European Unions Agricultural Policy - Essay Example

European Union's Agricultural Policy: Tough Rounds For Economic Change In Douglas North's essay en d Understanding the Process of Economic Change, he reckoned that "the structure that guides the way in which we operate is made up of formal rules, informal norms of behaviour, and their enforcement characteristics. All we can change quickly are the formal rules. We cannot change the informal constraints, at least not in the short run; and even our ability to control enforcement is very limited" (p.11). As an Economics Nobel Prize awardee, North was motivated to scan through the revolution in economic years ago. The resulting thesis demonstrated that economic performance is determined largely by the kind and quality of institutions that support markets. All these formal rules, including the European Union agricultural policy, are aimed in initiating economic change. Along with globalisation which promotes global free trade, the need for trade policies of importing and exporting products has to exacting under trade liberalisation laws. In June 2003, European Union (EU) farm ministers has reached the final compromise reform package has strayed a long way from the original agricultural policy that had been formulated in 1992. The deal confirms the concept of 'partial decoupling', which was introduced this year, although member states have the option of a further two-year delay. The agreement also boosts the EU's rural development ambitions with a deal on compulsory 'modulation'. But although butter and SMP prices are to be cut, milk quota increases are delayed, and the cereals intervention price will remain unchanged (Agra Europe, 2003). With trade liberalization under the General Agreement of Tariffs and Trade (GATT), hundreds enthusiastically adopted the regional trading arrangements that proliferated since its birth. The success recorded in the liberalization of international trade in the manufacturing sector has thus been matched by a reverse process of ever-escalating protection and subsidization in the agricultural sector. Could these agricultural policies drafted by the European Union promote more benefits or is this just another framework that would lead numerous promotion of selfish interests among bigger nations against smaller agricultural countries Long History Wielding their basic aim which is to increase agricultural production, ensure a fair standard of living for farmers, stabilise markets and guarantee the availability of supplies for consumers at reasonable prices, the EU agricultural policy has indeed come a long way. The pioneering principles of agricultural policy have been set out at Stresa Conference in July 1958., The CAP mechanisms were adopted in 1960 by the six founding member states and two years later, in 1962, the CAP came into force. The former CAP (Common Agricultural Policy) reform of the early 1990s can be viewed as a significant step toward increased economic efficiency in European agricultural sector. The major changes are essentially the introduction of compensatory payments and price support levels closer to long-run expected world prices. These changes essentially apply to the grain sector and, to a lesser extent, the beef sector. The 1990s was a crucial decade because of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations has culminated in new trade agreements, including the Agreement on Agriculture. In North America, the Canada-United States Free Trade Agreement was broadened to include Mexico under the North America Free Trade Agreement. The World Trade Organization (WTO) supplanted GATT as the institution overseeing the resolution of international trade disputes and providing the organizational framework for new trade negotiations. The effects of the creation of the new institution and the continuing impact of regional trade blocs on agricultural trade received much attention among the affected policy communities. Several important issues began to emerge that would provide much of the impetus for future discussion and negotiations. The European Union (EU) has a longstanding agricultural support scheme based on guaranteed prices. This policy aims to provide support for the farming sectors were partly shifted towards direct income support and service payments, in other words instruments that were not only less trade-distorting but also preferable from an environmental perspective. The European agriculture has been constructed in two different ways. First, environmental measures which carry the promise of resulting in lower yields due to extensification or reduced input of agro-chemicals are proposed not only as serving environmental interests but also as contributing to surplus reduction. Second, and partly in contrast, to the extent that it could be argued that high budgetary expenditures for the agriculture sector helped support the provision of desirable services such as environmental stewardship in rural areas, a sizeable common agricultural policy could still be justified to an increasingly critical public and hence maintained. On the basis of these two rationales, the 'greening' of the CAP represented an attempt at repackaging a policy under attack into one acceptable to the growing policy community that demanded a say with respect to the CAP's future (Rude, 2001). Today, the European Union spends $46.8 billion, nearly half its annual budget, on its common agricultural policy. Another $4.68 billion earmarked for rural development goes largely to farmers. The system is designed to ensure food safety, environmental preservation and stable farm income. But it has become problematic, pushing EU officials to seek changes that would lead to a more market-oriented and simpler policy. Budget of around 40 billion euros ($39.8 billion) a year, almost half of the total EU budget. Spending was fixed at around this level until 2006 by the Agenda 2000 budget deal agreed in 1999. France receives around nine billion euros (18 percent) of the total budget, Germany 5.6 billion, Spain 5.5 billion, Italy five billion and Britain four billion euros . (Refer to Table 1) The 15-nation European Union expected to add 10 members with large rural populations, so officials want policies and budgets in place now that will allow new countries join without running up farm costs. The proposed reforms change the way funds are spent while leaving overall spending levels alone. Most important for trade issues, the reforms would de-link farm payments from production levels, instead giving farmers money for meeting environment, food safety, animal welfare, health and occupational safety standards. De-linking the payments is designed to allow farmers to gauge supply and demand, helping reduce overproduction and limiting the practice of selling on world markets below the cost of production. Such subsidies depress prices and are especially hard on farmers in developing countries. Both 'policy linkages' are contained in a statement by Environment Commissioner Clinton Davis who argued in 1985 that [in its] role as the protector of the environment, of the landscape, and of natural habitats [the farming sector] thus renders services to society for which there is a real demand. Direct income support, which may be indispensable for income or market reasons and which has the advantage of not encouraging higher production, can take account of the role of agriculture in the environment (CEC, 1985). The idea of multifunctionality entered into the agricultural policy debate in the early 1990s and more recently has spread to trade policy discussions. The word multifunctionality came to the public's attention late in 1999 through the press reports on the World Trade Organization (WTO) ministerial meeting in Seattle. Inclusion of the concept of multifunctionality was one of the negotiating demands for agriculture by the European Union (EU) and Japan. This demand met stiff resistance from the United States and the Cairns Group of agricultural exporters. Multifunctionality, however, is a new name for an old idea. The idea is that agriculture produces unpriced spillover benefits that occur in addition to the provision of food and fibre (Rude, 2001). Although the global reduction of trade barriers is beneficial because it directs production to the most efficient sources and allows consumption at the least cost, regional trade agreements can have either positive or negative effects. Even though regional trade agreements can improve resource allocation within a region, they discriminate among members and non-members and can have detrimental effects for global resource allocation. Do they create or distort trade In drafting proposals, the regional trade agreements should therefore considers its impact on trade flows and on global welfare. Loopholes Unlimited The European Union's (EU) Common Agricultural Policy (CAP) has been blamed for many things. Critics say it prevents developing-world farmers from competing in European markets. It eats up state funding for important social programs, such as education and healthcare. And it strangles European competitiveness by redistributing money to unproductive sectors of the economy. This CAP policy led to a number of well documented problems, the main ones being the rising cost of the CAP, the deterioration of international relations, and environmental degradation. Pressures for reform increased. Other negative consequences of the CAP, such as high consumer inequitable poor transmission of support to farmers, received little if any attention. There were various reforms to the CAP, on a piece-meal basis, over the 1980s. However, it was the McSharry reforms in 1992 which were the most comprehensive. Whilst these left the basic price structure in place, they reduced fixed prices to, or closer to, world market levels and compensated producers with direct payments based upon past production patterns. In addition, the United States recently widened the gap on agricultural issues when it filed a case at the WTO against the European Union's policy on biotech crops, and Mr. Bush said Europe was hindering "the great cause of ending hunger in Africa." The root of this is the European Union's de facto moratorium on the importing of genetically modified farm goods. The 5-year-old policy effectively blocks the importing of some U.S.-produced goods, such as corn. About one-third of U.S. corn is genetically modified, but because it is not segregated from unaltered products, almost all corn exports to Europe are blocked, costing an estimated $300 million per year. EU officials deemed that US accusations are misguided and ignore consumer health and environmental concerns of developing countries (Buck & Cookson, 2003). The European Union, meanwhile, has its own problems with U.S. policies on trade, and has won major cases at the WTO against the way exports are taxed and against steel tariffs. The United States plans to appeal the steel case but must change its laws that shield major exporters from taxes on overseas sales, which the WTO ruled was an unfair subsidy. The European Union won the right to retaliate against the tax law with $4 billion in trade sanctions, but said it would not implement them. Another important controversy seen is the export subsidisation because it raises a kind of "food price dilemma". Depressed world prices of agricultural commodities, originating from EU export subsidies, are deemed to be one of the causes of the displacement of farmers in importing countries. But export subsidies may be beneficial to consumers in these countries, since cheap food is available. To the extent to which there are vulnerable population groups in importing countries that are net food buyers, export subsidisation may be an advantage for those countries, at least in the short run. But in the long run importing countries may increase their dependency on food imports (von Braun, Wobst and Grote, 2002). Applied research results in this field tend to attribute an overall positive welfare effect to net exporting countries and an overall negative welfare effect to net importing ones, especially low-income countries (Anderson et al., 2001). Traditional agricultural exporters are those more likely to benefit from a reduction of export subsidies (Messerlin, 2002). Rodgers and Cardwell (2003) provided a useful argument to agricultural trade and the GATT - WTO system along with the influences that this system has had on EU and US agricultural trade policies. Their argument singles out the controversial subject of agricultural domestic support to provide a detailed, account about the politics of agricultural trade. It is also interesting to read Grant's excellent description of national agricultural ministries and departments as "specialised institutions devoted to agricultural politics" who "see it as their task to promote the interest of their clients, the farmers" (p. 50). Grant adds that, "it is unusual for any other industry to have its own ministry protecting its position and advancing its claims with government". Grant's description of the interplay of political forces in the EU and the United States shaping the trade policies of these two leading players provides a powerful insight into the political game at the back of every entrenched negotiating position at the WTO where these two powers often stand on opposite sides of the table. Grant concludes: "The political process that underpins agricultural trade is in many ways a perverse one. It favours the "havest-rich" countries, big farmers, agribusiness - over the "have-nots". It is a process that still prioritizes the interests of producers over consumers. ... The forces that make the politics of agriculture distinctive at a national, regional and global level are unlikely to change very quickly" (pp. 66-67). In short, it is implicated that the powers behind the screen is dictated by the US and EU positions at the WTO. Conclusion Although several reasons have been put forward to assert certain provisions as an article of faith rather than properly argued and substantiated. The list of assertions include: the unique role of agriculture as a source of food, its dependence on the unpredictable vagaries of nature, its direct impact on the environment, its sentimental and cultural value for the preservation of traditional ways of life, etc. which make agriculture unsuitable for market forces. Proper scientific analysis of these and many other factors, their implications for national agricultural policies, their relations with international trade in agricultural products, and so on, has been scarce. Market liberalisation to facilitate trade is the best policy option to achieve development, but liberalisation requires institutional and technical capacity that may be lacking in some developing countries. Liberalisation may also require painful structural adjustment that, if done rapidly, may impose social costs that developing countries cannot afford to alleviate. Significant reforms the EU's Common Agricultural Policy has been agreed in June 2003. The main difference is that payments will no longer be linked to production is really a big triumph. But, the next step is to take on the complex issue of export subsidies. Thus, much research and efforts have to be contrived together at the WTO for EU countries to achieve the reasonable benefits that each one deserves. Bibliography Anderson K., Dimaranan, B., Francois, T., Hoekman, B. & Martin, W. 2001. The Cost of Rich (and Poor) Country Protection to Developing Countries. Centre for International Economic Studies, Discussion paper no. 01/36 (September). Grant, W. 2003. The Politics of Agricultural Trade, In Michael N. Cardwell, Margaret R. Grossman and Christopher Rodgers (eds), Agriculture and International Trade: Law, Policy and the WTO, CABI Publishing. Messerlin, P.A. 2002. Agriculture in the Doha Round . Paper prepared for the World Bank Roundtable on Policy Research in Preparation for the 5th Ministerial, Cairo, May 20-21. North, D. C. 2005. Understanding the Process of Economic Change. New Jersey: Princeton University Press. Rodgers, C. & Cardwell, M. 2003. The WTO, International Trade and Agricultural Policy Reform, In Michael N. Cardwell, Margaret R. Grossman and Christopher Rodgers (eds), Agriculture and International Trade: Law, Policy and the WTO, CABI Publishing, 2003 Rude, J. 2001. Multifunctionality: An Examination of the Issues and Remedies. In Hans Michelman et. al. Globalization and Agricultural Trade Policy. Boulder, Colorado: Rienner. Von Braun J., Wobst, P. & Grote, U. 2002. "Development Box" and Special and Differential Treatment for Food Security of Developing Countries: Potentials, Limitations and Implementation Issues. Bonn: ZEF Discussion Papers on Development Policy (May). Agra Europe. 2003. CAP reform - a detailed overview of the new deal. (European Policy News. June 27). p. 4 Buck, T. & Cookson, C. 2003. EU hits back at Bush GM food claims modified crops. The Financial Times, (June 25), p. 7 Table 1. Basic share-out key for redistributing 'modulated' money Fixed allocation key (%) Belgium 1.0 Denmark 1.7 Germany 12.9 Greece 5.6 Spain 18.5 France 19.8 Ireland 2.7 Italy 12.9 Luxembourg 0.1 Netherlands 2.2 Austria 4.2 Portugal 4.9 Finland 1.8 Sweden 2.0 UK 9.0 EU-15 100.0 Note: These are basic figures before any adjustment to ensure retention of at least 1% of modulated money in each member state, or to ensure 80% minimum retention threshold (90% in Germany). Source: European Commission. Schedule of dairy support price cuts and direct dairy aid payments under new CAP reform agreement (in [euro]/t) 2003 2004 2005 2006 2007 * Butter 3 282.00 3 052.26 2 822.52 2 591.99 2 461.50 SMP 2 055.20 1 952.44 1 849.68 1 746.92 1 746.92 Dairy aid payment - 11.81 23.65 35.50 35.50 (per tonne of quota) Note: * and following years. Read More