EU Agricultural Protection Measures

The EU is often accused of following very protectionist trade policies in agriculture, where developing countries have most of their comparative advantage. Trade barriers are indeed extensive, although they are tempered by a variety of preference schemes which give more favourable access terms to developing countries. This page outlines the most important trade barriers.

In broad terms, there are three types of agricultural protection

• Market access restrictions involves measures that protect domestic agriculture by restricting foreign imports. This usually involves high import tariffs or quotas, which restrict the quantity of imports for a particular product from a given country and allow domestic producers with high production costs to compete.
• Export subsidies are financial benefits conferred on exporting firms by the government in order to encourage exports as opposed to domestic consumption. As a consequence, global prices are suppressed and domestic consumers may pay a higher price than foreign consumers for the same product.
• Domestic support includes price supports and direct subsidies paid by the government to farmers. The most trade-distorting payments are those tied to levels of production (called coupled direct payments), thereby encouraging overproduction and driving down world prices.

The EU makes use of all three types of instruments.

Market access restrictions

Tariffs

Members of the World Trade Organization (WTO) must have transparent and predictable tariffs. Under the WTO Agreement on Agriculture, each WTO Member has committed to a set of maximum tariffs called bound tariffs which are contained in its WTO schedule of commitments.

These tariffs are also called MFN (Most Favoured Nation) tariffs because they apply to imports from any country which does not have preferential access rights. Estimates of the EU average bound MFN tariff on agricultural imports range between 18% and 28%. This is much higher than the EU's protection of manufactured goods, which averages around 3%. It is also higher than the protection to agriculture in the United States or Canada, albeit lower than in Japan.

Some commodity imports, such as cocoa, coffee, and oilseeds, face very low tariffs. Others, such as sugar, dairy products or beef, face a very high level of protection. Developing countries will seldom be able to export these products to the EU unless they have preferential tariff concessions under a particular regime.

Countries can decide to levy a lower tariff on imported products than the bound tariff rate - these are called the applied tariffs. If account is taken of the preferential tariffs imposed on exports of developing countries, and the lower tariffs negotiated under regional or bilateral trade agreements, the estimated EU average applied tariff is around 10% in agriculture. However, tariffs for some commodities remain very high, especially for those countries that are not eligible for preferences.

Special safeguards

WTO members are not allowed to impose tariffs higher than the bound rate in their schedules of commitments. However, the WTO Agreement on Agriculture allowed countries which converted their market access barriers to tariffs in the Uruguay Round to schedule the use of a special safeguard measure, provided they notified this when signing the Agreement. This is an additional tariff which can be triggered when the import price of a commodity falls below a reference price, or when there is a steep increase in the volume of imports. The EU makes use of this special safeguard measure for sugar and some dairy products.

Tariff escalation

Tariff escalation refers to a situation where the bound tariff on more processed products is higher than the tariff applied to the raw material. An example of an escalating tariff would be a tariff of 0% on imports of cocoa beans, 5% on imports of cocoa butter and 20% on imports of chocolate. When tariffs are proportionally higher for processed products, additional protection is provided to the value-adding processing industry processors and processing activities are discouraged in the exporting countries.

The EU tariff structure shows such tariff escalation. According to the WTO EU Trade Policy Review 2009, the average MFN tariff on primary food products was 9.9% in 2008, but for processed food products it was more than twice as high, at 19.4%. This is a serious disincentive for the development of processing industries in countries that do not benefit from preferences. However, tariff escalation is not a problem for those developing countries which benefit from preferences, such as African countries.

Tariff rate quotas

For some products, imports up to a certain quantity can be imported with a low or zero tariff, but the much higher bound tariff applies to quantities above this amount. Some developing countries can export significant quantities of, for example, sugar and beef, under these tariff rate quota (TRQ) arrangements . Following the conclusion of the Uruguay Round, the EU makes extensive use of tariff rate quotas to provide a minimum degree of market access.

However, their effect on trade is controversial. Because quantities imported under a TRQ are limited, trade has to be regulated by licences. The ability to sell into the EU market at a favourable preferential duty within a TRQ is a valuable right for which traders are prepared to pay a price, called a quota rent.  Who gains this rent depends, in part, on how the TRQ licences are administered. While in some cases the rents go to develoing countries, in other cases they are shared with traders and importers. The complexity of TRQ administration can be an additional barrier to trade, with the result that many TRQs are not completely filled.

Non-tariff barriers

Tariffs are not the only obstacle to imports. So-called non-tariff barriers are now major obstacles to developing countries’ exports to the EU. In addition to measures like import quotas and licences, examples of non-tariff barriers include technical, sanitary and phytosanitary regulations which imports must meet before they are allowed access to the EU market. EU rules in these areas must meet the criteria set out in the WTO Agreement on Sanitary and Phytosanitary Measures and the WTO Agreement on Technical Barriers to Trade. The increasingly stringent standards set by the private sector in the area of certification and traceability are particularly a problem for the poorest countries.

Export subsidies

Export subsidies, also called export refunds, have been an integral part of the EU’s CAP since its foundation. Export subsidies are paid to firms exporting food and agricultural products to countries outside the EU. Their main purpose is to enable agricultural products to be marketed in these countries by bridging the gap between the relatively high prices that the traders would receive on the Community market and the lower price they would receive in the third country market. By varying the amount of export subsidy and thus regulating how attractive it is to export outside of the EU compared to selling inside the EU, the Commission can stabilise domestic supplies and thus domestic prices on the EU market. With the reduction in EU support prices since 1992 and, in particular, higher world market prices in recent years, expenditure on export subsidies has shrunk considerably although they remain part of the EU's toolbox for market management when needed.

Domestic support

EU farmers receive direct payments in two ways: as the Single Farm Payment financed from the European Agricultural Guarantee Fund (called Pillar 1 of the CAP), and as agri-environment payments and payments for farming in less favoured areas from the European Agricultural Rural Development Fund (known as Pillar II of the CAP). In most cases these payment are decoupled from production, i.e. the amount of the payment is linked to the land area of the farm but is not influenced by how much the farmer produces or, indeed, in the case of Pillar 1 payments, whether he or she produces anything at all.

Single Farm Payment

This payment originated as compensation to farmers for the reductions in support prices since 1992. Since the Mid Term Review in 2003, these payments are now decoupled from production. EU Member States have the flexibility to make these payments on a regional flat-rate basis or on a historic basis or some combination of these two principles. To be eligible to receive these payments, farms must have a minimum size and farmers must observe a range of statutory standards with respect to the environment, food safety and animal welfare as well as keep their land in good agricultural and environmental condition. Farmers in the new Member States receive payments under a similar scheme, the Single Payment Scheme. Because the payments received by each Member State are based either on historic receipts or on amounts negotiated on accession, there are considerable differences in the payments per hectare across the EU. Development organisation argue that, even though these payments no longer are linked to production, their sheer size and the fact that farmers can use them to cross-subsidise their production means that they can maintain levels of output higher than they otherwise could, thus competing unfairly with farrmers in developing countries. EU farmers argue that these payments recognise the higher environmental, animal welfare and food safety standards required of farmers in the EU, and thus do no more than level the playing field.

Other direct payments

The main payments made under Pillar 2, the Rural Development pillar of the CAP, are agri-environment payments and payments to maintain farming in marginal and less favoured areas. On balance, it is likely that agri-environment payments reduce production because the conditions attached usually require farmers to minimise or restrict the use of inputs. Payments to farmers in less favoured areas prevent land abandonment and thus ae likely to lead to higher levels of production than would be the case in their absence.

Links:

WTO Tariff Analysis Online
This page gives access to a variety of WTO tariff databases. These include the Tariff Download Facility which allows users to make a basic search for bound, applied and preferential tariffs, and the Tariff Analysis Online database which provides access to more sophisticated searches.

USDA WTO tariff levels dataset   
This database contains data on tariff protection for agriculture for the majority of World Trade Organization (WTO) members organised into three main categories:  WTO bound tariffs, tariff rate quotas and applied tariffs.

European Commission Export Helpdesk for Developing Countries 
This on-line service allows users to look up information on the particular tariff applicable to an imported product by exporter, as well as to gather information on trade flows and other relevant information.

OECD Producer and Consumer Support Estimates database
OECD has developed a set of indicators specifically to measure and evaluate the level and composition of government support to agriculture for the OECD member countries.

Resources:

Action Aid - The Agreement on Agriculture - Market Access: Free Trade Rhetoric and Protectionist Realities (PDF), 2002
An excellent primer on continuing barriers to the agricultural exports of developing countries

World Bank - Market Access: Agricultural Policy Reform and Developing Countries (PDF), 2003
This Trade Note discusses the scale of market access barriers in agriculture today, with suggestions what to do about them.

OECD, European Union - Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2007
This is the extract concerning the EU from the 2007 OECD Monitoring and Evaluation of Agricultural Support report, and appears to be the latest available extract as far as the EU is concerned.