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European Affairs
Trade Relations
U.S. and EU Should Act as Partners in Agricultural Negotiations
Corrado Pirzio-Biroli
Head of Cabinet of Commissioner Franz Fischler, European Commission
The European Union is continuing a process of reform of its agricultural policies that has been underway for ten years or more. We are not abolishing support for our farmers. We shall always have agricultural support, from now till kingdom come. The question is what form it should take.
Our aim is to make the Common Agricultural Policy more market-oriented and to focus on many other aspects beyond the simple production of food. We are progressively shifting our priorities to include environmental benefits, food safety and quality, rural development and simplification of our policy, because it is too difficult to apply and often to understand.
The European Union has many good internal reasons for pursuing these reforms. But there are also two major external developments that will profoundly influence the future direction of our agricultural policies - the enlargement of the European Union to include up to ten new members, mostly in Central and Eastern Europe, in 2004, and agricultural negotiations in the Doha Development Round under the aegis of the World Trade Organization in Geneva.
Let me take enlargement first. This will be the largest simultaneous admission of new members that we have ever undertaken. It will increase the European Union's agricultural area by 30 percent and raise the number of farmers by 75 percent. I exclude Romania and Bulgaria for the moment - they will not be in the first wave of new entrants - so ultimately these figures will be even higher.
One consequence will be to reduce dramatically the average size of European agricultural holdings, which will shrink to seven hectares after enlargement, without Romania and Bulgaria, against 19 hectares before. It is important for Americans to realize that, for this reason, we cannot have the same agricultural policy as the United States.
We shall have to take care of a lot of very small farmers. And we are not inclined to encourage the establishment of huge U.S.-style agricultural corporations, which own large amounts of land and supply fertilizers, for example, at virtually monopoly prices.
Such concerns would buy much of the farmers' output in advance and make substantial profits, while the farmers would be left with the minimum amount necessary to stay in business. We have to look at the competitive aspects of these practices, and we are conducting a study entitled World Competition in Agriculture to see how they affect a number of farm sectors.
In Europe, for example, we abolished aid for the private storage of sugar in order to free budgetary funds to help the Balkans. The sugar industry wrote to the Commission saying that while the industry did not want to see the aid abolished, it did not really matter because in the end it would be the farmers or the consumers who would pay.
That is a letter from a monopolist. Our aid to sugar farmers, in fact, goes to the sugar industry at the end of the day. I think that these are important issues for Europeans and Americans to investigate.EU enlargement will cost a40 billion between 2004 and 2006, much of which will go toward general regional development via EU structural funds. The Common Agricultural Policy will absorb less than one quarter of total enlargement expenditure up to 2006, and more than half of that will go to rural development rather than to price or income support. The new members from Central and Eastern Europe will receive 50 percent more per capita for rural development than the current member states.
The most delicate issue has been that of direct payments to farmers in the new member states. If we do not make any direct payments, some acceding countries will complain that we are treating them less favorably than other countries that joined in the past. In those few areas where prices in the acceding country are higher than current EU levels, if we do not give direct payments to help bring prices down, the new members will feel discriminated against compared to previous high-price entrants.
In Austria and a few other countries that joined earlier, prices were higher than in the European Union. In Switzerland and Norway, which may never join the European Union, prices are two to three times higher. We are not the world's worst agricultural protectionists!
It was also necessary to reach a compromise between those EU members that wanted to use enlargement to abolish the CAP and put an end to direct payments, and those that wanted direct payments to continue at the same rate and the CAP to remain the same.
Another problem was that if we gave direct subsidies at 100 percent of our existing levels, considering that incomes in the acceding countries are much lower than ours, we would make people in the countryside very rich. Farmers would certainly become much richer than many of those in urban areas, and that could lead to social tension.
We found a way out. Direct payments to producers in the new member countries will be phased in slowly, calculated as increasing percentages of payments to the existing members. If there are further changes in the CAP, payments to producers in the new member states may never reach 100 percent of the levels in the existing member states. At that time, we can simply stop phasing in the payments in Central and Eastern Europe.
A recent study we conducted concludes that EU membership will significantly improve the prospects of farmers in Central and Eastern Europe without creating major market imbalances in the enlarged European Union. In fact, Central and Eastern Europe as a whole will remain a deficit agricultural producer for some time to come. Hungary and Bulgaria are surplus producers, but most of the rest are still net importers.
After enlargement we shall see increased market specialization - the East in crop-production, the West in animal production. It is not easy, however, to make all the adjustments necessary to become a net exporter of agricultural products. Our farmers were wrong when they made a big fuss about the free trade agreements we earlier signed with the Central and Eastern European countries. EU farmers falsely claimed that "they will flood us with farm products."
On the contrary, thanks to these agreements, the European Union moved from a deficit of $1 billion in farm trade with Central and Eastern Europe to a surplus of $2 billion. This suggests that it will be the most competitive producers that will gain from further trade liberalization in the WTO.
It is not necessarily true to say that the Doha Round negotiations on agriculture will benefit the developing countries. Further liberalization will have some benefits for those that export, for example, wheat. But the majority of developing countries that export commodities like coffee already have free access to our markets.
Unfortunately, many developing countries manipulate their markets in a negative manner, discouraging domestic agricultural production, in ways for which we are not responsible. When a government such as that of Ivory Coast or Belize keeps domestic prices artificially low because urban voters want cheap food, it sends a bad message to farmers and they stop producing.
I think that Europeans have the same interest as Americans in successful negotiations in the WTO. Market globalization means that access to our markets will increase. We need to compensate for this with additional market access abroad. It is a two-way street. This is what the European Union's agricultural reforms are intended to achieve, and if we do not reform, we shall not be able to gain more market access abroad in the WTO negotiations.
Why are we interested in more access abroad? Because, although the United States thinks it will come out ahead of the European Union with open agricultural markets, we believe we shall be the biggest beneficiaries.
After the last round of multilateral negotiations in the WTO, the Uruguay Round, and the internal agricultural reforms that we accomplished at the same time, the European Union moved from a net deficit in agriculture and agro-industry trade with the rest of the world to a surplus of $12 billion to $15 billion today.
What happened? We did not lose much in trade in bulk products, because our farmers tried to become more competitive. But there was a dramatic gain for Europe in processed agricultural products thanks to the Uruguay Round. We have, notably in France, a strong agro-food industry. That industry will gain an additional competitive edge if we can bring European import costs down to world market prices.
Our leitmotiv in the Doha negotiations will be that we should move from support of the product to support of the producer. Product support provides incentives to over-produce, with the risk that exports need to be subsidized to maintain domestic market equilibrium. This has a negative impact on world markets and threatens our environment at home. Over-production creates numerous environmental problems.
Support for the producer, on the other hand, allows society to remunerate the farmer for all the public goods it seeks, above and beyond the production of food. I am thinking of environmental protection, maintenance of biodiversity, production of safe and high quality food and all the positive contributions that farming makes to rural life.
Product support in Europe has dwindled from 91 percent of total CAP expenditure ten years ago to 21 percent today, while support to producers has increased from nine percent of the total to 68 percent. Rural development now absorbs another ten percent.
Overall the CAP is at a peak of three percent of EU public expenditure, but the trend is downward. We feel that this policy of decoupling payments from production will reduce trade distortions and will improve conditions for free trade.
The demands both of enlargement and of the Doha Round are likely to conform to the kind of changes we are already making in agricultural policy. If, however, we were to say that the WTO and enlargement were responsible for the reforms we are proposing, we would never be able to sell them to European public opinion. Fortunately, we shall not have to make that argument. The reforms that are under way are driven by our own internal requirements.
Although many Americans will deny it, we believe that the United States position is in many ways closer to ours than it is to that of the Cairns Group of farm-exporting nations, which seeks radical moves to slash farm support. We believe that the United States should dissociate itself from the Cairns Group and form a partnership with the European Union in the conduct of the WTO negotiations.
We should discuss how we can avoid attacking aspects of your policy and vice versa, and move together in the same direction. We need to look reality in the face. Both sides have political problems at home. Farming has always been considered different from all other sectors. Let us try to minimize disagreements, avoid excessive posturing, stop criticizing each other so sharply and agree to work together. We would be well advised to get together to see what is politically sellable on both sides of the Atlantic.