THE DEVELOPING WORLD
Reform the CAP yes, but dismantle it at our peril
Autumn 2007
Reforming the CAP and tackling US farm subsidies too will be vital to the developing world, says Michel Godet. But he warns that any attempt to dismantle EU and national support for Europe’s farmers would have serious consequences
Liberalising world trade has led to unprecedented growth of the global economy. Average tariffs between industrialised countries have dropped nearly 90% since 1947, trade has multiplied almost twenty-fold and world production is ten times greater. The next step must be to attack certain countries’ non-tariff barriers and protectionist practices, notably those of the United States and China.
Europe must therefore use all its influence at the World Trade Organisation to further improve free trade and to oppose any ideas that “might is right”. The EU must get its partners to accept the principle of reciprocity in opening up markets, and this must be done without caving in to protectionist tendencies.
But opening up Europe does not mean giving it away. The European Union has well-balanced trade with the rest of the world. Trade represents nearly a quarter of its production, and two-thirds of all its imports and exports are between the Union’s own member states. So it would be dangerous to try and regulate trade and production on the basis of employment pressures. Member states share the benefits of trade, albeit somewhat unequally. They enrich one another through trade. And even if, in certain sectors, jobs are lost as a result of free trade, the pros certainly far outweigh the cons.
It is no longer acceptable to accuse newly-industrialised countries of unfair competition because their labour costs are relatively low. Research by the OECD and others has clearly shown that foreign trade represents an overall positive net balance in terms of employment. We Europeans cannot refuse to import goods that low-income countries produce at more competitive rates, for that is their greatest comparative advantage. Allowing these nations to open up to trade is the best way to help them achieve social progress.
German companies, for instance, find it profitable to import large quantities of low-cost parts and components made by unskilled labour in low-income countries, and then use their technical know-how to incorporate them into their own products, thus gaining added value. The goods are then exported, and that is how, having now dealt with the costs of reunification, the Germans once again find themselves with a largely favourable trade balance. It is worth comparing Germany with France; the penetration in both countries of industrial imports is around 40% of domestic industrial consumption, but the share emanating from low-cost countries is two times lower in France than in Germany: 11% versus 24%. German industry, though; is better at specialisation and is more competitive when it comes to exporting converted products.
The globalisation of economies does not necessarily mean a levelling-down of living conditions. But for the less developed to catch up with the more advanced, the latter will have to make economic and social changes that will prove all the more painful if not properly prepared for.
A case in point is the Common Agriculture Policy. Following the Berlin agreements and the Luxembourg compromise in 2003, the CAP is due to be ended by 2013. In the meantime, we expect to see further market liberalisation and a major drop in all types of subsidies, including those in support of exports and those that give direct aid to farmers. Some 80% of farm aid in Europe has gone to the 20% of farmers who for the most part use very intensive methods, and it has done so to the detriment of water resources and the environment.
Obviously, once you start to sever the connection between subsidies and production, whether partially or completely depending on the country, the 80% of farmers receiving 20% of the aid will only continue to produce if they stand to gain more from producing than from doing nothing. As part of the revolution in European agriculture, and in the hope of buying the silence of the EU’s dwindling number of farmers, the Union is to continue subsidising them on condition that they stop producing, or do so under strict environmental conditions. The farmers have not entirely rejected this “last of the Mohicans” stance, as they do so well out of it. They get an income based on past production and, as there are fewer farmers, each one can receive as much if not more than before, even if the farm aid total is dropping. The risk is, however, that this will lead to the partial re-nationalisation of agricultural policy.
As the CAP represents over 40% of community expenditure for 2% of the working population, its detractors do not hesitate to emphasise this imbalance in their campaign to have it dismantled. They speak of the new European priorities created by the EU’s enlargement and of a society that badly needs research, training, infrastructure and social policy to be strengthened. The reality is, though, that agriculture is the only area in which community policy has replaced national policy, and if one adds up both the European and national supports given to agriculture in Europe, the total is in fact directly proportional to the size of the farm sector’s working population.
The CAP has been a great success in ensuring a stable supply of safe and affordable food in Europe, but it now needs to be entirely overhauled, not least because of the arrival of new member states that badly need modernisation of agricultural methods reminiscent of rural France in the 1950s. A more rational approach to agriculture would ensure greater respect for the environment, and would be a first step towards sustainable farming methods.
Rich countries’ farm subsidies lead to artificially low world prices that have little or no connection with real production costs, and are too modest to allow less-developed countries to earn revenues from their own farm exports. As to products like cotton, in both the United States and Europe, where 70% of total world production is now concentrated, the subsidy per kilo is higher than the selling price. African cotton, while actually more competitive, can never command its true value, so Africa’s cotton production and exports have never developed properly. The same holds true for cereals, sugar and most basic foodstuffs.
The power of the United States means that the world price for agricultural products is often a dumping price set to get rid of American surpluses. If we want to reform the CAP to make it an integral part of our sustainable development strategy, it will be crucial to do so independently of American pressure. But of course not all EU countries are affected equally; France’s subsidies represent 20% of the net added-value of European agriculture, Italy’s 19%, Spain’s 18%, with the rest trailing far behind − Germany with 10%, Greece with 7% and the United Kingdom 6.5%.
This doesn’t mean that Europe should drop its guard. Subsidies may be a bit lower in volume in the United States, but they are considerably higher per farmer − $20,000 in the US against $14,000 in the EU. According to the provisions of the current US Farm Bill before the Congress, American subsidies are set to increase by 70% over the coming 10 years. So this is not the time for us to casually dismantle at home what the United States is so busily reinforcing. The United States should not be the only country to wield a “food weapon”. Europe must have one too. The risk of food shortages − given weather vagaries and increased world demand − and skyrocketing prices is no flight of fancy when you consider that we only have only two months of world consumption in cereal reserves, against more than 50 years of proven oil reserves at $50 a barrel, and probably double that at $70. The risk of food dependence is just as serious as that of energy dependence, and is a factor that must be taken seriously into account in the coming reforms to the CAP.
When looking at world demand patterns for food, these risks are likely to be aggravated by the growing development of biofuels. Although promising enough in the one sense, bio-fuel development raises major tax issues, given that four-fifths of the price of hydrocarbon fuels consists of taxes. Competition with food crops is another issue being raised by experts because to substitute biofuels for only 10% of world fuel demand by 2025 would take 410m hectares of agricultural land, or 29% of the planet’s present farmland. In other words, agriculture’s contribution to energy independence is going to be limited by the constraints of food independence. What’s more, the exploitation and production of biofuels in any case requires conventional energy inputs; at present it takes about a litre of petroleum products to produce two to three litres of bio-fuel.
France is one of Europe’s largest green spaces, and that means its agriculture must remain in the hands of its farmers, who are the custodians of lands that have been cultivated over the centuries. It would be therefore wise when reforming the CAP to go from backing products to backing producers, while at the same time remunerating quality, environmental friendliness and non-commercial products and services that are a public benefit.
European agriculture’s dynamism must be preserved as part of our overall sustainable development drive. But agriculture also has other lessons for us. There are limits to the globalisation of markets and economies, and if we fail to protect sectors like food and energy, that are vital to our strategic independence, we risk disrupting our social structures while mortgaging the future for generations unborn.