Introduction
The European Union's agriculture and trade policies are under intense scrutiny in the ongoing WTO Doha negotiations. The EU is perceived to be the leader of the protectionist group of developed countries and is under increased pressure to reform its agriculture and trade policies.
Almost all WTO Members recognise that the WTO agriculture negotiations are the most critical issue, or the lynchpin, of the Doha Development Agenda. The demandeurs are led by the Cairns Group (a group of three developed and fourteen developing countries that are relatively competitive agricultural exporters) and supported by the United States. The agricultural protectionist countries are led by the EU and supported by the CEE countries, Japan, South Korea, Switzerland and Norway. Most other developing countries support the Cairns Group's generally aggressive approach to agriculture liberalisation of developed country markets because the EU's high level of protection impacts negatively on their development prospects. India and the ACP (African, Caribbean and Pacific) group of countries are, however, concerned about some short-term negative effects of an ambitious multilateral liberalisation agenda. The ACP countries fear that faster multilateral liberalisation by the EU may erode ACP preferences, with negative consequences for their access to EU markets. India, for its part, is cautious about the liberalisation of its market, arguing that its small-scale farmers and rural population of 650 million people will need to be protected from subsidised EU imports.
The Doha Development Agenda set an ambitious agenda for the liberalisation of agriculture. Indeed, agreement on the agenda for agriculture liberalisation was the only basis on which a large group of countries - including both developed and developing countries - agreed to the launching of a new Round of trade negotiations. In exchange for an ambitious outcome in agriculture, the demandeurs agreed to a comprehensive agenda for the Doha negotiations, one that includes those issues of great interest to the EU, that is, the environment and the so-called Singapore issues (competition, investment, trade facilitation and transparency in government procurement).
The Chair of the WTO Committee on Agriculture devised a process for the negotiations. To enable preliminary offers to be made by the time of the 5th ministerial meeting in Cancъn, Mexico, scheduled for September 2003, a deadline of the end of March 2003 was set for the establishment of modalities for the negotiations. Proposals were expected to circulate well in advance. However, the first draft of the EU's proposal on "modalities" was distributed only on 16 December 2002.
(Note 1) The EU proposal arrived too late for any substantive discussion and engagement by other WTO Member States. The Chair of the WTO Agriculture Committee had already begun to draft his end-of-year report on modalities, which was produced in draft form on 18 December 2002 as scheduled.
The EC proposal was "too little, too late". Critics (led by the Cairns Group) argue that the proposal falls far short of the ambitious targets set by the Doha Development Agenda, failing to produce real reductions in tariffs, current levels of domestic support or export subsidies. Rather, the proposal focuses on de-coupling (a term used in the earlier Fischler proposals for CAP reform) and proposed additions to WTO rules on geographical indications, animal welfare and food safety. The EU proposes to strengthen the use of precaution in the WTO Agreement on Sanitary and Phytosanitary Standards and mandatory labelling. The EU proposal does not make any significant proposals on special and differential treatment and its proposals do little to improve the market access of developing countries. (2)
WTO Members were unable to agree to the draft set of modalities produced by the Chair of the Agriculture Committee by the deadline of 31 March 2003. The so-called "Harbinson Text" attempted to incorporate the views of the Cairns Group, the "multi-functionality group" (the EU, Switzerland, Japan, Norway and South Korea), the United States and other developing countries. At the Tokyo Mini-Ministerial Meeting held in February, the Cairns Group of countries argued that the Harbinson Text did not go far enough in providing a basis to liberalise agriculture. The EU, on the other hand, argued that the Harbinson Text went too far. Commissioner Lamy insisted that the EU's non-trade concerns (geographical indications, the environment, mandatory labelling and animal welfare) needed to be taken into account before the EU could support the draft modalities.
The EU argues that one of the reasons for its conservative, gradualist approach to agriculture tariff liberalisation is its concern for the negative impact that the erosion of preferences will have on developing countries, such as the ACP group. The EU's apparent concern, some observers have pointed out, must be treated with caution-the EU itself has a clear interest in slowing down the opening of its market. Nonetheless, this issue is of great concern to many of the preference-dependent countries (mostly ACP countries benefiting from the EU-ACP banana, sugar, beef and rum trade protocols). Several recent studies (WTO, 2003; Tangermann, 2002) point to the negative development impact on many ACP countries that would result from multilateral liberalisation and the consequent erosion of ACP preferences.
Some delegations to the WTO have argued that low-income and vulnerable developing countries should not bear the burden of adjustment of the agriculture sector in the developed countries. It has also been argued that developed countries should assist countries that would need to adjust their economies and diversify their industries. (3)
Several recent studies have recognised the significant role of preferences in the export structure of some developing countries, namely ACP countries, and have raised several questions about the effectiveness of the preference system (Hoekman et al., 2003; Tangermann, 2002; Topp, 2001). These studies argue that, while the EU-ACP system of preferences has succeeded in contributing to the development of some countries, preferences can create dependence and generate unfair competition among developing countries. The very low rate of utilisation of these preferences has also been raised. For many developing countries, conditionalities such as stringent rules of origin limit their capacity to benefit from the preference system (Tangermann, 2002). UNCTAD calculated, for example, that although 99% of all EU imports from all least developing countries were eligible for EU preferences in 1999, only 34% actually received them (quoted in Short, 2003). The Harbinson Text has recognised the need to build mechanisms within the tariff reduction proposals that will ensure the maintenance of preferences for as long a period as possible, together with positive development measures to support export diversification.
At the Franco-Africa Heads of State meeting, held in Paris in February 2003, President Chirac made three significant proposals to address the complaints of African countries regarding EU agriculture and trade policies. He called for a temporary halt to export subsidies affecting Africa, an enhancement of trade preferences for Africa and possible subsidies to make up for the changes in commodity prices. The recognition by President Chirac of the negative impact of EU agriculture policies on African economies was welcomed by African leaders. However, some observers have pointed out that halting subsidized exports from going to Africa could just divert them elsewhere, causing greater harm to other developing countries. In addition, both the viability and WTO-compatibility of a temporary halt of export subsidies that targeted only Africa have been questioned (see Short, 2003).
At the April 2003 OECD Ministerial Meeting in Paris, governments continued the discussion on agriculture. This issue is critical to the prospects for success at the September 2003 Cancun WTO Trade Ministerial. The EU expressed confidence that it will meet the high ambitions of the Doha mandate and that the Cancъn Ministerial will not fail. Upbeat EU negotiators refused to take a defensive posture. They argued that the dates set by the Doha Ministerial Declaration (WTO, 2001) for the establishment of agriculture modalities were unrealistic and that the failure to meet the 31 March 2003 deadline for conclusion of the negotiations on modalities (the specific methods and targets for liberalisation) for the agriculture negotiations was to be expected.
The United States has begun to work closely with the EU to maintain the momentum in the WTO negotiations and ensure that the Cancъn ministerial meeting does not collapse. In an attempt to narrow their differences and advance the WTO Doha negotiations, intense bilateral meetings were held before and after the April OECD Ministerial meetings by the EU and US negotiating teams. While the key players in the WTO have welcomed this increased EU-United States co-operation as an essential element for the success of the negotiations, there is also much apprehension that such co-operation could result in a deal that would only take into account the interests of the two major players.
For the EU to make progress in the WTO agriculture negotiations, many observers pinned their hopes on the CAP Mid-Term Review proposals of the EU Minister for Agriculture, Franz Fischler. These proposals were considered by the EU Agriculture Ministers in June 2003. Some EU Members have argued that the decoupling of farm subsidies from production (as proposed by the CAP Mid-Term Review) is a necessary step toward enabling the development of a new EU mandate for the WTO agriculture negotiations (Becket, 2003). Ambassador Robert Zoellick, the United States Trade Representative, has been encouraging EU Ministers to support Fischler's proposals, arguing that they provide a positive step forward. However, even if Fischler's proposals are ultimately accepted by the EU, many critics have argued that this would still not be enough to enable the EU to meet its Doha commitments to substantially reform its agriculture sector (see the critique of Fischler's proposals by Mark Vaile, discussed in Section VI).
The intense pressure the EU is being subjected to by its trading partners in the current WTO Doha negotiations creates an opportunity for it to accelerate the reform of its agriculture sector and thus contribute to both multilateral liberalisation and sustainable development, particularly for the majority of developing countries.
Dynamic forces for change in the EU
In the EU's statement to the WTO's EU Trade Policy Review (European Commission, 2002b) the Deputy Director-General of the European Commission, Roderick Abbot, boasted that the EU had assumed leadership of the multilateral trading system over the past four years. This leadership he pointed out "comes at a price, but has high rewards". It is this kind of leadership that Fischler displayed when he produced the Commission's Mid-Term Review proposals to reform the CAP (European Commission, 2002a). The proposals set forth an agenda for de-linking the EU's direct subsidies to farmers from what they produce. Instead, farmers would receive a flat-rate payment which would be based on what the farmer has received in recent years and pegged more closely to environmental, animal welfare and food quality standards. Payment would be reduced gradually over six or seven years and the money saved would be used to finance rural development. Subsidies to an individual farm would be capped at Ђ300 000 per year.
The EU's Mid-Term Review proposals have been generally applauded as a step in the right direction, even by the EU's most severe critics. Mark Vaile, the Trade Minister of Australia and co-ordinator of the Cairns Group of agriculture exporting countries, for example, reported that he was encouraged by the de-coupling of farm payments from production. However, he stressed that the Mid-Term Review does not propose any significant reductions in the overall level of expenditure for farm support-it proposes only a minimal overall reduction of 0,4%. Fischler's proposals also fail to offer any agenda for reducing tariffs or quotas, and it does not discuss the reduction of export subsidies.
Fischler's proposals were considered by the EU Agricultural Ministers in Luxembourg in June 2003. Some member states were opposed to the proposed reforms. At a gathering of French Ambassadors, President Chirac stated that the new EU Members acceding at the end of 2004 must have a say in the future of the CAP: "I will not allow enlargement to serve as an excuse for bringing forward a reform of the Common Agricultural Policy (CAP), a reform than can only take place in 2006 as agreed [at the] Berlin [Summit in 1999]" (Financial Times, 2002). By insisting that the newly acceding Members need to participate in the reform of the CAP, President Chirac wishes to delay any decision on that reform until the end of 2006.
In his presentation to the WTO, however, Roderick Abbot remained optimistic about the possibilities of successful reform. Noting two powerful, inter-related domestic reasons for this assessment, he argued that the EU has "a budget envelope that we have to live in, and we have an enlargement in prospect which, if present policies were to be continued would put us in Chapter 11". (4)
The inclusion of ten more CEE Member States into the EU by the end of 2004 will increase by one-half the total number of farmers in the EU. Poland alone has more farmers than France and Germany combined. The cost of bringing all the ten CEE countries into the current CAP system (Messerlin, 2002) is estimated to be about Ђ9-23 billion. With these facts in mind, the EU Council has already made a budgetary decision to cap EU transfers to CEE farmers at Ђ3,4 billion in 2006 - thus preventing the possibility of transferring the current level of CAP15 subsidies to the CEE countries. Moreover, the EU has already agreed to almost freeze the CAP budget from 2007 to 2013 - allowing an increase of only 1% per year.
There are several further reasons why the current system of agriculture protection in the EU is under pressure. First, asymmetries exist between the proportion of contributions that EU Members make and the benefits they receive under the existing CAP - Germany being the main contributor and France the main beneficiary. Second, the CAP is biased in favour of large farmers (those with more than 2,000 acres), with 80% of the benefits going to just 20% of the EU's farmers (The Times, 2002). Third, European consumers pay an estimated 44% more for food due to CAP subsidies and the market-intervention pricing system: EU consumers pay 70% more for milk, 221% more for beef, and 94% more for sugar due to CAP policies (International Herald Tribune, 2002). The British Consumers Association argues that a family of four in the United Kingdom spends about $1 200 more on food than they would without the CAP (International Herald Tribune, 2002). Fourth, the same EU agri-business companies (such as Nestlй and Unilever) that benefited considerably from tariff escalation in the post-Uruguay Round period are becoming increasingly multinational. Their global sourcing and networking strategies now make them strong advocates of trade liberalisation. Fifth, environmental NGOs in the EU raise concerns about the negative environmental effects of the CAP. These groups could be a positive force for promoting acceleration of EU trade liberalisation where this course will also help meet environmental objectives.
In summary, there are a number of internal forces within the EU that have an interest in supporting the reform of the EU's current regime of protection. To meet its responsibilities to the global trading system and the reduction of poverty in developing countries, the EU will need to provide leadership by continuing to advance the process of reform of its agriculture and trade policies.
Implications for CEE countries
After intense accession negotiations to bring their policies into line with the thirty-one chapters of the acquis communitaire, 10 new members were admitted, at the recent EU Summit in Athens, to an enlarged EU to be effective from 1 May 2004: Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Cyprus and Malta. Bulgaria and Romania are expected to join later, and negotiations with Turkey have not yet begun (International Herald Tribune, 2003). With all the above Members, the EU - 25 population is expected to increase by 20% (by 75 million) and its gross domestic product (GDP) by 7% (WTO Secretariat, 2002). (5)
The EU accession process will generate both costs and benefits for the CEE countries. The GDP levels of acceding countries are expected to rise by up to 2% annually for about ten years. Already the benefits of greater integration with the EU have been spectacular for some countries. In the case of Poland, which has become the fourth-largest market for the EU, following the United States, Switzerland and Japan, the EU already accounted for 65% of its foreign trade in 2001. Of the total foreign direct investment Poland has received in the past few years (about $6,8 billion), EU Member States accounted for 68% (WTO Secretariat, 2002, Polish Statement).
The cost to CEE countries will also be significant. To comply with the EU acquis communautaire, the CEE countries are required to implement major changes in their institutions, laws and regulations. Whilst the EU will provide assistance for some of the structural adjustments that will need to take place, funds will be limited. Spain, for example, has insisted on its right to veto any structural funds to the CEE States up to 2006.
There are a number of reasons why the CEE countries should support reform of the CAP and liberalisation within the EU. First, the existing CAP is biased in favour of large farmers. CEE farmers are mostly small-scale and will not benefit significantly. Second, CEE farmers will have to compete within the EU with the already heavily subsidized farmers of the EU-15, with little chance of receiving equivalent subsidies themselves. Third, large farmers in the EU-15 are likely to purchase land in the CEE countries, expanding their grip as the main beneficiaries of the existing CAP (Messerlin, 2002).
The most prudent path for CEE farmers is to support a more level overall playing field. CEE countries should become a force for reform of subsidies, protection and the CAP within the existing EU-15. Not only are efforts to extend EU-15 levels of protection to CEE countries unlikely to succeed, they stand to mire these countries in the trap of EU protectionism, postponing adjustments that are needed for them to be competitive in an increasingly globalised world economy. By rejecting protectionism, the CEE countries can advance their own long-term economic interests and become a positive force for the creation of a fair and just multilateral trading system - one that fosters sustainable development and contributes to the reduction of poverty.
EU agriculture reforms: Implications for the WTO Cancъn ministerial meeting
The EU Agriculture Ministers finally agreed on a reform package on June 26, 2003, after a marathon third session in two weeks at their meeting in Luxembourg (see EU, 2003). The reforms amount to a much diluted version of Fischler's CAP Mid-Term Review proposals tabled more than a year ago. Whilst the package relates primarily to the EU's internal processes of agriculture reform, it will help define the parameters available to EU trade negotiators in making offers at the WTO with regard to the Doha commitments to further agriculture negotiations (see Buck et al., 2003).
The Luxembourg agriculture reform package has made a positive conceptual shift in the EU's subsidies: it breaks the link between subsidies and production. Farmers will have to increasingly produce for the market rather than being assured a market at fixed prices. The new system will mean that farmers will receive flat annual payments based on past subsidies received.
The reforms constitute, however, a significant dilution of the original Fischler proposals. First, a significant percentage of the CAP's production-linked subsidies will be retained. The reform package postpones reform decisions on several of the products of particular interest to developing countries. The Ministers postponed a decision to reform some products (olive oil, tobacco, cotton) to later in 2003. Dairy reforms are postponed to 2008, with existing quotas to remain till 2014/2015. In addition, sugar is excluded from the current reforms.
Second, the reforms will not significantly impact the EU's CAP Budget (Ђ43 billion), which will remain substantially the same for the period up to 2013. While the EU enlargement process (to begin on 1 May 2004) could enhance the reduction of subsidies paid to farmers, the phasing-in of farmers from the new EU accession countries is not clearly spelt out yet and its impact is uncertain. The reforms envisage increased support for farmers to assist them with building their competitiveness and marketing their products (an additional 10% of a single payment by members). In addition, the approved reforms provide for new assistance packages (including for food safety, animal welfare, promotion and marketing and advisory services) for farmers (rural development). There will also be a special focus on the less developed regions of the Community. This increased spending could also come from the savings from the envisaged reduction in direct payments made to larger farms. However, the larger proposed cuts to payments made to large farms by the Fischler proposals have been severely reduced in the current reforms to a mere 5% a year. Thus, the large farms will continue to receive the bulk of the subsidies. Currently, large farms receive up to three quarters of the CAP payments.
In general, the EU envisages shifting the bases of its support from increased output to improved quality and standards for animal welfare, animal and plant health, food safety and environmental standards from 2005. This shift in the rationale for its subsidies, the EU argues, will help it move towards less trade distorting (amber- and blue-box to green-box) support. (6) The impact of these new forms of support on maintaining distortions in global markets will need careful evaluation.
Finally, the EU reform package does not make any proposals to reduce its extremely high tariffs, tariff peaks and tariff escalation which continue to keep many developing-country products out of its markets. In addition, the reforms have not dealt with the huge export subsidies granted to its farmers, which stifle developing-country production (cotton in West Africa, for example) and impede their exports to third markets. Whilst the new single payment system for farm payments is due to begin in 2005, those members who are unable to do so can defer the onset of the new system to 2007.
In sum, the proposals amount to two steps forward, one-and-a-half steps backwards. WTO Members now await the presentation by the EU of its new agriculture negotiation proposals (before the Cancъn ministerial meeting). Most WTO Members remain cautious about the EU's capacity to live up to its Doha commitment to substantially reduce its domestic support, phase out its export subsidies and provide substantial access to its markets and are sceptical about the capacity of the EU to make an acceptable proposal. Most delegations have now linked their commitment to move in other non-agriculture areas of the WTO negotiations to the EU's commitment to move in agriculture. Thus, the success of the Cancъn ministerial meeting will hinge on the capacity of the EU to convince its trading partners that it is capable of honouring the commitments made in Doha to effect substantial liberalisation of its protectionist agriculture regime. For its part, the EU expects to extract the maximum concessions from its trading partners before it translates its reform efforts into WTO commitments. Commissioner Fischler has already warned that "there will be no unilateral disarmament", and the EU Trade Negotiator, Commissioner Lamy, has stated that the EU will be demanding concessions from its trading partners (Buck et al., 2003).
Conclusion
The article emphasised several additional dynamic forces that may also help stimulate the reform process within the EU. These forces include EU members who pay more to the CAP than they receive, small farmers who receive less than large ones, European consumers who pay more for food as a result of the CAP, agri-business in the EU who have to pay more for their inputs as a result of price escalation and environmental NGOs who are concerned about the negative effects of CAP policies on the environment.
The article then turned to the issue of EU enlargement and the process of the EU CAP reform. Current subsidy levels (at a total of Ђ40 billion) in the fifteen EU member states will clearly be unsustainable when the EU begins incorporation of the ten new acceding countries in 2005. The article suggested that it is in the interests of the CEE countries to support CAP reform, arguing that the reduction of protection in the EU will enable them to make the necessary adjustments in their economies and to compete more effectively, both within the EU and globally. In short, the article sets out a path for the CEE countries to become a force within the EU for global trade liberalisation, sustainable development and a more equitable global trading system.
Finally, the article evaluated the current process of negotiating agriculture liberalisation in the WTO Doha negotiations. It noted that the European Commission is yet to obtain from EU member states the mandate it needs to formulate new EU negotiating proposals for agriculture. The article argued that the EU CAP Mid-Term Review proposals set forth by Fischler will not by themselves contribute to significant reform of the CAP. Instead, the decisions taken by EU Agriculture Ministers at their Luxembourg meeting in June 2003 have, in fact, further diluted the prospects for substantial reform.
The Cancъn WTO ministerial meeting to be held in September 2003 provides the EU with the opportunity to maintain the leadership role it played in Doha and once again contribute meaningfully to the development of the multilateral trading system. With the support of the progressive forces in the EU which have an interest in liberalisation, and the more liberal northern member states (the Netherlands, Sweden, the United Kingdom and Germany), the EU can develop more robust negotiating proposals on agriculture before Cancъn. This leadership role will be enhanced if it advances environmental and other social policies in a manner that is consistent with increased openness of its market. By contributing to less distorted global markets for products of interest to developing countries, the EU will also help foster the conditions necessary for the sustainable development of those countries and for poverty reduction.
References
Becket, M., 2003: Speech presented by the United Kingdom Secretary of State for Environment, Rural and Food Affairs at the Carnegie Endowment for International Peace, Washington, D.C., 3 February.
Buck, Tobias, Guy de Jonquieres, and Frances Williams, 2003: CAP Reform: Fischler's Surprise for Europe's Farmers: Now the Argument over Agriculture Moves to the WTO, Financial Times, p. 11, Friday, 27 June.
European Commission, 2002a: Mid-Term Review of the Common Agricultural Policy, Brussels.
Idem, 2002b: Statement by Roderick Abbot, Deputy Director-General, European Commission, June.
European Union, 2003: EU Fundamentally Reforms its Farm Policy to Accomplish Sustainable Farming in Europe, press release, Luxembourg, 26 June.
Financial Times, 2002: Paris Faces Budget Conundrum after Election Promises, p. 3, 30 August.
Hoekman, B., C. Michalopoulos, and L.A. Winters, 2003: Special and Differential Treatment for Developing Countries: Towards a New Approach in the WTO, World Bank, Washington, D.C., 4 April.
International Herald Tribune, 2002: EU Pays the Price for Farm Subsidies, pp. 1 and 4, 26 June.
Messerlin, P., 2002: Market Access: Agriculture, paper presented to the Conference on New Trade Research for Developing Countries, Cairo, Egypt, May.
Shitori, Miho, Luca Monge-Roffarello, and Christopher Burger, 2002: The EC's Proposal for the WTO Agricultural Negotiations, Trade Negotiations and Commercial Diplomacy Branch, UNCTAD, Geneva, 24 December.
Short, C., 2003: The Dangers to Doha - The Risks of Failure in the Trade Round, Chatham House, New York.
Tangermann, S., 2002: The Future of Preferential Trade Arrangements for Developing Countries and the Current Round of WTO Negotiations on Agriculture, Food and Agriculture Organization, Rome.
The Times, 2002: Biggest Farmers to Fare Worst under CAP Reform, p. 18, 28 June.
Topp, V., 2001: Trade Preferences: Are They Helpful in Advancing Economic Development in Poor Countries? Australian Bureau of Agricultural and Resource Economics, Canberra.
WTO (World Trade Organisation), 2001: Doha Ministerial Declaration, WTO/MIN(01)/DEC/1.
Idem, 2002: Trade Policy Review - European Union, Report by the Secretariat, WTO/TPR/S/102, 26 June.
Notes:
- The EU Council of Ministers only agreed to the EU proposal on 26 January 2003.
- See Shitori et al. (2002) for an analysis of the EU proposal.
- See Statements made by the South African delegation to the WTO. Statements made at the March and April 2003 Trade Negotiating Committee meetings of the WTO are available from the author.
- Under US Federal Bankruptcy law, Chapter 11 application refers to the intention to reorganise and continue doing business.
- The European Commission has signalled that this number is bound to increase to include other South-East European countries-Croatia, Macedonia, Serbia-Montenegro, Bosnia- Herzegovina and Albania (Financial Times, 2003).
- See the WTO Agreement on Agriculture for information on the nature of these boxes.
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