Two years ago dairy prices were near record high, driven by strong exports and the high demand for cheese, a relatively expensive product which consumes almost half of the European Union’s milk production. In the last twelve months, dairy prices have collapsed and are hovering at near record lows due to a drop in demand, in particular for cheese, caused by the global economic crisis. As a result, dairy farmers are dumping milk, calling for a halt to milk quota increases and a return to interventionist buying, and more export subsidies. The latter two are despised by most members of the World Trade Organization (WTO), but current agreements offer the EU some ability to prop up prices and subsidise exports without running foul of the trade rules. Should the WTO’s Doha-round of negotiations, now it its eighth year, be concluded, however, the EU’s ability to intervene may be significantly reduced.

Two recent studies (DG IPOL, 2009 and Adler et al, 2009) analysed the need for further policy reform of the CAP and concluded that following the 2003 CAP reform, the CAP is now mostly “Doha-compliant”.

Indeed, the EU’s position during WTO negotiations has been to lock in the reform and subsequent changes introduced under the CAP ‘Health Check’ and to secure the Single Farm Payment (SFP)

Indeed, the EU’s position during WTO negotiations has been to lock in the reform and subsequent changes introduced under the CAP ‘Health Check’ and to secure the Single Farm Payment (SFP) in the ‘green box’ (domestic agricultural support that does not distort trade, or at most causes minimal distortion). Not all WTO members, however, are willing to accept the SFP as a minimally trade-distorting policy as it is based on historical production levels and thus, at least indirectly, supports the continuation of past patterns of production.

So the implications of a conclusion to the Doha-round on EU agricultural policy per se may be minimal, but the economic implications will not be. If import barriers are significantly reduced or eliminated, as proposed, trade-distorting domestic support that takes the form of market subsidies - administered prices or intervention buying, for example - would no longer be feasible. Because domestic producers would no longer be protected by high tariff barriers, there would be an ever increasing need for market intervention to maintain farming at the current level, punching an un-stoppable hole in the EU’s budget. In addition, export subsidies would be similarly ineffective - which is why the EU is happy to agree to their abolishment. The pain from these policy changes will not, however, be shared equally.

According to several economic modelling studies over the last few years (Peters, 2006, Binfield et al, 2004, and Vanzetti and Peters, 2003), the burden from the tariff reductions will mostly be felt in the meat, dairy and sugar sectors, but also among grain, fruit and vegetable growers. A small number of products could be designated as ‘sensitive’, thus avoiding a cut in tariffs - which will likely lead to huge lobbying efforts by sectors most affected by tariff cuts and the removal of export subsidies. The ‘sensitive’ product designation would give some relief to farmers, although it is clear that a conclusion of the Doha-round would represent major challenges for Western European farmers and dairy farmers in particular. More milk dumping is to be expected in the years ahead.

References

1. Directorate General for internal policies, Policy Department B: structural and cohesion policies, Agriculture and Rural Development - Stocktake of the WTO Agricultural Negotiations after the Failure of the 2008 Talks
2. Adler, M., Brunel, C., Hufbauer, G.C. and Schott, J.J, 2009, What’s on the Table? The Doha Round as of August 2009
3. Peters, R., 2006, Roadblock to reform: The persistence of Agricultural Export Subsidies
4. Binfield, J., Donnellan, T., Hanrahan, K., Hart, C. and Westhoff, P., 2004, CAP Reform and the WTO
5. Vanzetti, D. and Peters, R., 2003, An analysis of the WTO, US and EU proposals on agricultural reform