Economics Department

Economic survey of the European Union 2007: Reforming agricultural and trade support

 

Contents | Executive summary | How to obtain this publication | Additional info

The following OECD assessment and recommendations summarise chapter 6 of the Economic survey of the European Union published on 20 September 2007.

 

Contents                                                                                                                           

Trade barriers on manufactured goods, except for some processed food products, are relatively low and the liberalisation of the internal market in services will also open this market further to non-EU suppliers. The European Union grants extensive preferential access to less developed and African countries, and is a lead donor of aid for trade. The Union is an active member of the WTO and its first stated priority is to maintain the strength of the multilateral system of trading rules. The EU should continue to take a leadership role in the Doha round of trade negotiations by acting together with the other main trade partners to reduce farm subsidies and open up its markets. While support to EU farmers has declined slightly over the past five years and has become less production distorting by moving away from market price support, it remains above the average for the rest of the OECD and well above the most free-trading countries. From the focus of the economic effects of agricultural policy, as is the case for many countries, further reform is desirable because of the economic benefits resulting for Europeans. However, the common agricultural policy (CAP) has many objectives, including competitiveness of food production, protection of the environment, maintenance of the population in rural areas and underpinning farm incomes. But it has some negative side-effects. While imports from the poorest countries have been liberalised, import tariffs continue to reduce export opportunities for other countries. Consumers pay more for certain types of food, and it traps resources in a low productivity sector. There are many factors that contribute to more intensive farming, and to the extent that the CAP also encourages intensification it can cause environmental harm – although the CAP also includes policies that aim to mitigate the adverse environmental consequences.

 

Support to agriculture is above the OECD average

1. Consists of the members of the EU at each date, so the number of countries changes over time. The EU19 consists of the EU members who are also members of the OECD.
Source: OECD, PSE/CSE database.

 

The most significant reform has been the introduction of the single farm payment in 2003. It replaced many of the previous payments that were tied to production, herd size or planted area. Farmers can choose to produce whatever they wish (with some restrictions) or indeed to produce nothing at all so long as they keep their farmland in good agricultural condition. However, the CAP still includes elements that provide incentives to produce. Decoupling is only partial for some commodities while several countries have chosen to keep significant portions of payments tied to production. Second, support for certain products, in particular through import tariffs, still remains outside the single farm payment. Moreover, while de-linked payments are substantially less distorting than the pre-2003 system, they do not completely eliminate the incentive to produce – although the magnitude of any remaining production distortions is difficult to assess. In addition, market price support remains high for some commodities through high tariffs, especially meat, milk and sugar, and about half of estimated aid to farmers (based on the Producer Support Estimate) is still of the most market-distorting type. Export subsidies have been reduced considerably but remain extensive by international standards. The EU accounts for 90% of all WTO member states’ notified export subsidies, although this measure captures only a limited portion of total export support throughout the world and EU export subsidies amount to 5% of the value of agricultural exports. However, the EU has conditionally proposed phasing out all export support, including export subsidies, in its offer to the Doha trade round.

Farm support should be reduced and made less market-distorting

The benefits of recent reforms would be significantly enhanced if all payments were decoupled from production and if the level of support were reduced further. Some non-ad valorem tariffs for agricultural goods applicable to processed agricultural goods incorporating several inputs, are complex and could benefit from simplification. This has been conditionally proposed by the EU in its offer to the Doha trade round. And because tariff protection on processed food is also high, reform needs to be broader than just tackling support to farmers.  Lastly, because in the past richer farming regions of the EU have benefited by more than the poorer regions, and while we cannot yet assess the impact of recent reforms on cohesion, agricultural support would be more effective and efficient if it were better targeted at its objectives; for example, income support being better targeted at lower-income farm households and poorer farming regions.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the EU 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the EU Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by David Rae, Boris Cournède and Marte Sollie under the supervision of Peter Hoeller.

 

 

 

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