The Common Agricultural Policy and its impact on the developing countries

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The Common Agricultural Policy and its impact on
the developing countries
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Outline

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

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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 EUs
  GDP.
• Agriculture accounts for around 4.5 of EUs
  employment and for 12 of total trade.
• Yet, the CAP consumes about 45 of the total EU
  budget around 43 billion Euro each year.

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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

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1) The Common Agricultural Policy

• Objectives of the CAP
• to increase productivity
• to ensure a fair standard of living for the
  agricultural Community
• to stabilize markets
• to secure availability of supplies
• to provide consumers with food at reasonable
  prices

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1) The Common Agricultural Policy

• The price system of the CAP

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1) The Common Agricultural Policy

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

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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.

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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

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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)

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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

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2) Trade Preferences

• Effective Preference Margins
• All Goods Agricultural Goods

Regular Tariff Preference Tariff Preference Margin Regular Tariff Preference Tariff Preference 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

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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

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3) Effects on the Developing Countries

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

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3) Effects on the Developing Countries

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

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3) Effects on the Developing Countries

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

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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.
• -gt A reverse of the original positive effect is
• therefore quite likely in the long run.

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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.
• -gt A negative overall effect in the long run is
• therefore highly likely for the net exporters.

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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.
• -gt 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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• Maraming salamat po!