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.