Implications of a Doha Round outcome for EU agricultural policy

Would a successful Doha Round agreement on agriculture mean that further changes to the CAP market regimes would be required? The EU took a different negotiating approach in the Doha Round, in that it tried to avoid being put on the defensive in the negotiations and wanted to give itself some space to make offensive demands, e.g. protection for geographical indications. The 2003 and subsequent CAP reforms thus lowered support prices further and, importantly, through decoupling direct payments, shifted these from the blue box to the green box. Higher world market prices have also reduced its dependence on export subsidies. Thus the main impact of a Doha Round agreement would be lower tariffs. However, a Doha agreement would also lock in the value of the reforms that have been already taken, and the certainty value of these bindings would be an important gain to the EU's trading partners.

While some important issues remain outstanding in the agricultural negotiations, enough is known from the most recent draft of the modalities to be able to make an educated guess as to the likely implications for the EU. How reform of EU agricultural policy would affect developing countries is discussed in another topic.

Export subsidies

Export subsidies would be phased out. Export subsidies no longer play the role of a permanent crutch to support internal EU producer prices, but they have been a valuable instrument in helping the EU to manage temporary situations of over-supply, as most recently in the dairy and pigmeat markets. The loss of export subsidies will make the management of internal volatility on EU markets more difficult to manage (while preventing the EU from exporting these problems to the rest of the world) but this is something that the EU can learn to live with. More problematic would be the loss of the 'non-Annex 1' export refunds. These are paid on the export of processed foods to compensate for the higher cost of using EU-sourced agricultural raw material ingredients, particularly milk, sugar and cereals. The loss of these refunds would put some sections of the EU food processing sector in difficulty in competing on export markets. They would likely seek a further reduction in support prices to compensate, or else preferential access to low-priced raw material.

An important issue is whether the EU unilaterally will agree to abandon the use of export refunds as part of the post-CAP 2013 package now under negotiation without waiting for the outcome of the Doha Round negotiations.

Domestic support

The draft modalities stipluate reductions in trade-distorting support in both the amber and blue boxes as well as in overall trade-distorting support. In general, projections indicate that the CAP reforms already undertaken should allow the EU to meet these targets, albeit with little room to spare. However, the flexibilities involved in the WTO definition of trade-distorting support (particularly the way the market price support component is calculated) mean that a Doha Round agreement would probably not require further changes to the EU's support regime. This conclusion depends on the classification of the EU's Single Farm Payment as a green box payment, something which might be challenged by another WTO Member if the Doha Round broke down.

Market access

The draft modalities stipulate that agricultural tariff reductions will take place according to a tiered formula, with the highest tariffs being reduced by the most. For the EU, this could require large reductions in a range of tariffs, with particular impacts for beef, dairy products, sugar and poultry. However, the modalities also provide for flexibilities in the form of designating up to 4 per cent of agricultural tariff lines as sensitive.Countries will be entitled to reduce their sensitive product tariffs by a smaller proportion than the standard tiered formula, in return for an expansion in tariff quotas for those sensitive products.

How much additional market access will be provided as a result of a Doha Round agreement therefore depends on two things: which tariff lines the EU designates as sensitive, and the extent to which some of the EU tariff currently is redundant in terms of providing protection for higher EU internal prices. For example, for cereals for which the EU is an exporter internal EU prices are now largely set by world market prices. The world price plus the EU tariff is well above the market price which EU grain farmers receive, so there could be a substantial reduction in this tariff without any effect on EU market prices.

From a policy coherence perspective, the objective could be to maximise the amount of real additional market access provided to developing countries by a Doha Round agreement. This would mean seeking larger reductions in tariffs where developing countries have demonstrated supply capacity (sugar, rice, fruits and vegetables, beef, poultry) rather than, say, dairy products. There is room for controversy in the selection of any of these products. In the case of sugar, rice and fruits and vegetables, a significant proportion of EU imports from developing countries already enter duty-free under preferential arrangements, so that further liberalisation of tariffs on these products will hurt the poorer developing countries (the cases of sugar and bananas are discussed in more detail). In the case of beef, the largest beneficiary is likely to be Brazil, and fears that further incentivising beef production will encourage further deforestation and lead to higher global carbon emissions.In the case of poultry, production even in developing countries now takes place in highly-industrialised units where animal welfare standards (for example, minimum cage size) may be lower than in the EU and where the impacts on poverty reduction may be limited.

The lesson to be learned is that it is foolish to try to use trade policy to achieve particular development objectives both because trade policy is a second-best instrument and thus more costly and because trade policy inevitably creates winners and losers. A more productive approach is to start from a systemic perspective and how EU agricultural trade policy can best contribute to creating a robust, rules-based and open trading system which effectively contributes to food security goals. The EU should adopt an agricultural trade policy with moderate levels of protection and which avoids the highly distorting effects of tariff peaks, based on the principle that both imports and exports contribute to the improved welfare of EU citizens. This would also be its best contribution to policy coherence for development.

Resources:

Baltzer, K., Jensen, H. and Lind, K., Trade Liberalisation in the Doha Round A Global and Danish Perspective (PDF), University of Copenhagen Institute of Food and Resource Economics, 2009
Provides a qualitative and numerical analysis of a potential Doha agreement of multilateral trade liberalisation based on the July 2008 WTO modalities, provding results for the EU as a whole and for the Danish economy in particular.

Josling, T and Swinbank, A., European Union: Shadow WTO agricultural domestic support notifications (PDF), International Food Policy Research Institute, 2008
Projects forward the components of EU domestic support until 2013/14 based on forecasts of future production and estimates of policy parameters

Abler, D. and Blandford, D., Implications of a Doha Agreement for Agricultural Policies in the European Union (PDF), 2007.
Analyses the implications of the provisions of a Doha agreement for agricultural policies in the European Union based on the PEATSim model (Partial Equilibrium Agricultural Trade Simulator) developed by the Pennsylvania State University in collaboration with the Economic Research Service of the U.S. Department of Agriculture.