The Impact of European Agricultural Subsidies on the Global Food Market
Why a reform of the Common Agricultural Policy is necessary
Scientific Essay 2013 14 Pages
This paper takes a closer look at the Common European Agricultural Policy and especially at agricultural subsidies. The paper will firstly outline the important aspects of the EU agricultural policy and building on that will try to analyze the impacts of farm subsidies to large farmers in the EU on the markets in especially developing countries. It attempts to apply the concepts of international trade and market liberalization to account for current problems and possible solutions. The paper will argue that, although local African farmers cannot compete with subsidized products from the EU, an abolition of farm subsidize would not necessarily lead to economic development in developing countries, since they are not equipped for the increased prices and higher production requirements. However, this paper will conclude that the EU should cut its spending on subsidies.
Currently leaders of the European Union are negotiating the next EU budget for the coming seven years from 2014 till 2014. These long-term budget talks also focus largely on the role, which agricultural subsidies will play in the future, since these farm subsidies represented around 47% in llast year’s EU budget, and with the total EU budget amounting to around 1 trillion euros for the next seven years, spending on agriculture will again represent a considerable proportion (New York Times, 2012). There are now discussions about the future of the Common Agricultural Policy (CAP) after 2013, with propositions having been presented in a guideline paper in 2010 “The CAP towards 2020” (Matthews 2010). The ideas proposed in here shall later be critically analyzed and tested against other views. As the EU is generally moving in the direction of neoliberalism, it will be necessary to give a closer account of what this entails and to what extend this policy is enforced. It seems obvious that farmers will not easily give up on subsidies, which they are receiving at the moment, since they have enjoyed the benefits for several decades. At the same time globalization in trade and production is more advanced than it ever has been and developing countries are growing. On a state level the developed world, here the EU, does not want to easily give up on their advantages; however, at the same time, internationally, voices for equal trade and opportunities are getting stronger. Although it is, without a doubt, necessary that the EU reduces it trade barriers and levels of subsidies it is not clear when this will happen and to what extent.
The Common Agricultural Policy
Before one can start looking at the effects of the European agricultural policy one has first to understand the structure and history of the same. After the European Economic Area was established in 1958 it became necessary to introduce a variety of policies, regulating trade and economic conduct in every member state. For agriculture this was done with the ratification of the Common Agricultural Policy (CAP), which was signed in 1960 and came into force in 1962; with the goal to make the European agricultural market more competitive on a global scale, while assuring constant availability of products at affordable prices. Article 33 (formerly Article 39) of the European treaty is the most essential, specifying the CAP’s aims and has been kept unchanged till today. In particular in specifies the objectives as follows:
1. to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilization of the factors of production, in particular labour,
2. thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture,
3. to stabilize markets,
4. to assure the availability of supplies,
5. to ensure that supplies reach consumers at reasonable prices.
(Consolidated Version of the Treaty Establishing the European Community, 2010)
The EU relied in its common agricultural policy basically on four pillars to subsidize farmers and stabilize markets. In the beginning it firstly levied large import tariffs on foreign importers, secondly, bought all surplus product, which farmers could not sell on the home or world market at the market price, thirdly, subsidized exports to finally dispose of surplus product and fourthly, made direct payments to farmers to guarantee their survival. Although trade distorting, these introduced measures yielded positive results for the EU member states. After the introduction of the CAP, food shortages of the 1950s had been overcome quickly and self-sufficiency was soon achieved - in total making the introduction of the CAP a necessary and successful measure (Marti 2008). However, once the point of self-sufficiency was reached and markets were stabilized, the mechanisms and payments introduced through the CAP did not stop. At this point it would have been reasonable to reform the CAP in order to avoid overproduction and unnecessary trade distortions. Real reforms, however, did not take place until 1992, when with the MacSharry reform, prices, at which the government would buy surplus product, where lowered. At the same time these price reductions were accompanied by income subsidies for farmers, who suffered losses through this policy, thus basically off-setting any reduction in subsidies. With a strengthening international voice for fairer trade after the introduction of the Agreement on Agriculture, which coincided with the establishment of the World Trade Organization, in 1995, the EU was forced to think about new ways to reform their CAP. The most radical reform of the CAP was introduced with the Agricultural Reform of 2003, which most importantly decoupled direct payments from production. This means that farmers are no longer, at least this was true for most farmers, paid by the EU based on their level of production, but rather they receive a fixed amount based on the seize of the farm and also their compliance with environmental standard (so called “cross compliance”) (Cunha, Swinbank 2011) . Although this was an important and necessary step it has to be looked upon critically, since firstly, this regulation was not applicable to all products (such as wheat, pork or lamb) and secondly, the direct payments were guaranteed for the next couple of years (Fehr, 2009). Although these reforms were introduced there remained still large problems that have only been insufficiently addressed. Agricultural subsidies still represent a large amount of farmer’s income in some countries, with agricultural subsidize making up 60% of a farmers income in Norway in 2011 and the average in the EU-27 being almost 40% (European Commision 2009). It can be argued, however, that the EU has to some extend recognized the need to change its focus from export subsidies to rural development and environmental issues. For example, in 2005 the EU agreed, together with other WTO members, to eliminate all forms of agricultural export subsidies by 2013 if there will be a new multilateral trade round (Cunha, Swinbank 2011). At the moment, however, it looks unlikely that this date will be upheld. These improvements do not mean that the CAP needs no further reforms. On the contrary it is further necessary to reform the CAP and especially the amount of direct payments, which still can be over one million euros in some cases for a single farmer. Going forward the European Commission has, among other things, proposed to radically alter the amount of direct payments for the new fiscal period by implementing a cap for direct payments of 300.000€ for single farms. Although this policy does address the disproportionate amounts of payments that have been allocated to a small amount of beneficiaries, it does not solve the issue that a large amount of subsidies are still given to a variety of institutions that either do not deserve them or do not need them (Van den Brink, 2012). All these policy changes, although making changes, should not disguise that the CAP is still influencing world trade and has potentially large effects on world market prices and the agricultural sector in developing countries.