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Agricultural protectionism in the European Union
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This article will investigate some of the means by
which the European Union protects its agricultural sector as well as
some of its justifications for doing so. It will also examine the
impact this has on developing countries and the ways in which it
undermines their capacity to initiate and sustain viable economic
development programmes.
By Hussein Haeri
May 14 - 20, 2001
The ever-increasing integration of the world's
economies has resulted in the apparent institutionalization of
'liberal' trade values. Organizations, the most prominent of which is
the World Trade Organization, advocate (and often enforce) so-called
'free-trade,' arguing with considerable justification that it can
facilitate economic development in both the developed and developing
worlds, albeit to differing extents. Theoretically, the liberalization
of developing countries economies will allow those countries to obtain
the benefits of specialization that accrue, according to the principle
of comparative advantage. This contention is invalid, however, if the
liberalizing countries are denied access to international markets.
Such is the predicament facing much of the developing world.
While developed countries vigorously advocate trade
liberalization in those industries in which they have a comparative
advantage, they are notably more reluctant to do so regarding
industries in which they are less competitive. Efforts to liberalize
trade in these industries have been largely characterized by 'foot
dragging' on the part of developed countries and a plethora of
justifications for protecting and subsidizing those respective
industries. Agriculture, an industry of utmost significance to the
majority of less developed countries is one of the most, if not the
most, distorted and protected sector of the global economy. Daniel
Griswold of the Cato Institute notes, for instance, that "the
average tariff on manufactured goods has today fallen to about 5 per
cent worldwide, while tariffs on agricultural goods top 40 per
cent.1" This is a tragic irony, since agriculture is a source of
comparative advantage for numerous less developed countries. The
significance of this statistic is further highlighted if one notes
that the vast majority of the world's poorest people reside in
agricultural areas.
The European Union, which "controls 38% of the
world's agricultural trade2" is particularly culpable of
'agricultural protectionism' and market distorting policies in its
agricultural sector. 'Agricultural protectionism' in the European
Union takes many guises, such as "domestic support policies,
import barriers, and export subsidies,3" to name a few measures.
In fact, the European Common Agricultural Policy accounts for almost
half of the European Union's budget. This results in significant
distortions in both European and international agricultural markets.
This article will therefore investigate some of the means by which the
European Union protects its agricultural sector as well as some of its
justifications for doing so. It will also examine the impact this has
on developing countries and the ways in which it undermines their
capacity to initiate and sustain viable economic development programmes.
While Europe's Common Agricultural Policy currently
accounts for less than half of the EU's budget, where it once
accounted for two-thirds, this is still a remarkable state of affairs
for an industry whose farmers "make up less than 5% of the
(European) labor force and contribute less than 2% of GDP.4"
According to OECD figures, "in 1999 the EU paid out an average
subsidy of $17,000 to every full time farmer in the Union.5" The
economic costs of these subsidies are significant. The Institute for
Economic Affairs in London, for example, estimates "that the
costs of the Common Agricultural Policy are about $75 billion a year,
with $49 billion borne by the EU countries and the rest by other
countries.6" While this policy makes little economic sense, it is
political expediency that ensures its continuation. As Grady and
Macmillan point out in their book 'Seattle and Beyond,' "We all
have our sacred cows. In Canada, our dairy sector is highly protected
along with poultry and egg producers. The sacred cow in Japan and in
Korea is rice farming; in the United States it is the sugar and peanut
sectors; and in Europe virtually anything that grows is sacred.7"
That is all well and good but on what pretext does
the EU justify the protectionism of its 'sacred cow.' The answer can,
to a great extent, be summed up in one word: 'multifunctionality.'
According to Daniel Griswold, the EU argues that "agriculture
deserves government support because its functions reach beyond merely
producing food to include a number of 'positive externalities' that
benefit society as a whole, such as conservation and rural
development.8" This argument is flawed for two reasons. Mr.
Griswold points out the first, noting that these 'positive
externalities' "must be weighed against possible negative
externalities such as pollution from pesticides and
fertilizers.9" It stands to reason that agricultural support
policies, tariff barriers and large direct subsidies, will encourage
more intensive farming in the European Union. There is therefore
increasing concern that "such intensive farming, encouraged by
the CAP, damages the environment and public health.10" Is it not
somewhat ironic that the CAP largely ignores negative externalities
exacerbated by its policies, while dwelling on the positive ones?
The second flaw in the 'multifunctionality'
argument is that numerous other industries and sectors of respective
economies could equally 'stake a claim' to 'multifunctionality.'
Agriculture is not the only sector, which yields positive
externalities. In other words, the implications of the 'multifunctionalty
argument' and its potentially widespread applicability could result in
the effective protection of numerous industries.
The costs of agricultural protectionism in Europe
and elsewhere (most notably, the United States and Japan) are
tremendous. Indeed, "research by Kym Anderson, of the University
of Adelaide, suggests that stripping such distortions from the OECD's
agricultural policies would boost global agriculture by more than
half, making the OECD and the developing world $160 billion better off
between them.11" Jorge Campbell, the Argentinean secretary of
International Economic Relations, estimates that "Latin America
has lost more than 215 billion dollars in exports since 1970 as a
result of agricultural subsidies in wealthy countries.12" Brazil
for instance, according to the Permanent Forum of International
Agricultural Negotiations, would earn an additional $6 billion per
annum if agricultural protectionist policies were eliminated in
developed countries.13 These are but a few examples of a global
phenomenon: agricultural trade restrictions hurt producers in both
developed and developing countries.
The removal of agricultural trade restrictions
would facilitate economic growth in numerous less developed countries,
by providing them with significantly increased markets for their
products. However, the elimination of agricultural subsidies would
have another effect. It would significantly increase global prices for
numerous agricultural products. This is because "generous
compensation payments tied to agricultural production (have) prompted
enormous increases in output14" in the EU. The resultant
surpluses have depressed global agricultural prices for numerous
commodities. It has been estimated that the elimination of
agricultural protectionism could raise food prices by as much as 5%
over a decade.15 Needless to say, this could have an adverse effect on
those developing countries, which are net importers of food. However,
it would also increase incentives for investment in agriculture, both
in developing countries and elsewhere. Faced with rising prices,
farmers in developing countries would undoubtedly increase their
production, as indeed they have consistently done when governments
have reduced or eliminated policies, which artificially depress
agricultural prices. As the Assistant Director-General of the Food and
Agriculture Organization (FAO) Hartwig de Haen notes, "over the
longer term the depressed prices have led a number of net food
importing countries to neglect their own agriculture in public
policies.16"
Investment
Increased investment in the agricultural sector,
facilitated by rising prices for agricultural products, would have
three beneficial effects in developing countries. It would
"generate (increased) rural income, increase foreign exchange
through agricultural exports and increase food production for domestic
markets.17" These benefits would result in equally beneficial
'multiplier effects,' such as decreasing rural-urban migration. This
could, in turn, have a positive effect regarding urban unemployment,
for instance.
While the EU, Japan and the United states are all
culpable of protecting their agricultural sectors, it has been
estimated, albeit by the US Department of Agriculture, that the
European Union "accounts for 85 per cent of export subsidies
worldwide.18" Indeed, such is the continued protectionism of
global agriculture that Grady and MacMillan ('Seattle and Beyond')
state that agriculture has "remained largely outside the
multilateral trading system.19" Whether or not one accepts this
contention it is certainly the case that agriculture has been afforded
more protection than most, if not all other sectors of the global
economy. For example, "agricultural products were the only
products that received exemption from the general ban on export
subsidies in the General Agreement on Tariffs and Trade.20"
One of the many ostensible justifications for
agricultural protectionism in the EU relates to product standards and
sanitary restrictions. Outbreaks of BSE and the recent 'foot and
mouth' epidemic have highlighted the importance of maintaining
stringent standards regarding agricultural trade. The Sanitary and
Phytosanitary Agreement, which is accorded international legitimacy by
the WTO, therefore ensures that "a country is able to restrict
imports if they compromise human, animal or plant health.21" That
this is an important clause hardly needs stating. However, as the
Economist notes, "there is a fine line between protection and
protectionism, and it is tempting for local producers to keep out
foreign competition by invoking food safety or environmental
concerns.22" European import restrictions regarding genetically
modified crops may be a case in point, although the verdict is still
pending regarding the safety and health implications of these crops.
Indeed, scientific disputes have been at the heart of agricultural
protectionism in the EU. They have featured, to a large extent, in the
"agricultural trade wars," in which Europe and the United
States have been so prominently engaged in recent years.
A more straightforward, though equally contentious
issue, is the stubbornly high tariff restrictions the EU places on a
number of agricultural products. It should be noted that
"progress has been made reducing tariff barriers on unprocessed
tropical products like coffee, tea and cocoa.23" However, much
less progress has been made on reducing tariff barriers on those
products, which the EU countries produce themselves. This is perhaps
unsurprising. Nevertheless it is evident that, "many more
developing countries would benefit if similar improvements in market
access were granted for other agricultural products such as temperate
zone horticulture, sugar, cereals and meat, as well as for processed
agricultural products.24"
Reform of the Common Agricultural Policy is
currently underway, albeit at a relatively slow pace. There has, for
example, been a significant "conversion of non-tariff barriers
into tariffs,25" following the Uruguay Round of negotiations of
the WTO. According to Merlinda Ingco of the World Bank,
"liberalization is implicit because countries are prohibited from
arbitrarily raising tariffs to higher new levels.26" However, as
she subsequently points out, "many of the newly established
tariffs are so high as to effectively prohibit trade.27"
Nevertheless reforms are being incrementally adopted. Developed
countries have, for instance, reduced their export subsidies "by
36% of their 1986-88 value for most commodities,28" following the
Uruguay Round Agreement of the WTO. CAP reforms have also been adopted
regarding price supports. Reforms adopted in March 1999, for example,
ensured that "price supports for grain farmers would be cut by 15
per cent in two equal annual installments beginning in
2001-2002.29" Part of the reason for this limited liberalization
is the imminent incorporation of several Eastern European countries
into the EU and the increased costs this will entail regarding the
CAP. Political pressure, most notable from the United States and the
'Cairns Group' (an association of 15 countries "fed up with....a
global system that had made agriculture the most distorted sector of
world trade30") has also facilitated reform.
Although agricultural protectionism in the European
Union is justified on numerous grounds, it has an extremely
distortionary effect on global agricultural markets. Significantly,
"The European Union is the world's largest importer of
agricultural goods and the second largest exporter.31" Its
policies are a serious impediment to economic development in much of
the developing world. While "developed countries farm subsidies
amount to over $360 billion a year32" it is worth noting that
this figure is some "$30 billion more than Africa's entire
GDP.33" Such is the extent of distortions in global agricultural
markets.
The reality is that developed countries, which
vigorously advocate trade liberalization in those industries in which
they enjoy a comparative advantage, are culpable of restricting trade
in those industries in which they are less competitive. Agricultural
protectionism in the European Union is a case in point. While
lecturing poorer countries on the merits of 'free trade' the EU adopts
policies, which inhibit the 'free trade' of agricultural products.
This is ironic, to say the least. Although liberals advocate free
trade as an inalienable human right, many countries appear only to
adhere to its principles when it is expedient to do so.
References
1. Griswold, Daniel. 'Bringing economic
sanity to agricultural trade.' Cato Institute Center for Policy
Studies. 12/ 02/1999.
www.freetrade.org/pubs/articles/dg-12-02-99.html
2. Osava, Mario. 'Trade: South renews focus
on agriculture.' November/1999. www.oneworld.net/ips2/nov99/19_48_079.html
3. A not-so-perfect market.' The Economist.
23/03/2000. www.economist.com/displayStory.cfm?Story_ID=295666
4. Ibid.
5. 'From bad to worse, down on the farm.'
The Economist. 1/03/2001.
6. Rippel, Barbara. 'Multifunctionality; a
new form of protectionism?' July/2000.
www.foodstuff.org/News/OnThePlate/OTPJul00.htm
7. MacMillan, Kathleen / Grady, Patrick.
'Seattle and Beyond: The WTO Millenium Round.'
8. Griswold, Daniel. 'Bringing economic
sanity to agricultural trade.' Cato Institute for Policy Studies.
12/02/1999.
www.freetrade.org/pubs/articles/dg-12-02-99.html
9. Ibid.
10. 'Has the CAP peaked?' The Economist.
15/10/1998. www.economist.com/displayStory.cfm?Story_ID=172492
11. Ibid.
12. Osava, Mario. 'Trade: South renews focus
on agriculture.' November/1999. www.oneworld.net/ips2/nov99/19_48_079.html
13. Ibid.
14. 'The reform of the European Union Common
Agricultural Policy.' http://iisd.ca/greenbud/reform.htm
15. 'A not-so-perfect market.' The
Economist. 23/03/2000. www.economist.com/displayStory.cfm?Story_ID=295666
16. The UN food and agriculture
organization. 2/12/1999. "http://www.reliefweb.int/IRIN/wa/country"
www.reliefweb.int/IRIN/wa/countrystories/other/19991203.htm
17. Ibid.
18. Rippel, Barbara. 'WTO meeting brings no
progress on reducing agricultural export subsidies.' December/1999.
www.foodstuff.org/News/OnThePlate/OTPDec99.htm
19. Macmillan, Kathleen / Grady, Patrick.
'Seattle and Beyond: The WTO Millenium Round.'
20. Rippel, Barbara. 'WTO meeting brings no
progress on reducing agricultural export subsidies.' December/1999.
www.foodstuff.org/News/OnThePlate/OTPDec99.htm
21. 'A not-so-perfect market.' The
Economist. 23/03/2000. www.economist.com/displayStory.cfm?Story_ID=295666
22. Ibid.
23. The UN food and agriculture organization.
2/12/1999.
www.reliefweb.int/IRIN/wa/country stories/other/19991203.htm
24. Ibid.
25. Ingco, Merlinda. 'Agricultural trade
liberalization in the one step forward, one step back?' August /1995.
www.worldbank.org/research/trade/wp1500.html
26. Ibid.
27. Ibid.
28. 'A not-so-perfect market.' The
Economist. 23/03/2000. www.economist.com/displayStory.cfm?Story_ID=295666
29. 'EU leaders pass diluted CAP reform
package.' 29/03/1999. The International Center for Trade and
Sustainable Development. www.ictsd.com/html/story8.29-03-99.htm
30. Rippel, Barbara. 'WTO meeting brings no
progress on reducing agricultural export subsidies.' December/1999.
www.foodstuff.org/News/OnThePlate/OTPDec99.htm
31. Ibid.
32. 'Africa's elusive dawn.' The Economist.
24/02/2001.
33. Ibid.
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