US and EU jostle for world markets

Date: 27/02/1997

By Michael Mann

IN THE field of agriculture, relations between the EU and the US have never been particularly warm.

Over the past few months, the transatlantic relationship has been undermined by disputes over issues ranging from the trade in pet food and genetically-modified maize to the EU's failure to respect agreements to compensate Washington for trade losses resulting from the last Union enlargement.

Before the spring is over, it should also be clear which side has won long-running disputes over hormones in beef and the EU's banana import policy.

All this has kept diplomats busy, despite the existence of a supposed 'peace clause' forbidding either side from interfering in the protectionist farm policies of the other.

But the relationship between the two goes a lot deeper than the occasional trade spat. Changes in policy on one side of the Atlantic can have a resounding effect on the other as the two struggle to maintain their pre-eminence on world commodity markets.

The 1996 US Farm Bill - known as the 'free to farm act' - is set to play a central role in shaping the development of the Common Agricultural Policy. It will also be a crucial factor in the next round of world trade talks, due to begin in 1999.

Coming as part of the Clinton Administration's drive to reduce the budget deficit, the Farm Bill concentrates on reducing aid to grain and oilseed growers. Between 1997 and 2002, the aim is to cut annual support spending by around 30&percent;, to 4.7 billion ecu.

Crucially for the EU, short-term set-aside arrangements have been phased out and agricultural aid payments will no longer be linked to what crops farmers choose to cultivate.

“Within reason, US farmers can now select what they want to grow to allow them to react to market developments,” said an official from European farmers' body COPA.

This disconnection of payments from what farmers produce has become known in agricultural parlance as 'decoupling', and the EU will only be able to continue paying aid to its farmers after the next round of trade liberalisation talks by devising a similar system.

The US will find itself in a strong negotiating position as it enters future discussions in Geneva. While the EU's direct compensation payments introduced under the 1992 CAP reform are protected for the moment, this will no longer be the case after 1999.

Washington will be able to argue with some justification that they have a marked distorting effect on production, as they are paid according to what crop farmers sow. That is why the Commission is racking its brains to find another way of subsidising farmers.

For the moment, money is paid as compensation for reductions in guaranteed prices. In future, the aim is to find a different mechanism linked, for example, to environmental benefits. Such wholesale 'decoupling' from production would be safe from attack in the World Trade Organisation, and would have the added advantage of protecting the rural environment.

The new freedom granted to American farmers is also a major threat to the Union. But European farm ministers have so far been loath to take the initiative needed to fend off the threat to their export markets from across the water.

The Farm Bill is likely to see the American share of world trade in coarse grains rise from 27&percent; to 34&percent;, and in beef from 17&percent; to 25&percent;. The US is also set to make enormous inroads into the pigmeat and poultry markets.

Meanwhile, it looks increasingly likely that unless the EU reforms its grain policies, it will face export problems because its prices will remain above world market levels. The difference cannot be offset by export subsidies, already constrained by the GATT agreement.

Even if the EU can defend the basis upon which it pays its subsidies, the 30&percent; reduction in internal support in the US will provide a useful bargaining chip for the Americans.

In the last trade round, the required 20&percent; cut in domestic aid presented no problem for the Union. Next time, things could look very different.

If the US can move its prices nearer to the world level, it will also seek further restrictions on export subsidies - a subject which is already exciting US Agriculture Secretary Dan Glickman.

This will force the Europeans to get serious about bringing their prices into line with international levels.

“They will simply have to increase the share of produce they export without subsidy if they want to keep their place on the world market,” said one diplomat.

The challenge for Agriculture Commissioner Franz Fischler is to persuade 15 defensive EU farm ministers of the need to act sooner rather than later.

In the meantime, the Commissioner is refusing to be bullied. Speaking recently in Australia, he stressed that “as we do not go around telling others how to run their farming sectors, others should do likewise with us”.