April 7th 2001


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Articles from this issue:

CANBERRA OBSERVED: BHP goes offshore as Australia goes broke and ill

EDITORIAL: IMF or UN intervention - what's the difference?

New Zealand sets up a People's Bank

BRITAIN: Foot and mouth: the real costs

Straws in the Wind

QUEENSLAND: Horan has the hardest job in Queensland

DRUGS: Beazley's drug policy: more of the same

THE MEDIA

LETTERS

TRADE: Europe's Common Agricultural Policy flourishes

ECONOMICS: The Aussie peso is dropping; but so is the penny

AS THE WORLD TURNS

COMMENT: Islam and the West

BOOKS: 'Damaged Men: The Precarious Lives of James McAuley and Harold Stewart', by Michael Ackland

BOOKS: 'LIFE IS A MIRACLE: An Essay Against Modern Superstition', by Wendell Berry

BOOKS: King's servant: 'David Collins: A Colonial Life', by John Currey

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TRADE:
Europe's Common Agricultural Policy flourishes


by Colin Teese

News Weekly, April 7, 2001
Despite the foot-and-mouth disease crisis, and the oft-repeated claims of Australian Agricultural Ministers, Europe remains committed to protecting its primary industries, as Colin Teese explains.

Reports are dribbling into the press that pressure is mounting within the European Union against the Common Agricultural Policy (CAP). The CAP is the mechanism by which the EU supports its farmers and farm industry. The possibility of the imminent demise of the CAP is a hoary old chestnut.

Successive generations of Australian trade negotiators (including this writer) have frequently been encouraged to believe that moderation of the subsidy impact of the CAP was a realistic possibility. All have been disappointed. It is interesting to note that in the latest flurry of excitement, the EU's Agricultural Commissioner himself has ruled out any such possibility. We should believe him.

For this reason alone, the policy' s impact and influence - both inside and beyond Europe - is perhaps worthy of closer examination.

The CAP is, of course, a key element in the process of European integration which commenced with the negotiation in 1956 of the Treaty of Rome. The original integrating unit was the European Economic Community (EEC). Initially the six founding member states of the EEC created a customs union, more or less consistent with the rules of the General Agreement on Tariffs and Trade (GATT).

By widening the scope of integration, the group became the European Community (EC) and is now the European Union. The original six member states of the EEC have been expanded, over time, to 13. Further extensions are in contemplation.

The EU is now a comprehensively empowered political and economic force, ranking, in all but military power, with the US. Like the US in international trade, the EU is able to make its own rules, and to over-ride the political tensions that practice sometimes causes.

The original customs union has grown into the most powerful trading bloc in the world. It comprises two essential elements.

On industrial tariffs, the original six member states agreed to phase in - over five years - zero tariffs with each other. Newly joining member states were similarly committed. Industrial goods from non-member states faced higher tariff barriers. This kind of discrimination against non-EEC member states could be maintained under GATT rules when associated with the creation of a customs union.

As to agricultural policy, the EEC member states accepted a Common Agricultural Policy. Precisely how and why the CAP emerged is a subject in its own right, beyond the scope of this article. For the moment, it is enough to observe that French farming interests played a dominant role in shaping CAP rules.

Unlike the agreements on tariffs, there was to be no phase-in period for the adoption of the CAP by incoming member states. Its provisions would apply, in full, from day one.

Essentially, the CAP provided that the EEC and its successors - the European Community and the European Union - would aim at self-sufficiency in food production. Except in time of shortage, imports would be confined to those products not produced within the Union.

The purpose of the policy was to create a sustainable and flourishing farm sector. Two separate elements of policy were needed to achieve this aim. First, farmers needed a sufficiently high income to keep them on the farm.

Declining world prices for farm produce have actively discouraged the practice of farming for the last 50 years. Worldwide, some kind of income support has been needed to make farming worthwhile. In Europe, the chosen form of assistance was for consumers within the customs union to pay more than world prices for food.

But higher domestic food prices could never have been maintained without denying consumers access to cheaper imports. The chosen mechanism of import control was the variable levy. Historically, this has been achieved by a sliding scale of duties. The lower the price at which the imports were offered, the higher would be the levy applied. Effectively, imports were excluded, unless the EU administration decided otherwise. The system has been modified, though it remains as an effective control over import competition.

The CAP has worked to sustain European agriculture and farmers, which, for all of the most influential member states, except Britain, has been important for social rather than economic reasons.

There was, however, to be an unwelcome side effect. Indiscriminate income support for farmers encouraged the more enterprising of them to increase production beyond the needs of the domestic market. Surpluses were generated, at first to nourish internal stockpiles, and later, inevitably, to be dumped on world markets, further depressing world prices.

And because consumers were not subsidising these surpluses, they had to be supported by the customs union's exchequer. Currently this subsidy element of stockpiles and surpluses is consuming about 80 per cent of the EU budget.

The adverse consequences of this policy have been the subject of endless discussion and sometimes negotiation, within the former GATT - and, more recently, within the World Trade Organisation. The Uruguay Round of trade negotiations in the early 1990s gave rise to a new agreement on agriculture, which was supposed to contain, and over time, moderate the subsidy impact of the CAP.

It did nothing of the sort. Farm income support in the EU (and also in the US and Japan) is now higher than ever and still rising.

What can we learn from a study of the CAP? Above all, if we want to keep our farm population on their farms, we cannot expect them to survive at world prices. Maintaining farmers, and farm production, entails some form of income support to shield farmers from the worst effects of destructive price competition.

The world price for any product, farm or otherwise, is in effect a dumped price. And consumers should not, in any sense, be encouraged to believe that they are either economic or efficient. Ultimately, cheap food has to be paid for in other ways.

Britain and Europe are finding this out with the outbreak and spread of animal disease by adopting practices which seemed at first glance to be low-cost, but in the end turned out to be very expensive.

And so it may be with some of our practices. Cost price pressures could be forcing our farmers into practices which may be unsustainable as to their environmental and other consequences. In the end the community will have to pay to fix these problems. In the end, cheap food will, once again, come at a very high price.

Sustainable and profitable agriculture in Australia requires a measure of income support for farmers. It also requires that domestic consumers pay a reasonable price for farm output.

Precisely how this might be done is a subject for detailed discussion. One thing, however, can be said for certain. As in Europe, and, for that matter, the United States and elsewhere, it cannot be achieved with an "open door" policy on imports. Nor can it be possible in the context of what is now called National Competition Policy.

However we decide to solve our problems, the general philosophy which lies behind the Common Agricultural Policy could well be a foundation on which to rebuild an income support policy for the Australian farmers.




























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