TCS Daily

Progress Report

By Roger Bate - July 2, 2003 12:00 AM

The farm reforms agreed by the Europeans last week 'gives the EU a very good platform in the WTO negotiations. The ball has now been played to the other WTO partners', claimed Renate Kunast, Germany's Farm Minister. Her claims are echoed across the continent, with most European Governments smugly pointing the finger at the U.S. and Japan for more action to help poor countries' farmers and taxpayers in the rich nations. But their smugness is not appropriate because the EU will remain the biggest problem for the developing world even if all goes well. For while last week's agreement is partly a step in the right direction, it is also not a substantial change as it is subject to argument at WTO by Europe's farm troublemakers -- the French. And it is likely to maintain the financial dependence of EU farmers on aid.

On Thursday morning, when most sane Europeans were either asleep or having breakfast, farm negotiators were drinking champagne, heralding their new agreement. The EU farm commissioner, Franz Fischler, claimed that it was 'the beginning of a new era' for European agriculture. And in one respect he is correct. It is probably the beginning of the end of subsidies linked to output. Most European subsidies are paid to farmers to produce crops or livestock, regardless of market signals. Since 1958 the system has rewarded agricultural production not the demands of consumers (for either the products themselves, or the amenities and environment farmers provide). Mr Fischler has achieved what many, including me, thought unlikely, and that is to de-couple subsidies from production to the provision of other goods -- notably stewardship of the environment and rural development. From now on farmers will have to pay more attention to the demands of the market, than satisfying the bureaucrats in Brussels (although there is a danger that they will have to satisfy some different green bureaucrats in Brussels, and the whole game continues in a different guise).

But at least market signals on price will be more relevant than before. And it is encouraging that the production-driven and incredibly entrenched national farm lobbies were 'disappointed' at the outcome of the reform. One farm leader even overly dramatised the agreement saying it 'undermines the CAP and the future of agriculture'. Unfortunately it doesn't go anywhere near that far, even if it is the most significant change in CAP for a decade.

Nevertheless, Fischler is broadly correct when he claims that the new agreement is 'trade-friendly' because the new subsidy system does not 'distort international trade' and does not 'harm developing countries'. According to the Financial Times 'the breakthrough was greeted with undisguised relief in Geneva, where Supachai Panitchpakdi, WTO director general, welcomed it as a "substantial agreement" that should lead to progress in many areas of the Doha talks'.

But much of the claims of Fischler and Panitchpakdi are overblown. At least a quarter of payments to beef and cereal producers will continue to be based on production targets. It is possible that operating two systems of rural development and production subsidies will prove too complex and the latter will be dropped. The optimists claim this will happen, but EU bureaucracies thrive on confusion so it's far from guaranteed that this will happen.

More worrying for developing country farmers is that the EU policy change does nothing to increase market access. Reducing barriers to African produce is as important as lowering subsidies, and the EU is unlikely to move on the issue. The fact that subsidies will be de-coupled may lower pressure on EU officials to maintain quota barriers and tariffs. However, with 10 new nations joining the EU shortly, and agriculture a large part of their potential exports to Western Europe, there will be increasing pressure from their farm ministers to keep out produce from other countries.

However, the EU move does open up opportunities at the WTO Ministerial Meeting in Cancun since African political eyes will switch to the U.S. farm bill and other grotesque subsidy schemes around the world. U.S. producer support averages around only 20% of total farm receipts, while U.S. support is particularly bad on some crops like cotton. Overall it is far better than the current EU average of 35%. Japan's average is not far short of 60%, and is even higher on its staple, rice. But countries in the low-production-subsidy Cairns group are aligning themselves with the African nations in demanding Japan, EU and U.S. go far lower than the current U.S. average. New Zealand's production subsidies are at 2% and Australia's at 5%, and this is where Cairns and the poorer nations want the main OECD countries to aim.

Robert Zoellick, the U.S. Trade Representative, knows he cannot move that far. President Bush would never allow it given the 2004 election and the importance of the farm states to the Republican cause. So when African farm ministers complain about American subsidies, Mr. Zoellick is likely to point to the still existing European barriers, and the fact that the French may still scupper the de-coupling proposals. This will be unfortunate when so much that USTR does is excellent. But he will be unable to resist the pressure, especially since there are senior U.S. politicians, such as Iowa Senator Charles Grassley, who would rather see no deal at Cancun than one that might weaken subsidies to U.S. farmers.

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