EU farm reforms do not reduce trade distortions

Analysts disagree with the European Union's contention that the restructured farm subsidies under the new agreement on the common agricultural policy (CAP) do not distort global trade to the disadvantage of developing countries.

The EU's new deal provides for decoupled direct payments to farmers, which essentially means delinking subsidies from actual production.

The policy, applicable mainly to cereals (dairy and sugar sectors are exempted), allows EU member countries to provide decoupled direct payment to arable farmers based on historical production reference years (2000-2002). Such support can also be provided to farmers who keep the land in "good agricultural condition".

However, the member states have the option of retaining up to 25 per cent of payments as 'coupled subsidies'. Besides, they can also delay the introduction of these changes till January 2007.

Such direct payments to farmers are non-trade distorting and hence compatible with the World Trade Organisation (WTO) norms, the EU has maintained at the ongoing ministerial meet at Cancun.

"This policy is merely a smoke screen behind which the EU countries can shift their subsidies to the 'green box' without reducing them. In fact, the actual domestic agricultural support may increase further. Besides, level of export subsidisation will remain intact," said Samar Verma, policy advisor to Oxfam GB India, an international non-governmental organisation working for the protection of trade rights of developing countries.

He said this might enable the EU to show a 75 per cent reduction in its 'blue box' subsidies, exceeding the 50 per cent reduction level proposed in the Harbitson draft for the Cancun meet, without actually reducing the overall support.

Disputing the EU's plea of decoupled direct support being non-trade distorting, Verma said even if it was true that such payments might not change incentive prices, it did not follow that these were not linked to production decisions and would not influence overall output.

Since the direct payments were linked to a 'base acreage', there was a clear incentive to build base acreage for the future. Moreover, a guaranteed stream of direct income payments might increase producers' willingness to plant, besides strengthening their borrowing power to undertake investments in production.

This apart, the scale of export production in the EU was such that any direct support impacting surplus production did include both a production subsidy and an implicit export subsidy. A study of the EU wheat sector showed that direct payments did not lead to a drop in the level of export dumping.

On the other hand, it led to significantly increased subsidised wheat production to the point that export refunds had been brought back to enable wheat surpluses to be disposed of in the export market, he pointed out.

Thus, instead of being non-trade distorting, nominally decoupled payments increased production and included an implicit export subsidy that gave rise to disguised export dumping, Verma said.

The findings of a study done by the Washington-based International Food Policy Research Institute (IFPRI) have also revealed the trade-distorting nature of the farm subsidies being given by the EU and the US to their farmers.

This report, released just two weeks before the Cancun summit, concluded that the trade-distorting measures of rich nations displaced more than $40 billion of net agricultural exports every year from developing countries.

Elimination of these measures would triple developing countries' net agricultural trade, it stated.

More than half of the trade displacement was due to the policies of the EU and less than those of the US. Japan and other high-income Asian countries caused displacement of 10 per cent exports, it reckoned.

The study also estimated that protectionism and subsidies by the industrialised nations cost the developing countries about $24 billion annually in lost agricultural and agro-industrial income.