House of Commons - Agriculture

Select Committee on Agriculture Sixth Report

III. AFTER SEATTLE - THE NARROW ROUND (Continued)

31. Two possible changes have been suggested. First, blue box payments could become degressive, subject to phased reductions (like amber box measures). This is the course of action favoured by groups such as the RSPB.[56] Alternatively, they could be decoupled from production payments in order to be eligible for the green box exemption.[57] Professor Swinbank believed that this "would be a relatively simple task".[58] He described how it might be done[59] and predicted that such re-deployment of CAP expenditure to fund rural initiatives "would probably receive considerable support from the public and some lobby groups" in the UK. However, it would also mean that "the geographical pattern of payments could be very different from that under the existing CAP".[60] Ms Quin warned us that "Transition is a very important principle in any process of this kind" and that "given the situation of agriculture in our own country and indeed in other parts of Europe at the present time I think we are also keen to avoid very sharp changes".[61] Nevertheless, she agreed that "It is certainly difficult to defend the blue box as an on-going unchanging mechanism and in fact it does not sit very well with the Government's agricultural policy".[62] Speaking "In general terms", she expected the contents of the blue box to be changed into green box measures.[63] We believe that the price of defending the blue box will depend on the evolution of US policy and that the EU should concentrate on converting measures currently within the blue box to green box payments. This would over time simplify the system as well as signify an important shift away from the acceptability of subsidies related to production.

The green box

32. The definition of green box measures on which no expenditure limits are placed is set out in Annex 2 to the Agreement on Agriculture and is meant to encompass payments which have little or no impact upon production. Any argument here is likely to focus on whether these definitions should be tightened or relaxed.[64] Evidence submitted to our inquiry from animal welfare groups suggested that Annex 2 should be amended to include a specific reference to payments designed to promote farm animal welfare, although the RSPCA noted that the de minimis exemptions allowed some such payments to be made under the existing wording.[65] English Nature, the Government's statutory adviser, argued that the green box needed a better definition of environmental criteria: "Even legitimate environmental payments may be ruled out if they have a more than 'minimal trade distorting effect'", as was inevitable under biodiversity protection policies.[66] We know of no cases where environmental measures have so far been ruled out, but we accept that the number of EU measures included in the green box is likely to increase, particularly as a result of the rural development regulation,[67] and that it is essential that the criteria for green box inclusion are transparent and helpful. We are anxious to avoid a situation where the green box becomes overloaded, but we see a need for a process which allows support to be given to farmers for particular purposes. The RSPB proposed that the EU should conduct "a review of green box criteria and of the support measures currently used within it".[68] Professor Swinbank on the other hand warned that "it would be extremely dangerous for the EU to try and re-open the green box ... because as soon as one re-opens the green box others will be wanting to narrow the definitions within the green box".[69] We believe that the criteria for inclusion in the green box should be defined more clearly by WTO members and that measures should be judged to be within the green box only when their primary purpose is to meet these criteria and not when the qualifying characteristics are merely a secondary by-product of measures.

The Peace Clause

33. The Peace Clause, due to expire in 2003, provides a mechanism whereby all WTO members have agreed first, not to challenge certain types of payments and second, to show restraint in making such payments to their own industries. Professor Swinbank explained the importance attached to the Peace Clause by explaining that "to my mind at least the blue box loses its value if there is not a Peace Clause in place to defend it".[70] Members of the WTO must notify all domestic subsidy payments to WTO headquarters in Geneva, specifying whether they are green or blue box measures. Under the Peace Clause (Article 13 of the Agreement), these measures (together with export subsidies) are exempt from "a range of challenges normally possible under WTO rules".[71] There are concerns that once this clause expires there could be any number of challenges to subsidy payments, although Professor Swinbank pointed out that "Opinions differ widely between those who suggest it gives absolute protection to the CAP, and others who do not believe it is worth the paper it is written on".[72]

34. There was no dissension among our witnesses that it was essential that the Peace Clause should be extended as far as the EU was concerned. The NFU told us that "There is no point in having any form of agreement if it is open to perpetual challenge".[73] Whilst it is not clear whether there would be a flood of challenges after 2003, this remains a threat over the heads of the EU and other users of the blue/green boxes. A particular problem for the EU could be that the clause is renewed but only applied to payments within the existing EU and not to new entrants.[74] MAFF expressed the hope in its memorandum last November that the benefits of the Peace Clause in reducing the number of disputes in the agriculture area could be an incentive for many members to wish to renew the clause (and to conclude the talks by the expiry date).[75] In May, after Seattle, the Minister admitted that it was "very difficult to be certain" whether the expiry of the Peace Clause would be "a cataclysmic event" and that it would depend on the state of the wider negotiations by 2003 and on progress made on WTO disputes.[76] We believe that the true value of the Peace Clause is probably more symbolic than real but that the EU should continue to support its renewal.

Market access

35. Market access in terms of the Agreement on Agriculture is determined by import tariffs and quotas. As far as the EU is concerned, the 36% average cut in maximum tariffs demanded by the agreement has failed to open up its market to third countries. Professor Swinbank judged that "on the whole the EU's tariff barriers will remain prohibitively high even after the full implementation of the Uruguay Round tariff cuts later in 2000".[77] He cited the case of butter where the import tariff will be 1,896 euro per tonne, "equivalent to a tariff of 200 per cent on the world market price data used by the European Commission to establish the tariff in the first instance."[78] Table 3 below compiled by MAFF illustrates the gap between world landed prices and EU institutional prices for butter and other products.

Table 3: Gap between landed and EU institutional prices

(following complete implementation of GATT commitments and Agenda 2000)

World price level	"Low" forecast	"High" forecast
Common Wheat	55%	55%
Maize	55%	55%
Barley	55%	55%
Rice	44%	44%
White Sugar	12%	16%
Skimmed Milk Powder	55%	75%
Butter	47%	54%
Beef	62%	79%
Sheepmeat	10%	33%
Pigmeat	6%	23%
Eggs	19%	59%
Poultry	8%	26%

Source: Ev. p. 80.

36. Professor Swinbank offered various possible explanations for this continuing large gap but one thing is clear - as MAFF pointed out, it allows the EU plenty of scope "to offer further tariff reductions on a reasonably wide range of commodities without affecting the internal market".[79] MAFF identified pigmeat, poultrymeat and sugar as exceptions to this rule,[80] an analysis supported by the British Poultry Meat Federation which argued strongly against any cuts in poultrymeat tariffs, believing that they would lead to huge surplus stocks of EU-produced cereals.[81] Claiming that "the greatest threat to EU agriculture and rural employment comes from reduction or removal of EU tariffs across the board", the BPMF called for "any unavoidable cuts in tariffs to be applied to those sectors that are currently most protected."[82] This accords in some ways with the views of the food industry as expressed by the British Meat Manufacturers Association and the Food and Drink Federation in identical phrasing. Although as exporters both organisations supported the need "to increase the access for manufactured food products to third country markets", the FDF considered that in achieving this key objective, negotiators should concentrate "on the most distorting" tariffs.[83] Alternatives to across-the-board cuts or reductions in peak tariffs could include reducing tariff escalation or increasing tariff-rate quotas.[84] MAFF pointed out that "Combinations of these approaches are of course also possible".[85]

37. There is general agreement among members of the WTO and witnesses to our inquiry that tariffs should be cut. The only dissenter was Compassion In World Farming (CIWF), which argued for conditions to be placed on lowering tariffs in order to prevent products produced to lower welfare standards entering EU markets.[86] Ms Quin, speaking for the Government, confirmed that "We certainly want to see a reduction in tariffs".[87] She also stressed the extra help that could be given to the least developed countries in this way by giving their products "duty free access" to the EU market.[88] In doing so, of course, the EU is also keen to protect the "valuable concessions to the countries concerned" of the preferential and non-reciprocal market access enjoyed by African, Caribbean and Pacific countries under the Lomé Convention for bananas, rum, beef and veal, and sugar.[89] We support the Government and the EU in assisting the least developed countries in this way. On tariffs more generally, we recognise that the EU might find itself subject to a challenge on its tariff quota arrangements unless it makes greater progress on opening up its market.[90] We conclude that the EU has scope to offer substantial tariff cuts from the current high levels in most commodities. In doing so, it should concentrate on the most distorting tariffs both for importers and exporters and should offer the greatest assistance to the least developed countries for whom this is an important issue.

Export subsidies

38. By far the most problematic area is that of export subsidies. The draft text nearly agreed in Seattle referred to "Substantial reductions in export subsidies ... in the direction of progressive elimination of all forms of export subsidisation".[91] This is a key objective for many WTO members, some of whom (for example, the Cairns Group) wish to see the total abolition of export subsidies. MAFF explained that "Many developing countries see export subsidies as especially harmful, leading to produce being dumped on their markets ... leading to import dependency".[92] On the other hand, "Net food importing countries have ... benefited in the past from subsidised and thus cheaper food supplies, and some are concerned at the prospect of reduced availability of these exports".[93] The attack on all forms of export subsidisation brings into question the use by the US of export credits and the role of state trading enterprises in Canada and Australia, both leading Cairns Group members, though the expenditure on both is relatively small compared to the subsidies paid by the EU. Cuts in this areas are likely to cause the greatest difficulties for the EU which, we understand, "on a global basis holds most of the existing entitlements to subsidise exports".[94]

39. Unlike many issues to be raised in the WTO talks, reduction commitments in export subsidies are already causing problems for the EU and will continue to do so whatever the outcome of the current negotiations. The Agenda 2000 reforms were meant to help the CAP adapt to the limits on volume and expenditure on export subsidies agreed at Marrakesh but the markets for several commodities are still expected to come under severe pressure. Professor Swinbank forecast that the Agenda 2000 price cuts probably would not be sufficient to allow coarse grains, beef and dairy products to be exported without subsidies, to which of course sugar must be added as a sector which was untouched by the reform package.[95] MAFF told us that "Surpluses of cereals, sugar, beef and skimmed milk powder are projected to rise" as a result[96] so it is disappointing that the opportunity was missed to lower raw material prices which would have the potential to benefit consumers. These problems are also affecting the food industry where "The expenditure limits on export refunds for processed products are ... now constraining the EU's ability to export".[97] This situation is unlikely to improve, and indeed could get worse with the enlargement of the EU.[98] The FDF explained that as a result of the URA, export refunds, which are "essential as compensation to allow exports of processed foodstuffs made of CAP ingredients", will "only cover about two thirds of industry's requirement" by October 2000.[99] In common with other representatives of the food industry, it called for the retention of export refunds in the current climate to protect the EU from competitive disadvantage.[100]

40. The EU's reliance on export subsidies clearly sits uneasily with its commitment to liberalise trade. As the RSPCA observed, "We do not see how it is possible for the EU to maintain its position on export subsidies. At the very least you have to reduce these".[101] The Minister agreed that "I would accept certainly progressive reduction and eventual elimination of export subsidies is a desirable objective".[102] She was sympathetic to the very real concerns of the food industry but pointed out that they always said that their preferred objective was reform of the CAP, rather than the retention of protection in the form of export subsidies which were made necessary by the market distortion created by the current arrangements.[103] The reduction of export subsidies should be a high priority in any negotiations. We strongly agree with the Minister that the answer to the problem faced by the food industry is further substantial reform of the CAP and we note that the pressures caused by export subsidies make such reform more likely. Within the context of the current negotiations, we agree with the British Poultry Meat Federation that "less obvious forms of export subsidy such as export credits, export guarantees, and food aid should be dealt with in the same way as export refunds".[104] This should help to highlight the use by other countries of such assistance to their exporters and give the EU more room for manoeuvre. We also support the approach taken by the Minister in persuading "our allies ... that we are not here just talking about self-contained agricultural subsidies, we are talking about subsidies which have a very important knock-on effect in terms of the food industry more generally and the economy more generally".[105] Moreover, we agree wholeheartedly with her twin objectives of ensuring that the UK industry is not unfairly targeted in agreeing cuts in export subsidies and of making such cuts "part and parcel of a wider agricultural reform process".[106] It is understandable that the EU should defend the outcome of the Berlin summit on CAP reform. After all, no new Round has been launched yet, and the US objectives for such a Round are still largely undefined. But it is difficult to see how the Berlin settlement can sustain the EU throughout the negotiations. Indeed, the demands for further change within the EU and the requirements of enlargement will become pressing.