Trade Policy in Agriculture - Essay Example

 Introduction The Agricultural Trade Policy of the European Union, particularly its subsidy program, is a very important aspect of policy studies in international trade. The policy has been criticized both in the EU for its wastefulness and elsewhere for being a hindrance to free trade, particularly for developing countries. This paper will discuss this policy as a case that has an important implications for the future global free trade. The Common Agricultural Policy The European Union, formerly the EEC, instituted an interventionist and subsidy policy for agriculture following the Treaty of Rome in 1957 which established the Common Market. Known as the Common Agricultural Policy (CAP) , it is a system of agricultural subsidies and price support programs. It consists of direct payments to farmers for crops as well as land cultivated with price support, tariffs and quotas on agricultural goods imported from outside the Union, and intervention prices whereby the EU would buy all production if prices fall to these levels. The objective was to achieve food self-sufficiency, set fair and stable consumer prices, preserve the rural heritage, and ensure a fair and reasonable standard of living for EU farmers. In specific terms, the CAP imposes import tariffs on certain goods; import quotas designed to restrict quantity that enter the EU market, except for some countries with which it has had some traditional links; intervention prices, already described above; direct subsidies designed to motivate farmers to cultivate certain crops that would ensure stable domestic supply, paid on the basis of land area devoted to such crops; and production quotas intended to prevent overproduction of some food crops. “Set-aside” payments (meaning payment for setting aside land that were difficult to farm) were also made, although this has been suspended ("Seaside subsidy. . ."). This CAP system is so important that since 1992 close to half of the EU budget has been allocated to it, although there is a plan to decrease such spending gradually until it would fall to one-third of the budget by 2013. Several attempts to reform the CAP system have been made. The first one was made in the 1960s by the Mansholt Plan, sought to consolidate small farms into larger ones for more efficient farming. This proposal was defeated by powerful farm lobbies. The MacSharry reform plan sought to limit rising production while simultaneously promoting less restricted market through reduced support levels for agricultural products such as beef and cereals. The "set-aside" principle was first advanced in this proposal. The most recent reforms that have been effected to rationalize the policy are the following: 1) single farm payment linked to respect for environmental standards, food safety, animal and plant health, and requirement to keep all farmland in good agricultural and environmental condition; 2) finance of rural development by way a reduction in direct payment for bigger farms; 3) better budget discipline; and 4) to avoid cuts in intervention price for butter, as well as revisions in the CAP market policy (“Common Agricultural Policy”). Preferential Access Arrangements The European Union, as an exemption to its CAP policy, grants preferences to developing countries under a variety of arrangments. These are of two kinds: 1) non-reciprocal Generalized System of Preferences (GSP) which are available to all developing countries, and 2) non-reciprocal preferential schemes for special groups of developing countries. Non-reciprocity means that the countries that benefit from these schemes have no obligation to grant similar preferences to countries to which they are given tariff-free access. The CAP regime is however protected from the coverage of GSP schemes. The least developed countries obtain more favorable GSP preferences than other developing countries. The introduction of the 'Everything but Arms' (EBA) initiatives in 2001 paved the way for the least developed countries to have no-quota duty-free access to the EU market, except for sensitive agricultural products (namely, rice, bananas, and sugar) at the time, but the exceptions were to be phased out until completely removed in 2009. There are also bilateral and regional arrangements entered into by EU with some countries and groups of countries. For example, the Lome Convention allowed African and Caribbean countries duty-free access of their exports, except for those covered by CAP. There are also agreements with Mexico, Chile, South Africa, and with MERCOSUR (the South American Common Market composed of Brazil, Paraguay, Uruguay, and Argentina). Other similar agreements were being negotiated, such as one with the Mediterranean countries. These preferential agreements for agricultural products of developing countries make it costly for EU to support domestic producers, thus exerting some pressure for the agricultural sector to liberalize. At the same time, further reform towards liberalization will tend to erode such preferences. This can be explained by the fact that when overall tariffs are reduced, the advantages enjoyed by countries under such preference arrangements are diminished ("Preferential access agreements"). Criticisms of the CAP According to Hill (165) the Common Agricultural Policy was designed to protect the jobs of Europe's politically powerful farmers by restricting imports and guaranteeing prices. The higher prices that resulted from CAP have cost Europe's consumers dearly. Hill further says that governments do not always act in the national interest when they intervene. The CAP policy, which arose because of “the political power of German and French farmers. . . benefited inefficient farmers and the politicians who relied on the farm vote but no one else (171). The EU agricultural policy has been the object of criticisms for being protectionist with regard to agricultural products in which developing countries have comparative advantage. The tariffs of many agricultural imports to EU are higher than tariffs on manufactured goods, and are also higher than those of the United States and Canada, although lower than Japan's. Developing countries, unless they have preferential tariff concessions with the EU through bilateral or regional agreements, are seldom able to export to the EU. The EU also uses special safeguards which the Uruguay Round of the World Trade Organization allowed for those countries that converted trade barriers to tariffs, to protect its agricultural sector. The safeguard measures are triggered whenever the import price falls below a reference prices or when import volume rises steeply: The EU applies these measures with respect to sugar and some dairy products (“Agricultural Protection Measures”). Tariff escalation is used by EU and other developed countries in order to discourage value-adding processes for their exports. The tariff rates on raw agricultural products are lower than products that are semi-processed or processed. This protects domestic processors. Tariff rate quotas constitute another problem for developing countries as they impose lower bound tariff on a specific quantity, after which the tariff goes up. This limits the volume of exports from developing countries that can access the EU market. Because the procedure requires the acquisition of a TRQ licenses, it can be considered as a barrier to trade. Conclusion With the collapse of Doha Round of the WTO, countries have to take their own initiatives to develop trade arrangements with one another. This can include bilateral and regional trade agreements which nevertheless trend towards freer trade in the future. The EU is moving towards gradual relaxation of its own restrictions under CAP thereby reducing the proportion of its budget to more acceptable levels especially for countries (e.g. Britain) that contribute a higher,disproportionate share to support the agricultural policy in other EU member countries. Works cited "Agricultural Protection Measures." Trinity College Dublin. Accessed 17 January 2010 http://www.tcd.ie/iiis/policycoherence/index.php/iiis/eu_agricultural_trade_policy/agricultural_protection_measures "Common Agricultural Policy." A Dictionary of Geography. Oxford University Press, 1992, 1997, 2004. Answers.com 18 Jan. 2010. http://www.answers.com/topic/common-agricultural-policy Hill, Charles C.W. Global Business. 2nd ed. New York: Irwin/McGraw Hill, 2001 "Preferential access agreements." Trinity College Dublin . Accessed 16 January 2010 http://www.tcd.ie/iiis/policycoherence/index.php/iiis/eu_agricultural_trade_policy/preferential_access_agreements "Set-aside subsidy halted to cut grain prices." The Telegraph, 27 September 2007. Accessed 16 January 2010 http://www.telegraph.co.uk/news/uknews/1564327/Set-aside-subsidy-halted-to-cut-grain-prices.html Read More