REFORM OF THE EUROPEAN UNION'S COMMON AGRICULTURAL POLICY (CAP)
By Paul Goodison
Summarised by Sylvester Madzvova

1. Overview of the CAP Reform (Agenda 2000 reforms)

The process of reforming the European Union's Common Agricultural Policy (CAP) has now been underway since 1993. Progress varies greatly between sectors, with the process of reform being most advanced in the cereals sector, and not yet underway in the sugar sector. Important factors influencing this process of reform include:
· internal budgetary pressures;
· the challenge of enlargement;
· the EU's WTO commitments and WTO rules;
· growing pressures from consumer and environmental groups over the safety and sustainability of the current European pattern of agriculture;
· on-going pressures from farming sector lobbies.

Traditionally the CAP was based on the maintenance of high producer prices, either through the establishment of minimum level intervention prices or through the establishment of minimum grower price schemes. High prices served to stimulate production and suppress domestic demand, leading to the emergence of high priced surplus production, which could only be stored or sold, on international markets with the benefit of substantial levels of public funding. In 1991, the decision was made that reform was essential since the financial burden of storage and disposal of EU surplus production was getting out of hand. The impending conclusion of the Uruguay Round of multilateral trade negotiations was also a factor in making EU policy makers "bite the bullet" of reform.

Since 1992 across a range of sectors, the EU has begun to shift from systems of price support to systems of direct aid to farmers. This is intended to reduce the internal price of EU agricultural products, without undermining farm incomes.

The plan

Phase 1: Short Term
Reduce prices whilst increasing direct aid to farmers so as to close the gap between EU and World Market prices
Phase 2: Long Term
Direct aid payments to farmers reduce the real value of direct aid so as to encourage more efficient cropping patterns and hence improved competitiveness of basic agricultural production and gradually move over to non-product specific direct aid payments to farmers.

The ultimate aim of this reform process is to create a situation where internal EU prices are brought into line with international prices. If the envisaged transition can be brought about, this will result in a fundamental shift in the orientation of European agriculture. European agricultural production will no longer be orientated towards ensuring European food security; with incidental surpluses being exported with the benefit of publicly financed export refunds. Instead European agriculture will be geared towards providing primary agricultural inputs into a European food and drinks industry orientated towards competitively serving world markets. Virtually all direct payments to EU farmers introduced since 1992, in compensation for price reductions, are compatible with WTO "green box" or "blue box" provisions. As such these measures are exempt from commitments made to reduce trade-distorting support to domestic agricultural production. This is why the EU puts pressure in the WTO'S maintenance of the 'blue box' provisions.

2. Impact of the CAP on the Development of Value Added Food Processing Industries in Southern Africa

The paper argues that if Southern African economies (particularly outside of South Africa) are to develop in ways which are sustainable and poverty focused, then industries will need to be developed which increasingly add value to competitively produced local raw materials for national, regional and international markets. This, it is felt, will reduce dependence on volatile international raw material markets and create a buoyant local demand for primary agricultural raw materials. This in turn it is felt will spread wealth more broadly throughout the society, with benefits particularly for the rural poor. Developing competitive local value added food product industries to serve, initially, national and regional markets, could then provide the basis for greater international competitiveness and expand further the market opportunities for local agricultural producers. However, in the context of moves towards trade liberalisation, the study note that in many of these areas CAP distortions are undermining opportunities for the development of agriculturally based value added processing activities. This applies both to traditional patterns of CAP distortions and the new patterns of CAP distortions.

The text explores ways in which CAP market management regimes have impacted on, and are impacting on, the development of value added food processing industries (cereal, sugar and beef) in the Southern African region, by looking at:

· its impact on EU import regimes for value added food products;
· the impact on the "competitiveness" of EU value added food product exports, despite the high prices of basic agricultural raw materials in the EU;
Impact on Market Access: The Case of Sugar Based Products

The impact which CAP distortions of primary agricultural products have on downstream value added processing industries in the sugar sector, a sector in which Southern Africa has a clear competitive advantage. The EU not only applies high rates of duties on raw sugar and white sugar but also the sugar content of value added food products. This additional duty is based on the sugar content of the product and the prevailing duty applicable to white sugar. This system is comprehensive in its coverage and ensures that the price difference between EU sugar and world market sugar does not undermine the competitiveness of European food and drinks production for the domestic EU market. The system prevents competitive low cost sugar producers from moving down stream and developing the production of value added, sugar based, food products for export to the EU market. It effectively prevents the exploitation of comparative advantage and locks Southern African developing countries in to the export of raw sugar to the EU market.

The EU Export Regime for Value Added Food Products

In order to counter the adverse effects of high EU sugar prices on the competitiveness of EU sugar based manufacturers the EU has established a comprehensive system of export refunds on the sugar content of value added manufactured products The basic export refund on sugar seeks to bridge the gap between world market and EU sugar price. With EU exporters receiving export refunds on sugar based value added products destined for Southern African markets based on the difference between the world market and EU sugar price, this creates a bizarre situation where, manufacturers from a high cost sugar producer (the EU) are able to obtain sugar more cheaply than manufacturers in low cost sugar producers such as those in Southern Africa. This gives EU manufacturers/exporters an unfair advantage and prevents low cost Southern African sugar producers from exploiting the comparative advantage they have in competitively producing sugar and sugar based value added products, for local, regional and international markets.

The study sites the example of the impact of the EU export regime on the South African market price of sugar, it fell and the gap between world market priced sugar and the price of sugar for industrial users in South Africa widened markedly and began to effect the competitiveness of the South African sweets and chocolates industry. According to the South African Chocolate and Sweet Manufacturers Association (SACSMA), from a situation of virtually no imports of sweets and chocolates, imports rose quickly to account for 17% of the sugar confectionery market and 11% of the chocolate confectionery market by the year 2000. It has contributed to a 21% decline in consumption of domestically produced sweets and chocolates in South Africa between 1997 and 2000 and has had effect on production and employment in local chocolate and sweet manufacturers. EU policies in the sugar and dairy sectors under the CAP, impact on second stage processing industries in Southern Africa in three main ways:
· through their impact on world prices:
· though the provision of low cost raw material to export oriented production platforms;
· through the support extended to directly competing chocolate and sweet exports under the system of non-annex I export refunds.

The major problem in the South African sweets and chocolates sector is that the EU gives export refunds on the basis of the difference between an artificially low world market price and the high EU price, even when competitors in the markets, which EU exporters are seeking to penetrate, are paying sugar prices substantially above the world market price. At a minimum the EU should base the export refunds on the sugar content on the difference between the EU price and the locally prevailing sugar price.

Will The WTO Provide Relief To Non-Annex I Distortions?

Whether this broad trend continues will be determined by how the EU responds to emerging constraints on the provision of export refunds for non-annex I products and how Southern African policy makers respond to the challenges this will pose for their sugar based food product industries. However, the European Commission is now being urged to find ways of "overcoming" this WTO constraint. In this context the European Parliament has called for:

· removing certain items from the list of eligible products; using a system of refund certificates to allocate available funds;
· increasing the use of "inward processing arrangements", which allow the import of raw materials at world market prices for use in the production of exported products;
· the use of EU "C" sugar in the production of manufactured products destined for export.

Many Southern African countries have capacity constraints on customs services in effectively implementing complex tariff regimes since it seriously reduces the options open to Southern African governments in responding to the external impact of CAP aids on the trade in value added food products.

The study notes that it would be important to ensure that the EU respects not only the letter of WTO export refund constraints on non-annex I export refunds, but also the spirit of the commitment made to limit the availability of export refunds on the agricultural raw material content of exported manufactured products.

3. The effects of EU cereals sector reform on Southern Africa

There are 3 major ways in which the reform of the EU's cereals sector will impact on Southern Africa:

· through the effects of increased EU cereal exports, at or below world market prices, on the markets currently served by Southern African cereal producers;
· through the effect of cheaper EU cereals on the competitiveness of EU cereal based manufactured exports on markets currently served by Southern African producers of cereal based products;
· through the impact of cheaper EU cereal based animal feeds on the competitiveness of European meat exports on markets currently served by Southern African producers.

The impact this will have on Southern African markets for these products will depend crucially on the policy adopted by Southern African governments for the regulation of trade in these cereal products.

Currently, this is the subject of an intense debate in Southern Africa, with SADC governments holding widely divergent views on the intra-regional and external trade regime that should be established for wheat and wheat based products. In the light of these widely divergent views, a technical committee on wheat has been established under the auspices of the SADC Trade Negotiating Forum (TNF).

By 2007/08 the EU intervention price for wheat will be substantially below the projected world market price, while the intervention price for maize and barley will be at or below the world market price. This will mean that the actual internal EU market price for these cereals will be at or below the world market price. This means that EU cereal based food product manufacturers will have access to a range of cereals at or below the world market price. This is likely to further increase the competitiveness of EU cereal based value added food product exports, beyond that achieved by the current system of non-annex I export refunds.

As the process of reform spear-headed by the cereals sector is extended to other sectors, so across a growing range of food product exports, local Southern African companies will find themselves facing increased competition on local and regional markets from imports from the EU. Where this increased competition occurs, it will largely be the result of increased levels of direct aid to EU farmers, which will have allowed internal EU prices to be lowered, rather than being the result of any dramatic change in the underlying competitiveness of European systems of agricultural production and agro-processing. Important consequence of CAP distortions (both old and new) is that in a context of trade liberalisation, the artificial trade flows they can generate can come to fundamentally transform the relationship between local agricultural producers in developing countries and local agro-processing companies.

4. Implications of the beef regime on Southern Africa

The 1992 reform process in the beef sector involved a movement away from price support to increased levels of direct aid payments to farmers. This involved the payment of a wide variety of "premiums" to cattle farmers. The main premiums for beef production, the "suckler cow premium" and the "special premium for male animals" were increased in three steps in line with the reduction in the intervention price. The suckler and special premiums were tied to historical levels of production and were subject to maximum limits on the stocking density on farms, in order to encourage less intensive forms of beef farming. In addition a "de-seasonalisation premium", to encourage the slaughtering of cattle outside of the normal slaughter season was introduced, alongside an "extensification premium", intended to further encourage less intensive forms of beef production. This basic trajectory for reform was to be further extended under the Agenda 2000 series of CAP reforms, implemented from January 1st 2000.

There are two areas in which the EU beef regime affects the beef sector in Southern Africa:
· through its effects on exports to the EU of specified beef products;
· through its effects on local and regional markets for certain beef products arising from EU exports of beef with the benefit of export refunds.

In this new context, the distinct possibility arises that the orientation of agro-processing enterprises could shift from being primarily on the processing of locally produced meats for national and regional markets to the production of low cost meat products for national and regional markets utilising the cheapest sources of supply of meat from international markets.

If this fundamental shift occurs in the orientation of meat processing enterprises in Namibia, then Namibian cattle farmers are likely to face declining or stagnating prices for their cattle, as they are forced to compete with alternative sources of supply whose prices are determined not by costs of production but by ease of access to export subsidies or other forms of state aid. It should be noted that given the fragmentation of meat markets in Southern Africa this reorientation could occur with reference to certain components of the market and not others. The reform will reduce the price of beef by 20% between 2001 and 2003, the study notes that this will reduce the income earned by the Southern African beef exports to Europe under the beef protocol, it is noted however that although the EU prices will still be substantially above the world market price, it is unlikely though that it will be the final stage of the reform process of the beef sector.
The study noted the SADC-EU Agricultural Ministers consultation held in October 2001 in Windhoek, Namibia, as an opportunity provided for discussing with the EU the serious implications arising from the twin threats of declining EU prices and increasing costs of meeting EU hygiene standards. There was need to highlight for EU Agricultural Ministers the cost implications of meeting higher EU SPS standards against the background of declining EU beef prices. Against this background a discussion could be launched on:

a) how new SPS standards can be met without unduly increasing the unit cost of processing beef for export;
b) the need for greater duty free access for Southern African meat products, so as to allow the costs of meeting new SPS standards to be carried across a higher value of exports.

As prices in other sectors are brought down with the shift over to programmes of direct assistance and as WTO ceilings on export refunds become increasingly irrelevant (as EU prices are lowered to levels which no longer require export refund support), so agro-processing industries in Southern Africa could increasingly find their production, based on local procurement of agricultural raw materials, being undermined by companies in neighboring countries producing similar, more competitively priced products on the basis of subsidised imported raw materials. This is likely to pose a real dilemma for SADC governments as they seek to implement the SADC Trade Protocol. A dilemma, which will only partially be addressed by strict rules of origin.

It could create a situation where countries with no sugar production, (e.g. Namibia) import cheap EU sugar for use in the manufacture of sweets for export to the SACU markets, where production takes place on the basis of higher priced South African produced sugar. The study notes that a very real danger exists that a cycle could develop in Southern Africa in which the most competitive value added processing takes place not on the basis of locally produced agricultural raw materials but on the basis of imported raw materials procured at highly competitive prices, as result of the provision of increased levels of direct aid to farmers (or the continuation of export refunds) in the exporting country (most notably the EU). While these developments lie in the future, it raises policy issues which the SADC will have to get to grips with now, as on the one hand, it seeks to establish arrangements for the implementation of the SADC Trade Protocol in a range of agricultural sectors, and on the other hand, Southern African governments face the prospect of negotiating reciprocal preferential trade agreements with the EU in the coming years. Ì

APPROVAL OF COTONOU AT WTO MINISTERIAL NOW IN EC'S HANDS
Extracted from: BRIDGES Weekly Trade News Digest - Vol. 5, Number 34 9 October, 2001

After a 19-month blockage, the WTO Council for Trade in Goods (CTG) finally agreed at a 5 October meeting to commence the examination of a waiver request for the EC-African, Caribbean and Pacific (ACP) Partnership agreement, also known as the Cotonou Partnership Agreement. The examination will take place through a Working Party, clearing the way for a subsequent approval of Cotonou's predecessor, the Lomé Convention, at the approaching WTO Ministerial Conference currently scheduled to take place in Doha, Qatar on 9-13 November. In addition, Members addressed a further extension of transition periods for Trade- Related Investment Measures (TRIMs) as requested by several developing countries.

The new ACP-EC Cotonou Agreement Working Group must now consider the waiver request within a 90-day period starting 5 October. After the review, a report is to be submitted to the Ministerial Conference (see Article IX 3.b of the Marrakesh Agreement establishing the WTO) so that a decision could be taken to grant the waiver this year before the November Ministerial.

Central and Latin American banana producers Ecuador, Colombia, Honduras, Guatemala, and Panama have previously blocked the EC's request for a waiver due to differences over the EC's proposed new banana import regime (see BRIDGES Weekly, 20 March 2001, http://www.ictsd.org/html/weekly/20-03-2001/story5.htm), which reserves a banana quota exclusively for ACP countries. Although the ongoing banana dispute had recently been settled formally by the EC agreeing on Understandings on banana trade with Ecuador and the US, discussions persist on the exact provisions of the revised EC implementing legislation. Due to these remaining discrepancies, Latin American countries, as well as Canada and the US, announced they would raise these unresolved issues during the Working Party's review of the waiver request.

According to one WTO official, however, this step can be regarded as a real "breakthrough", taking into account that during the last CTG meeting before the WTO summer break, the Latin American complainant countries made clear their dissatisfaction with the information submitted by the EC on its draft legislation implementing the Understandings.

Gabon, on behalf of ACP countries, welcomed this decision but said that "its smile is a bitter one due to the many ups and downs during the consideration of the waiver request in the past 19 months." It was also reported by a WTO official that ACP countries were especially disappointed that in this case two groups of developing countries had been fighting against each other for an additional quota on 100,000 tons of bananas, although there had been no real dissent on the Cotonou agreement with all Members principally sharing the view that the
especially poor ACP countries "really deserve it."

As the Latin American countries expressed their readiness to tackle the Cotonou agreement during the examination procedure, much will now depend on the EC's ability to implement the new banana regime as agreed with Ecuador and other Members in order to shepherd the new EC-ACP arrangement through in Doha. Ì

AFRICA AT LARGE: EU LAUNCHES CAMPAIGN TO SALVAGE WORLD TRADE TALKS
By Paul Redfern
(The Nation (Kenya), 3. October 2001, Extracted from Africa News Update of 3 october, 2001)

The European Union appears to be offering concessions to African and Asian farmers in an effort to enable critical negotiations at next month's World Trade Organisation talks in Qatar to go ahead. But there is still some scepticism as to whether the talks will go ahead, particularly in the event of conflict in Afghanistan.

Entrenched differences of opinion between the EU, the United States and the developing countries still persist. But a leaked copy of the negotiating text revealed that the EU has proposed a reduced agenda focusing on industrial tariffs, agricultural subsidies and expanding trade in services.

There seems to be little hope of agreeing on a demand to link trade with labour standards and calls by the EU to include rules on the environment. Both proposals were opposed by developing countries, which are still reluctant to restart negotiations after the failed Seattle talks two years ago.

Tanzanian President Benjamin Mkapa said recently that developing countries would be unwilling to participate in a new round of trade talks until the inequities of previous rounds were addressed.

President Mkapa, in particular, criticised western countries for the enormous subsidies they spent on their farmers, an amount he said was roughly equivalent to the entire gross domestic product of sub-Saharan Africa.

He also criticised the West for continuing to restrict access to their markets, saying the existing rules made poor countries poorer and rich countries richer. Trade ministers met in Tanzania last month and agreed to press for easier access for African products at the talks and insist that industrialized countries fulfil their publicly agreed international obligations.

With the price of commodities such as coffee and cocoa continuing to stagnate on the world market, African countries desperately need to sell more of their produce in the West. The good news, however, is that the US too is keen on the talks in an effort
to try and prevent the world economy from further slumps.

"Launching a new round of trade liberalisation negotiations is essential to promoting global recovery, growth and development," said Robert Zoellick, the US trade representative. Ì

DIRECTOR'S COMMENT: THE EU AND SADC

The Maastricht Treaty of the European Union states as one of its objectives the integration of the developing countries in the world economy, and the fostering of their sustainable development. The relevant article (Article 130u) reads as follows.

That development cooperation which shall be complementary to the policies pursued by the Member States, fostering sustainable economic and social development of developing countries, and more particularly the most disadvantaged among them, a smooth and gradual integration of the developing countries into the world economy and campaigning against poverty in developing countries.

But judging by the Goodison article in this issue of the Bulletin, the EU is openly transgressing its own stated objective in relation to the developing countries. It is clear from the analysis presented by Goodison that the EU's "reformed" CAP (Common Agricultural Policy), instead of "fostering sustainable economic and social development" of the Southern African countries, may indeed emasculate their economies and the potential for their development. .

Goodison takes three commodities - sugar, cereals and beef - and has convincingly shown that the impact of the "reformed" CAP on the food processing industries in Southern Africa is to undermine the agricultural development and value-added industrialisation of the countries of the SADC region.

In relation, for example, to the sugar and dairy sectors, the new CAP regime will impact on second stage processing industries in Southern Africa in three main ways: One is through the impact on world price of sugar. This is artificially kept low as a result of the intervention strategy of the EU. The second is though the provision of low cost raw materials to export oriented production in Europe and in countries in the SADC region which European companies can use as their production platforms.

These two enable a non-sugar producing country, for example, Namibia, to import sugar at the lower world price (say from Mauritius) and produce sweets and confectionery, and compete against South African processing industries whose local price of sugar is higher than the world price. And, since Namibia may not have the required capital or processing technology to meet the high standards required by the SPS (Sanitary and Phyto-Sanitary Measures) of the WTO, it would not be surprising if it is some company in Europe that takes advantage of this facility and sets up plant in Namibia to compete directly with a South African company on the latter's own terrain. Namibia may get a small share of the added value, but the main beneficiary is Europe, and the region, as a whole, would have suffered.

A third way in which the new CAP undermines Southern African development potential is through the support extended to European companies under the system of non-annex I export refunds. These help to maintain the competitiveness of European companies directly competing in the chocolate and sweet market in Southern Africa. It is no wonder that, according to the South African Chocolate and Sweet Manufacturers Association (SACSMA), from a situation of virtually no imports of sweets and chocolates, imports in South Africa rose quickly to account for 17% of the sugar confectionery market and 11% of the chocolate confectionery market by the year 2000. It has contributed to a 21% decline in consumption of domestically produced sweets and chocolates in South Africa between 1997 and 2000. This, in turn, has spill-over effects on other industries, downstream and upstream, as well as on employment.

There is yet another, a fourth, way in which the Southern African producers of added value products from sugar would suffer from the tariff regimes in place in Europe. And this is through escalated tariffs that Europe (among other industrialised countries) imposes on manufactured products from the developing countries, an issue that continues to defy resolution under the WTO.

The real beneficiaries of CAP's reform are not Europe's partners in Africa but Europe itself. Under pressure from various quarters, including the WTO, the European Commission has been forced to review its agricultural policies, especially price support schemes. But instead of revising them, the EC has only replaced them with direct payments to farmers. These, conveniently, happen to be compatible with the "blue" and "green" boxes that Europe, with considerable acumen and foresight, was able to negotiate under the Agreement on Agriculture during the Uruguay Round of trade negotiations.

This enabled Pascal Lamy, the EU Trade Commissioner, to argue at a conference in the UK (the Oxford Farming Conference) on 4th January 2001, that the reform of CAP was both "necessary and achievable." He added, "The results already demonstrate that. We have moved progressively from market price support to direct payments, which are much less distortive of trade." Right? No, wrong. As Goodison's paper shows, the direct payments scheme is highly distortive of trade. Indeed, in the case of South Africa it has diverted local consumers from locally produced chocolates and confectionery to those imported from Europe.

No doubt, this will add to the WTO's statistics to show how "trade increases growth", and is "good" for the developing countries. But the reality on the ground shows a different scenario. Trade liberalisation certainly increases the volume of trade, almost as a law of nature so to speak, but different countries differently share the benefits of this growth. As the Swedish economist, Gunnar Myrdal, told us long ago (in the 1960s), competition and free trade does not level down uneven development; it reinforces it. If there is more evidence needed for this, then Paul Goodison's study on the impact of "reformed" CAP on the value-added industries in Southern Africa amply provides it. It is a pity some countries never learn from history.

The lesson of this story is that the SADC countries need to get its house in order. They need first to carry out proper impact studies of the agreements they sign with other countries before jumping into bed with the first suitor. South Africa has signed a separate Free Trade Agreement with the European Union even as the rest of the countries in the region have still not defined the geographic boundaries of the entity within the region that would negotiate the REPA (the Regional Economic Partnership Agreement) with the European Commission. This has created for SADC a vexing dilemma. How do they now negotiate with the European Commission - with or without South Africa?

There are some countries in the region that are too much in a hurry to liberalise their trading regimes. They may be mistaken in thinking that they would necessarily benefit from these trading regimes, or that this would help attract foreign capital. In their haste to liberalise, they may hurt the other countries in the region, and indeed, as Goodison's study shows, they may also hurt themselves. Or, as the Chinese say, they may lift a stone only to drop it on their own toes. Do not, the lesson is, be too liberal-minded about liberalisation; be careful.

Produced by the International South Group Network (ISGN) Director and Editor: Y. Tandon; Advisor on SEATINI: B. L. Das
Editorial Assistance: Helene Bank, Rosalina Muroyi and Raj Patel
For more information and subscriptions, contact SEATINI, Takura House, 67-69 Union Avenue, Harare, Zimbabwe, Tel: +263 4 792681, Ext. 255 & 276, Tel/Fax: +263 4 251648, Fax: +263 4 728695, email: seatini.zw@undp.org,Website: www.seatini.org

Produced by the International South Group Network