High Level Workshop organized by

1

• High Level Workshop organized by
• EC FP5 STRATA e-Foresee Project
• "New Approaches
• to Agricultural Policy
• Development in the EU25" 
• Riga, June 30, 2003

2

• Multi-functionality,
• the WTO and CAP reform
• Dr Antonis Constantinou
• Director
• Department of Agriculture
• Nicosia, Cyprus

3
Importance of the WTO (1)

• Why is the WTO so important from a policy point
  of view?
• It is an engine of policy reform
• Constant pressure to reduce tariff protection,
  eliminate export subsidies and provide domestic
  support in a minimally trade distorting way
• Pretext for reformist block to promote their
  goals
• Effective tool for overcoming resistance to
  reform by countries and lobbies
• Determines more and more the choice of policy
  tools from price support to direct payments to
  decoupled support

4
Importance of the WTO (2)

• Even more importantly
• It has provided a platform for developing
  countries to fight against perceived commercial
  domination by developed countries using
  "free-market" arguments (e.g. example of cotton)
• WTO negotiations constitute a most important
  factor in the global market play/antagonism

5
Importance of the WTO (3)

• USA tries to be always one step ahead of EU
• lower " visibility " of existing supports
• more flexible decision making
• homogenous block, one voice
• unlimited political influence
• EU drawbacks
• optimality of policy choices restricted by need
  for consensus
• national interest optimization rather than block
  optimization
• more difficult to accept changes/innovation
• lacking behind in terms of reforming "visible"
  support

6
Importance of the WTO (4)

• Why is the WTO so important in terms of
  "Foresight"?
• By studying the tools applied today by some
  influential WTO members, notably by the USA, and
  by examining where the USA has an advantage/is
  vulnerable over Europe and vice-versa, you can
  draw inferences on tomorrows policies
• 1992 Blue Box (EU, USA) 1996 FAIR
  ACT (USA)
• 2003 decoupled payments (EU)
• Effect of the USA shift towards de-minimis
  support and decoupled payments, production
  flexibility programmes, income insurance
• Effect of the EU disciplines on indirect types
  of support especially to exports emphasis on
  the multifunctional role of agriculture, the
  environment, food safety and animal welfare

7
SOME WELFARE - THEORETICAL ASPECTS (1)

• Welfare theorems
• Efficiency is maximized when the prices of goods
  represent a competitive equilibrium between
  producers and consumers
• Utility for consumers can be maximized in a
  decentralized way as a competitive equilibrium
  with transfers among consumers

8
SOME WELFARE - THEORETICAL ASPECTS (2)

• Policy guideline
• - Competitive conditions should be created, if
  they do not exist already
• Hence
• Abolish price fixing and remove subsidies
  internally
• Engage in FREE TRADE externally
• If income redistribution is desirable socially,
  provide decoupled support as a lump-sum transfer,
  if necessary based on a historical base period

9
SOME WELFARE - THEORETICAL ASPECTS (3)

• Even theoretically these guidelines hold only
  when
• a) Income transfer policies are SIMPLE
  Administration and other costs can easily exceed
  any gains in efficiency.
• b) There is no imperfect competition and
  protectionism in other sectors and ABROAD watch
  for artificial barriers to trade, hidden
  protectionism and non-visible support
• c) The land market behaves competitively based
  on the profitability of agricultural production
  and there are no limitations to the divisibility
  of farms
• d) Competition does not lead to a downward
  spiral of depression and impoverishment at the
  regional level need to maintain the VITALITY of
  rural areas
• e) There is no market failure with regard to the
  reward of positive externalities such as the
  maintenance of valuable landscapes and the
  environment
• This leads us to the concepts of
  multi-functionality and of Non-Trade Concerns

10
MULTI-FUNCTIONALITY (1)

• a) The environment argument
• Agriculture produces public goods such as the
  maintenance of the environmental and cultural
  landscape. The market fails to reward these
  important positive externalities.
• Public support, even price support, is justified
  to maintain agricultural production. Price
  support may have the advantage of requiring
  minimal administrative cost.

11
MULTI-FUNCTIONALITY (2)

• Counter-arguments
• If there is no market, there is no appropriate
  valuation for environmental services. A lobby
  for higher agricultural prices can easily become
  a green lobby for higher environmental prices.
• In most cases, the mere existence of the farm
  generates the landscape. You need only to make a
  transfer for this purpose. It is not necessary
  for support to be linked to output.
• If you reward the provision of environmental
  amenities, you must also penalize pollution (e.g.
  raise a tax on the use of groundwater).

12
MULTI-FUNCTIONALITY (3)

• b) The rural development argument
• In many rural regions agriculture forms the
  backbone of
• the economy
• It provides employment and income to rural
  populations
• It is an enabling factor for other industries
  such as agro-processing, agro-tourism, arts and
  crafts
• It maintains the vitality of rural areas and
  prevents a vicious circle of migration,
  depression and impoverishment
• Therefore
• Support to agriculture is justified to maintain
  the social and economic fabric of rural areas.

13
MULTI-FUNCTIONALITY (4)

• Corollaries
• - An integrated model of development is required
  CORK DECLARATION
• - Support to rural development has priority over
  direct or price support to agriculture
  DEGRESSIVITY AND MODULATION
• - Generally applicable income support to
  agriculture is necessary only as a transitional
  measure. In the long run only two types of
  payments are socially acceptable and economically
  justified
• - to reward farmers for environmental and
  cultural services rendered to society CORRECT
  MARKET FAILURES
• - decoupled support to farmers as part of a well
  designed and targeted income redistribution
  policy ELEMENT OF COHESION

14
NON-TRADE CONCERNS (1)

• A term often used as a synonym to
  multi-functionality to describe public goods
  provided by agriculture.
• - NTCs is a wider concept, that also describes
  additional societal concerns normally not
  safeguarded by market forces alone such as food
  security, food safety and animal welfare.

15
NON-TRADE CONCERNS (2)

• Some argue
• - Food security not a problem today for most
  countries except LDCs
• - At best there is a problem of consumer
  awareness and information. Take care of it by
  labeling or otherwise and let market forces do
  the rest

16
NON-TRADE CONCERNS (3)

• Others respond
• - Consumers are loaded with information that they
  cannot understand
• - The state has an important role to play in
  safeguarding the citizens health
• - What about PRECAUTION?

17
The Doha mandate

• Recalls long term objective of fundamental reform
  through strengthened rules and specific
  commitments on support and protection in order to
  correct and prevent restrictions and distortions
  in world agriculture markets
• Comprehensive negotiations aimed at
• - substantial improvements in market access
• - reductions, with a view to phasing out, of all
  forms of export subsidies
• - substantial reductions in trade-distorting
  domestic support
• Non-trade concerns to be taken into account
• Special and differential treatment for developing
  countries embodied so as to be operationally
  effective to enable them to take account of their
  development needs, including food security and
  rural development

18
The Doha roadmap

• The March 31, 2003 deadline for agreeing on
  modalities for further commitments was missed
• The Cancun Ministerial Conference is the last
  chance for saving the comprehensive round
• Question Who is so eager about it?

19
Where do we stand? (1)

• The Chairman of the WTO Committee on Agriculture,
  Special Session (negotiations) presented
• A first draft of modalities in early February
  2003
• A revision of the first draft (REV 1) in
  mid-March, 2003
• Neither was accepted. The Chairman was
  critisized for ignoring the positions of those on
  the defensive

20
What did he propose?

21
A. MARKET ACCESS

•  
• All tariffs to be converted to ad valorem
  equivalents
• Over 5 years
•       tariffs gt90 down 60 average, min. 45
•       tariffs 15-90, down 50 average, min. 35
•       tariffs ?15, down 40 average, min. 25
•     "tariff quota volumes" to be increased to
  10 of domestic consumption (8-12 in some
  cases)
•     tariff quota fill rates to be improved and
  in-quota duty free access for tropical products
  to be provided
•       tariff quota administration to be
  regulated
•      "SSG" to cease for developed countries
•      Generous S D treatment for developing
  countries, including a special safeguard
  mechanism (SSM) to "effectively take account of
  their development needs, including food security,
  rural development and livelihood security
  concerns"

22
B. EXPORT COMPETITION

• for products representing 50 of bound budgetary
  outlays for export subsidies
• - eliminate over 5 years (10 for DCs), in steps
  of 30 of residual outlays
• for remaining products
• - eliminate over 9 years (12 for DCs), in steps
  of 25 of remaining outlays
• STEs, food aid, export credits, export credit
  guarantees and insurance programmes to be subject
  to disciplines
• Additional export restrictions or taxes
  prohibited (DCs exempted)

23
C. DOMESTIC SUPPORT

• AMBER BOX support (AMS) to be reduced by 60 in 5
  years (40 in 10 years for DCs). No product to
  receive more than the 1999-2001 level. 5 de
  minimis to be reduced to 2,5 in 5 years (DCs 10
  maintained)
• BLUE BOX support to be reduced by 50 in 5 years
  (33 in 10 years for DCs)
• GREEN BOX maintained but
• payments based on fixed and unchanging historical
  base periods
• tightened disciplines on income insurance and
  safety-net programmes, relief from natural
  disasters, structural adjustment programmes etc.
• animal welfare added to environmental programmes
  but payments limited to extra costs or loss of
  income (NO INCENTIVE)

24
WHERE DO WE GO? (1)

• fundamental reform remains the long term
  objective but the pace of reform is to be
  determined by give and take, defensive and
  offensive aspects

25
WHERE DO WE GO? (2)

• Other aspects
• visible vs non-visible protection and support
• de minimis vs AMS support
• blue box a tool for reform?
• danger for DCs to demand exemption from
  everything
• danger for rules under green box to be tightened
  excessively

26
WHERE DO WE GO? (3)

• emerging USA/EU alliance/animosity
• defend the green box even with tightened rules
• fight out everything else and gain as much as
  possible on the way
• the block moving faster towards the long term
  objective of fundamental reform is at an
  advantage as long as there are no artificial
  restrictions to farming and the green box is not
  tightened excessively

27
Implications for CAP reform
28
IMPLICATIONS FOR CAP REFORM (1)

• ? Main thrust of future CAP Market orientation
  and improved competitiveness
• important assets quality and Gls
• ? Move from price support direct payments
  decoupled support, appears
  inevitable but
• pace to be determined by what you get in return
  and extent to which unfair practices are
  disciplined
• production limiting programmes an important
  intermediate step, but not advantageous in the
  long run
  

29
IMPLICATIONS FOR CAP REFORM (2)

• ? Need to insist on safeguarding
  multi-functionality and NTCs under the green box.
  NTCs are universal, they cannot be treated
  differently for developing or developed countries
• ? No WTO justification for reducing total support
  to agriculture especially during transition and
  with 10 new member states depending more heavily
  on this sector
• DEGRESSIVITY ? MODULATION
• Rate of DEGRESIVITY Rate of MODULATION

30
IMPLICATIONS FOR CAP REFORM (3)

• Priorities
• Integrated rural development
  vitality of rural regions
• environmental and cultural landscape payments
• food quality schemes and incentives
• reimbursement of extra costs for improving food
  safety and animal welfare
• emphasis on preventing abandonment of agriculture
  in vulnerable regions

31
IMPLICATIONS FOR CAP REFORM (4)

• Questions
• Is there a need for specific payments under the
  green box to safeguard the existence of farms?
• Should the EU insist on the maintenance of an
  INCENTIVE for environmental programmes?

32
IMPLICATIONS FOR CAP REFORM (5)

• Other important aspects
• ? In the long run decoupled payments can only be
  justified economically as an income
  redistribution policy
• Redistribution from whom to whom?
• - within member countries?
• - as part of the community cohesion policy?
• - as part of the community regional policy?
• - Who pays for it?