The Common Agricultural Policy

1. The Common Agricultural Policy Impact on International Trade 29th November 2009 European Economic Integration, Institute of economic studies

2. Outline • What is Common Agriculture Policy? • Establishment • Pressures to reform CAP • CAP reforms over time • IT consequences • Africa & CAP

3. What is Common Agriculture Policy? • System of European Union agricultural subsidies and programs • 42 % of the EU's budget and still decreasing • Practices: • Trade controls • Price-support measures • Income transfers • Production subsidies • Health regulations

4. EU budget Source: EU budget 2009; Sustainable developmentand innovation at the core of the EU budget

5. establishment • after World War II - part of the Treaty of Rome (signed in 1957, came into force in 1958) • 1962: went into effect – 4 BASIC PRINCIPLES: • A unified market for the free movement of agricultural products in the European Union • Financial solidarity • Community preference • Parity and productivity

6. Pressures to reform cap • Budgetary pressures • Pressures from consumers • External pressures • Environmental pressures

7. CAP reforms over time • Introduction of milk quotas in 1984 • Mac Sharry reform in 1992 • The Agenda “2000” • The 2003 reform • CAP “Health Check” 2008

8. IMPORT TARRIF EFFECT

9. MILK PRODUCTION & CONSUMPTION BEFORE THE QUOTAS

10. EU was exporter of diary products Subsidization of diary farmers (per produced output) motivated farmers to produce more. Overproduction led to export subsidies and consequently to dumping. Results: Producer surplus= a+b+c Consumer surplus= -(a+b) Gov. Revenue = -(b+c+d+f+g+h) + High storage costs (not depicted) Situation before the milk quotas Export subsidy case

11. Introduction of milk quotas in 1984 • Total guaranteed quantity: the quota of each country • The references quantities: the producers’ and/or purchasers’quotas • The milk tax: Taxes if producers exceed their reference quota - (superlevy)

12. Impact on international trade • End of overproduction of diary products • Reduction of the production from 103.7 million tons in 1984 to 96 million tons in 1992 • Thus decrease in EU diary export as result of abolishment of large production subsidies (=export subsidies) • Side-effect – higher import of cows for beef (especially from Brazil) • Decrease in storage costs

13. Mac Sharry reform in 1992 • Pressures from other agricultural exporting countries • From price support to income support • The beginning of direct payments • compensation for the decrease of the price support • New subsidies to farmers for good environmentalpractices • „Set-aside land“

14. Export subsidies

15. Impact on international trade • Lower export subsidies • Higher direct payments

16. Impact on international trade • EU prices closer to world prices • International agricultural trade liberalization • Fall in cereal prices by 50% • Fall in income of African countries, which were making profits on selling goods to Europe (under Lomé convention) • An increase in the export price competitiveness of basic EU food and agricultural exportsfor African countries

17. Further reforms • The Agenda 2000 • “multi-functionality” of farming activities • The reform in 2003 • A reduction in direct payments for bigger farms to finance the new rural development policy • CAP “Health Check“ 2008 • Increase of milk quotas, ...

18. „CAP vs. Africa“ case • African exporters seem to be sensitive to EU reforms • Pros and cons of CAP reforms (from African point of view) • Future prospects

19. Pros and Cons + — 2001: free access to the market granted to the least developed countries under „Everything Buts Arms“ initiative. Problem? – sugar,rice and bananas excluded After MacSharry reform, EU price reductions drove some African exporters out of the EU market Undermining of African markets by price-competitive EU goods (wheat) – „markets of last resort“ EU policy emphasis shift – „from quantity to quality“ • Large food surpluses exported to Africa as a food aid (before MacSharry) • Certain African (sugar) exporters profited from Lomé convention (€500 mil. in 99/2000)

20. Situation when Africa rejects to trade with EU Africa higher value food Qh PPF Ql lower value food

21. Trading situationRicardian model Africa EU QH QH PFT TT TT PA = CA PA = CA higher value food higher value food IFT CFT PPF CFT IFT PPF IA IA PFT Ql QH lower value food lower value food Africa has comparative advantage in producing lower value food

22. Future prospect • African exporters: • lower value food and agricultural products distributors • European exporters: • higher value food and agricultural products

23. Conclusion • Trend in reforms of CAP – lower direct payments • Decoupling: • ↑ economic prosperity • ↓ negative impacts on the environment • From import levy to direct subsidies – before and after Mac Sharry reform • Africa has to trade with lower value food

24. Thank you for your attention Petra Andrlíková Radovan Parrák

25. references • Institure for Agriculture and Trade Policy: The Common Agricultural Policy: A Brief Introduction, Prepared for the Global Dialogue Meeting (May 14 and 15, 2007, Washington, D.C.) • European Economic Policies:CommonAgricultural Policy; Laurent Weill: Université de Strasbourg, Charles University - Prague , April 2009 • Policy Notes 2009/7: The Impact of Common Agricultural Policy (CAP): Reformon Africa-EU Trade in Food and Agricultural Products • http://ec.europa.eu/budget/index_en.htm