for agriculture value added (-18.7%) and reorient their resources toward the other sectors. China and India are hardly affected.

EU value added reduces by -0.7%, with some differences across sectors. The largest drop in value added is projected in the sugar sector (-12.9%). For vegetable and fruits, fibres and crops, cereals, dairy, and even meat, changes are below 2% for the EU, but oils and fats show a drop of -4.2% over the long run. These changes reflect the use by the EU of sensitive product status for a number of the more vulnerable import-competing commodities, in which tariff cuts are only one-third of those otherwise mandated but compensated by increases in tariff rate quotas.

Despite this, the relatively small changes projected in EU agricultural value added are striking and will give rise to some controversy. They reflect in part the continuing reform of the EU’s agricultural policy which has removed some of the worst excesses of past protectionism, including reforms undertaken since the Doha Round was launched. But they will be interpreted by developing countries as justifying their criticisms that the current modalities do not offer much in the way of agricultural benefits in return for the concessions they are being asked to make in NAMA and services.

This post has been authored by Alan Matthews.

A row has broken out over the Commission’s proposal to use the European Globalisation Adjustment Fund (EGF) in the next financial perspectives period to help farmers who might be adversely affected by the conclusion of EU trade agreements. According to a report in Europolitics, the European Trade Union Confederation (ETUC) is opposed to farmers being included in the list of potential beneficiaries of the Fund. The union confederation wants the funds reserved for workers, and argues that farmers should be helped under Pillar 2 of the CAP.

Background

In the new EGF regulation the Commission has proposed that its scope should be extended to provide transitory support to farmers to facilitate their adaptation to a new market situation resulting from the conclusion by the Union of trade agreements affecting agricultural products. Examples given of such possible forthcoming trade agreements are those under negotiation with Mercosur countries, or in the context of the World Trade Organisation under the Doha Development Agenda.

The EGF has been in operation since January 2007 (the summary in this paragraph and next is taken from a report by the UK House of Commons European Scrutiny Committee). It was introduced to provide support for workers affected by large scale redundancies occurring as a result of shocks due to globalisation and trade shifts. It provides one-off, time limited individual support, geared directly to redundant workers, so that they are able to find new jobs as quickly as possible. Expenditure from the fund is allowed only for active labour market policies, including training measures. It must not be used for activities that are ordinarily carried out by public employment services or are receiving other EU funding, for example, through the European Social Fund. Nor, in principle, can it finance the restructuring of companies or sectors. At a practical level, Member States have to apply to the EGF on a case-by-case basis, with each application subject to agreement by the Council and the European Parliament.

The EGF was amended in June 2009, in response to the financial crisis, through a mix of permanent and temporary changes to improve take up. The scope of the EGF was temporarily enlarged until 30 December 2011 to cover redundancies caused by the impact of the global financial and economic crisis; and the maximum contribution from the EGF (the co-financing rate) was increased from 50% to 65%, thus reducing the direct match-funding requirement from applicant Member States. The Commission has recently proposed an extension of the temporary derogations until 31 December 2013, the end of the current EGF implementing Regulation and of the Multi-Annual Financial Perspective for 2007-2013.

Since the fund’s establishment, the Commission has received 78 applications for support for 76,000 dismissed workers representing a total budget of €355 million. Applications for assistance have been growing — from 18 applications for €75.72 million under the original Regulation to 28 for €131.70 million, 75% related to the crisis, in 2009, and 31 for €132.50 million, 87% related to the crisis, in 2010.

The indicative amount available annually under the present EGF is €500 million, but as the figures show, this amount has never been reached in any year. Against this background, the Commission is proposing a slight reduction in the funding of the EGF, with a maximum amount from January 2014 to 31 December 2020 of €3.0 billion, or €429 million annually. According to the proposed EGF regulation for 2014-2020, five-sixths of the fund’s total budget – i.e. €2.5 billion (2011 prices) – could be used for farmers affected by trade agreements.

How the EGF would work for farmers

For the agricultural sector the Commission proposes that an EGF application would be triggered using a dual-threshold procedure. First, ex-ante information about the sectors and/or products likely to be affected by increased imports as a direct result of trade agreements will be provided in the analysis carried out by the Commission departments for the trade negotiations. Once the trade agreement is initialled, the Commission departments will check the sectors or products for which a substantial increase in EU imports and a significant drop in prices are expected and will assess the likely effect on sectoral income. On this basis the Commission would designate agricultural sectors or products and, where relevant, regions as eligible for possible EGF support.

Second, Member States would then have the possibility to submit applications for an EGF contribution, provided that they can prove that eligible sectors experience significant trade-related losses, that farmers operating in these sectors are affected and that they have identified and targeted the affected farmers.

The regulation provides that an application shall include the following information:

(a) a reasoned analysis of the link between the redundancies and the major structural changes in world trade patterns, or the serious disruption of the local, regional or national economy caused by an unexpected crisis, or the new market situation in the agricultural sector in the Member State and resulting from the effects of a trade agreement initialled by the European Union in accordance with Article XXIV of the GATT or a multilateral agreement initialled within the World Trade Organisation as per Article 2(c). This analysis shall be based on statistical and other information at the most appropriate level to demonstrate the fulfilment of the intervention criteria set out in Article 4;

For farmers, including all members of the farm household active on the farm, the measures would focus on the acquisition of appropriate training and skills and use of advisory services enabling them to adjust their activities, including carrying out new activities, within and/or outside agriculture, as well as to support to a limited extent the initial investments in changing or adjusting their activities so as to assist them to become structurally more competitive and secure their livelihoods. The cost of investments in physical assets for self-employment and business start-up or for changing or adjusting activity may not exceed €35,000. The aid would be provided to farmers changing or adjusting their previous agricultural activities within a period starting upon initialling of such trade agreements and ending three years after their full implementation.

Evaluation

I think that the Commission’s proposal deserves to be supported. A feature of trade agreements is that they generally lead to overall positive benefits, but the gains are generalised across the population as a whole while the costs are often felt by much more specific groups of workers and industries, including farmers. The obvious example is the Mercosur agreement which would result in significant overall welfare gains for the EU but which would increase competition significantly for EU beef farmers. It makes sense to provide a system of targeted adjustment support to help those sectors adversely affected by such agreements.

The ETUC may feel that including farmers in the scheme may increase the competition for resources for non-agricultural workers. In this context, the Commission proposal to also reduce the ceiling on resources in the forthcoming period as well as widening the beneficiaries might be criticised, even if usage of the fund to date has been well below the indicative ceiling. The ETUC proposal that funding for farmers might be taken from Pillar 2 of the CAP does not recognise the unprogrammed and unforeseeable nature of adjustment assistance and the need for quick disbursement of available funds to assist restructuring, which has led the Commission to propose that the EGF for the next period should be placed outside the MFF ceiling.

In terms of how important this might be for agriculture, the details are important. The fund would not be used to provide generalised and degressive income support to farmers adversely affected by a trade agreement. Its intention is to focus on ‘personalised support’ to help affected farm families to understand their options and to provide targeted assistance to those farmers who want to change or adjust their activity. What exactly will be accepted as ‘adjustments’ to farm activity in response to a fall in market prices will be crucial in determining how many farmers are likely to benefit from the EGF in future.

A final observation is that the proposal places a lot of responsibility on the shoulders of economists and their models, because the results of ex-ante modelling will be used by the Commission in formulating the first threshold to be met before farmers can access these funds.

The International Centre for Trade and Sustainable Development has now published the final updated version of my paper looking at the trade and development implications of the Commission’s legislative proposals for the CAP post 2013. Apart from making some corrections to the preliminary version, it takes account of the main changes in the Commission’s proposals on October 12th last compared to what was in the heavily-leaked drafts as well as the full impact assessments released at the same time.

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).

World food prices are on the rise again. In December 2010, they exceeded the dramatic peak they had reached during the global food crisis in 2007/08. Add to this threatening megatrends, such as population growth and climate change, and think of recent news about the severe drought in Russia or the once-in-a-century flooding in Australia, both major staple food exporters. Who wouldn’t get an uneasy feeling that the specter of famine might come to haunt Europe again?

The European Commission has concluded in its communication on the post-2013 CAP that the CAP must preserve the EU’s food production potential, ‘so as to guarantee long-term food security for European citizens’. Similarly, ministers of agriculture from 22 member states claim in their Paris Declaration that ‘only an ambitious, continent-wide policy can safeguard Europe’s independence’.

Surprisingly, however, there are no scenarios and no calculations to substantiate this perceived threat. Only the Department for Environment, Food and Rural Affairs (Defra) has conducted a Food Security Assessment. The lessons are clear-cut: there are no discernible dangers for the UK. In a recent working paper, I have looked at the entire EU.

EU food production per capita has constantly increased in the past and far outstrips dietary energy requirements. The share of income that households spend on food has steadily declined. By now, food prices are so low compared to income that even a 10-fold increase in the farm gate price of staple crops would be far off from provoking food scarcity in the EU. Forecasts predict roughly stable or increasing production quantities for the EU – even in the case of subsidy and tariff cuts. The expected main effect of climate change during the coming decades will be to shift production from southern to northern Europe without significantly curtailing overall production.

If food prices rose dramatically, the EU could increase the agricultural area used for growing cereals; in particular, by cutting back on biofuel and livestock production. Furthermore, agricultural labor and capital input could be multiplied. An additional measure would be to enhance investments into agricultural productivity.

The EU does thus not depend on imports for its food security. Still, it’s interesting to have a closer look at EU food imports. Since food prices are so low compared with EU wealth that the EU could afford sufficient imports even if prices rose tenfold (always speaking of basic staples, not caviar and passion fruit), only export restrictions could impair the EU’s import potential. A number of considerations show how unlikely this threat is.

Agricultural markets are becoming thicker: world food trade has increased by 230% between 2000 and 2008 according to the FAO. The greater the volumes, the more food can still be bought on the world market if a given amount of supplies is interrupted.

Export concentration has been low, or at least decreasing, during recent decades in the most important agricultural markets, as Defra notes in its Food Security Assessment. The concentration of countries’ share in world food exports matters because export restrictions are more lucrative and can be more easily upheld if most of the market is in the hands of one or few suppliers.

A significant share of EU imports comes from highly reliable exporters: the US, Switzerland, Canada, Australia and New Zealand. These countries could greatly expand their exports to the EU if the need arose. The other main source of exports to the EU, South America, is decently stable. The figure below shows the market shares of key exporters to the EU (it stems, as the following figures, from the DG Agri MAP newsletter).

Food is a homogenous good if the issue is not taste but calories. If exports of wheat were seriously curtailed, they could be replaced by rice, maize and other grains. Export restrictions are therefore less harmful to importers and less attractive to exporters.

Food is mostly traded on a spot market and can be easily transported. Food thus differs greatly from oil and gas where imports hinge on long-term contracts, pipelines and suitable refineries.

Food production in major exporting countries can be more easily increased than energy production (beyond currently available capacity) as the latter depends on long-term capital investments. If some suppliers restrict their exports, it is thus easier for their competitors to pick up market shares.

No prolonged and encompassing phases of export restrictions have occurred since the Second World War. Export restrictions taken during the 2007/08 price spikes were usually of short duration and limited to one or a few products.

The EU imports relatively little staple food. Most agricultural imports are either feedstuff (soya), ‘luxury’ products (coffee, tea, tobacco, sugar, exotic fruits, meat, food preparations) or products with multiple non-food uses (palm oil). The figures below show this at a highly aggregated level and for the main imported products.

All readers are cordially invited to discuss these issues at a lunch seminar at ECIPE in Brussels on January 26.

Great Britain went through a protectionist phase in agriculture after the defeat of Napoleon in 1815, lasting for three decades until the repeal of the Corn Law in 1846. In food-importing Great Britain, the interruption of trade through Napoleon’s Continental Blockade had driven up food prices and farmers resisted the subsequent resumption of trade in peacetime. But the historic roots of continental agricultural protectionism, I always thought, were somewhat more recent, namely the transport cost revolution of the second half of the 19th century. As it became economically efficient to transport grain by train from the US Midwest to the East Coast, and then by ship to Europe, agrarian interests defended the higher rents on scarcer European land against the international convergence of factor prices.

However, I stumbled upon an intriguing paragraph by Findlay and O’Rourke (Power and Plenty, p. 374) that dates some continental agrarian protectionism back to Napoleonic wars: ‘in 1811, faced with the growing scarcity of sugar, Napoleon issued a decree promoting beet cultivation through a variety of means, leading to a rapid growth in the number of factories. This new industry, which eventually spread to several other Northern Hemisphere countries, would soon become dependent on government subsidies and protection, since tropical producers retained important underlying cost advantages. Indeed, government production and export subsidies became so prevalent that in 1902 nine European countries … signed the first international primary commodity agreement, the Brussels Convention, which aimed at abolishing sugar subsidies. In this sector, therefore, war time import substitution had not only a long-run effect on subsequent trade policies, but also a large negative impact of tropical sugar producers, particularly from the 1870s onwards … Between 1860 and 1900, European countries increased their share of world trade in sugar from zero to 60%. … By 1902, free-market sugar prices had declined to little more than a third of their 1880 level.’

What an outstanding example of policies’ path dependence! There is a dangerous tendency in man to rationalize the past and call for continuity. Generally it feels better to say: ‘We have done what we had to do. Now times are changing and we need to adapt by building on what we have already achieved’, than to admit ‘We have seriously messed up in the past and now we need to start again with a clean slate.’ It would be preferable to be honest and concede that agricultural protectionism – including but also antedating the CAP – was a big mistake and that we need to move on to an entirely different policy targeting sustainable land use.

Another thought that comes to mind from this historical perspective: both causes of agricultural protectionism, from the early and late 19th century, are classical examples of special interests defending their rents to the detriment of collective welfare. The idea that agricultural subsidies/protectionism originated with the food shortages of the Second World War is clearly a myth. Whilst this experience facilitated the creation of the CAP, the real driving forces of the second half of the 20th century have remained the same as ever: the sectoral interest of agriculture.

The EU dairy market is now recovering from the severe drop in milk prices in 2009. Perhaps the clearest sign of this recovery is the setting of export refunds on dairy products to zero since mid-November, as world market prices for dairy products have strengthened in recent months.

It is thus an opportune time to evaluate the EU’s response to the crisis, and to see what lessons might be drawn for how the Union can address similar problems in other farm sectors in the future. My view is that there is a lot to be learned from the dairy crisis, and that the outgoing Commissioner deserves credit for the way she handled it.

EU milk prices improving

Let us first review the evidence that the milk market is improving. The trends in the EU market prices (proxied by the German price and represented by the blue line) and the EU intervention price (the red line) for butter and skim milk powder (SMP) have been graphed by CLAL.it and are reproduced below.

The German butter price is now back to the level of 2002 before the cuts in intervention prices. The recovery in SMP prices has not been as strong, but even so these are now comfortably above intervention levels. EU dairy farmers also benefit from an additional €5 billion per year in the form of direct payments (3.5c/kg milk) to compensate for the reductions in intervention prices.

Farm prices are responding to the better prices for dairy products, although with some lag. The average EU price for standardised 4.2% fat milk, according to the LTO, has risen to €27.06/100kg in October 2009 from its lowest point of €23.74/100kg in April. It is now back at the levels of Spring 2007, before the big run-up in prices in 2008.

The recent USDA market outlook for dairy products in 2010 foresees continued strong prices into 2010 as economic growth recovers particularly in developing countries. While the large stocks of SMP in particular overhanging the market are seen as a negative factor, it observes that in the US most of these stocks are committed for domestic food programmes and that the EU is unlikely to release its stocks on to the market soon for fear of the political fallout from producers.

The Commission’s response to the dairy crisis

Assuming that prices continue to strengthen throughout 2010, it is useful to review what lessons were learned for crisis management when faced with a substantial fall in the price of a farm commodity. The Union’s responses to the collapse in domestic milk prices in 2009 can be divided into market management measures and income support measures.

Among the market management measures were

In total, the Commission expects to spend up to €600 million on market measures this year.

Among the income support measures were:

Reflections on the Union’s response to the dairy crisis

A first observation to make is that, while the Commission did resort to market management measures such as intervention and export subsidies, much more emphasis on this occasion was put on income support measures.

It was noticeable that the Commissioner firmly set her face against any increase, even temporarily, in intervention prices and against a reduction in quotas, arguing that both would be against the spirit of the Health Check intended to move the CAP in a more market-oriented direction.

Although the future of export refunds after 2013 is uncertain (the EU has committed to their elimination but only in the context of a successful outcome of the Doha Round in which similar disciplines applied to other forms of export support), it is likely that the greater emphasis on direct income support measures in response to crisis is here to stay. While the loud voices calling for stronger support measures as part of a food security policy for Europe would doubtless like to see stronger market management measures, these are effectively beggar-my-neighbour responses unless undertaken as part of a global framework (e.g. a global stocks policy).

A second observation is that the income support measures included both a relaxation of state aid restrictions (allowing Member States to fund payments to producers) and a Community scheme. While the national state aids were permitted only in the context of a measure taken as part of a wider response to the economic crisis, they do flag a possible direction for future responses to agricultural market crises. When the figures come in, it will be interesting to assess how much use the individual Member States make of this opportunity.

A third observation is that the payments will be made to producers only with a lag (the exception is the speeding up of the disbursement of the standard Single Farm Payment). This means that payments will reach farmers after the crisis has passed and when incomes are already recovering. Clearly, payments should reach farmers at the time when they are most needed, and hopefully the decision to allow the Commission to respond to future dairy market crises on its own initiative may facilitate this in future.

A fourth observation is that there is now little headroom in the EU budget up to 2013 to fund unexpected crisis management measures. The outgoing Commissioner has made clear that funding the €300m emergency aid from the 2010 budget has utilised any remaining headroom and, apart from the use of the safety margin, any further call on the agricultural budget would trigger the financial discipline mechanism requiring a cut in direct payments.

Price volatility on agricultural markets is expected to increase in future (though whether this is a reasonable presumption to make deserves further analysis, and the outcome depends on the interaction between production shocks and their distribution where climate change is expected to increase volatility, trade policies and their implications for price transmission from world to national markets, and government behaviour particularly with reference to stocks).

Presumably these lessons will be analysed by the High Level Experts’ Group on Milk which is looking into the medium and long-term future of the dairy sector and which will deliver its final report by the end of June 2010. A very useful input is the report on price volatility in the dairy sector commissioned by the European Dairy Association and written by my Irish colleagues Michael Keane and Declan O’Connor.

The 2009 EU dairy market crisis was handled well by the outgoing Commissioner. There was no back-tracking in the direction of CAP reform, and a number of innovative new instruments to address income volatility in a particular sector are being tested. The lessons learned from this experience will be an important input into the discussions on the shape of the CAP post-2013.

Update 5 January 2010: When writing this post, I had not seen that the French have made use of the national state aid provision to provide up to €700 million to farmers affected by the crisis. Aid under this new scheme can be granted until 31 December 2010 and will take the form of direct grants, interest rate subsidies, subsidised loans as well as aid towards the payment of social security contributions. See http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1866&format=HTML&aged=0&language=EN&guiLanguage=en,

When the negotiators in the Uruguay Round of the GATT introduced the concept of the ‘green box’ – farm support measures that are minimally or non-trade distorting and therefore exempt from any limits – few would have foreseen that within 15 years, the bulk of farm support in the developed world would be in the green box. A new book “Agricultural Subsidies in the WTO Green Box: Ensuring Coherence with Sustainable Development Goals”, published by Cambridge University Press, shows the extent to which farm support has been shifted out of more traditional, trade distorting measures and into the green box. It addresses the vexed question of whether green box supports are really as trade-neutral and environmentally beneficial as they are claimed to be. [...]

I realise that opposition politicians have to say all things to all persons and jump on any bandgwagon that’s going on, but I must say that I found an interview with Nick Herbert, the shadow Defra secretary, in Farmers Weekly a bit disappointing. It remains to be seen whether the MP for Arundel and South Downs will be Defra secretary in David Cameron’s Conservative government, or even whether Defra will remain in his present form. However, if his thinking is typical of that in the shadow cabinet on agriculture and food matters, it’s a bit worrying. It looks as if we could be lurching back towards productionism. [...]

The resort to intervention buying and export refunds in the dairy sector has been predictably bad PR for the EU, especially in the southern hemisphere. But a more fundamental question is, can these tired old policy instruments work any magic in a deep economic crisis? [...]

It was the recession of the 1930s that ushered in agricultural protectionism and subsidies, not least in the United States. Now the European Union has reverted to two of its old favourite policy instruments: intervention buying and export subsidies in the dairy sector just when we thought we had seen the last of them. Stocks of butter disappeared completely in 2007.

Faced with a drastic drop in dairy prices, the EU is to buy 30,000 tons of butter at a guaranteed price. Over three times as much skimmed milk powder is to be purchased – 109,000 tons. In addition, export subsidies will be given to skimmed milk powder, butter, butter oil and cheese. These subsidies are, of course, particularly damaging to developing countries where they undermine the viability of local farmers. As Oxfam has pointed out, once the EU starts using them, other countries may follow suit.
[...]

SPS (sanitary and phytosanitary standards) barriers figured prominently in the final Agricultural Council of 2008 under the French Presidency. Agricultural Ministers agreed Council Conclusions on the safety of imported agricultural and agri-food products and compliance with Community rules. At the same meeting, EU Farm Ministers rejected a Commission proposal to allow the use of antimicrobial substances to treat poultry carcasses, which would have re-opened the Community market to US imports. Is there a danger that food safety protection becomes an excuse for protectionism?

[...]

Commissioner Mariann Fischer Boel’s proposal for five annual dairy quota increases of 1 per cent each, adopted unchanged by farm ministers, is under attack from two sides. The Commission believes that this is a sure sign that it has negotiated a fair middle path through a morass of conflicting objectives. A less charitable interpretation would be that the needs of an internationally competitive industry have been partially sacrificed to those of marginal farmers with political clout. [...]

The internet silence following the collapse of the Doha Round on 30 July last has been striking. It appears not only the negotiators but also the commentators feel the need for a well-earned August break. In a piece for last Sunday’s Irish Sunday Business Post, I tried to summarise my own views on why the Round collapsed. [...]

The description of a Fortress Europe has often been applied to the CAP. But just as the CAP has undergone significant internal reform since the first faltering steps under Commissioner MacSharry in 1992, there have also been substantial changes to the CAP’s external trade regime. The EU still maintains high tariffs on specific agricultural imports, but in fact the majority of the EU’s agricultural imports (including here fish as well as highly processed products like beverages and tobacco products) enter the EU duty-free, either because the Most Favoured Nation (MFN) tariff is zero, or because the EU has granted duty-free preferential access. [...]