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MEMO/02/296

Brussels, 16 December 2002

Facts and figures on EU Trade in agricultural products: open to trade, open to developing countries

    The EU and trade in agricultural products

The EU is open to trade in farm products

Since the conclusion of the last round of World Trade Organisation (WTO) trade negotiations, so-called Uruguay Round in 1995, the EU has continuously opened up its market to imports of agricultural products from third countries. The EU has respected the commitments adopted in 1995 both to reduce the level of tariff as well as to reduce the level of domestic and export support afforded to agricultural products. In addition, the EU has concluded a number of bilateral free trade agreements as well as preferential trade arrangements, which have substantially benefited third countries and in particular developing countries.

Some of the most salient features of the EU trade in agricultural products include:

  • The EU is the world largest importer of agricultural goods - $60bn in 2001(1).

  • The EU is the world largest importer of farm products from developing countries: it imports from developing countries as much as the US, Japan, Canada, Australia and New Zealand taken together.

      Table 1. Comparison of agricultural imports by developed countries in 2001

Countries

2001 ImportsRank
EU37 7611
US22 4122
Japan12 3653
Canada2 3044
Australia9455

Source: COMEXT for EU, COMTRADE for other countries.

  • The EU absorbs around 85% of Africa's agricultural exports and 45% of Latin America's.

  • The EU is the largest importer of agricultural products from poorest countries (Least Developed Countries LDCs).

  • The EU is a net importer of agricultural products. The EU imported $6,5bn more agricultural products than it exported in 2001. In contrast, the US is a net agricultural exporter.

    Trade in agricultural products and developing countries

  • A recent World Bank report found that a key factor distinguishing developing countries which have grown in recent years from those which have not is the extent to which they have managed to break into markets for manufactured goods. It is in these industrial sectors that the basis for growth is fostered.

  • From being primarily commodity exporters, in recent years developing countries have been progressively increasing their exports of non-agricultural goods. Today at least 70% of developing countries exports consist of manufactured goods. Textiles and clothing (12%) have become more important than trade in agricultural products (around 10% of total trade by developing countries).

  • The Uruguay Round did provide important new opportunities for developing countries. WTO statistics show that developing countries accounted for almost half ($47bn) of the nearly $100bn growth in agricultural trade between 1993 and 1998. Their exports increased by 72% in that period from $120bn to $167bn.

  • The EU has been an important source of this growth. Since the conclusion of the Uruguay Round agricultural imports from developing countries to the EU have shown increasing growth, with annual growth rates of 5% between 1996-2001 compared to 3% between 1990-95.

  • In the WTO, developing countries are allowed to maintain very significant levels of tariff protection. All members of the WTO agreed to bind their tariffs after the Uruguay Round. It is this basic GATT principle which assures predictability for all exporters and helps to avoid trade wars.

  • The bound tariffs of developing countries are very high for agricultural products. They exceed an average 100% in India and Tunisia, are higher than 80% in Colombia, Bangladesh and Romania and more than 30% in Argentina and Brazil, who are very competitive on agricultural trade. This gives them a wide margin for manoeuvre: even if their applied tariffs are lower, they can always raise them up to the level of their consolidated tariffs. The effectively applied tariffs of developing countries are lower than their bound rates, but nevertheless very high, compared to those in industrialised countries, average 65% in Egypt, 32% in Thailand, over 25% in Mali or Bangladesh.

  • As to domestic support, the Uruguay Round granted flexibility to developing countries to subsidise their agriculture. The agreement provides a ceiling inside which subsidisation is protected from reductions. These subsidies can amount up to 10% of the value of production twice the level applies to industrialised countries. Up to this level support is not subject to reduction in the WTO.

  • Current negotiations are conducted on the basis of the bound tariff levels, which puts developing countries in an advantageous position, as they have consolidated their tariffs at a high level.

  • Food security is a structural problem in many developing countries, that does not stem only from unfair trade practices, but it is primarily the result of poverty and lack of resources. Trade can contribute positively or negatively depending on the conditions prevailing in each country and on how far multilateral rules take these issues into consideration. Addressing food security within the Doha Development Agenda is therefore essential.

Recognising the need for further flexibilities for developing countries, the Commission proposes the creation of a 'food security box' that would allow developing countries to:

Undertake less market liberalisation and at a slower pace. Implementation period would be 10 years for developing countries and 6 years for developed countries.

  • Protect their markets for sensitive food products by using a special safeguard instrument.

  • Have more flexibility in supporting their agricultural sectors for food security and development reasons.

      Opening Markets

The main elements of market access are the level of the tariffs, the existence of tariff peaks and tariff escalation and the existence of quotas. The performance of the EU regarding all these elements leaves no doubt about the EU's commitment to freer trade in farm products:

    Tariffs

  • EU tariffs can only be properly analysed if the effect of preferential access for developing countries is taken into account. Of all industrialised countries, the EU gives by far the highest level of preferential access to developing countries.

  • The EU has continued to reduce its tariffs since the Uruguay Round. The USA say that our average tariff is 30%? We say it is approximately three times lower in real terms.

  • A total of 142 developing countries benefit from the extensive EU preferences under the recently enhanced "General System of Preferences" (GSP). In addition, 77 Africa Caribbean and Pacific countries (ACPs) also benefit from preferential access to the EU market (more than 80% of African exports enter the EU at preferential or zero rates). Furthermore, the EU has concluded free trade agreements with a number of developing countries (this is the case for Mexico, South Africa and Mediterranean countries). This preferential access is reflected in the much higher level of exports from these countries to the EU, compared to other Quad members (see table 1).

  • The EU has also unilaterally reduced the tariffs applied to the poorest countries. The 'Everything But Arms' initiative gives the 49 poorest countries duty and quota free access to the EU market, including for such sensitive products as beef, dairy products, fruit and vegetables. This initiative has already enabled these countries to export goods that they had previously exported only in limited quantities or not at all (e.g. exports of sugar by Sudan and tomatoes by Senegal).

    Tariff peaks

  • The percentage of total agricultural tariff lines subjected to tariff peaks is around 10%, covering a limited number of farm products such as beef and lamb sectors, dairy products and sugar. In addition, it is important to underline that the majority of developing countries are not subject to these peaks in the Community market due to their preferential access (Generalised System of Preferences, Everything but Arms, Cotonou Agreement with Africa, Caribbean and Pacific countries, Mediterranean agreements etc).

    Tariff escalation

  • This is a real problem for development, because tariff escalation in agricultural processed products encourages developing countries to export their raw commodities without adding any value. This is particularly the case for least developed countries. It is therefore very difficult to exploit the dynamics of industrialisation and development that accompany the processing of agricultural commodities. For these poorest countries, tariff escalation in the EU market is not a problem since, given the Everything But Arms initiative, they face no tariffs.

  • The EU is not a great user of tariff escalation, ie does not have a tariff structure that is very progressive. In comparison, Japan and Canada are much more progressive.

  • Tariff escalation is also very high in developing countries, in particular in Egypt and India. This is particularly damaging as 40% of developing countries' exports are to other developing countries. In Asia, countries like China, Malaysia or the Philippines suffer directly from the very high levels of tariff escalation in some Asian markets.

  • Trade in agro-food products is one of the most dynamic areas of world trade. In the long term, it is therefore, important to reduce tariff escalation. On products of particular interest to developing countries.

    Quotas

  • A preliminary clarification is required: since the Uruguay Round, there are no quotas applied in agricultural trade, either by the EU or elsewhere. What 'quotas' now exist are the 'tariff rate quotas' which the EU, along with other WTO partners, uses in agriculture. This is not a quota. A quota restricts imports to a given quantity. Tariff rate quotas don't limit trade. On the contrary they provide for imports at a favourable tariff up to a given limit. Beyond these limits imports are unlimited, although they are subject to higher tariffs.

  • The EU has 87 tariff rate quotas. These tariff rate quotas (TRQs) were opened as a result of the Uruguay Round.

  • TRQs are managed by the European Commission on a fully transparent basis and are handled either on a "first come first served" basis (20 TRQs out of 87) or on the basis of licenses (44 TRQs) or on historic imports (22 TRQs).

  • Despite the EU clear and transparent rules on TRQ, third countries have only used around 67% of the TRQ each year.

  • Due to the EU's initiatives EBA and GSP and other preferential schemes (where no TRQ are applied), TRQs are simply not relevant to least developed countries and less relevant to many other developing countries. In some cases, such as bananas, a TRQ system has been put in place primarily to safeguard the interests of certain traditional exporters from developing countries.

    Non-tariff measures

  • Agricultural trade is often subject, in one way or another, to non tariff measures based on the desire to protect human health, bio-diversity or the environment. Although not all countries use these sort of measures they nevertheless directly affect at least 40% of trade in agricultural products.

  • According to a recent study (2), these measures particularly affect the exports of least developed countries: Almost 40% of their agricultural exports are affected, a figure that is twice as high as for industrialised countries or other developing countries. The EU is not by any means the main user of such measures. The biggest users are Latin America (90% of their agricultural imports are affected on average) Japan (80%), Australia and New Zealand (70%), the US (60%) and Canada (50%). Only 25% of EU imports are affected.

  • Many of these measures reflect real concerns about public health and the protection of the environment. However, their multiplication in some countries which are often the only users of certain measures, gives cause for concern.

But the EU is committed to a further opening of its agricultural market while proposing a fair burden sharing among all developed countries.

The Commission proposes(3):

  • Reduction in average tariff by 36% and a minimum of 15% per tariff line

  • All developed and advanced developing countries provide duty-free and quota-free access to their markets for all imports from the Least Developed Countries (LDCs) and commit to this at the Cancun ministerial conference

  • At least 50% of developed country farm imports from developing countries should enter duty free

  • A set of rules and disciplines should be defined to increase the transparency, reliability and security of the management of tariff rate quotas.

  • Developed countries reduce tariff escalation on products of particular interest to developing countries.

  • Substantial budgetary support on Trade Related Technical Assistance measures be continued.

  • To clarify the use of precautionary measures

      Reducing export support

    Export subsidies: the EU direction is clear

    • Export subsidies are the only form of export support that was transparently communicated, quantified and reduced at the Uruguay Round. The EU has abide by the commitments undertaken at the UR to reduce the level of export subsidies. EU export subsidies are becoming less and less significant, falling from 25% of the value of farm exports in 1992 to 5.2% in 2001. In 2001, export refund expenditure was €2.763 billions (compared to €10 billions in 1991).

    • The EU budgetary expenditure on export refunds has fallen from 29.5% of the value of exports in 1991, to 7.5% in 2001.

      Export subsidies: Demon or scapegoat?

    • It is important to note that the EU exports at world prices to global markets. However the EU does not set these prices. These are set by global market conditions, which, for food security crops, are dominated by a few big exporting developed countries, like the US, where they benefit from substantial deficiency payments and some Cairns countries.

    • The EU has reacted when there have been negative impacts resulting from its exports, as was the case of beef to West Africa in the 1980s. The EU stopped giving subsidies for certain products. However, experience shows that when the EU withdraws from a market it is frequently taken over by products from other developed countries which are equally competitive whether subsidised or not. So the development effect of removing export subsidies is exaggerated.

      Falling prices of commodities a long standing trend

    • The EU export support cannot be blamed for the decline in prices of commodities. Industrial and agricultural commodities have shown long term negative trends, almost since statistics were first collected. For example, since 1960 the index of prices of agricultural commodities has more than halved.

    • A number of economic analysis have shown that this long-term decline of commodity prices is primarily due to reduced transport costs, increased productivity and excess world production capacity, rather than subsidies - and has equally occurred in non-agricultural commodities. These declines are evident as much in commodities which are unsubsidised as in those which are subject to support. The commodity whose price fall has been most catastrophic in recent years coffee is a product for which no developed country provides subsidies.

    • An OECD report indicates that the elimination of subsidies would result in small changes in world crop and meat prices (in the range of 1-2%), although there could be more significant impacts in certain dairy prices.

      Other forms of support also impact on exports

    • Some WTO Members resort to state supported export credits for a significant part of their trade in order to capture market share in developing countries. According to a OECD study, the US used about $ 4 bn of officially supported export credits in 1998. These practices, which are highly trade distorting should be disciplined in the same way as other forms of export subsidiasation.

    • Moreover, the pricing practices of State Trading Enterprises that have been granted special rights or privileges from their Government should also be disciplined. These practices such as cross subsidiation and price pooling, which are not in accordance with commercial practices, should be addressed in the on-going WTO negotiations.

    • Practices based on the export of agricultural surpluses as non genuine food aid can also have a damaging impact on food security crops in developing countries. This is the case for the US which give more food aid when prices are low and less when prices are high.

    • Certain US prices for agricultural commodities are pushed to artificially low levels as a result of the deficiency payments system, which guarantees minimum revenue to farmers, regardless of the price at which they sold their goods. In addition, world prices are often directly derived from the artificially reduced US prices, the deficiency payments system thus has a greater effect of depressing world prices for many commodities than EU refunds.

The EU has complied with the commitments undertaken at the UR in terms of exports subsidies and it is committed to continued substantial reductions. However it believes that all support for export should be subject to disciplines.

The Commission proposes:

  • An average substantial cut in the volume of export subsidies and an average 45% cut in the level of budgetary outlays,

  • Total elimination of export refunds for certain key products (such as wheat, oilseeds, olive oil and tobacco) provided that no other form of export subsidisation is given for the products in question by other WTO Members

  • Treatment of all forms of export support on equal footing and in particular:

 - Subject export credits to strict disciplines

 - Food aid in kind to be provided only for well-defined vulnerable groups, emergencies and humanitarian crisis

 - Disciplines for state trading enterprises

    Reducing trade distorting domestic support

Domestic farm support: a political choice

  • Agricultural structures and efficiency vary in the world making some countries more efficient than others. Moreover, agricultural production has a tendency to fluctuate, producing market volatility and market failures. These are justifications for intervention and explain why most countries in the world have taken measures in some form to support the sector and to stabilise their agricultural markets. There are various methods of protection. Much depends on domestic agricultural structures such as the size and efficiency of farms and the availability of finance. In developing countries where budgets are limited, the use of border protection is a more common policy choice.

  • Agriculture and rural development play a key role in preventing depopulation and land abandonment in disadvantaged rural areas. Many such areas in Europe, the US, Japan, India and other countries at differing levels of development, would face major economic, social and environmental problems without an active agricultural policy.

  • According to a recent IMF study (4), the elimination of domestic support and of all tariffs for agriculture globally would favour large developed countries' producers and a few in some more advanced developing countries (notably the United States, Canada, Australia, New Zealand, Brazil, Argentina). Their gains would come at the cost of greater food insecurity and rural deprivation in many developing and developed countries. For developing countries, gains would be small and concentrated in Latin America and some Sub-Saharan African countries, where they would represent between 0.3 and 0.6 percent of GDP.

  • In Europe as well as in other countries, the challenges facing agriculture have increased. Food safety and environmental protection are increasingly high priority. Expectations of levels of food quality have also grown. Concerns extend to the protection of the rural environment, as well as the preservation of traditional landscapes. On its own, the market will fail to guarantee the provision of these desirable public goods, or at least provision will not be assured at an acceptable level.

  • For all of the above reasons the EU has made a policy choice to provide support for its farmers based on the objective of ensuring a sustainable agriculture in the Community, including not only economic, but social and environmental criteria as well.

    … but respectful of fair trade

  • The EU believes that support to its farmers is compatible with the commitment to substantially reducing trade-distorting domestic support, since not all forms of domestic support are trade distorting. Such support has been reduced significantly already and the present CAP mid term review (MTR) proposals would further reduce this to low levels. In reducing subsidies that are directly linked to production, the EU would pay more for non trade concerns such as maintaining and enhancing the rural environment, while ensuring minimum levels of income for farmers.

  • The recent decision by the European Council to cap EU expenditure for the next 10 years should be good news for third countries. Indeed, following enlargement, the same total payments will be shared out between more farmers (+56%) and across a larger farm  area (+29%).

  • This is in sharp contrast with the US Farm Bill which has increased the US agricultural expenditure by an estimated 70%.

      Table 3: Increase in farmers, agricultural area and farms after EU enlargement.

Farmers (000)

Agricultural Area (000 Ha)Farms (000)Average farm size Ha
10 Candidate countries3 80038 5005 2007
EU 156 800132 0007 00019
Increase56%29%74%

 Source: European Commission

    Domestic support: the EU and the US

  • Because of the very different structures of EU and US agricultural support, it is very difficult to compare the two. The main OECD indicator is the 'Producer Subsidy Equivalent (5)' (PSE), which for 2000 is $49 billion in the US and $90 billion in the EU. The OECD also calculates "per full time farmer" data: $20,000 in the US and $14,000 in the EU. A key overall indicator of support, which is less widely quoted, is the cost per capita to citizens of domestic farm policy (Total Support Estimate, TSE(6)). This is $338/year for the US, while the equivalent figure for the EU is $276/year.

  • The EU and US farm sectors produce almost the same total value of output: around $190 billion in 2000.

      The main differences between the EU and the US are:

  • amount of land: EU has only 134 million ha or one-third of the farmland (which is three times as productive) as the US, which has 425 million ha under farm activity.

  • number of farms: the agriculture sector in the EU supports over 7 million farmsthree and-a-half times the 2 million farms in the US.

  • Thus the overwhelming difference is in size and number of farms EU farms are more numerous and smaller. This is a key reasoning behind the EU Common Agricultural Policy, which has an important social function in supporting small rural communities.

Table 3: US-EU Farming structure

US

EU
Production (farm gate value)OECD oecd

Number of farms ("holdings"; 1996)es

Farmland ("UAA" 1997)es

Average size of holding

Total Support Estimate TSE (2000)oecd

TSE per capita oecd

TSE as %GDP oecd

Producer Support Estimate PSE (2000) oecd

PSE / full time farmer equivalent oecd

$ 190 billion

2 058 000 farms

425 million ha

207 ha

$ 92.3 billion

$ 338

0.92 %

$ 49.0 billion

$ 20 000 /farmer

$ 197 billion

7 370 000 farms

134 million ha

18 ha

$ 103.5 billion

$ 276

1.32 %

$ 90.2 billion

$ 14 000 /farmer

Oecd = OECD figures for 2000; es = Eurostat figures

The Commission proposes:

  • A 55% reduction in the "amber box" support (the most trade distorting agricultural support), starting from the level of commitments made in the last round of negotiations,

  • Define non-product specific domestic support, as measures not related to the type or volume of production, prices, or the factors of production employed.

  • Eliminate the "de minimis" exception for developed countries (a loophole in the agreement on domestic support that allows some subsidies not to be counted. In one non EU developed country WTO Member, this could amount to $20 billion

    Some more facts

  • No dirty tarification!: Tarification (manner in which non-tariff measures (e.g. quotas) on agricultural products were transformed into tariffs and tariff quotas in the context of the UR) has been strongly criticised. Developed countries, including the EU, have been accused of artificially increasing their protection through this process, by basing their calculations on inflated world prices. Thus, the argument goes, the average reductions of 36% on tariffs achieved during the UR were at least partially offset by the preceding inflation of the level of protection.

    • The manner in which current tariffs were established is no longer at issue. The fact is that an exercise like the conversion of non-tariff barriers to tariffs will always attract criticism, as it necessitates a choice which can only ever be ad-hoc. The key point is that the trading system which emerged is far more transparent and less distorting than that which preceded it. Like all other trading partners, the EU now only applies tariffs or tariff rate quotas at its borders. In addition, the EU has fully respected its commitment to tarification and reduction. Indeed, if this had not been the case, they could have been pursued within the Dispute Resolution procedure of the WTO, as the tarification procedure was an integral part of the Uruguay Round agreements. However no panel has ever been initiated on this issue.

    • Domestic support to agriculture does not necessarily mean higher food prices for consumers: the part of the agricultural raw material in the retail price of finished food products is between 15% and 20%. It diminishes as the level of processing increases. A good illustration of a basket of agricultural products is a burger containing beef, wheat, dairy products, sugar and vegetables. The price of a certain standard burger where the ingredients are purchased on local markets was recently published in The Economist magazine. The price on the so-called protected and high priced € area was $2.37 and in the supposedly more liberal US, a more expensive $2.49!

    • Farming is no privileged sector in the EU: the average income in the agricultural sector (including fishing and forestry) in the EU was €14,870 in 1998 compared with €28,245 for a services employee and €33,753 for a general industrial worker. Even if an average for agricultural income includes a wider variation than for other sectors (as much depends on type and size of farm), as a general rule, these figures show that they are by no means privileged. Furthermore, direct aids received by farmers are a compensation for the changes in policy imposed on them which otherwise would have drastically reduced their incomes. In the future, these payments will be made subject to strict compliance with obligations such as effective management of the landscape and environmental protection.

    • EU cows receive more than $2 a day: this argument distracts the attention from the key issue at stake: the question is not how much a country supports its farming community, but rather what part of this support is trade-distorting. Putting a large percentage of Europe's dairy farmers out of a job would not provide food for the millions in Africa who face food crisis, nor would it increase potential for poor farmers seeking to export to our market! The EU system is aimed at protecting smaller dairy farmers in peripheral regions. Were we to do away with support for the dairy industry the result would be a consolidation of intensive farming in the most productive parts of the union and bankruptcy for the smaller dairy farmers. No immediate benefit for third countries;

    • To be noted that the European Union and its member countries give more development aid to developing countries than all other regions of the world put together. While ensuring coherence between development policies and agricultural policies, it is important to distinguish both from the trade distorting effects that agricultural policies may have. One of the main effects of the reform of the common agricultural policy proposed by the Commission is to reduce its trade-distorting elements.

      (1)Source from Comext

      (2)Figures in this section come from a study undertaken by CEPII A first aassessment of environment-related trade barriers, Fontagné et all, 2001, CEPII Working Paoer, 2001-10.

      (3)Still subject to approval by the EU Council of Ministers.

      (4)IMF World Economic Outlook, September 2002 How do Industrial country agricultural policies affect developing countries ?

      (5)According to the OECD the PSE is an indicator of the value of gross transfers from consumers and taxpayers to agricultural producers due to policy measures regardless of their objectives or impacts. (OECD,1999). There are two components. Firstly the market price support is calculated as the difference between the countrys commodity price and the price on the world market multiplied by the value. This is considered to be paid by the consumer. To this is added the direct payments, paid by the taxpayer. The PSE was created to facilitate comparisons of support between countries. However it is often criticised as direct payments made by certain OECD members are not included.

      (6)Total Support Estimate includes some measures like marketing assistance and all types of food aid, which are used to a great extent in the US to benefit farmers, but are excluded from the PSE calculation of farm support.


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