ECONOMY

Fairer international farm produce market needs bold CAP reform

The European Commission’s proposals for agricultural trade reform, recently agreed to by EU ministers, are a missed opportunity for Europe to show leadership on agricultural subsidy reform. Negotiations on agriculture have now been under way in the World Trade Organization (WTO) for over a year, and are reaching a critical juncture. In November 2001, ministers agreed in Doha to «substantial reductions in trade-distorting domestic support» – in other words, to cut deeply into those subsidies that distort trade and production, such as those provided under the Common Agricultural Policy (CAP). By the end of March, WTO members need to have agreed on how to achieve this. Unfortunately, the proposed reforms Europe has put on the table do not go far enough, and are simply a carry on from existing reforms already agreed under Agenda 2000. In effect, the proposed cuts to domestic support would result in no new reductions in subsidies. Many Europeans may respond: «So what? The CAP is Europe’s business; leave it to us to work out how we should support our farmers.» Actually, the CAP is not just Europe’s business. For most members of the WTO, the CAP is legitimately everyone’s business – and reforming it is an urgent priority. Achieving substantial reform of the CAP is a priority for efficient agricultural producers everywhere, and in particular for poor farmers in developing countries. Australia, of course, has a clear incentive to increase opportunities for our efficient agricultural exporters. Like our European trading partners, and indeed all other WTO members, we have a strong interest in advancing our national interest by maximizing the trading conditions for Australian exporters. The size and nature of expenditure under the CAP affects the production and trade prospects of agricultural producers worldwide. EU support and protection is estimated by the OECD to be worth over $Aus100 billion annually. Much of the support provided by the CAP is directly linked to prices, with around 60 percent provided in direct market price support. This is the most damaging form of subsidies because it encourages overproduction, which in turn reduces world market prices and lowers the return to efficient farmers. These subsidies hurt poor farmers in the developing world the most. In many developing countries, over half the labor force is employed in the agriculture sector. Agriculture is far more important to those countries than it is to developed countries, such as the EU, the United States, Japan and Australia, where agriculture typically accounts for less than 5 percent of the labor force. And even if they wanted to do so, developing countries simply do not have the capacity to match the level of subsidies provided by rich countries. Recent research by international aid agency Oxfam, titled «Milking the CAP? How Europe’s dairy regime is devastating livelihoods in the developing world,» documents the enormous damages inflicted on developing-country farmers by Europe’s dairy regime. It found the CAP encourages the overproduction of milk and milk products, and the resulting surpluses are dumped on world markets using costly export subsidies. The livelihood of thousands of poor small-scale farmers, including in Jamaica, the Dominican Republic and Kenya, have been destroyed by imports of cheap subsidized EU dairy products. The same pattern is repeated for many other commodities supported by the CAP. An example is sugar, where the EU annually disposes of around 7 million tons of surplus sugar onto an already strained world market. Agricultural trade reform is essential to provide access to markets for developing country farmers. Developing countries will benefit more from agricultural trade reform than will developed countries, when measured as a percentage of their economies, because agriculture generally accounts for a much larger percentage of their output, employment and trade. The gains to most developing countries would be largely the result of higher world prices for agricultural exports, which would result from reduced artificial support. The higher prices will have a direct, positive impact on farm and rural sector incomes, and will lead to bigger and more profitable rural sectors in developing countries. But reform of the CAP is not just a preoccupation for those seeking to export to Europe. Significant reform of the CAP is clearly in Europe’s best interests. The CAP tends to flow mostly to the wealthiest, largest farmers in Europe, rather than the struggling small-scale farmers. EC estimates released last year showed that 5 percent of European farmers received half of the direct aid under the CAP. This puts some industries and regions at a disadvantage relative to others, for no reason other than the government support they are able to access. What is more, the CAP does not even help those in Europe it is intended to. The January 2003 OECD report «Farm Household Incomes: Issues and Policy Responses» found that most agricultural support in OECD countries does not reach its intended recipients – farmers. Only 25 percent of market price support eventually gets to farmers themselves. The rest flows to landowners, and suppliers of farm inputs like machinery and fertilizers. So agricultural reform would have benefits in Europe also. Economic analysis of the impact of reform typically shows that the greatest gains from agricultural trade liberalization will accrue to those countries which are most heavily protected, as introducing competition where it has not been before can give a huge boost to an economy’s efficiency. Longer term, farmers in the EU would have much to gain from agricultural trade liberalization and the improvements to competitiveness that arise from the innovation and dynamism of competition. European consumers would benefit from greater choice and lower prices. Reform would also reduce the cost of the CAP to European consumers – the CAP currently costs a European family of four over $Aus1000 per year in taxes and higher food prices. Also, money saved on the CAP could be injected into other parts of the European economy. The Cairns Group of agricultural fair trading nations and a number of other WTO members have put forward strong reform proposals at the WTO agriculture negotiations, which would cut deeply into the rising agricultural subsidy levels of recent years and deliver genuine liberalization of markets. We welcome the efforts by those in Europe who are pressing for reform of the CAP, including through the midterm review. The EU still has an opportunity to confront in a serious way the political challenge of reform of protected agricultural markets. Of course, we are also looking for agricultural reform and trade liberalization from those outside the EU, including the United States and Japan, as well as others in Europe. Now is the time to bring about a fairer world trading environment for farm products. (1) Mark Vaile is the Australian minister for trade and chair of the Cairns Group of Agricultural Fair Trading Countries. He contributed this article to the Greek and English editions of Kathimerini.