The Common Agricultural Policy and its impact on

The Common Agricultural Policy and its impact on the developing countries

Outline 1) The Common Agricultural Policy (CAP) 2) Trade Preferences 3) Effects on the Developing Countries 4) Concluding Remarks

1) The Common Agricultural Policy Some facts • The EU is the largest importer and the second largest exporter of agricultural goods. • Agriculture contributes to less than 2% of EU’s GDP. • Agriculture accounts for around 4. 5% of EU’s employment and for 12 % of total trade. • Yet, the CAP consumes about 45% of the total EU budget – around 43 billion Euro each year.

1) The Common Agricultural Policy Justifications for State Intervention • Agricultural production and therefore farmers’ incomes depend largely on climatic and other natural fluctuations. • Agricultural quantities cannot be adjusted as fast as industrial quantities (for example due to a dropping demand). • This leads to price fluctuations

1) The Common Agricultural Policy Objectives of the CAP 1. to increase productivity; 2. to ensure a fair standard of living for the agricultural Community; 3. to stabilize markets; 4. to secure availability of supplies; 5. to provide consumers with food at reasonable prices

1) The Common Agricultural Policy The price system of the CAP

1) The Common Agricultural Policy Reforms of the CAP • • Mac Sharry-Reform 1992 Agreement on Agriculture 1994 Agenda 2000 Agricultural Reform 2003 -> Common, important points: o Lowering the intervention prices for several commodities as well as the tariffs and export subsidies. o Largely compensating the farmers with direct payments.

2) Trade Preferences Some facts • The EU grants trade preferences to all developing countries. • 2003 about 80% of all commodities from developing countries were imported tariff-free or at lower tariffs. • The level of trade preferences is higher than that of other developed countries.

2) Trade Preferences General System of Preferences (GSP) • Introduced in 1971 • Covers all developing nations • Covers 7200 industrial and agricultural goods which can be imported tariff-free or at a lower tariff depending on whether a good is considered “sensitive” or “non-sensitive” • Protection clause

2) Trade Preferences Cotonou Agreement (ACP-States) • In force since 2003 • Covers 77 African, Caribbean and Pacific States • All goods - except for those covered by the CAP - can be exported tariff-free into the EU • Unilateral trade preferences until end of 2007 • From 2008 onwards bilateral trade agreements enforced during a transition period of 12 years (exception for least developed countries)

2) Trade Preferences Everything But Arms-Initiative (EBA) • In force since 2001 • Covers all least developed countries • Covers all goods except for arms (additional exceptions for bananas, rice and sugar) • Protection clause similar to GSP

2) Trade Preferences Effective Preference Margins All Goods Agricultural Goods Regular Preference Tariff Margin GSP 7. 9% 4. 5% 3. 4% 21. 9% 19. 7% 2. 2% ACP 7. 9% 3. 0% 4. 9% 21. 9% 13. 3% 8. 6% EBA 7. 9% 0. 3% 7. 6% 21. 9% 1. 1% 20. 8%

3) Effects on the Developing Countries General Effects of an Import Tariff • Higher European price • Foreign suppliers get lower prices General Effects of an Export Subsidy • Higher export supply • Lower world market prices

3) Effects on the Developing Countries Additional Effects of the CAP System • Price Stability Effect -> The CAP increases the price instabilities on the world markets. • Price Structure Effect -> The CAP distorts the price structure between the different commodities.

3) Effects on the Developing Countries Welfare Effects on the Net Importers in the Short Run • Lower import prices (positive) <-> lower export prices (negative) -> Positive effect outweighs the negative one • In fact, this positive effect is much bigger, if the trade preferences are taken into consideration. -> The overall effect for net importers in the short run is therefore clearly positive.

3) Effects on the Developing Countries Welfare Effects on the Net Exporters in the Short Run • Lower import prices (positive) <-> lower export prices (negative) -> Negative effect outweighs the positive one • However, the negative effect can be reversed or at least reduced, if trade preferences are taken into consideration. -> The overall effect for net exporters in the short run cannot be clearly determined.

3) Effects on the Developing Countries Welfare Effects on the Net Importers in the Long Run • • • Negative price stability effect Negative price structure effect Net importing position cannot be seen as given Dependence on political decision of the EU The CAP fostered indirectly wrong agricultural policies in the developing countries. -> A reverse of the original positive effect is therefore quite likely in the long run.

3) Effects on the Developing Countries Welfare Effects on the Net Exporters in the Long Run • • • Negative price stability effect Negative price structure effect Trade position cannot be seen as given Dependence on political decision of the EU CAP fostered indirectly wrong agricultural policies in the developing countries. -> A negative overall effect in the long run is therefore highly likely for the net exporters.

4) Concluding Remarks How to reform the CAP? • By a gradual (not radical) liberalization • This would be beneficial for the vast majority of the developing countries. -> Losers could be compensated However, the result that the CAP harms the developing countries should not conceal the fact that developing countries would benefit the most from reforming their own agricultural policies.

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