Europe tackles agriculture subsidies

July 8, 2003

Free Market Foundation

Last week the European Union (EU) took a step toward reform of its Common Agricultural Policy, or CAP. Cutting farm subsidies and tariffs in developed countries has been a major obstacle to freer world trade in the Doha negotiation round of the World Trade Organisation.

Agricultural protectionism is costly for consumers and encourages inefficiencies in agriculture:

Europe’s CAP costs $50 billion a year, half the entire European Union budget; the French alone receive more than $10 billion a year from the EU to keep unproductive farmers in business.

CAP subsidies account for 35 percent of the entire value of European farm production, about double the share of America’s.

Due to market distortions, the price of sugar in Europe, for example, is two and a half times the prevailing world price.

Under the so-called “radical reforms,” the EU won’t pay subsidies based on what farmers produce.

The EU will pay farmers just as much, but instead will pay them for things like protecting the environment, keeping the cows well groomed and following food safety rules.

Under the old system, the EU guaranteed prices to farmers and bought directly whatever couldn’t be sold on the market and it restricted imports.

The reform removes the incentive for overproduction that so distorts world agricultural markets and punishes in particular the developing world.

However, the French managed to impose an opt-out clause that lets a country maintain the current payment-for-production if it is necessary to keep farmers in business. Which may cancel out the “reforms”.

Source: Editorial, French De-Capitation, Wall Street Journal, June 30, 2003.

For text http://online.wsj.com/article/0,,SB105693742017810200,00.html
For more on International Trade Barriers http://www.ncpa.org/iss/tra/

FMF Policy Bulletin/1 July 2003