1. The Common Agricultural Policy
Impact on International Trade
29th November 2009
European Economic Integration, Institute of economic studies

2. Outline What is Common Agriculture Policy? Establishment
Pressures to reform CAP
CAP reforms over time
IT consequences
Africa & CAP

3. What is Common Agriculture Policy?
System of European Union agricultural subsidies and programs
42 % of the EU's budget and still decreasing
Practices:
Trade controls
Price-support measures
Income transfers
Production subsidies
Health regulations

4. EU budget
Source: EU budget 2009; Sustainable development and innovation at the core of the EU budget

5. establishment after World War II - part of the Treaty of Rome
(signed in 1957, came into force in 1958)
1962: went into effect – 4 BASIC PRINCIPLES:
A unified market for the free movement of agricultural products in the European Union
Financial solidarity
Community preference
Parity and productivity

6. Pressures to reform cap
Budgetary pressures
Pressures from consumers
External pressures
Environmental pressures

7. CAP reforms over time Introduction of milk quotas in 1984
Mac Sharry reform in 1992
The Agenda “2000”
The 2003 reform
CAP “Health Check” 2008

8. IMPORT TARRIF EFFECT

9. MILK PRODUCTION & CONSUMPTION BEFORE THE QUOTAS

10. Situation before the milk quotas
Export subsidy case
EU was exporter of diary products
Subsidization of diary farmers (per produced output) motivated farmers to produce more.
Overproduction led to export subsidies and consequently to dumping.
Results:
Producer surplus= a+b+c
Consumer surplus= -(a+b)
Gov. Revenue = -(b+c+d+f+g+h)
+ High storage costs (not depicted)

11. Introduction of milk quotas in 1984
Total guaranteed quantity: the quota of each country
The references quantities: the producers’ and/or purchasers’ quotas
The milk tax: Taxes if producers exceed their reference quota - (superlevy)

12. Impact on international trade
End of overproduction of diary products
Reduction of the production from million tons in to 96 million tons in 1992
Thus decrease in EU diary export as result of abolishment of large production subsidies (=export subsidies)
Side-effect – higher import of cows for beef (especially from Brazil)
Decrease in storage costs

13. Mac Sharry reform in 1992
Pressures from other agricultural exporting countries
From price support to income support
The beginning of direct payments
compensation for the decrease of the price support
New subsidies to farmers for good environmental practices
„Set-aside land“

14. Export subsidies

15. Impact on international trade
Lower export subsidies
Higher direct payments

16. Impact on international trade
EU prices closer to world prices
International agricultural trade liberalization
Fall in cereal prices by 50%
Fall in income of African countries, which were making profits on selling goods to Europe (under Lomé convention)
An increase in the export price competitiveness of basic EU food and agricultural exports for African countries

17. Further reforms The Agenda 2000 The reform in 2003
“multi-functionality” of farming activities
The reform in 2003
A reduction in direct payments for bigger farms to finance the new rural development policy
CAP “Health Check“ 2008
Increase of milk quotas, ...

18. „CAP vs. Africa“ case
African exporters seem to be sensitive to EU reforms
Pros and cons of CAP reforms (from African point of view)
Future prospects

19. Pros and Cons + —
Large food surpluses exported to Africa as a food aid (before Mac Sharry)
Certain African (sugar) exporters profited from Lomé convention (€500 mil. in 99/2000)
2001: free access to the market granted to the least developed countries under „Everything Buts Arms“ initiative.
Problem? – sugar, rice and bananas excluded
After Mac Sharry reform, EU price reductions drove some African exporters out of the EU market
Undermining of African markets by price-competitive EU goods (wheat) – „markets of last resort“
EU policy emphasis shift – „from quantity to quality“

20. Situation when Africa rejects to trade with EU
higher value food Qh
PPF Ql
lower value food

21. Trading situation Ricardian model
Africa has comparative advantage in producing lower value food
Africa EU QH QH
PFT TT TT
PA = CA
PA = CA
higher value food
higher value food
IFT
CFT
PPF
CFT
IFT
PPF IA IA
PFT Ql QH
lower value food
lower value food

22. Future prospect African exporters: European exporters:
lower value food and agricultural products distributors
European exporters:
higher value food and agricultural products

23. Conclusion Trend in reforms of CAP – lower direct payments Decoupling:
↑ economic prosperity
↓ negative impacts on the environment
From import levy to direct subsidies – before and after Mac Sharry reform
Africa has to trade with lower value food

24. Thank you for your attention
Petra Andrlíková
Radovan Parrák

25. references
Institure for Agriculture and Trade Policy: The Common Agricultural Policy: A Brief Introduction, Prepared for the Global Dialogue Meeting (May 14 and 15, 2007, Washington, D.C.)
European Economic Policies: Common Agricultural Policy; Laurent Weill: Université de Strasbourg, Charles University - Prague , April 2009
Policy Notes 2009/7: The Impact of Common Agricultural Policy (CAP): Reformon Africa-EU Trade in Food and Agricultural Products