House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Ninth Report

BENEFITS OF MODULATION

71. Modulation is considered to offer two important benefits to policy makers. Through increasing modulation, direct payments and subsidies to agricultural production can be reduced, thus diminishing the distorting effects of such payments (although such changes must be accompanied by amendments to other parts of the CAP which distort the supply side, such as production quotas). Secondly, it provides a source of funding for other schemes such as those to reward farmers for delivering 'public goods' including environmental benefits.

European Union enlargement

72. A total of thirteen countries are currently engaged in the enlargement process. Accession negotiations began with six countries in March 1998, and the European Commission recommended that negotiations commence with a further six countries on 13 October 1999.[111] Before enlargement can take place all European Union member states must ratify the Nice Treaty which was agreed in December 2000. So far eleven Member States have ratified the Treaty, but it was rejected by the Irish people in a referendum held in June 2001.[112] In a second referendum in Ireland, in October 2002, a majority voted in favour of ratification of the Treaty.[113]

73. Negotiations are proceeding with the applicant countries on a number of issues to determine the conditions under which those countries join the Union. Agriculture is the most significant of the 31 negotiating "chapters". The process principally covers regulations which will be directly applicable in the new member states.[114] By the end of March 2002, negotiations on agriculture had begun with eleven countries.[115] Negotiations have not been completed with any of the countries yet, although agreement was reached in the veterinary and phytosanitary fields between the European Union and Slovenia in December 2001, and with Hungary and Estonia in March 2002 .

74. In January 2002, the European Commission published Enlargement and Agriculture: Successfully integrating the new Member States into the CAP - Issues Paper.[116] The purpose of the Issues Paper was to:

117

The key issue is the cost of extending the CAP to a wider European Union. It is clear that if CAP is not to become a crippling burden, Community direct payments to farmers in the existing member states will need to fall progressively and substantially as support for farmers in the new member states rises to meet them. The most significant proposal made in the Issues Paper was that farmers in new member states should receive direct payments set at only 25 per cent of the level paid to those in existing member states, and that they would increase to 100 per cent over ten years.[118] That was met with a very negative response from the applicant states,[119] which argued that they could not sell a discriminatory package to their electors, while some of the existing states are unhappy with the proposal as it stands because of its cost.[120] There is increasing questioning of the benefits of membership of the European Union and the CAP in particular especially in countries such as Poland.

75. On 9 October 2002, the European Commission published Towards the Enlarged Union.[121] The European Commission drew the following conclusions about the preparedness of the thirteen accession countries for membership of the European Union:

"Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia fulfil the political criteria. Bearing in mind the progress achieved by these countries, the track record in implementing their commitments, and taking into account their preparatory work in progress and foreseen, the Commission considers that these countries will have fulfilled the economic and acquis criteria and will be ready for membership from the beginning of 2004. The Commission therefore recommends to conclude the accession negotiations with these countries by the end of this year with the aim to sign the Accession Treaty in spring 2003."

"Bulgaria and Romania have set 2007 as their indicative date for accession. The Commission will strongly support the two countries in achieving this objective, which will continue to be guided by the principles of differentiation and own merits."

"Through constitutional reform and a series of legislative packages Turkey has made noticeable progress towards meeting the Copenhagen political criteria, as well as moving forward on the economic criteria and alignment with the acquis. Nonetheless, considerable further efforts are needed. Against this background and in view of the next stage of its candidature, the Commission recommends that the European Union should enhance its support for Turkey's preaccession preparations and should provide significant additional resources for this purpose".[122]

76. The process of enlargement has significant implications for United Kingdom agriculture. In his evidence to us Professor McInerney told us that it was another major signal of adjustment in farming.[123] Enlargement will inevitably put pressure on the CAP budget since direct payments already made in existing member states will have to be paid in new member states.[124] In the short term, the effect on the CAP budget may be limited since "the financial assumptions underlying Agenda 2000 were that they [the applicant countries] would not be receiving direct payments in the years running up to 2006":[125] thus, the European Commission is proposing a gradual introduction of direct payments in the new member states. However, in the longer term, continuing to pay direct payments at their existing levels across a wider Union is likely to prove unacceptable, not least because of the way the European Union budget impacts on different member states. Germany, as the biggest net contributor, would face the biggest incremental bill from enlargement. This may lead a German Government, of whatever complexion, to seek CAP reform.

77. The deal over agriculture reached as a result of enlargement will be affected by the outcome of the current World Trade Organisation negotiations. We were told that "there is a clear interface within the two negotiations", given that "the enlarged Community will have to conform to our new obligations".[126] Although the Community is currently well within the limits set in World Trade Organisation agreements on the level of domestic support permitted (known as Aggregate Measures of Support[127] or AMS), enlargement will bring Europe closer to those limits: "in the context of an enlarged Community, the scope in our AMS is rather less",[128] "and it is not, of course, clear how far the AMS levels will be reduced.

Agriculture's Importance to the Economies of the Candidate Countries[129]
	Population (000)	GDP/head (euro)	Agriculture as a percentage of GVA*	Proportion of employment in Agriculture and Forestry
2004 entrants
Cyprus	762	15,100	3.9	4.9
Czech Republic	10,244	6,200	4.2	4.6
Estonia	1,364	4,500	5.8	7.1
Hungary	10,190	5,700	4.3^#	6.1
Latvia	2,355	3,600	4.7	15.1
Lithuania	3,481	3,800	7.0	16.5
Malta	395	10,300	2.4	2.2
Poland	38,641	5,100	3.4	19.2
Slovakia	5,380	4,200	4.6	6.3
Slovenia	1,992	10,500	3.1	9.9
2007 entrants
Bulgaria	7,915	1,900	13.8^#	26.7
Romania	22,408	2,000	14.6	44.4
no entry date intimated
Turkey	68,618	2,400	12.1	35.4
* Gross Value Added ^# 2000 data

World Trade Organisation

78. In 1948 a General Agreement on Tariffs and Trade (GATT) was concluded between a number of nations.[130] It began a series of multilateral trade negotiations, or rounds, which initially concentrated on reductions in tariffs on trade in goods between members of GATT. Later negotiations included other areas such as anti-dumping and non-tariff measures. In 1986 the GATT members embarked on the Uruguay Round, which addressed a much wider range of issues, including agriculture, and sought to address trade distortions caused by subsidies as well as tariffs. The Uruguay Round concluded in agreement in 1994. The result was the creation in 1995 of a permanent "global international organization dealing with the rules of trade between nations", the World Trade Organisation (WTO).[131]

79. The World Trade Organisation inherited the rules of the original GATT agreement, as well as those rules decided upon as part of the Uruguay Round. The Organisation's structure centres on the Ministerial Conference, which takes place at least every other year. There are a number of other specialist Councils, as well as a Trade Policy Review Body and a Dispute Settlement Body, as well as numerous working groups and working parties. The Organisation's secretariat, of 550 staff, is based in Geneva. It provides technical advice and support, and analysis of world trade.

The Agreement on Agriculture

80. During the Uruguay Round negotiators adopted the concept proposed by the European Union of classifying Government support payments to agriculture in three categories. Red box supports were to become unauthorised, amber box supports were considered substantially to affect trade, and so commitments should be made to reduce them, and green box supports were viewed as having little or no effect on trade. In parallel with the Uruguay Round negotiations, the United States and the European Union reached the Blair House agreement in 1992, which resolved an outstanding dispute over European domestic support programs that limited United States access to the European oilseeds market. The Blair House agreement gave rise to another category, the blue box, which consisted of subsidy payments linked to production but not to price or volume of output, and which are implemented under production-limiting programmes.[132]

Agriculture and the WTO boxes

"In WTO terminology, subsidies in general are identified by "boxes" which are given the colours of traffic lights: green (permitted), amber (slow down — i.e. be reduced), red (forbidden). In agriculture, things are, as usual, more complicated. The Agriculture Agreement has no red box, although domestic support exceeding the reduction commitment levels in the amber box is prohibited; and there is a blue box for subsidies that are tied to programmes that limit production. There are also exemptions for developing countries (sometimes called an "S&D box")".[133]

amber box: domestic support arrangements in agriculture linked to production support which have to be reduced under the Uruguay Round Agreement on Agriculture .

blue box: domestic support arrangements based on acreage and headage which limit production, as defined in Article 6(5)(a) of the Uruguay Round Agreement on Agriculture , which states:

(a) Direct payments under production-limiting programmes shall not be subject to the commitment to reduce domestic support if:

(i) such payments are based on fixed area and yields; or

(ii) such payments are made on 85 per cent or less of the base level of production; or

(iii) livestock payments are made on a fixed number of head.

green box: domestic support arrangements in agriculture having no significant effect on levels of commodity consumption, production and trade, exempt from the provisions on reducing support. The Annex to the Uruguay Round Agreement on Agriculture states:

Accordingly, all measures for which exemption is claimed shall conform to the following basic criteria:

(a) the support in question shall be provided through a publicly-funded government programme (including government revenue foregone) not involving transfers from consumers; and,

(b) the support in question shall not have the effect of providing price support to producers.[134]

Within the European Union, CAP market support - through intervention payments - falls into the amber box. Arable area payments and livestock headage payments, such as the suckler cow premium, fall into the blue box. Payments under the agri-environment scheme fall into the green box.

81. The Agreement on Agriculture reached at the end of the Uruguay Round included provisions to reduce both the value of export subsidies and the volume of subsidised exports; to limit the levels of trade-distorting domestic support that could be provided to farmers; and to require reduced-tariff access arrangements. In addition agreement was reached under Article 13 of the Agreement of a 'peace clause', under which the subsidies paid to agriculture by countries complying with the Agreement cannot be challenged under other World Trade Organisation agreements. The peace clause is currently due to expire at the end of 2003.[135] Article 20 of the Agreement committed signatories to further negotiations aimed at liberalising agricultural trade within a short period of time.

Article 20 of the 1994 Agreement on Agriculture - Continuation of the Reform Process

"Recognizing that the longterm objective of substantial progressive reductions in support and protection resulting in fundamental reform is an ongoing process, Members agree that negotiations for continuing the process will be initiated one year before the end of the implementation period, taking into account:

(a) the experience to that date from implementing the reduction commitments;

(b) the effects of the reduction commitments on world trade in agriculture;

(c) nontrade concerns, special and differential treatment to developingcountry Members, and the objective to establish a fair and marketoriented agricultural trading system, and the other objectives and concerns mentioned in the preamble to this Agreement; and

(d) what further commitments are necessary to achieve the above mentioned longterm objectives".[136]

The Doha Round

82. In 2000, new talks on agriculture began, as determined by the Article 20 agreement. These have now been incorporated into a broader agenda launched at the fourth World Trade Organisation Ministerial Conference in Doha, Qatar, in November 2001. In Doha, the members of the World Trade Organisation agreed to negotiate for further liberalisation in agriculture on the basis that the long-term aim was a fair and marketoriented trading system; that the negotiations would address market access, the phasing out of export subsidies, and substantial reductions in domestic support; that allowances would be made for nontrade concerns and the specific difficulties of developing countries; that 'modalities' for the negotiations would be agreed by the end of March 2003, and that the new agreement on agriculture would be concluded at the same time as the whole Doha round.[137] Not all parties to the negotiations believe in, or would want to deliver, market liberalisation, and this difference of perspective is likely to grow in the future.

The Doha Ministerial Declaration - Agriculture

"13. We recognize the work already undertaken in the negotiations initiated in early 2000 under Article 20 of the Agreement on Agriculture, including the large number of negotiating proposals submitted on behalf of a total of 121 members. We recall the longterm objective referred to in the Agreement to establish a fair and marketoriented trading system through a programme of fundamental reform encompassing strengthened rules and specific commitments on support and protection in order to correct and prevent restrictions and distortions in world agricultural markets. We reconfirm our commitment to this programme. Building on the work carried out to date and without prejudging the outcome of the negotiations we commit ourselves to comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in tradedistorting domestic support. We agree that special and differential treatment for developing countries shall be an integral part of all elements of the negotiations and shall be embodied in the schedules of concessions and commitments and as appropriate in the rules and disciplines to be negotiated, so as to be operationally effective and to enable developing countries to effectively take account of their development needs, including food security and rural development. We take note of the nontrade concerns reflected in the negotiating proposals submitted by Members and confirm that nontrade concerns will be taken into account in the negotiations as provided for in the Agreement on Agriculture.

"14. Modalities for the further commitments, including provisions for special and differential treatment, shall be established no later than 31 March 2003. Participants shall submit their comprehensive draft Schedules based on these modalities no later than the date of the Fifth Session of the Ministerial Conference. The negotiations, including with respect to rules and disciplines and related legal texts, shall be concluded as part and at the date of conclusion of the negotiating agenda as a whole".[138]

83. There has been some debate within the European Union as to the practical meaning of the Doha Ministerial declaration, notably whether the European Union was committing itself to ending export subsidies or merely to think about phasing them out.[139] This ambiguity will no doubt crop up in the course of the negotiations because export subsidies are the least defendable part of the CAP and do the most damage to markets and other producers.

84. The European Commission negotiates in the World Trade Organisation on behalf of European Union member states. The European Council of Agriculture Ministers agreed a position for the new negotiations at its meeting in November 2000.[140] The Deputy-Director General of Agriculture at the Commission told us that, in that negotiating position, the Council had affirmed the view that "trade increases wealth".[141] He foresaw that the Commission would find itself in the negotiations "under pressure ... to make more deep cuts in our trade distorting support, in our export subsidies, and we will be pressed to give much more market access".[142] He conceded that the European position on export subsidies "is the most difficult", and that "we are also under pressure with regard to blue box payments". He also expected difficulties with tariff quotas.[143] However, the negotiating mandate agreed at Doha was, he said, satisfactory to the Commission, since it was "capable of the interpretation which we have always wanted to place on it, which is that it is the negotiation itself and not the decision to open the negotiation which will determine the outcome".[144]

Timetable of the agriculture negotiations in the Doha Round[145]
by 31 March 2003	Agreement on the 'modalities', or targets (including numerical targets) for achieving the objectives set out in the Doha Ministerial Declaration. Also some rules will be agreed. According to the World Trade Organisation, "this stage will therefore determine the shape of the negotiations' final outcome".[146]
by September 2003, at the Fifth Ministerial Conference, Cancun, Mexico	Members to produce their first offers or bids for negotiation under the modalities as agreed.
by 1 January 2005	Completion of the negotiations.