GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

European agriculture policy is undergoing a transformation. In 2003, wide-ranging changes began to take Europe’s Common Agricultural Policy (CAP) in a direction that tied government payments less to production and focused more on rural development and environmental initiatives.

The changes should be familiar to agricultural producers in the United States, where similar policy shifts also are occurring. 

“If you look at the broader trend both in the U.S. and the European Union, we are both moving in the same decoupled direction of not tying our payments to the production and prices of specific commodities,” says David Schweikhardt, professor of agricultural economics at Michigan State University.

“It may be difficult to trace a direct line between specific changes in the E.U. and specific changes in the U.S., but this is all part of a general trend that is probably not reversible.”

That trend is having a significant impact on how support is delivered to producers on both sides of the Atlantic. It also will continue to play an integral role in world trade negotiations.

‘Decoupling’ of EU payments
The E.U.’s CAP reforms have three major features. The first replaces traditional production payments with a single farm-payment program. These “decoupled” payments are given to farmers independent of current production.

“Previously, the CAP operated through an internal price-support system that held prices above the world level,” Schweikhardt explains, “and a system of export subsidies by which surpluses that occurred under that price support system were exported at lower prices into the world market.”

The move toward a single-payment system, which is based on historic production, must be fully implemented by the 25 E.U. member states by January.

“This moves them [E.U. countries] in a much more decoupled direction, much like the U.S. did with Freedom to Farm [the 1996 farm bill],” Schweikhardt says.

As a result of the changes, he adds, farmers in the E.U. likely will have greater flexibility than U.S. producers.

The second major reform established a system of cross-compliance that requires farmers to respect and respond to certain environmental, food safety and animal welfare standards. Payments to farmers are now linked to their compliance with these requirements. The E.U. has said there will be on-site inspections of 1 percent of farms each year to make sure producers are meeting the standards.

Third, an increased emphasis is being placed on rural development programs, which are receiving a growing portion of the E.U.’s agriculture budget.

These programs are receiving more funding in part because of how they are viewed in world trade negotiations. E.U. and U.S. officials agree that rural development initiatives fall into the so-called “green box” — the category of non-trade-distorting, domestic-support policies.

Budget, trade pressures mount
Developed after World War II, CAP was the culmination of policy efforts in Europe to guarantee farmers a certain income level as well as to ensure the availability and affordability of agricultural products. The program met these objectives by subsidizing farmers to grow certain crops and by applying import tariffs so that commodities from outside Europe did not come in at substantially lower prices.
But budgetary and world trade concerns have helped lead to the CAP reforms that began earlier this decade.

Four years ago, Franz Fischler, then head of the E.U.’s agriculture agency, told a Midwestern Governors Association delegation that huge stresses would be placed on the subsidy program as the result of E.U. expansion. When Poland joined, for example, the number of farms in the EU effectively doubled. Farm support at previous levels would simply be unsustainable, Fischler said at the time.

Schweikhardt also notes that new member states simply did not have the tax base to support CAP’s traditional level of support. He adds that E.U. countries “probably realized that they were going to have to make some changes with regard to what might come out of WTO [trade talks under the World Trade Organization].” 

The Doha round of WTO negotiations has been dealing with a number of agriculture-related issues, including reductions in tariffs and domestic subsidies as well as the elimination of export subsidies. 

“The EU was trying to get prepared for and ahead of that [round of negotiations],” Schweikhardt believes. “And if you have to do that anyway, why not get credit for it at the WTO?”

A third reason for the CAP changes has been political pressure, with groups such as Oxfam and Greenpeace pushing for reforms that reduce or eliminate trade-distorting agriculture policies in order to help developing countries become more competitive in the European market. 

Impact of CAP changes
While acknowledging the CAP changes as a significant step, U.S. trade officials do not believe the reforms require a response or concession from this country in future trade negotiations. They say Europe could not continue price supports at past levels anyway.

Schweikhardt adds that “the payments the E.U. will be making, even under the single-payment approach, are still large relative to other countries and to the U.S.”

But officials in the E.U. member states counter by saying the CAP overhaul was a politically painful move to make. And at the same time direct support programs for European farmers were being cut, E.U. officials say, provisions in the 2002 farm bill were increasing assistance for U.S. farmers. For this reason, member states are expected to take a hard stand in future WTO negotiations. 

Schweikhardt says the agriculture policy changes in Europe — particularly those involving specific subsidy programs — could have important ramifications in the United States. For example, the E.U. has announced plans to drastically reduce sugar subsidies, a move that could lead to changes to similar American programs.

Ilene Grossman, assistant director of the Midwestern Office of The Council of State
Governments, received a fellowship from the GMF to study agriculture and rural
development policies and trade.