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Published on May 7, 2008

Author: Raffaele

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The Common Agriculture Policy and Developing Countries:  The Common Agriculture Policy and Developing Countries Dr Dirk Willem te Velde (ODI) Presentation at DSA/EADI meeting 25/25 June, ODI London Overview:  Overview What is the CAP CAP reform How to assess the effects (methodological issues) Possible effects on developing countries Economic, social and environmental Different effects by country type and product Relation to WTO negotiations Political Economy of CAP reform What is the CAP?:  What is the CAP? Treaty of Rome 1958, few “common” policies Three principles Free intra-EU trade of agriculture commodities Discrimination in favour of domestic products EU budget to finance agriculture programmes Two types of instruments Market intervention price (coupled with tariffs, EU export subsidies) Socio-environmental, rural development pillar CAP reform:  CAP reform MacSharry reforms 1992 From price intervention to (compensated by) direct payments (e.g. cut in price of cereals (30%), and butter/beef) Agenda 2000 Price reductions (20% in beef; 15% for cereals) but coupled with payments for e.g. “social and environmental purposes.” Agenda 2000, midterm review of 2003 (until 2013) Price reduction for butter, rice, milk, towards Single Farm Payments (argued to be less trade-distorting); sugar reform in 2005. Assessing the effects of the CAP Stage 1; remaining distortions:  Assessing the effects of the CAP Stage 1; remaining distortions Domestic support (direct support to farmers, €20bn; implicit support through price intervention, AMS, producer support estimates), EU PSE 33% of farm revenues Average tariffs and tariff peaks Export subsidies (e.g. sugar and milk) Other issues: standards, Geographical Indications Slide6:  Agriculture support in OECD countries, 2000-2002, bn dollars) Slide7:  EU’s high average tariffs, and tariff peaks for agriculture Slide8:  EU’s high average tariffs, and tariff peaks for agriculture Assessing the effects of the CAP Stage 2; methodology/CCA:  Assessing the effects of the CAP Stage 2; methodology/CCA Tariffs: reduction in EU tariffs will increase EU imports, depending on price elasticity (or substitution with domestic products) Domestic support and export subsidies: removal will reduce EU production, and raise world prices; different effects on exporters / importers Which countries / products are affected? Importance of affected products, world price effects of halving OECD subsidies; :  Importance of affected products, world price effects of halving OECD subsidies; Outline of SIA approach:  Outline of SIA approach Mainly causal chain analysis for mid-term report: Step 1. Identify trade measure (tariff reductions, or changes in world and domestic prices in case of subsidies), feed this into country case studies Step 2. Identify production/adjustment and trade effects Step 3. Identify economic effects (domestic producers, consumers, employment and investment) Step 4. Identify social effects (poverty, livelihoods, multifunctionality, inequality) Step 5. Identify environmental effects (land/environmental degradation, animal welfare) Assessing the effects of liberalising agriculture markets :  Assessing the effects of liberalising agriculture markets The overall economic impact of (mult) liberalisation is very likely to be positive and significant. reduces distortions, facilitates an expansion of trade and production, encourages increased efficiency in the allocation of resources to agriculture; Overall gains will include increased volumes and efficiency of production, implying higher incomes, and lower consumer prices in generally; a more vibrant and efficient agricultural sector contributes to sustainable economic development, globally and especially in developing countries with a strong agriculture sector. The social impact will be positive but more mixed, environmental effects likely to be negative Multilateral agr trade liberalisation (% change):  Multilateral agr trade liberalisation (% change) Assessing the effects of liberalising agriculture markets :  Assessing the effects of liberalising agriculture markets Developing countries that are major exporters of agricultural products, are unambiguous economic beneficiaries The welfare gain is unlikely to exceed one per cent of national income. The social impacts may be small but are also likely to be positive Increased agricultural production and exports offers opportunities to increase employment and reduce prices, both of which can benefit the poor. Environmental impacts will depend on the product in question but one expects they would be adverse. Assessing the effects of liberalising agriculture markets :  Assessing the effects of liberalising agriculture markets Least Developed Countries will only benefit if domestic producers are enabled to respond. (Some SSA expected to loose from CAP reform) Most of the products they export are largely unaffected by the liberalisation scenario As exporters, LDCs gain little in general and face a reduction in their margins of preferences As many LDCs are net food importers, they suffer a welfare loss from higher world prices If domestic producers can respond, domestic production will expand and domestic prices may ultimately fall, implying a long-run gain To the extent that the domestic sector expands, the social impact will be positive, favouring in particular the rural poor. As food production in LDCs tends to make low use of agro-chemicals, adverse environmental impacts will be minimal, and more than offset by savings on transport as domestic products displace imports. Assessing the effects of liberalising agriculture markets :  Assessing the effects of liberalising agriculture markets The European Union is expected to gain Benefits to consumers and efficiency gains offset producer losses, but the welfare gain is in the order of only 0.1% of GDP. Agriculture exports in relatively processed products will increase, but imports will increase for those products that initially had high protection There are large differences across and within EU countries: all gain from tariff liberalisation and most from reduction in support Rural employment represents a small share of employment in most EU countries so social impacts will be small but concentrated and the EU has the resources and institutional capacity to ‘compensate losers’ Decreases in farm production will affect rural incomes, although the largest commercial farms with high average incomes and agri-businesses are expected to be the main losers of subsidies No large overall environmental effects are expected. On the whole, overall environmental pressure is expected to decrease as long as trade liberalisation is likely to reduce overall production Assessing the effects of liberalising agriculture markets Cotton :  Assessing the effects of liberalising agriculture markets Cotton Cotton issues is mainly US (US did not agree to reduce domestic subsidies for cotton, but WTO case brought by Brazil), but EU (and China) also support their farmers. Subsidies a fifth of producer earnings; US in value, EU in focus Removal of subsidies will raise world prices, and provide an opportunity for cotton producing countries Differences between Australia/Uzbekistan and West African countries, but both groups are expected to gain. One study: Current European subsidies depress two fifth of West African earnings (cotton represents 5-10% of GDP). Assessing the effects of liberalising agriculture markets Sugar :  Assessing the effects of liberalising agriculture markets Sugar EU-ACP Sugar Protocol: guarantee a volume against a price from 18 ACP suppliers, transfers worth around US$500mn; Special Preferential Sugar (variable, lower price); and EBA free access to EU from 2009. Sugar market reform: cut in EU price by 36% with compensation (single farm payment); WTO dispute about level of export subsidies. Cut in sugar price will make high-costs protocol countries worse off, but Southern African countries (EBA) better off. Compensation (sugar exports - 10% of GDP Guyana). Tate and Lyle share price Announcements of sugar reform :  Tate and Lyle share price Announcements of sugar reform Overall effects of further CAP reform on developing countries :  Overall effects of further CAP reform on developing countries EU Tariff liberalisation: overall positive but effects will depend on country type (extensive EU preference regime); preference erosion no excuse to postpone efficient trade liberalisation. Domestic support: some argue that effects would be minor (after decoupling), but it is better to still treat some green box subsidies as somewhat (not minimal) trade-distorting Export subsidies hurt local producers (and perhaps third countries) in beef and poultry in West Africa; milk dumping in Jamaica and India; but in many other net food importing countries, higher cost would not be beneficial. CAP relation to WTO negotiations Direct link to agriculture negotiations :  CAP relation to WTO negotiations Direct link to agriculture negotiations Domestic support Amber box: reduction requirements for trade distorting subs, but de minimis Green box: minimal trade distorting (e.g. for economic, social and environmental reasons) Blue box: reduction commitment to certain (arbitrary?) level Export subsidies Market Access: tariff reductions CAP relation to WTO negotiations Effects of WTO :  CAP relation to WTO negotiations Effects of WTO Limiting export subsidies – a lot has already been reduced (from €10bn to €2bn now) Push for decoupling – to ensure that EU support would be classified as green box MacSharry reforms and support into blue-box CAP relation to WTO negotiations EU position :  CAP relation to WTO negotiations EU position Domestic support AMS (amber + blue) reduction by only 70% (lower than 80% required) in order to run CAP Blue box: 5% Export subsidies: agreed to remove all export subsidies by 2013. Not really new, but still part of conditional offer. Market Access, EU very conservative, much less than G20 and US want (cut of 45% compared to 75% required), and want to exclude sensitive products (up to 8%) from major cuts. Political economy of EU’s position on agriculture:  Political economy of EU’s position on agriculture Different views across the EU in trade policy. CAP budget, but others are less in favour before 2012. Further reduction in tariffs, essential; but French and Irish are against. What next? Need to move at WTO (has acted as stick before) Agriculture now less important in EU GDP and employment (few exceptions) CAP expensive and benefits larger farms. Conclusion:  Conclusion CAP is reforming But protection is still remaining (not easy to classify forms of protection, by effect on trade) Effects of existing protection has different effects on different countries and products – may need further work CAP is related to WTO negotiations The EU needs to offer more at the WTO Need to examine political economy of CAP reform Thank you:  Thank you dw.tevelde@odi.org.uk

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