The CAP and the WTO: Learning to live with legal challenge and regionalism

Paper presented at the conference ‘Agricultural Policy Changes: Canada, EU and the World Trade Organisation’, University of Victoria, Victoria, BC, 13-15 September 2007.

Susan Senior Nello,

University of Siena

Since 1992 the Common Agricultural Policy (CAP) has been (and still is) undergoing a process of fundamental reform. The negotiations to liberalise world trade first in the GATT (General Agreement on Tariffs and Trade), and subsequently in the World Trade Organisation (WTO), have been a catalyst for change of the CAP with EU (European Union) agricultural policymakers constantly looking over their shoulders at developments in the wider context. One of the main aims of the 1992 MacSharry reform was to enable a successful conclusion to the Uruguay Round of GATT negotiations. The 1999 Berlin Agreement on Agenda 2000 and the Mid-term Review, or Fischler Reform of 2003, were also intended to enhance the bargaining power of the EU and demonstrate that it was a serious negotiating partner in the subsequent Doha Development Agenda (DDA). However, the timing of the 2003 reform was such that it did not seem to be used by the EU as an effective bargaining counter to wrest reciprocal concessions and it appeared to be taken for granted by other WTO members.

Domestic pressures and the role of successive EU Commissioners for Agriculture and Rural Development probably play a predominant role in explaining the timing of CAP reforms. In particular, the deepening (with the emergence of other policy areas competing for financing) and widening (successive enlargements) of the EU have necessitated a re-dimensioning of EU spending on agriculture and have rendered the EU budget constraint binding.

The enlargements of the EU have also forced change in the decision-making institutions of the CAP and altered the agricultural political arena of the EU. No longer is EU agricultural policy shaped in an ‘isolated political circuit’ in which final decisions are taken by the Council of Agricultural Ministers anxious to obtain the best possible deal for their farmers back home. Moreover, after a series of crises such as avian flu, BSE and foot and mouth, the general public has expressed strong preferences in favour of healthy and safe food and protection of the environment. EU decision-making bodies have evolved and become more responsive to these preferences.

Given that it is unlikely that a successful conclusion to the Doha Development Agenda will be reached in the next couple of years, the question that arises is whether the external influence on CAP reform will be eroded. Here it is argued that the role of the WTO in dispute adjudication and the growing regionalism and bilateralism likely to replace multilateralism could be harnessed provide continuing incentive to CAP reform, though this implies a change in the nature of incentives and risks involved. For instance, policymakers may be able to use litigation, or negotiations of bilateral or regional agreements, to push through their domestic reform agenda. If, however, international trade rules clash with strong domestic preferences (such as those on food safety or health matters) the political legitimacy of using the architecture of the international trade system in this way may be challenged.

The aim here is to use a political economy approach to illustrate the links between CAP reform and the changed WTO framework. This will first entail presenting the key features of recent reforms to the Common Agricultural Policy and the proposals for further change. Then a brief discussion follows of how a political economy approach could be applied to CAP policy-making, and WTO negotiations, including a comparison of the Doha Round with the previous Uruguay Round of trade negotiations to indicate where some of the main difficulties in reaching consensus appear to lie. The role of the WTO dispute settlement and of regional arrangements in influencing the ongoing process of CAP reform will then be indicated, before drawing conclusions in the final section.

Recent Reforms of the Common Agricultural Policy

The traditional Common Agricultural Policy of the EU relied mainly on a system of price support. The high and stable prices encouraged surpluses that either had to be held in public storage or sold on world markets with export subsidies. For many years the high EU agricultural prices were isolated from world prices by variable import levies,[1] but as a result of the Uruguay Round Agreement these were converted into tariffs from 1995.

The system of price support weighed heavily on the EU budget, caused huge transfers from consumers to farmers, encouraged intensive production methods with negative implications for the environment, and favoured larger farmers. From the early 1990s the issue of CAP reform became more urgent with the prospect of EU enlargement, pressures to re-dimension agricultural spending in the EU budget and the need to reach agreement in the GATT/WTO framework.

Reforms of the CAP were therefore introduced in 1992, 1999 and 2003. The general direction of these reforms consisted of a reduction in price support and the introduction of direct aids to farmers in the form of payments per hectare or per animal. Receipt of these direct aids was rendered increasingly conditional on realising environmental, food-safety and animal-welfare objectives.

The 2003 reform (also known as ‘Fischler’ reform after the then EU Agricultural Commissioner) entailed the introduction of a Single Farm Payment (SFP) for most EU farmers and the aim was to render this decoupled, or independent, from the level of production. Decoupled support is considered to have the advantage of causing less distortion of international trade but, as explained below, subsequently debate emerged as to how far the SFP was in effect ‘decoupled’.[2] In its ‘historical’ form the SFP would be based on a reference amount of the annual average of the arable crop and meat direct payments that the farmer received during the 2000-2002 period. The farmer would receive the SFP regardless of whether land were used to produce anything (except fruit, vegetables or permanent crops apart from olives in the initial version of the reform) or was left idle (but maintained in good agronomic condition). Member states wanting to reduce the risks of abandonment of production could continue to pay limited per hectare payments for production of certain arable crops, and some premia per head of animal (partial decoupling).

The EU(15) member states could opt for partial or total ‘regionalisation’, paying all farmers in a region the same flat rate of aid per hectare based on the average payment per hectare in the region during the reference period. In the new member states a flat rate of per hectare payments was to be paid to all farmers.

Subsequently similar reforms were introduced for sectors such as olive oil, tobacco, fruit and vegetables and, partly in response to disputes in the WTO framework, for cotton, sugar and bananas, while in 2007 a Commission proposal was presented for reform of the wine sector. In all cases support was to become at least partially decoupled and included in the Single Farm Payment system.

The Single Farm Payment is linked to respect of environmental, food safety and animal health and welfare standards, and to the requirement to keep all farmland in good agricultural and environmental condition (cross-compliance). Failure to respect these objectives would entail reduction of the direct payments to farmers. The reform strengthens rural development policy (the second pillar of the CAP) with increased EU financing, reshaping of all measures into a single Rural Development Regulation covering the 2007-2013 period, and new measures to promote the environment, quality, animal welfare and to help farmers to meet EU production standards.

As Buckwell (2007) argues, the complexity and comprehensiveness of these reforms tends to be overlooked, in particular, at the WTO level.

One of the initial aims of the 2003 reform was to limit the size of transfers to large farmers but in the event the reform does little to meet this objective. The 2003 reform envisaged a reduction in total payments (known as ‘modulation’) to farmers of 3 per cent in 2005, 4 per cent in 2006 and 5 per cent from 2007 (the initial proposal of the Commission had been 20%). The first €5000 received by a farm is exempt from this reduction. The funds released will be used to improve the environment, ensure the quality and safety of foodstuffs or to protect animal welfare. The European Council subsequently agreed on voluntary modulation of 20%, but there is debate about whether this should be rendered compulsory because different applications in member states may cause distortions.[3]

In comparing support to agriculture three indicators published annually by the OECD are generally used: the per cent Producer Support Estimate (PSE), the per cent consumer support estimate (CSE) and the sum of the most production- and trade- distorting forms of support. The PSE sums up the monetary value of government interventions that result in financial transfers from consumers and taxpayers to support agricultural producers. When expressed as a percentage of total farm receipts the PSE allows comparisons of support across countries and commodities (see Figure 1). The CSE is the annual monetary value of gross transfers to and from consumers of agricultural commodities measured at the level of farm gate arising from policy measures that support agriculture. Following the various CAP reforms the percentage CSE fell from –37 per cent in 1986-88 to –19 per cent in 2003-05. Over the same period (1986/8 to 2003/5) the share of most-distorting forms of support[4] in total CAP support fell from 97 per cent to 63 per cent.

Figure 1: Producer Support estimate by selected country

Transfers to farmers as a per cent of value of gross farm receipts

Provisional data for 2005.

*2004

**2003

Source: OECD (2006).

Despite the various CAP reforms, as Table 1 shows, EU agricultural tariffs remain relatively high, also when compared with those of the USA.

Table 1 Average tariffs applied on selected major agricultural products (per cent), 2005

meat / milk (processed) / rice / sugar / wheat
Australia/New Zealand / 0.0 / 0.9 / 0.0 / 2.1 / 0.0
Canada / 7.9 / 103.2 / 0.0 / 3.7 / 1.7
EU 25 / 39.7 / 47.0 / 138.6 / 128.6 / 0.5
USA / 1.7 / 18.8 / 4.9 / 34.9 / 2.4
Argentina / 8.6 / 16.8 / 12.2 / 17.5 / 5.7
Brazil / 6.0 / 19.7 / 14.5 / 17.5 / 4.6
China / 9.9 / 11.4 / 1.0 / 19.8 / 1.0
India / 24.2 / 51.4 / 72.8 / 59.5 / 7.7

Source: Bouët (2006b)

Further reform of the CAP

The development of other EU policy areas such as the Single European Market, Economic and Monetary Union and Social and Economic Cohesion has meant competing claims on Community resources and this has become even more explicit since 1988 with the use of financial perspectives setting out the EU budget for a number of years (currently 2007-2013).

At the Brussels European Council of October 2002 the French President, Chirac, (a former Minister of Agriculture) convinced Germany and the European Council to accept a limit of 1% per year in nominal terms on the increase in CAP spending from 2007 until 2013.[5] Phasing in of the CAP in Bulgaria and Romania (who joined the EU in 2007) will also have to be covered by this budgetary guideline. Although some cuts in market support seem likely, reductions in Single Farm Payments (of possibly in the order of 3 per cent, Anania, 2007) will probably be necessary to release funds for CAP spending in the two new member states. Spending on rural development was excluded from the limit agreed in 2002.

At the June 2005 European Council Tony Blair linked the question of the UK budget rebate to reduced spending on agriculture, but France, in particular, opposed further CAP reform. By way of compromise in 2005 it was agreed that there would be a comprehensive review of all expenditure and resources of the EU Budget by 2008/9, including a review of spending on the CAP.

The Commission has stressed that the debate about the future of the CAP is characterised by ‘one vision’ but two steps. The first, according to the EU Commissioner for Agriculture and Rural Development, Mariann Fischer Boel, is a ‘health check’ of the CAP until 2013 and is said to be simply an adjustment and simplification of the CAP with nothing radically new compared with the 2003 reform. However, some of the proposals raised in this context would seem to imply profound changes in the CAP, and they include:[6]

  • an end to many of the exceptions from decoupling,
  • harmonisation of entitlements to single farm payments and a reduction of the flexibility given to EU member states in the application of the 2003 reform,
  • an increase in compulsory modulation,
  • simplification of the CAP with the introduction of a single common market organisation rather than the existing 21,
  • a review of market instruments such as intervention and quotas, possibly including steps towards the elimination of milk quotas (though their continuation has been agreed until 2015) and of set aside.

The second stage is to be a fundamental debate on the future of the CAP from 2013 when a new financial perspective has to be agreed. The Commissioner seemed determined to arrive at that debate with a more transparent, rational CAP that is easier to defend. Among the issues raised in the debate about the shape of the CAP after 2013 are:

  • Increased co-financing by member states
  • Making regionalisation mandatory;
  • Increased compulsory modulation;
  • An end to milk quotas;
  • Improved management of risk;
  • Degressivity of direct payments (a fixed percentage decrease over a specified interval of time);
  • Ceilings/caps on transfers to individual farms and cancelling those of farms below a minimum size.[7]
  • Continued promotion of biofuels, with the aim of covering 20 per cent of EU energy requirements with renewable sources by 2020 and at least 10 per cent of transport fuel from bioenergy.

In order to understand what impact a successful conclusion to the Doha Round might have had on CAP it is useful to consider the most recent EU offers. Agricultural trade negotiations at the WTO level are generally centred on three main pillars: export competition policies, market access, and domestic support, though other issues may play a role, such as Special and Differential Treatment (SDT) for developing countries; protection of geographical indications at an international level (which is of particular interest to the EU given the high share of processed food and beverages in its exports), and taking account of ‘non-trade concerns’ or the role of farmers in protecting the environment and countryside, and in promoting food quality and safety.

During the Doha Development Agenda at Hong Kong in December 2005 the EU agreed to complete elimination of agricultural export subsidies by 2013. Overall, following the various CAP reforms the cost of the EU of maintaining its commitment to eliminate export subsidies is not very high, and Hoeckman and Messerlin (2006) argue that the EU was ‘selling its WTO partners a rapidly depreciating asset’. However, there may be consequences for some EU food processors.

On tariffs in 2006 the EU Commissioner for Trade, Peter Mandelson, stated that the EU was prepared to improve on its formal offer of an average reduction of 39 per cent and that the member states had given him a license to offer a larger tariff cut (51 per cent was mentioned unofficially). Certain member states, and notably France, subsequently denied this. For instance, at the St Petersburg G-8 Summit of July 2006 the President of the European Commission, Barroso, promised to hand EU negotiators a stronger bargaining mandate, but President Chirac maintained that Barroso had no power to dictate the terms of the WTO talks.[8]

The EU offer on tariff reduction would probably reduce domestic prices on the EU market (Anania, 2007), but the scale of this effect will depend on the treatment of ‘sensitive’ products. As in the Uruguay Round, concessions in other policy areas such as rural development, or economic and social cohesion, could be used to overcome the opposition of member states such as France to an improved offer on EU agricultural market access.

On domestic support, the EU offer to cut trade-distorting domestic farm subsidies by more than 70%was based on the view prevalent at the time of the 2003 reform that the Single Farm Payment was sufficiently decoupled to fall into the green box category of policies (see Box 1), which were exonerated from the obligation to reduce domestic support.However, as explained below, it now appears much less certain that the SFP can be defended as a decoupled green box measure.

Box 1 The WTO classification of Domestic Support for Agriculture

The WTO classification of policies follows a traffic-light analogy: red measures must be stopped (but no agricultural policies are included in this category), amber box policies should slow down (by means of reduction), while green measures can go ahead.

The amber box covers policies considered to distort production and trade, which are permitted within the limits agreed in international negotiations. They are defined in Article 6 of the Uruguay Round Agreement on Agriculture (URAA) as all domestic supports except those in the blue and green boxes.

The blue box is the amber box with conditions, and covers support under ‘production-limiting schemes’. It was initially designed to cover the EU direct payments to farmers following the 1992 CAP reform and the US deficiency payments.