AGRICULTURAL PROTECTIONISM IN THE EUROPEAN UNION

 

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.