The development critique of the CAP

The European Union’s Common Agricultural Policy (CAP) is heavily criticised for its detrimental effects on agricultural production in developing countries. The criticisms are directed against both the way subsidised EU agricultural products undermine local markets for domestic producers and compete with African exports in third country markets, and at the way trade barriers make it more difficult for African producers to export to EU markets. NGOs have produced case studies of the damage done to local production due to subsidised EU exports of milk powder, sugar, preserved tomatoes and tomato concentrate, beef, cotton and the sale of frozen chicken.

EU agricultural policy influences developing country agricultural production through at least three channels:

• First, through its impact on world market prices. Export subsidies, tariff barriers and domestic support can all have the effect of lowering world market prices and increasing competition for developing country producers.
• Second, through its impact on the variability of world market prices. EU efforts to stabilise internal prices for EU farmers has the effect of exporting price volatility to the rest of the world.
• Third, through the way non-tariff barriers increase the cost of market access and may have the effect, unintentionally or otherwise, of excluding smallholder farmers from global supply chains.

Export subsidies

The distorting effect of the use of subsidies to dump surplus production on to world markets is easily seen. The arrival of subsidised EU wheat, milk powder or beef on a local market clearly has the effect of lowering prices for local farmers. Whether, overall. subsidised exports damage the welfare of developing countries is a more moot point, given that consumers are likely to benefit from access to lower-priced imports. Export subsidies are also attacked by other exporters who stand to lose lucrative markets because of competition from subsidised EU exports. However, while EU subsidised exports have undoubtedly distorted competition in particular sectors in particular locations, empirical evidence suggests that their elimination would not make a huge difference to overall market conditions for developing countries. Their elimination is desirable to remove unfair competition, but at least as far as the poorest countries are concerned it would not have a big impact.

Domestic support

The EU claims that its direct payments to farmers are now decoupled and thus no longer have an effect on production. This claim is contested by development groups who argue, in the extreme, that the EU has merely substituted one form of support for another with no overall change in the distorting impact of its agricultural policy. Economic theory suggests that making a payment to a farmer, even without an obligation to produce, is likely to encourage additional production, but there are wide variations in the empirical importance of this effect. It is difficult to pick up the anticipated effect of decoupling in terms of lower production in the statistics on EU agricultural output apart from some reduction in livestock numbers in more marginal areas. This could reflect the fact that the previous coupled payments were often accompanied by production restrictions which have also been removed in the recent reforms.

Border tariffs

Empirical studies suggest that it is border tariffs which are responsible for the largest distortions on world markets. This is partly because of the 'double whammy' effect, that is, high prices both encourage domestic production but also discourage domestic consumption, thus exacerbating the impact on third country producers. Further distortions are introduced by the high variability in the EU's tariff structure and by the existence of tariff escalation.

Price volatility

One of the objectives for the CAP set out in the EU Treaties is price stability. In the past, this was mainly achieved by the use of variable import levies for EU border protection which were varied to offset fluctuations in world prices. Although variable levies were supposedly prohibited in the WTO Agreement on Agriculture, the EU retains some flexibility to vary its tariffs particularly for cereals and fruits and vegetables. Also, the widespread use of specific tariffs (that is, tariffs fixed as an absolute amount per kg or tonne) means that the protective effect of the tariff varies as world market prices fluctuate. Finally, the EU continues to make use of export subsidies which are also variable depending on the quantitites that the EU wishes to export at any particular point in time. All of these instruments work to stabilise internal EU prices, to the benefit of EU producers and consumers, but they increase the extent of price volatility on world markets, putting the burden of adjusting to price volatility on to the shoulders of developing country farmers and consumers who are in a much weaker position to bear this burden.

Non-tariff barriers and the cost of market access

Developing countries fear that higher EU standards, particularly in the case of animal and plant health and food hygiene, can become a de facto barrier to access to the EU market. Even when exporting firms in developing countries can comply with EU standards, they may face difficulties and extra costs in getting the required certification from the national standards agency which may not be recognised by the EU. However, other research has shown that standards can also open the door to market access because the ability to meet these standards is a sign of quality thus facilitating consumer acceptance. Other research shows that, often, private standards required by supermarkets and other importers are higher and more restrictive than the public standards enforced by governments. The EU can play a role by providing development assistance to help developing country exporters to meet its standards.

Resources:

UN Millennium Campaign, Give Development a Chance. Europe's CAP Needs Urgent Reform, 2010

Action Aid, Farmgate: the development impact of agricultural subsidies (PDF), 2005

Oxfam Briefing Paper, Stop the Dumping! How EU agricultural subsidies are damaging livelihoods in the developing world (PDF), 2002