The Common Agricultural Policy and its impact on the developing countries

The Common The Common Agricultural Agricultural

Policy and its Policy and its impact on the impact on the

developing developing countriescountries

The Common The Common Agricultural Agricultural

Policy and its Policy and its impact on the impact on the

developing developing countriescountries

OutlineOutlineOutlineOutline

1)1) The Common Agricultural Policy The Common Agricultural Policy (CAP)(CAP)

2)2) Trade PreferencesTrade Preferences

3)3) Effects on the Developing Effects on the Developing CountriesCountries

4)4) Concluding RemarksConcluding Remarks

1)1) The Common Agricultural Policy The Common Agricultural Policy (CAP)(CAP)

2)2) Trade PreferencesTrade Preferences

3)3) Effects on the Developing Effects on the Developing CountriesCountries

4)4) Concluding RemarksConcluding Remarks

1) The Common 1) The Common Agricultural PolicyAgricultural Policy


Some factsSome facts• The EU is the largest importer and the The EU is the largest importer and the second largest exporter of agricultural second largest exporter of agricultural goods.goods.

• Agriculture contributes to less than 2% of Agriculture contributes to less than 2% of EU’s GDP.EU’s GDP.

• Agriculture accounts for around 4.5% of EU’s Agriculture accounts for around 4.5% of EU’s employment and for 12 % of total trade.employment and for 12 % of total trade.

• Yet, the CAP consumes about 45% of the total Yet, the CAP consumes about 45% of the total EU budget – around 43 billion Euro each EU budget – around 43 billion Euro each year.year.

Some factsSome facts• The EU is the largest importer and the The EU is the largest importer and the second largest exporter of agricultural second largest exporter of agricultural goods.goods.

• Agriculture contributes to less than 2% of Agriculture contributes to less than 2% of EU’s GDP.EU’s GDP.

• Agriculture accounts for around 4.5% of EU’s Agriculture accounts for around 4.5% of EU’s employment and for 12 % of total trade.employment and for 12 % of total trade.

• Yet, the CAP consumes about 45% of the total Yet, the CAP consumes about 45% of the total EU budget – around 43 billion Euro each EU budget – around 43 billion Euro each year.year.



Justifications for State InterventionJustifications for State Intervention• Agricultural production and therefore Agricultural production and therefore farmers’ incomes depend largely on farmers’ incomes depend largely on climatic and other natural fluctuations.climatic and other natural fluctuations.

• Agricultural quantities cannot be Agricultural quantities cannot be adjusted as fast as industrial quantities adjusted as fast as industrial quantities (for example due to a dropping demand).(for example due to a dropping demand).• This leads to price fluctuationsThis leads to price fluctuations

Justifications for State InterventionJustifications for State Intervention• Agricultural production and therefore Agricultural production and therefore farmers’ incomes depend largely on farmers’ incomes depend largely on climatic and other natural fluctuations.climatic and other natural fluctuations.

• Agricultural quantities cannot be Agricultural quantities cannot be adjusted as fast as industrial quantities adjusted as fast as industrial quantities (for example due to a dropping demand).(for example due to a dropping demand).• This leads to price fluctuationsThis leads to price fluctuations



Objectives of the CAPObjectives of the CAP1.1. to increase productivity;to increase productivity;

2.2. to ensure a fair standard of living to ensure a fair standard of living for the agricultural Community;for the agricultural Community;

3.3. to stabilize markets;to stabilize markets;

4.4. to secure availability of supplies;to secure availability of supplies;

5.5. to provide consumers with food at to provide consumers with food at reasonable pricesreasonable prices

Objectives of the CAPObjectives of the CAP1.1. to increase productivity;to increase productivity;

2.2. to ensure a fair standard of living to ensure a fair standard of living for the agricultural Community;for the agricultural Community;

3.3. to stabilize markets;to stabilize markets;

4.4. to secure availability of supplies;to secure availability of supplies;

5.5. to provide consumers with food at to provide consumers with food at reasonable pricesreasonable prices



The price system of the CAPThe price system of the CAPThe price system of the CAPThe price system of the CAP



Reforms of the CAPReforms of the CAP• Mac Sharry-Reform 1992Mac Sharry-Reform 1992• Agreement on Agriculture 1994Agreement on Agriculture 1994• Agenda 2000Agenda 2000• Agricultural Reform 2003Agricultural Reform 2003

-> Common, important points:-> Common, important points:o Lowering the intervention prices for several Lowering the intervention prices for several commodities as well as the tariffs and export commodities as well as the tariffs and export subsidies.subsidies.

o Largely compensating the farmers with direct Largely compensating the farmers with direct payments.payments.

Reforms of the CAPReforms of the CAP• Mac Sharry-Reform 1992Mac Sharry-Reform 1992• Agreement on Agriculture 1994Agreement on Agriculture 1994• Agenda 2000Agenda 2000• Agricultural Reform 2003Agricultural Reform 2003

-> Common, important points:-> Common, important points:o Lowering the intervention prices for several Lowering the intervention prices for several commodities as well as the tariffs and export commodities as well as the tariffs and export subsidies.subsidies.

o Largely compensating the farmers with direct Largely compensating the farmers with direct payments.payments.

2) Trade Preferences2) Trade Preferences2) Trade Preferences2) Trade Preferences

Some factsSome facts• The EU grants trade preferences to all The EU grants trade preferences to all developing countries.developing countries.

• 2003 about 80% of all commodities from 2003 about 80% of all commodities from developing countries were imported developing countries were imported tariff-free or at lower tariffs.tariff-free or at lower tariffs.

• The level of trade preferences is The level of trade preferences is higher than that of other developed higher than that of other developed countries.countries.

Some factsSome facts• The EU grants trade preferences to all The EU grants trade preferences to all developing countries.developing countries.

• 2003 about 80% of all commodities from 2003 about 80% of all commodities from developing countries were imported developing countries were imported tariff-free or at lower tariffs.tariff-free or at lower tariffs.

• The level of trade preferences is The level of trade preferences is higher than that of other developed higher than that of other developed countries.countries.


General System of Preferences (GSP)General System of Preferences (GSP)• Introduced in 1971Introduced in 1971

• Covers all developing nationsCovers all developing nations

• Covers 7200 industrial and agricultural Covers 7200 industrial and agricultural goods which can be imported tariff-free goods which can be imported tariff-free or at a lower tariff depending on or at a lower tariff depending on whether a good is considered whether a good is considered “sensitive” or “non-sensitive”“sensitive” or “non-sensitive”

• Protection clauseProtection clause

General System of Preferences (GSP)General System of Preferences (GSP)• Introduced in 1971Introduced in 1971

• Covers all developing nationsCovers all developing nations

• Covers 7200 industrial and agricultural Covers 7200 industrial and agricultural goods which can be imported tariff-free goods which can be imported tariff-free or at a lower tariff depending on or at a lower tariff depending on whether a good is considered whether a good is considered “sensitive” or “non-sensitive”“sensitive” or “non-sensitive”

• Protection clauseProtection clause


Cotonou Agreement (ACP-States)Cotonou Agreement (ACP-States)• In force since 2003In force since 2003

• Covers 77 African, Caribbean and Pacific StatesCovers 77 African, Caribbean and Pacific States

• All goods - except for those covered by the CAP - All goods - except for those covered by the CAP - can be exported tariff-free into the EUcan be exported tariff-free into the EU

• Unilateral trade preferences until end of 2007Unilateral trade preferences until end of 2007

• From 2008 onwards bilateral trade agreements From 2008 onwards bilateral trade agreements enforced during a transition period of 12 years enforced during a transition period of 12 years (exception for least developed countries)(exception for least developed countries)

Cotonou Agreement (ACP-States)Cotonou Agreement (ACP-States)• In force since 2003In force since 2003

• Covers 77 African, Caribbean and Pacific StatesCovers 77 African, Caribbean and Pacific States

• All goods - except for those covered by the CAP - All goods - except for those covered by the CAP - can be exported tariff-free into the EUcan be exported tariff-free into the EU

• Unilateral trade preferences until end of 2007Unilateral trade preferences until end of 2007

• From 2008 onwards bilateral trade agreements From 2008 onwards bilateral trade agreements enforced during a transition period of 12 years enforced during a transition period of 12 years (exception for least developed countries)(exception for least developed countries)


Everything But Arms-Initiative Everything But Arms-Initiative (EBA)(EBA)

• In force since 2001In force since 2001

• Covers all least developed countriesCovers all least developed countries

• Covers all goods except for arms Covers all goods except for arms (additional exceptions for bananas, rice (additional exceptions for bananas, rice and sugar)and sugar)

• Protection clause similar to GSPProtection clause similar to GSP

Everything But Arms-Initiative Everything But Arms-Initiative (EBA)(EBA)

• In force since 2001In force since 2001

• Covers all least developed countriesCovers all least developed countries

• Covers all goods except for arms Covers all goods except for arms (additional exceptions for bananas, rice (additional exceptions for bananas, rice and sugar)and sugar)

• Protection clause similar to GSPProtection clause similar to GSP


Effective Preference MarginsEffective Preference Margins

All GoodsAll Goods Agricultural GoodsAgricultural Goods

Effective Preference MarginsEffective Preference Margins

All GoodsAll Goods Agricultural GoodsAgricultural GoodsRegulaRegular r TariffTariff

PreferencPreference Tariffe Tariff

PreferencPreference Margine Margin

RegulaRegular r TariffTariff

PreferencPreference Tariffe Tariff

PreferencPreference Margine Margin

GSPGSP 7.9%7.9% 4.5%4.5% 3.4%3.4% 21.9%21.9% 19.7%19.7% 2.2%2.2%

ACPACP 7.9%7.9% 3.0%3.0% 4.9%4.9% 21.9%21.9% 13.3%13.3% 8.6%8.6%

EBAEBA 7.9%7.9% 0.3%0.3% 7.6%7.6% 21.9%21.9% 1.1%1.1% 20.8%20.8%

3) Effects on the 3) Effects on the Developing CountriesDeveloping Countries


General Effects of an Import TariffGeneral Effects of an Import Tariff• Higher European priceHigher European price

• Foreign suppliers get lower pricesForeign suppliers get lower prices

General Effects of an Export General Effects of an Export SubsidySubsidy

• Higher export supplyHigher export supply

• Lower world market pricesLower world market prices

General Effects of an Import TariffGeneral Effects of an Import Tariff• Higher European priceHigher European price

• Foreign suppliers get lower pricesForeign suppliers get lower prices

General Effects of an Export General Effects of an Export SubsidySubsidy

• Higher export supplyHigher export supply

• Lower world market pricesLower world market prices



Additional Effects of the CAP SystemAdditional Effects of the CAP System

• Price Stability Effect Price Stability Effect

-> The CAP increases the price -> The CAP increases the price instabilities on instabilities on the world the world markets.markets.

• Price Structure EffectPrice Structure Effect

-> The CAP distorts the price structure -> The CAP distorts the price structure between the different between the different

commodities.commodities.

Additional Effects of the CAP SystemAdditional Effects of the CAP System

• Price Stability Effect Price Stability Effect

-> The CAP increases the price -> The CAP increases the price instabilities on instabilities on the world the world markets.markets.

• Price Structure EffectPrice Structure Effect

-> The CAP distorts the price structure -> The CAP distorts the price structure between the different between the different

commodities.commodities.



Welfare Effects on the Net Importers inWelfare Effects on the Net Importers inthe Short Runthe Short Run• Lower import prices (positive) <-> lower Lower import prices (positive) <-> lower export prices (negative)export prices (negative)-> Positive effect outweighs the negative one-> Positive effect outweighs the negative one

• In fact, this positive effect is much bigger, In fact, this positive effect is much bigger, if the trade preferences are taken into if the trade preferences are taken into consideration.consideration.

-> The overall effect for net importers in the-> The overall effect for net importers in the short run is therefore clearly positive.short run is therefore clearly positive.

Welfare Effects on the Net Importers inWelfare Effects on the Net Importers inthe Short Runthe Short Run• Lower import prices (positive) <-> lower Lower import prices (positive) <-> lower export prices (negative)export prices (negative)-> Positive effect outweighs the negative one-> Positive effect outweighs the negative one

• In fact, this positive effect is much bigger, In fact, this positive effect is much bigger, if the trade preferences are taken into if the trade preferences are taken into consideration.consideration.

-> The overall effect for net importers in the-> The overall effect for net importers in the short run is therefore clearly positive.short run is therefore clearly positive.



Welfare Effects on the Net ExportersWelfare Effects on the Net Exportersin the Short Runin the Short Run• Lower import prices (positive) <-> lower Lower import prices (positive) <-> lower export prices (negative)export prices (negative)-> Negative effect outweighs the positive -> Negative effect outweighs the positive oneone

• However, the negative effect can be reversed However, the negative effect can be reversed or at least reduced, if trade preferences or at least reduced, if trade preferences are taken into consideration.are taken into consideration.

-> The overall effect for net exporters in the -> The overall effect for net exporters in the short run cannot be clearly determined.short run cannot be clearly determined.

Welfare Effects on the Net ExportersWelfare Effects on the Net Exportersin the Short Runin the Short Run• Lower import prices (positive) <-> lower Lower import prices (positive) <-> lower export prices (negative)export prices (negative)-> Negative effect outweighs the positive -> Negative effect outweighs the positive oneone

• However, the negative effect can be reversed However, the negative effect can be reversed or at least reduced, if trade preferences or at least reduced, if trade preferences are taken into consideration.are taken into consideration.

-> The overall effect for net exporters in the -> The overall effect for net exporters in the short run cannot be clearly determined.short run cannot be clearly determined.



Welfare Effects on the Net Importers inWelfare Effects on the Net Importers inthe Long Runthe Long Run• Negative price stability effect Negative price stability effect • Negative price structure effectNegative price structure effect• Net importing position cannot be seen as givenNet importing position cannot be seen as given• Dependence on political decision of the EUDependence on political decision of the EU• The CAP fostered indirectly wrong agricultural The CAP fostered indirectly wrong agricultural policies in the developing countries.policies in the developing countries.

-> A reverse of the original positive effect is-> A reverse of the original positive effect is therefore quite likely in the long run.therefore quite likely in the long run.

Welfare Effects on the Net Importers inWelfare Effects on the Net Importers inthe Long Runthe Long Run• Negative price stability effect Negative price stability effect • Negative price structure effectNegative price structure effect• Net importing position cannot be seen as givenNet importing position cannot be seen as given• Dependence on political decision of the EUDependence on political decision of the EU• The CAP fostered indirectly wrong agricultural The CAP fostered indirectly wrong agricultural policies in the developing countries.policies in the developing countries.

-> A reverse of the original positive effect is-> A reverse of the original positive effect is therefore quite likely in the long run.therefore quite likely in the long run.



Welfare Effects on the Net Exporters inWelfare Effects on the Net Exporters inthe Long Runthe Long Run• Negative price stability effect Negative price stability effect • Negative price structure effectNegative price structure effect• Trade position cannot be seen as givenTrade position cannot be seen as given• Dependence on political decision of the EUDependence on political decision of the EU• CAP fostered indirectly wrong agricultural CAP fostered indirectly wrong agricultural policies in the developing countries.policies in the developing countries.

-> A negative overall effect in the long run -> A negative overall effect in the long run isis therefore highly likely for the net therefore highly likely for the net exporters.exporters.

Welfare Effects on the Net Exporters inWelfare Effects on the Net Exporters inthe Long Runthe Long Run• Negative price stability effect Negative price stability effect • Negative price structure effectNegative price structure effect• Trade position cannot be seen as givenTrade position cannot be seen as given• Dependence on political decision of the EUDependence on political decision of the EU• CAP fostered indirectly wrong agricultural CAP fostered indirectly wrong agricultural policies in the developing countries.policies in the developing countries.

-> A negative overall effect in the long run -> A negative overall effect in the long run isis therefore highly likely for the net therefore highly likely for the net exporters.exporters.

4) Concluding Remarks4) Concluding Remarks4) Concluding Remarks4) Concluding Remarks

How to reform the CAP?How to reform the CAP?• By a gradual (not radical) liberalizationBy a gradual (not radical) liberalization

• This would be beneficial for the vast majority This would be beneficial for the vast majority of the developing countries.of the developing countries.-> Losers could be compensated-> Losers could be compensated

However, the result that the CAP harms the However, the result that the CAP harms the developing countries should not conceal the factdeveloping countries should not conceal the factthat developing countries would benefit the mostthat developing countries would benefit the mostfrom reforming their own agricultural policies.from reforming their own agricultural policies.

How to reform the CAP?How to reform the CAP?• By a gradual (not radical) liberalizationBy a gradual (not radical) liberalization

• This would be beneficial for the vast majority This would be beneficial for the vast majority of the developing countries.of the developing countries.-> Losers could be compensated-> Losers could be compensated

However, the result that the CAP harms the However, the result that the CAP harms the developing countries should not conceal the factdeveloping countries should not conceal the factthat developing countries would benefit the mostthat developing countries would benefit the mostfrom reforming their own agricultural policies.from reforming their own agricultural policies.

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The Common Agricultural Policy and its impact on the developing countries

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