Memorandum submitted by Professor A Swinbank
(CAP 07)
THE NEED FOR, AND THE DIRECTION OF, THE NEXT
CAP REFORM
EXECUTIVE SUMMARY
A Vision ... is a useful contribution
to the debate on CAP reform, and I have no quarrel with the thrust
of its argument. In this submission, rather than reiterate the
full debate, I outline some of the WTO pressures that are being
brought to bear on the CAP, discuss some of the problems associated
with the Single Payment Scheme (SPS), and make some suggestions
for further reform. With an agreement to the Doha Round, the elimination
of export subsidies by 2013, and substantial reductions in import
tariffs, will increase the pressure to reduce levels of price
support for sugar, dairy, beef, etc. If there is no satisfactory
outcome to Doha, a resurgence of litigation can be expected in
the WTO that could lead to the piecemeal dismantling of the CAP.
Even the new SPS could prove problematic in the WTO. There are
other problems with the SPS, particularly as applied in England.
CAP reform 2008-2009 should involve significant reduction in the
remaining levels of market price support, and an agreement on
a phased reduction in the Single Payment. Ideally, the latter
would also be decoupled from land. Expenditure on Pillar II should
be increased, when this can result in a cost-effective enhancement
in environmental provision.
INTRODUCTION
1. A Vision for the Common Agricultural
Policy, published jointly by Defra and HM Treasury in early
December 2005, is a useful contribution to the new debate on CAP
reform launched by the European Council on 16 December 2005: the
meeting invited "the Commission to undertake a full, wide
ranging review covering all aspects of EU spending, including
the CAP, and of resources, including the UK rebate, to report
in 2008-09" (paragraph 80 of the Final comprehensive proposal
from the Presidency on the Financial Perspective 2007-13,
emphasis added). There is considerable evidence to suggest that
substantial pressures will be building for a new reform of the
CAP by 2008-2009. As I am in broad agreement with the Defra/Treasury
text, I have chosen in this submission to: first emphasise the
WTO pressures that are being brought to bear on the "old"
CAP, second outline the problems inherent in the new SPS, and
third suggest some issues that have to be addressed in any future
reform.
THE "OLD"
CAP, AND THE
WTO
2. By the "old" CAP I mean the
market price support measures of high import taxes, intervention
buying and other domestic market interventions, and export subsidies.[1]
Despite the MacSharry Reforms of 1992, the Fischler Reforms of
2003-2004, and recent changes to the sugar regime, the original
market price support measures still form an important part of
the CAP, imposing costs upon European consumers and taxpayers,
distorting resource use within the EU, disrupting international
markets, and producing an uncertain benefit in terms of the long-term
sustainability of farm incomes and an acceptable environmental
impact. These "old" policies are still very important
for sugar, dairy, beef, and other products. Furthermore they are
under threat in the WTO.
3. The WTO "threat" is two-fold.
First, through negotiation (as in the ongoing Doha Round), tighter
constraints on domestic farm policies can be agreed. Second, through
the Dispute Settlement Process, existing policies can be tested,
and found wanting, as the EU discovered in relation to its export
subsidies on sugar, and the US for many aspects of its support
for upland cotton. The December 2005 WTO Ministerial in Hong Kong
was successful in that the Doha Development Agenda talks continue.
If these talks are to be successfully concluded, it would seem
that a considerable tightening of the constraints embodied in
the existing Agreement on Agriculture will need to be agreed.
4. If the negotiations fail, the existing
agreement will remain in place, but without the special protection
of Article 13 (the so-called Peace Clause) that has, in the past,
allowed certain elements of farm policies to depart from WTO norms.
A more litigious future would ensue, which could result in a piecemeal
dismantling of the "old" CAP if the EU is to remain
a respected member of a rules-based organisation.
5. Reference is frequently made to the three
pillars of the existing agreement: market access; domestic support;
and export competition. All three raise potential problems for
the existing CAP.
6. It is already agreed that, in the framework
of any new agreement, export subsidies will be eliminated by 2013.
This could be problematic for the CAP, as Table 1 suggests (and
this is quite apart from any difficulties the EU may face in curbing
its exports of sugar as of 22 May 2006, to conform with the WTO
sugar panel ruling). For bulk commodity exports, the EU frequently
uses a tender mechanism under which traders bid for the export
subsidy they are willing to accept to export product. Table 1
reports the results of three tenders held in January 2006 (as
reported by Agra Europe). I have then adjusted these figures
to allow for the further cuts in the intervention price for butter
(agreed in the Fischler Reforms, but not yet implemented) and
in the support price for sugar (as agreed in November 2005).
Table 1
MAXIMUM EXPORT REFUNDS (SUBSIDIES) DETERMINED
BY TENDER FOR WHEAT, BUTTER AND SUGAR, JANUARY 2006
|
| <lh1>
| Maximum refund determined by tender January €/tonne
| Implied refund after ongoing reform
€/tonne
| Revised refund expressed as a % of the new support price
|
|
<lh0>Wheat
19 January
| 9.00 | 9.00
| 8.8 |
Butter
12 January | 985.50
| 625.00 | 25.4
|
Sugar
19 January | 359.24
| 131.74 | 32.6
|
|
7. It is a mechanistic calculation, that allows for no
increase in world market prices, but the implication is that an
export subsidy equivalent to 25% of the new support price for
butter (and 33% of the new support price for sugar) would still
be necessary if these products were to be exported. Now it may
be that as a result of increased consumption (particularly in
the new Member States) and the policy measures currently being
implemented, the new supply-demand balance of EU-25 will eliminate
the need for bulk commodity exports by 2013 (failing which a further
tightening of quotas could reduce EU production). But where does
that leave the food industry? Manufacturers of processed products,
incorporating cereals, dairy products and sugar, qualify for export
refunds under the Non-Annex I regime, based on the export subsidies
that would have been paid on the raw materials. If all export
refunds are to be eliminated by 2013, including those on Non-Annex
I goods, whilst EU prices for raw materials remain substantially
above those prevailing on world markets, EU-based food manufacturers
could see their overseas sales jeopardised.
8. In October 2005 the EU offered to make substantial
cuts in the "bound" level of domestic support (which
of course is not the same as a cut in the actual level of support,
given that this is lower that the WTO binding): for example, by
reducing the permitted binding on the Aggregate Measurement of
Support (AMS) by 70% (Making Hong Kong a Success: Europe's
Contribution, Brussels, 28 October 2005, p 3). The complex
set of proposals on domestic support is difficult to disentangle
and interpret, but it does seem clear that the EU's strategy is
based on the premise that the new SPS will qualify for the "green
box", and consequently that it will not be subject to expenditure
limits. I return to this in paragraph 13 below.
9. On market access, the EU has suggested that import
tariffs of over 90% (typical for many core CAP commodities) should
be subject to a cut of 60%; but that up to 8% of tariff lines
should be designated "sensitive", allowing a smaller
reduction to apply; and that the special safeguard mechanisms
should be retained for "beef, poultry, butter, fruits and
vegetables and sugar" (op cit, pp 5-6). My guess is
that this proposal is on the edge, but that more ambitious tariff
cuts, with fewer sensitive products, and the abandonment of the
special safeguard clause, would render untenable the proposed
domestic support prices for sugar, butter, beef, ... A group of
developing countries are insistent that the Doha Round can only
be concluded if more ambitious market access openings are conceded
by developed countries.
POTENTIAL PROBLEMS
WITH THE
SINGLE PAYMENT
SCHEME (SPS)
10. The Fischler Reforms of 2003-2004 introduced an important
decoupling of support with the introduction of the SPS. Potentially
it gives farmers greater freedom to farm, enhancing the competitiveness
of European agriculture; it could have reduced the administrative
burden of the old area and headage payment schemes, paid under
the Integrated Administration and Control System (IACS), although
Member States seem to have conspired to thwart this ambition;
and it moved the EU towards a more WTO-compatible system of support.
However, it is not without its problems.
11. Article 1 of Regulation 1782/2003 introducing the
scheme, calls it an "income support for farmers". Quite
why "farmers", as opposed to any other group in society,
need an income support funded by taxpayers is unclear; but even
within the context of farming its rationale is uncertain. The
main beneficiaries of a land-based payment will be existing landowners,
rather than tenant farmers or new entrants to the industry (although
new business enterprises may emerge, growing crops and raising
livestock, and paying a peppercorn rent to the established "farmer"
who retains the Single Payment). Furthermore, there is no suggestion
that the "income support" is targeted on need or circumstance:
instead it is determined, basically, on the area farmed and the
country's historic IACS entitlements (under the regionalised scheme)
or the farm's historic IACS entitlements. It will be some time
before we have data which will show the distribution of Single
Payments within and between Member States, but data produced by
the European Commission on all direct payments made to producers
in 2003 suggests that the distribution is likely to be highly
uneven. Figure 1 shows the average payment per claimant in each
of the Member States, whilst Figure 2 shows the size distribution
of payments in the UK. There are lots of problems associated with
this data, and its interpretation, and these distributions will
not be replicated under the SPS, but—these caveats apart—it
is not immediately apparent why the average payment in Portugal
should be a fraction of that in the UK, if this is an "income
support" measure; or why 0.7% of claimants in the UK should
have been entitled to 11% of the payments made.
Figure 1
AVERAGE DIRECT PAYMENT MADE IN 2003, BY MEMBER STATE
€/CLAIMANT
Source for Figures 1 and 2: calculated from data in a pdf
document (Annex 1. Indicative Figures of the Distribution of
Aid, by Size-Class of Aid, Received by the Producers According
to Reg (EC) No 1259/1999 (Financial Years 2002 and 2003)),
available at http://europa.eu.int/comm/agriculture/fin/index_en.htm
(accessed 20 January 2006).
Figure 2
DISTRIBUTION OF DIRECT PAYMENTS, BY SIZE OF PAYMENT, UK
2003
Source: As Figure 1.
Note, the horizontal axis indicates the size of payment (in €1,000
euros) per claimant. The size categories across the figure are
highly uneven. Thus the first category refers to payments per
claimant of less than €1,250, the second of payments between
€1,250 and €2,000, etc. It shows, for example, that
20.2% of claimants received payments of €1,250 or less, accounting
for 0.5% of the monies paid in 2003.
12. It is often said, with much justification, that European
agriculture is multifunctional: that it supports a cultural and
visual landscape, and a fauna and flora, that is manmade having
evolved over thousands of years of agricultural (and other land
use) practice; and it is pointed out that farmers are not directly
reimbursed for any costs that they might incur for the provision
of these services. Thus the Single Payment might be thought of
as a payment for multifunctionality. However, no attempt has been
made to link the size of payment either to the cost of provision
of, or to the value society places on, multifunctionality. Under
the regionalised scheme, it will be a flat-rate payment per hectare;
and under the farm-based, historic, scheme payment rates per hectare
vary regardless of the multifunctionality of the land. Cross compliance
does of course apply, but apparently Defra figures suggest that
"the costs to English farmers of cross-compliance ... is
less than 2% of the value of direct payments made to English farmers
under the CAP" (A Vision ..., p 33). Furthermore,
additional payments are made for multifunctionality: for
example "the general expectation in England is that Entry
Level Stewardship (ELS) will cover two-thirds or more of English
farmland within three or four years" (op cit, p 33).
13. As suggested in paragraph 8 above, and despite the
EU's best intentions, the SPS may not fit the green box. The overarching
requirement is that green box policies must have "no, or
at most minimal, trade-distorting effects or effects of production"
(Article 1 of Annex 2 of the Agreement on Agriculture), and whilst
it might be thought that the SPS (at least in its decoupled form,
as applied in the UK)[2]
readily satisfies this condition, this could be misleading as
a series of policy specific criteria must also be met. For example,
paragraph d of Article 6 (the heading that the EU is most likely
to use to declare the Single Payment to the WTO) specifies that
"The amount of such payments in any given year shall not
be related to, or based on, the factors of production employed
in any year after the base period". As the Single Payment
is an annual payment, paid to farmers, on the basis of
the area farmed (or kept in good environmental condition) in that
year, and cross compliance applies, it seems that, from a strictly
legal perspective, the SPS fails to comply.[3]
Although there has been some talk about revising the green box
criteria in the ongoing Doha Round, this has not yet happened;
and many participants would be very reluctant to see the criteria
weakened. Thus there is a danger (slight, maybe) that the cornerstone
of the post-Fischler CAP could be challenged in the WTO.
CAP REFORM 2008-09
14. The foregoing discussion has suggested that a further
reform of the "old" CAP must be undertaken in the near
future, in order to comply with any likely outcome to the Doha
Round. This could involve substantial reductions in the support
prices for sugar, dairy, beef, and other products, to make an
elimination of export subsidies by 2013 a feasible objective,
and permit a substantial reduction in import barriers. If the
EU is unable to reach such an agreement in the Doha Round, then
the prospect is that of unplanned and piecemeal dismantling of
the "old" CAP as the provisions of various commodity
regimes are attacked in dispute settlement cases.
15. Reform will doubtless lead to calls for financial
compensation for the producers so affected, and the creation of
new Single Payment entitlements. The logic of the budget ceiling
agreement in Brussels in 2002, reaffirmed last December, is that
the money for these new entitlements must come from the existing
Pillar I budget. This implies some reduction in the funding of
existing Single Payment entitlements, in order to release funds
for the new compensation schemes. In England and Germany, under
the regionalised scheme, a rather bizarre readjustment of entitlements
could occur, as first monies will have to be released from existing
entitlements to fund the nominal compensation payments of the
new commodity specific reform, but then these monies will be used
to augment everyone's Single Payment on a flat-rate basis (further
complications arise if this rebalancing takes place at EU, rather
than the national, level). Thus, most claimants will be left with
more-or-less the same level of payment (despite the reduction
in the level of existing payments to fund the new scheme)
whilst producers of the affected product will experience a fall
in support prices, but receive no product-specific compensation.
16. In passing it might be noted that, although doubtless
adopted in good faith, the regionalised system of payment does
seem flawed. It is strategically, economically and socially problematic.
Strategically, because it undermines the UK's negotiating position
in the EU's Council of Ministers. The regionalised scheme was
justified as a more defensible income support measure in
the longer run, and with an enhanced environmental impact over
a larger farmed area. But this long-term justification fits uneasily
with a vision in which "production-linked support and the
Single Farm Payment had effectively disappeared" (A Vision
... p 15). Economically, because the SPS is not fully decoupled,
it has brought more land and more producers into the subsidy net.
Finally, within agriculture, it is socially problematic because
it gives landowners enhanced power (than would be the case under
the historic, farm-based, scheme) in negotiation with tenants
over the appropriation of the financial benefits conferred.
17. If the SPS is phased out, recipients must be given
a clear indication of the timescale involved, rather than the
uncertain message that the financial mechanism might be applied
after 2007, that modulation can now be applied at 20%, etc, with
each "expert" touting their own vision of the future.
18. It would also be beneficial to further decouple payments
from land: A Vision ... (p 17) suggests that "time-limited
payments to producers to compensate for income foregone, or to
compensate for reduced asset values could be considered. In both
cases, de-linking such payments from land would better facilitate
adjustment." In essence this is the bond scheme, articulated
by Professor Stefan Tangermann in the early 1990s.[4]
Under such a scheme, compensation payments would not be
linked to farmers, land, or farming, but would be completely decoupled
(and, I believe, accepted as such in the WTO).
19. A phasing out of the SPS does, however, imply a loss
of the limited environmental benefits secured by cross-compliance.
However it would release funds for an enhanced and reinvigorated,
but cost-effective and WTO-compliant, programme of environmental
protection under Pillar II.
January 2006
1
The WTO refers to an export subsidy; the CAP uses the term export
refund. Back
2
Where partial decoupling applies-for example, linking 25% of
the former arable area aid to cropped land-the green box criteria
are almost certainly not satisfied. Back
3
For further discussion see: Alan Swinbank and Richard Tranter,
"Decoupling EU Farm Support: Does the New Single Payment
Scheme Fit within the Green Box?", The Estey Centre Journal
of International Law and Trade Policy, 6(1): 47-61, 2005. Back
4
See Alan Swinbank & Richard Tranter (editors), A Bond
Scheme for Common Agricultural Policy Reform, CABI Publishing:
Wallingford, 2004. Back
|
