House of Commons - Agriculture

Select Committee on Agriculture Sixth Report

VI. THE IMPACT OF LIBERALISATION OF TRADE IN AGRICULTURAL PRODUCTS

75. In discussing the implications of trade liberalisation for UK agriculture and EU agricultural policy, it is important to retain the distinction between the process of liberalisation and the concept of "free trade". The latter would encompass completely open markets with no tariffs, trade restrictions or domestic subsidies. Professor Swinbank viewed this as "a very distant prospect"[212] but significant progress has already been achieved within the EU and as a Committee we would want the process to be completed as rapidly as possible within the EU and beyond it. The move is towards a gradual and managed reduction in barriers to trade, taking into account the right of individual countries to use domestic policy instruments to respond to national circumstances and concerns. The UK Government believes that it should support "further liberalisation of agricultural trade in order to support sustainable development and economic growth worldwide, as well as to improve opportunities for our own exporters".[213] Speaking at a conference in March 2000, the Rt hon Nicholas Brown, Minister of Agriculture, Fisheries and Food, stressed that "Trade liberalisation has the potential to create jobs and to increase living standards for billions of people".[214] He reminded the audience that "during the lifetime of GATT, a 17-fold increase in world trade volumes has gone hand in hand with a 6-fold growth in world incomes" and that "No country has achieved sustainable increases in living standards through a policy of economic isolation."[215] Judged in these terms, trade liberalisation is clearly a success. However, the very emphasis of the EU's negotiating position on the European model of agriculture highlights the fact that there are factors peculiar to trade in agricultural commodities and food products which make liberalisation in this area particularly sensitive. For example, concerns were raised with us as to the impact on the environment and traditional farming communities, as well as wider issues such as food security and food sovereignty.[216]

76. A starting point in assessing the likely implications of liberalisation as a result of a Millennium world trade round should be an analysis of the impact of the last Agreement, though the fact that we have yet to reach the end of the implementation period means that it is perhaps too early to make an objective judgement of the Uruguay Round. Some of our witnesses argued that there have been significant downsides to the Agreement in terms of its effect upon UK agriculture. The CPRE, for example, noted that while early academic studies stressed "the environmentally beneficial outcomes of greater trade liberalisation", more recent work highlighted the view that "the net impact on biodiversity, landscape and historic and cultural resources is far less predictable and likely to be highly damaging in certain circumstances": for example, in the UK uplands or the South West of England.[217] Others attributed growing intensification of farming to the WTO rules on agriculture, both in Europe[218] and in developing countries.[219] We perceive a need for greater understanding of the impact of past attempts at trade liberalisation, particularly the Uruguay Round Agreement, in order to determine the most advantageous and effective measures to promote in the ongoing negotiations. The RSPB suggested that "there should be a social and environmental impact assessment of the AoA - either before, or as part of, the negotiations - in order to inform their scope and direction".[220] In fact, Article XX of the Agreement provides for countries to take into account "the experience" and "the effect" of implementing the Uruguay reduction commitments in terms broad enough to allow for factors other than volume of trade to be taken into account. We recommend that the Government, through the EU, ensure that such an assessment is made and published at an early stage of the agriculture negotiations.

Impact on UK agriculture of further liberalisation

77. The Rt hon Nicholas Brown, the Minister of Agriculture, Fisheries and Food, has acknowledged that in the context of trade liberalisation "Perhaps the biggest challenge we face is the development of strategies for farming that reconcile the movement towards the globalisation of agricultural markets with the preservation of farming on a human scale".[221] This goes to the heart of the matter. There is a widespread concern that globalisation will intensify the trend towards larger agricultural businesses at the expense of small family-owned farms. The TFA accused the Government of "muddled thinking" in not recognising that the "part of the agriculture structure which is most under pressure from a higher degree of exposure to world markets" is the very sector which represents the "virtues of traditional agriculture" espoused by the Government itself, including "family farms, high environmental and animal welfare standards, high landscape value and integrated communities".[222] Working to maintain these characteristics costs money, rendering the UK agricultural industry vulnerable to competition from producers in other countries who do not have to respect such high standards for animal welfare or environmental protection. As an example, the British Egg Industry Council calculated that with the improvements in the welfare of laying hens demanded by the EU, "unless some form of equivalence is enforced on imports of third country eggs and egg products, then 25-40 per cent of the EU egg market will be completely lost to third country suppliers".[223]

78. The picture is not necessarily all gloom. Professor Swinbank argued that "British agriculture as a whole will ... be relatively well-placed to compete on relatively equal terms with agriculture around the world".[224] He accepted that "a sad consequence of the changes which I foresee in the future" would be that "some farm businesses ... will not survive in a more competitive environment", identifying small farms, particularly in the hills, as those with "a very problematic future".[225] The President of the NFU took a different view, arguing that, in determining which sectors would be affected, "It is not just a simple matter of small or large" but rather whether a farmer owned his own farm, whether he had borrowed money and whether he employed labour or farmed his land as a family farm.[226] However, his NFU colleague agreed with Professor Swinbank that the key factor was the recognition that "we shall be faced with increasing exposure to world markets and, therefore, the industry has to adapt to that".[227] These pressures are not hypothetical and for the future, but real and already affecting the industry with "increasing exposure ... to world prices and world forces".[228] The only way of dealing with the process, described by Professor Swinbank as "grinding away to reduce levels of agricultural support",[229] is to plan ahead to accommodate the reduction in protection and prices.

79. When asked about the impact of liberalisation on the various sectors of the UK agricultural industry, Ms Quin expressed the Government's view that "British agriculture can certainly compete well in the European Union framework and can compete in a more liberalised framework at world level", although "certain sectors are capable of experiencing difficulty".[230] She highlighted in particular the problems created by "additional costs in either the United Kingdom or in the European Union ... if there is just liberalisation and no offsetting factors whatsoever".[231] Ms Quin also added the caveat that "an awful lot depends on the progress of the negotiations, the details of the negotiations and the final shape of any package".[232] This is of course true, and we accept that in the absence of such details it is difficult to make authoritative statements on the impact of trade liberalisation. As the talks progress, however, we expect the Government to take into account the potential impact of proposals made during the negotiations upon UK agriculture when contributing to the EU's response to those proposals. We also expect the Government to take particular account of the likely cost and effect upon the competitiveness of UK industry of existing, pending and likely future WTO commitments in implementing new EU or domestic legislation. We understand the fears which lead some in the industry to "suggest that globalisation is likely to affect British farmers profoundly and adversely".[233] There is certain to be a change in the structure of UK agriculture with the loss of many small farms. But it would be wrong to attribute to trade liberalisation changes in agriculture which are in fact the result of both long-term economic and social trends and the policies pursued by national Governments. Even under current WTO rules, it is possible for the Government to implement measures aimed at the preservation of the valuable characteristics which these farms represent. We regard the Rural Development Regulation as a modest but important first step in the right direction.

Impact on the food industry

80. There are fewer fears associated with the prospects of the UK food industry in competing in more open markets. The Food and Drink Federation "were disappointed by the failure of the Seattle Ministerial" and "continues to support equitable liberalisation of world trade".[234] Professor Swinbank thought that "on the whole the processing sector would like to be relieved of the constraints which are currently placed upon subsidised exports, the process of putting products onto world markets".[235] This was a view shared by Ms Quin who believed that the food and drink industry has "a lot to gain from liberalisation and particularly from changes in export subsidy arrangements and better access to overseas markets".[236] We have already noted the FDF's concern about across-the-board cuts in export refunds which, unless matched by a reduction in the price for EU-sourced raw materials, would seriously hamper the competitiveness of the European food industry.[237] We recognise that the potential impact of measures agreed under the WTO will not be the same in all cases for the food and drink industry as for farmers and that the Government should be mindful of the need to promote the interests of the food sector as well.

Impact on consumers

81. Many of the issues raised in the previous sections of this Report owe their prominence to consumer pressure. Trade liberalisation inevitably has a great impact on the consumer in the form of the products available on the supermarket shelf. There are clearly consumer advantages to the process. The Consumers' Association identified "greater choice" as one example.[238] It is also possible that there will be an economic benefit. Professor Swinbank judged that while "we are not going to notice dramatic price changes in the supermarkets", there could be an impact as a result of lower prices throughout the system since the CAP is a significant burden on consumers.[239] These benefits, however, are accompanied by concerns over "the potential negative effect on national standards" and "the ability of national governments to implement measures in response to consumer concerns".[240] The New Zealand Government was adamant that such concerns need not be "sacrificed on the altar of free trade" since "Countries are free to adopt whatever standards they consider appropriate, provided the standards are non-discriminatory, transparent and based on sound scientific analysis".[241]

82. The difficulty is that, whilst in a perfect market labelling and information would ensure that consumers were able to choose products in accordance with their moral and ethical opinions, price and other constraints are always going to determine the range of products available. Moreover, consumer protection demands that Governments are able to exercise a precautionary approach on food safety issues. It is worth stressing the distinction drawn during our visit to Brussels between food safety which should be covered by regulation and issues such as PPM where more flexibility was possible. We endorse this approach and would welcome clarification from the Government and the EU on the principles governing the development of clearer labelling for both food safety and production purposes. On balance, we conclude that there are clear benefits for the consumer in trade liberalisation but that the existing safeguards in the form of the SPS and other agreements need to be monitored to maintain food safety and standards to an optimal degree, especially in the context of the new UK Food Standards Agency and the proposed EU Food Safety Authority, and to provide consumers with clear information to enable them to make choices.

The WTO and EU agricultural policy

83. In our Report last year on the outcome of the CAP reform negotiations, we commented that "We strongly believe that the current agreement [on CAP reform] will prove to be unsustainable as a negotiating position if the WTO talks are to succeed.".[242] This remains our view and we neither have heard nor read anything to shake our conviction during the course of the current inquiry. The reform of the CAP as part of the Agenda 2000 package was intended to "prepare the EU for further negotiations on agriculture in the forthcoming WTO round".[243] However, in fact the changes barely meet the requirements of earlier commitments and even they were diluted at Berlin. MAFF told us that the existing WTO limits on export subsidies "are expected shortly to place considerable pressure on EU markets for several commodities, leading to the accumulation of intervention stocks".[244] The European Council adopted a statement at Berlin affirming that "the decisions adopted regarding the reform of the CAP within the framework of Agenda 2000 will constitute essential elements in defining the Commission's negotiating mandate for the future multilateral trade negotiations in the WTO", but even then it was clear that the European Commission had no chance of succeeding within such a remit. The Council therefore also adopted the somewhat contradictory statement that "further price reductions are necessary in order to facilitate the enlargement with the new member states and the future multilateral trade negotiation at the WTO".[245]

84. As the second of the Council's statements implies, there are other pressures on the EU to reform the CAP in addition to the WTO. These include EU enlargement and the impact of budgetary constraints which led the NFU to conclude that "it is inevitable that further reform of the CAP will have to take place, without any impact from the WTO".[246] The combination of all these factors make the timing of each crucial in determining strategies for reform and negotiation. Ms Quin saw the key dates as the mid-term review of Agenda 2000 in 2002, the reform of the dairy sector in 2005 and the accession of the first wave of new EU members at some point before 2006.[247] During this period, Professor Swinbank identified the review of the EU sugar regime in 2001 as "a litmus test of the EU's willingness to embrace radical CAP reform".[248] However, he believed that "it would be strategic folly to embark upon another reform of the CAP now prior to the conclusion of [the WTO] negotiations" and that it would be better to wait until it is was clear "what changes to agricultural policy are necessary as a consequence of that".[249] He also warned that it would be far better for the EU to participate constructively in the WTO talks in order to "negotiate a ten or fifteen year transition for a further reduction in support and make that clear to the farm sector so they can adjust their businesses accordingly", [250] than to face challenges to the CAP in the disputes settlement procedures, which could only result in "rapid and traumatic change in EU farm policies, generating a wave of bankruptcies through rural areas".[251]

85. The Government's view is that trade liberalisation is "firmly linked to further reform of the CAP" with the aim of reducing the cost of the CAP to consumers and taxpayers, encouraging the development of viable and sustainable farming industry and reducing the negative impact of the CAP on agriculture in developing countries.[252] Nick Brown MP has identified the Rural Development Regulation as the principal instrument by which to "move towards a more competitive and sustainable European agricultural sector with a stronger market orientation".[253] We agree that this is the direction in which we should be moving but we are still disappointed at the pace of reform. Ms Quin detected signs of greater interest among our European neighbours than she had encountered before.[254] Nevertheless, it is evident that action must be taken to address those areas of the CAP which are directly linked to shoring up production. Much depends upon EU/US relations. We recognise that it is far better for reform to be planned within the European Union than be forced on a piecemeal basis by lost cases in the dispute settlement process. We offer our continuing support to the UK Government in its endeavours to persuade other member states of the urgency of radical reform of the CAP and urge the UK Government to pursue that reform more strenuously and to place this issue higher on its own agenda of EU reform.