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Brexit, Trump, and the unintended consequences of incomplete CAP reform

EU should aim for leadership in global trading system

The European Commission made no mention of agricultural tariffs in its CAP reform proposals for the 2021-27 period, but with the global trading system coming under increasing pressure, it should reconsider its priorities and put the issue firmly on the agenda.

In a recent article in Studies in Agricultural Economics, I pointed out that the EU has failed to complete the process of CAP reform launched in the early 1990s  —thus import tariffs on a number of agricultural products are still excessively high.

This inflates food prices, leads to trade distortions, and needlessly complicates the EU’s current trade policy concerns, two of which are highlighted below.

For beef, milk, wheat, sugar, etc., the CAP of the 1980s offered support in three ways: i) export refunds (aka subsidies); ii) intervention buying and other forms of domestic market price support; and iii) a variable import levy mechanism to ensure cheap imports could not undercut the EU’s market prices.

As a result of a succession of CAP reforms overseen by Ray MacSharry, Franz Fischler, and Marion Fischer-Boel, and the successful completion of the GATT’s Uruguay Round of trade negotiations, today’s CAP is rather different.

Export subsidies are no more. Taxpayer support for Europe’s farmers is largely decoupled, and unthreatened by WTO disciplines.

Variable import levies were written-out of the CAP in 1995, and replaced by fixed import tariffs (‘tariffication’), although elements of the old regime still remain. Those tariffs were then reduced by 36% on average.

Despite successive reforms of the CAP, bringing down domestic support prices, these excessively high tariffs remain in place, rather like a whale’s carcass left stranded on a beach.

But as the EU’s institutions deliberate on a recalibrated CAP for the post-2020 period, agricultural tariffs are not on the agenda. Perhaps they should be.

Preferential Access

Although a number of agricultural commodities enter the EU duty-free, the MFN (most-favoured nation) tariffs on many CAP products can be prohibitively high, and consequently trade is only feasible if these MFN tariffs can be sidestepped.

Thus, the EU allows duty-free access for the least-developed countries under its Everything-but-Arms programme, and offers concessions in its many free trade area (FTA) agreements.

In addition, it offers a number of Tariff Rate Quotas (TRQs), allowing duty-free or reduced-duty access for a specified volume of imports. Restrictive conditions might apply: rules of origin to determine eligibility for the trade regime, and tightly defined product criteria for example.

So, if MFN tariffs are prohibitively high, it is not difficult to see why the farm sector in a country such as Australia or Brazil would be keen to access the EU (or UK) market via a FTA; or why the EU’s farmers would lobby to resist such developments.

Trump’s threats

One country that does not have a FTA with the EU - although it says it wants one with the UK - is the USA. President Donald Trump is already engaged in a tit-for-tat trade “war” with China, Canada and the EU over what he perceives to be unfair trade practices.

No friend of the EU, he has with some justification - but less than perfect understanding of US policy - attacked the CAP’s high tariffs, saying: “Look what they do to our farmers. They don't want our farm products. Now in all fairness they have their farmers... But we don't protect ours and they protect theirs.”

Is he about to launch and attack on the CAP, or - as some reports suggest - preparing to tear-up the WTO rule book?

If the global trading system is to be saved, the EU needs to lead. Why not counter Trump’s threats and offer to unilaterally reduce farm tariffs?

Brexit and the CAP

On 6 July 2018 the Theresa May’s Cabinet agreed the deal they hope to negotiate with EU27, and has subsequently resulted in the resignations of two Cabinet ministers at the time of publication. 

The proposal reiterated the UK’s intent to “leave the Common Agricultural Policy”, whilst saying that the UK and EU27 should establish a “free trade area for goods”, with a “common rulebook for all goods including agri-food, … covering … those necessary to provide for frictionless trade at the border.” But, again, what about tariffs?

There would be a “new Facilitated Customs Arrangement that would remove the need for customs checks and controls between the UK and the EU”. Apparently the “UK would apply the UK’s tariffs … for goods intended for the UK, and the EU’s tariffs … for goods intended for the EU”.

The administrative and political feasibility of this proposal is difficult to judge. Will sufficiently secure and reliable computer systems be in place to trace goods through the supply chain, allowing for post-hoc adjustments to the tariff paid and the correct apportionment of tariff revenues to the two jurisdictions, whilst minimising the risk of fraud and ensuring the approval of their auditors?

Rules of origin

What the text fails to tell us - maybe the expected White Paper will - is what rules of origin will apply on UK-EU27 trade in processed foods and drinks.

It would be a highly unusual FTA if rules of origin did not apply, and a UK-manufactured food product containing imported butter, sugar or wheat flour could be freely imported into a EU27 member state. Would these ingredients face a post-hoc tariff adjustment at the virtual border?

One circumstance in which EU27 might be persuaded to forgo rules of origin would be for the UK to match the EU’s tariffs, and other aspects of its trade regime, on sugar, butter, beef, etc., thereby minimising the risk of lower-priced ingredients from the world market masquerading as British produce, undercutting the CAP’s highly protected market.

But that would imply that the UK could not break free from the CAP’s protectionist trade regime, and would probably preclude FTAs with other trading partners.

Remember: to be WTO compliant a FTA must ensure that tariffs are “eliminated on substantially all the trade between the constituent territories in products originating in such territories”.

Whilst there is no definitive threshold specifying what “substantially all” might mean, it is difficult to believe that a UK-Australia FTA that excluded agriculture would be acceptable to the WTO’s membership.

Australian farm products lost access to the British market when the UK adopted the CAP: how ironic if, over 40 years later, access is still denied because of the EU’s distorted farm policy.

Alan Swinbank is Emeritus Professor of Agricultural Economics at the University of Reading’s School of Agriculture, Policy and Development. He also works as a consultant on issues such as trade policy options for the UK post-Brexit and CAP reform.

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