The Impact of European Farm Subsidies on Developing Countries
Promoting Fair Trade and Spending Billions for Internal Firm Subsidies - A Contradiction?
Term Paper 2011 26 Pages
Table of Contents
2 What is Fair Trade
3 Fair Trade in Europe
4 EU Common Agricultural Policy (CAP)
5 The Impact of Subsidies on Developing Countries
5.1 How Subsidies Affect Market Prices
5.2 Subsidized Exports to Developing Countries
5.3 The European “Sugar Regime”
6 Abandoning Agricultural Subsidies versus Promoting Fair
The importance of Fair Trade products for the world economy has been significantly growing within the last decade. In 2010, the global Fair Trade turnover reached €3.4 billion showing an upward trend with double-digit growing rates per year.1 One of the biggest selling markets for certified Fair Trade products is the European Union (EU) which is thus a crucial actor when it comes to promote and market Fair Trade goods (see attached table 1).2
Yet, besides the EU’s effort of achieving a fairer international trading system, it can be argued that the EU might be even partially responsible for the misery in those countries. In this context the Common Agricultural Policy (CAP) of the EU is controversially discussed. About €60 billion which account for 42% of the total EU budget are currently spent on agricultural subsidies.3 They are provided to European farmers to support and protect the internal agricultural market. Consequences for other agrarian countries are immense.
In our research paper we want to investigate the paradox on Europe spending money on Fair Trade on the one hand, while dishing out harming subsidies on the other hand. We question whether it would be more beneficial for developing countries if Europe stepwise reduces its agricultural subsidies to a minimum rather than investing in Fair Trade.
First of all, a brief introduction to the Fair Trade principles and its history is provided. The main efforts of the EU to achieve a fairer trading system are identified in Chapter 3. Chapter 4 will briefly present the basic principles of the EU’s Common Agricultural Policy (CAP) including the payment of direct farm subsidies to European farmers. Chapter 5 will reveal how Europe’s agricultural subsidies influence the world market and which consequences arise for developing countries. A comparative analysis contrasting the fair trade concept and the reduction of subsidies is conducted in chapter 6. A conclusion is provided in chapter 7.
2 What is Fair Trade
When using the term Fair Trade, most people might think of the term connected to firms, which provide their suppliers, who often operate in economically underdeveloped countries, with a better price for their good. Although this is not incorrect, it is only part of what this trade movement fostered by organizations such as the World Fair Trade organization (WFTO) or the Fair Trade labeling organization (FLO) does. Also do these organizations share the vision of creating a trade movement in favor for the disadvantaged farmers in rural regions of the developing world. They often argue that those farmers in today’s trading environment are suppressed by the developed nations, who have more power when negotiating with suppliers and also use subsidies on agricultural goods to protect their often uncompetitive homeland farming sectors. Thus in addition to providing fairer wages, they also aim to empower farmers by encouraging them to create cooperatives, who benefit from the effect of bundling the interests of many farmers to form one strong appearance, which is capable of competing with powerful agricultural countries like Europe and the USA.
One possible source of problems cannot be targeted by any of the Fair Trade Organizations though. This source of problem arises from subsidies provided by developed countries for their home market. Distorted market prices for commodities such as sugar, cotton and wheat are the often addressed problem as well as the closure of potential markets for competing farmers with a competitive advantage. In the following sections, we will examine the European market and investigate whether or not the claims of Fair Trade organizations, which blame Europe to be partially responsible for the poor living conditions of farmers in developing countries hold or can be rejected.
3 Fair Trade in Europe
The following section outlines Europe’s effort of aiding developing countries by fostering fair trade. By now many initiatives have been established within Europe. While at the beginning fair traded goods were made available to customers through private initiatives, the realization of a fairer trading system has been noticeably changed during past years.
The EU realized that there is a need to support the fair trade sector and meanwhile it has become an important position in EU policy. Fostering the sustainable, economic and social development of developing countries is stated in the Treaty of the European Community (Article 177). In the Resolution of 1998 the European Parliament referred to fair trade as the most efficient way to support development.4
In addition to European Parliament resolutions, progress had been achieved through many other actions:
- Foundation of the European Fair Trade Association (EFTA) in 1990 where eleven Fair Trade importers of nine European countries are grouped5
- The World Fair Trade Organization (WFTO) Europe, former IFAT Europe, opened a European regional office in 20066
- Establishment of labeling bodies
- Allocation of financial aid approved by the EU7
- Other activities and local projects (e.g. Fair Trade town movement, World Fair Trade Day, campaigns)8
These are only some examples to demonstrate Europe’s engagement for Fair Trade. Nowadays, Fair Trade sales in Europe have been growing more than 20% annually since 2000. The annual turnover of Fair Trade products sold in Europe accounts for more than 80% of the total global turnover of €3,4 Billion reflecting the highest consumption world-wide. Products can be found in over 3,000 independent Fair Trade shops and over 67,000 supermarkets all over Europe. Coffee, flowers, fruit juices, sugar and bananas are among the most popular Fair Trade certified products in Europe. Other common product groups are tea, cocoa, tropical fruits, honey, rice, wheat, wine, cotton and handicrafts.9
4 EU Common Agricultural Policy (CAP)
Europe’s agricultural policy is determined at EU level by the governments of the Member States. Its major aim is to support income of European farmers. The EU’s Common Agricultural Policy (CAP) comprises direct payments for crops and land, minimum prices, import tariffs, limits and controls for non EU-members. Direct payments or financial assistance offered to selected local producers is referred to as farm subsidy.
The CAP has its roots in the 1950s whose societies had been suffered from years of war where food supply could not be guaranteed. Agricultural subsidies were introduced to ensure that consumers have access to a stable, reliable and affordable food market. (Source: Official CAP website, PDF). Even though, there still might be other reasons for EU subsidies the main focus of CAP is on: Enhancement of Agricultural Competiveness, improvement of environmental protection, offering consumers high quality products at an affordable price and increase of living standards in rural areas.
These catchwords stand for actions that are being subsidized by the EU. Examples for these actions are:
- Training courses to introduce new crop growing techniques and rural trade
- Establishment of agricultural holdings
- Modernization of real estates and machines
- Retirement regulations for elderly agriculturists
- Implementation of demanding EU standards in the fields of environment, animal protection and health
- Improvement of product quality and marketing of quality
- Formation of producer cooperatives in the EU member states
- Rehabilitation of villages and rural facilities
The question in dispute is whether the EU subsidies really have any positive effect on the agriculture. At the beginning they were coupled to the amount of production, furthermore the farmers have been ensured that there commodities would all find purchasers.
When discussing the period after World War II which resulted in a food crisis, the EU agricultural policies certainly can be seen as a success. Through transfusion of money they stimulated the agricultural production and therefore guaranteed the supply of aliment. However, after a few years the financial aid lead to mass production which ended in overproduction in the 1980s. A main problem of this overproduction was its cost. Actions were needed to store or transport the surplus of food. In 1992 about 80% of the EU budget went to the agriculture sector.10 Though the European support to farm incomes has decreased constantly,
Abbildung in dieser Leseprobe nicht enthalten
Graph 1: Development of farm subsidies in percentage of the total EU budget
Still critics see a correlation between the expensive subsidies and the increase in prices for food. As will be discussed later on, the rising prices because of EU subsidies do not only affect the domestic market in the EU but also the global market.
Before examining the effect of EU subsidies on developing countries it has to be pointed out that the EU is not alone when it comes to subsidizing and protecting producers. For instance, Japan, Korea and Canada provide comparatively high farm subsidies influencing the world market, too. According to the OECD, total expenditures of OECD countries for supporting farmers reached €172 billion in 2010. Still, even though the EU has reduced its financial support to farm net income, the EU remains above the OECD average.11
1 Fair Trade Deutschland , „Fair Trade weltweit. Zahlen und Fakten“
2 Krier, Jean-Marie (2007), EFTA article: “Fair Trade 2007: new facts and figures”, p.10
3 European Commission , “The budget in figures: financial framework 2007 - 2013”
4 Council of Europe, “Legislation of Fair Trade”
5 European Fair Trade Association (EFTA), “Sixty years of Fair Trade” (2006)
6 World Fair Trade Organization Europe, “Background”
7 Lamy, Pascal (2004), European Parliament, Conference Paper, p.1
8 WFTO Europe, “Background and Fair Trade Agenda”, Fair Trade UK
9 Oxfam Ireland, “Fair Trade facts and figures”
10 Bondakdar, Maryam, Tagesschau, “Ziele und Empfänger der EU-Agrarsubventionen“
11 OECD, “Agricultural Policy Monitoring and Evaluation 2011”
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