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Why is agri-food so often the major issue in EU trade negotiations?

EU would be wise to include agriculture in trade talks with the United States to show how reciprocal trade liberalization can create win-win situations and achieve much better results than unilateral action, argues Stefan Tangermann

In the last few years the EU has negotiated a number of new trade agreements, most recently with the Mercosur countries in Latin America, and the European Commission expects to conclude more such deals in future.

Agriculture is always a hard nut to crack in these negotiations. Why do such trade deals play a growing role? How does the EU's approach compare to trade policies of other countries, particularly the United States? Why is agriculture time and again a stumbling block in such negotiations, and is there no way around that specific problem?

To mark the difference with multilateral trade agreements under the WTO, trade arrangements among selected countries are often referred to as regional trade agreements, or RTAs, even if they are bilateral, linking only two countries. The EU has over the years negotiated some 70 such specific trade agreements. It is in the process of negotiating 12 more such agreements.

The rate at which the EU has agreed such RTAs has accelerated over time, and hence a large part of the active agreements are relatively recent. The share of the EU's overall external trade covered by RTAs is approaching 40%. Among all countries worldwide, the EU is the entity that has concluded the largest number of RTAs globally, around three times as many as the US.

Yet, RTAs are not at all a new phenomenon, and the EU is not the only active player in this game. When the GATT, precursor of the World Trade Organization, was concluded in 1947 it already contained provisions for how to deal with such specific forms of liberalizing trade between subsets of its member countries. However, the nature of such agreements has changed considerably over time.

‘Special treatment’

Traditionally RTAs dealt mainly with tariffs, which were reduced or eliminated in trade among the participating countries, typically for agreed lists of specified goods.

'Sensitive' products, particularly agri-food items, often received special treatment, being either excepted altogether from tariff reductions or subject to less deep tariff cuts. Another customary feature in dealing with 'sensitive' products are tariff rate quotas (TRQs), where reduced tariffs apply only to a limited quantity of imports.

Over time the coverage of RTAs has, however, broadened. Tariff cuts became deeper and applied to a larger share of all products. Non-tariff trade barriers, such as sanitary and phytosanitary regulations, were increasingly integrated into the deals; trade in services and public procurement were comprehensively included; foreign direct investment, and the protection of geographical indications, all became part of RTA negotiations.

Another development was the growing territorial scope of individual RTAs, including more and more countries and the largest economies of the world. There is now often talk of 'mega-regionals'. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), covering eleven Pacific countries, is one such case.

Negotiations on a Regional Comprehensive Economic Partnership (RCEP) among the 10 members of ASEAN and six further countries is another example. TTIP, the Transatlantic Trade and Investment Partnership between the EU and the US, if ever taken out of the deep freezer again, would rightfully be considered a mega-regional.

What drives regional trade agreements?

Traditionally, specific trade agreements among selected countries had much to do with historic political relations, often dating back to colonial times. Trade preferences were granted to stabilize and strengthen economic, and it was hoped political, ties between the participating countries. The Commonwealth Preference system was one such case.

After the UK had joined the European Economic Community (EEC) in 1973 it was transformed and integrated into the regime of tariff preferences that the EEC, as a whole, extended to developing countries.

Later such unilateral preferences were required, under WTO rules, to become reciprocal. Thus, the EU negotiated a whole set of RTAs, referred to as Economic Partnership Agreements, with a large number of developing countries.

To this day, the aim of strengthening political ties has remained one important driver of negotiating RTAs. But purely economic considerations have become more important.

This reflects the insight, much promoted by economic analysis, that trade liberalization can be a most effective way of promoting economic growth, providing wider choice and lower prices to consumers and making better use of resources.

As value chains have become increasingly globalized, with components of modern production processes typically originating in various countries, it makes less and less sense to separate national markets through protective borders.

In principle, this insight speaks for liberalizing trade at the multilateral level. This is precisely what the GATT, and the WTO, were supposed to accomplish. And indeed, for decades after the Second World War, much progress was achieved in successive negotiating rounds at this multilateral level. The Uruguay Round of GATT negotiations, conducted from 1986 to 1993 and establishing the WTO, was the last such successful exercise in multilateral negotiations.

The following round of multilateral negotiations, referred to as the Doha Development Agenda, launched in 2001, has however run into major difficulties and so far achieved near to nothing. By now, some observers already consider it dead even though it was never officially put to rest.

This more recent lack of success in WTO negotiations has become another important driver of efforts to conclude RTAs. As a matter of fact, it has turned out that trade deals among groups of selected friendly countries were more easily struck than comprehensive agreements among the whole membership of the WTO, now comprising 164 nations. In short, RTAs have, to some extent, become a substitute to multilateral trade liberalization.

Why is agriculture so difficult?

Agriculture has always been the most difficult sector in trade negotiations, be they multilateral or bilateral.

It has taken the GATT more than 40 years to come to grips with agricultural trade. Seven rounds of negotiations, up to the Tokyo Round, achieved rather little progress in this sector. It was not before the 8th set of negotiations, the Uruguay Round, that a breakthrough was reached.

But even then, tariffs for agricultural and food products remained much higher than those for manufactures. On a worldwide average, tariffs on agricultural products continue to be as high as 18%, while those on industrial products are somewhat below 4% (these are 2013 data for tariffs applied on a most favoured nation basis).

What is more, in many countries agricultural products are still protected by some mega-tariffs that far exceed the average. Outstanding cases are, for example, the ingredients of the infamous 'rice pudding', i.e. milk, sugar and rice, where tariffs in the order of magnitude of more than 100% are not rare.

Why are tariffs so high in agriculture, in addition to all sorts of domestic subsidies and other forms of government support? Generations of analysts have researched this question.

The answer is as complex as simple: farm lobbies, particularly those in developed countries, have managed to convince the general public and politicians that they are more vulnerable than economic agents in other sectors, and hence need more protection. That is the simple part of the answer. The complex dimension is how they have achieved this, without hard facts behind the argument.

In multilateral WTO rounds, not only tariffs are on the negotiating table, but also domestic support and export subsidies. In other words, in WTO negotiations the sensitive sector of agriculture comes much more under pressure than in RTA negotiations where domestic subsidies are typically not negotiated. This may be another reason why RTAs are more easily negotiated than multilateral trade liberalization.

Yet farmers, and politicians feeling for them, still feel threatened when tariffs on their products are under attack in RTA negotiations.

In a purely factual sense they are right. And what is more, leaving agricultural products largely untouched in RTA negotiations has become more and more unfashionable among trade negotiators.

In early RTAs, significant shares of agricultural products were spared tariff reductions, and where tariffs were reduced in agriculture, reduction rates remained relatively low. In more recent RTAs, agricultural products are much more comprehensively covered in market opening among the participating countries. From that perspective one may understand concerns among farmers about the EU's efforts to engage in more and more regional trade liberalization.

Positive aspects for farmers

Is there any consolation for farmers when the EU concludes RTAs, for example the most recent agreement with the Mercosur countries? Three points are worth considering.

First, to the extent that RTAs have become substitutes for broad trade negotiations under the WTO, farm support policies are spared some pressure as domestic subsidies are not on the negotiating table in RTAs.

In the EU, four fifths of all government support to agriculture come in the form of domestic support, while only one fifth of support is in the form of border protection (data are from the 2019 OECD report on agricultural policy monitoring). In other words, in RTA negotiations only a limited share of farm support is affected.

Second, in RTAs, not only the EU has to open its markets, markets of the EU's trade partners are opened as well. The EU's food and agriculture sector is a growing and increasingly successful exporter, and it should feel and behave like that.

Indeed, the EU is now exporting more food and agricultural products than it imports. There is, therefore, a chance that RTAs offer more chances on the export side than they threaten wellbeing in agriculture on the side of EU imports.

Third, the EU can and does assist those producers who are likely to suffer losses as a result of market opening. There is no doubt that some sub-sectors of agriculture come under pressure from competitive imports when markets are opened under an RTA. For them it is little consolation that other sub-sectors are likely to benefit.

Yet, as the EU economy overall will gain from trade liberalization, generous assistance to those who pay the costs for such benefits is possible and justified. In the case of the Mercosur agreement, EU Agriculture Commissioner Phil Hogan has already suggested that a € 1 billion aid package will be made available to assist those farmers whose markets are disrupted as a result of the agreement. Public money should be spent wisely, but this is a worthy case.

What next?

This should also be considered by those governments of EU member countries that have announced they would resist ratification of the Mercosur agreement.

Concerns over the limited sector of agriculture should, particularly if ‘losers’ can be compensated, not be allowed to get into the way of an agreement that benefits the EU overall.

The EU is effectively demonstrating how well negotiated agreements with trading partners can benefit both sides. This is infinitely more desirable than the unilateral approach adopted by the current US Administration.

And there is also another opportunity for the EU to demonstrate to the US how well considered negotiated trade agreements can benefit all participants. The US and the EU have agreed in principle to work towards a bilateral free trade agreement.

Negotiations have, though, not begun as the EU fiercely objects to the US insistence that agriculture be included in them.

For many years, the EU was intensely and positively engaged in negotiating TTIP with the US, and agriculture was clearly part of those negotiations. It was a decision by the US, not the EU, to pause these negotiations.

One way of showing the US how much the EU would like to return to a comprehensive approach would be to give up resistance to including agriculture in the upcoming negotiations.

A wise judgment like this by the EU would also provide the US, and the world, an example of how reciprocal trade liberalization can create win-win situations and achieve much better results than bullying unilateral action.

Stefan Tangermann is a former Director for Trade and Agriculture at the Organisation for Economic Co-operation and Development (OECD), and is a retired professor at the Department of Agricultural Economics and Rural Development at the University of Göttingen, Germany.

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