The next WTO negotiations on agriculture: A European view

The next WTO negotiations on agriculture: A European view:

BY SIR LEON BRITTAN (Vice President of the European Commission, with responsibilities for external relations with North America, Australia, New Zealand, Japan, China, Korea, Hong Kong, Macao and Taiwan; Common commercial policy; relations with OECD and WTO) 1999 is going to be a crucial year for European agriculture, first and foremost because it will need to see the adoption of the Agenda 2000 reforms. Progress on the Commission proposals has so far been rather disappointing but a commitment was made by the Vienna European Council of last December to reach an overall agreement on the package on 24-25 March at the next European Council in Brussels and to achieve the final adoption of all the legislative texts before the elections of European Parliament in June. Such commitments have a history of being observed. Agenda 2000 is, of course, not limited to agricultural reform. It is a package of measures which also involves changes to the Structural Funds as well as a proposal for a new overall financial framework for the Union replacing the current arrangements which expire at the end of 1999. Obviously, these issues are linked, as the CAP still accounts for some 50% of total EU expenditure. So it is not really feasible to agree on the CAP reform in complete isolation from the overall debate on the future EU-budget and the question of Member States contributions to it.

The second important event in 1999 is the start of the next round of WTO talks on agriculture. The so-called 'built-in agenda' of the Uruguay Round Agreement obliges WTO members to resume negotiations on agriculture and trade in services by the year 2000, and these talks will be launched in December at the Ministerial Conference of the WTO in the United States.

The domestic process on Agenda 2000 and the new WTO-talks are, of course, very much inter-related. The Commission recognised this unequivocally when it argued the case for CAP reform on the following three grounds:

- the need to abide by the Uruguay Round Agreement commitments while retaining competitivity in world markets

- the need for a sustainable position on agriculture to carry the EU through the next WTO round

- the need to prepare for EU enlargement with the countries of Central and Eastern Europe and Cyprus.

This does not mean that Agenda 2000 is only necessary because of external pressures. As Franz Fischler has argued convincingly on many occasions, the CAP is in need of reform even without the WTO or enlargement prospects. An unchanged CAP would lead to a massive build-up of stocks and to huge extra budgetary costs and is therefore not an option. Moreover, despite the Asian and Russian crises, the basic assumptions and trends on which the Commission based its reform proposals remain entirely valid today and do not reasonably allow for any other conclusions than the ones which have been put forward in Agenda 2000.

Nonetheless, some people still advocate a type of 'European agricultural model' which would involve a retreat behind high tariff walls, closing our farming industry off from growing world markets and leaving only our internal market. This is not the 'European model' that I would want to defend or create. It is clearly at odds with the fact that the EU is not just the biggest importer of agricultural products in the world, but also its second largest exporter (after the US). Such an approach therefore is wholly negative and short sighted. It looks to the past instead of the future and fails to recognise the growing importance of the world market for European agriculture and hence for the income and prosperity of our farmers.

It is therefore a mistake to consider the WTO talks as a threat to European farming. They can provide, rather, an opportunity, so long as we have a clear and realistic agenda for the new round. To have this, it is essential to achieve agreement on Agenda 2000 before the start of the new round, rather than to negotiate CAP reform internally, in parallel with the WTO talks. This is what happened in the Uruguay Round and gave rise to a situation in which the EU lost the initiative from day one, was constantly on the defensive and was held responsible for delaying the conclusion of the Round.

WTO talks:

Unlike in the Uruguay Round, where the negotiators started off with vastly different ideas about the objectives of the Round in agriculture, the general objective for the next WTO talks, agreed internationally is already quite clear. Article 20 of the Uruguay Round Agreement on Agriculture set down not only a legal obligation to resume the discussions on agriculture by the year 2000, but also clearly indicates that the aim of these negotiations is to continue the reform process that was started with the Uruguay Round and to achieve (and I quote), 'a substantial progressive reduction in support and protection'. The text of Article 20 makes it very clear what the direction of the talks must be: we have to further liberalise trade in agricultural products and reduce trade-distorting support schemes. The only question is how far we should want to go in this direction and how we want to get there.

The Uruguay Round Agreement on Agriculture provided for detailed commitments in three specific areas:

- domestic support

- market access

- export subsidies.

In the area of domestic support, it was agreed to reduce the overall amount of trade-distorting subsidies that are paid to farmers, by 20% over a period of six years which ends in 2000. The Agreement divides subsidies, on the basis of their effect on trade into three categories which are commonly referred to as those in the 'amber box', the 'blue box' and the 'green box'. The amber box contains the most trade-distorting category of aids and in particular those which give price support and encourage farmers to produce more because they are 'coupled' to how much they produce: the more a farmer produces, the more aid he receives. Such subsidies have to be reduced by 20%. 'Green box' subsidies, as defined in the Agreement on Agriculture are exempt from any reduction commitment. These are regarded as unobjectionable because they have minimal or no effect on production. This category includes, for instance, the EU's fully 'de-coupled' agri-environmental schemes, its pre-retirement subsidies, and the other structural payments that are specifically designed for rural society and which do not distort trade.

Then there are the famous 'blue box' payments. They too are exempt from the reduction commitment. These are subsidies that are granted under what are described as 'production-limiting programmes' and/or fulfil certain other conditions. Both the EU compensatory payments which were introduced in the 1992 MacSharry reforms of the CAP and the deficiency payments which the US pays to its farmers come under the 'blue box'. Since both types of aid are only partially de-coupled from production, they do not come under the 'green box' and are only permissible because they have been specifically permitted. They are the type of subsidies which are most likely to come under attack in the new round.

On market access, the Uruguay Round resulted in the conversion and the consolidation of the EU's variable import levies into customs duties with an obligation to reduce them by 36% on average over a six-year period. WTO members also agreed to import a minimum percentage of their domestic consumption. Finally, on export refunds, it was agreed to put a ceiling on both the money that can be spent on export subsidies and on the quantities that can be exported with the benefit of a subsidy. Under these commitments, the EU had to reduce the amount of export refunds for each individual product by 36% by 2001 and will have exported on the back of refunds at least 21% less in quantitative terms.

Reaching agreement on this involves a formidable intellectual effort as well as the acceptance by farmer of major and often unwelcome change. It enabled very different support systems all over the world to be compared and comparable commitments to be applied to them. This is of huge significance for the new talks. It means that both the methodology and the agenda for these talks in effect already exist. It will be infinitely simpler to go further towards reducing them although of course politically it will be as difficult as ever now that we have defined them and know how to compare them.

The Millennium Round:

The EU has welcomed the commitments to new talks on agriculture and on services but beyond that is firmly in favour of including them fully in a comprehensive round of negotiations covering not only the two subjects of the 'built-agenda' but also other issues such as industrial tariffs, trade and investment, public procurement and trade and environment, in other words a full-scale new round, which we have called the Millennium Round. The EU has a keen interest and much to gain in these areas and, as we know from the Uruguay Round, negotiations have a much better chance of success if there are possibilities to achieve trade-offs between differing sectors. It is not in our interest for the focus to be exclusively on agriculture. We should not lose sight of the fact that trade in agricultural products represents a mere 4% of total world trade and that other economic sectors contribute more heavily to our prosperity. Support for a Millennium Round has been steadily growing, and even the US, which originally opposed it, has undoubtedly moved closer to the EU position, and I am confident will eventually come round to what is increasingly becoming the general view.

The WTO talks will need to be considerably shorter than the Uruguay Round and the fact that they will be comprehensive in scope need not extend the process. It is premature to make any predictions today, before we have even started the negotiations, but there are some objective factors which will have an effect on the timing of the negotiations and I will briefly point out two of them.

First, there is the so-called 'peace clause' under Article 13 of the Agriculture Agreement which will expire at the end of 2003. Although the 'peace clause' has not always ensured protection against certain WTO action, and in particular against countervailing duty cases, it does afford the EU with effective guarantees in respect of domestic support payments. In particular the 'blue box' compensatory payments, and the other elements of the CAP support system cannot be attacked in WTO panels or through countervailing duty procedures. The prospect of its expiry and the possibility of new WTO challenges to our system mean that we have every reason to push for the conclusion of the round before that date. We should learn from the experience of the Uruguay Round where the results of the two 'soya panels', triggered the Blair House Agreement with the US which led to a breakthrough in the negotiations, and eventually made it possible to conclude the Round.

Another event that will have a bearing on the speed of the negotiations is EU enlargement. The EU has identified six candidates for accession and has begun negotiations for EU membership with Poland, the Czech Republic, Hungary, Slovenia, Estonia and Cyprus. This process will therefore run in parallel with the WTO. Concluding the negotiation is a top political priority for the EU but the most realistic scenario is that this can be done by 2003, but probably not significantly before. The EU will need to secure approval of the arrangement for the inclusion of new Member States in the EU customs union under the WTO rules and will have to ensure that the combined commitments in agriculture of the EU and the acceding Member States can be met by the enlarged EU. This linkage makes it desirable for the WTO agricultural negotiations and the enlargement negotiations to be concluded in parallel.

Agenda 2000:

This brings me back to the Agenda 2000 reform proposals, which in my view need to be concluded urgently to clear the decks for the WTO talks. The proposals follow a logic which is very similar to the 1992 MacSharry reforms involving a further reduction in internal EU price levels for the main commodities, to bring them closer to world market levels, combined with a system of direct payments to compensate farmers for some of the loss in income caused by the lower prices. These lower prices will make our products more competitive and above all allow increased exports without refunds. This will enable us to have positive ambitions for agriculture and not simply shelter behind our system of protection.

I am convinced that this is the right approach to follow. One could, of course, argue for more ambitious price reductions for beef and dairy and I have myself done so. But frankly the present proposal is the only one which stands any realistic chance of being adopted in Council. I would wish to add my voice to Franz Fischler's in calling upon the Agriculture Ministers to come to an early political agreement on these proposals. Respecting the Vienna European Council timetable will be difficult, since it basically requires a political compromise in the Agriculture Council scheduled for 22 and 23 February. But it is still possible. The German Presidency has committed itself to this agenda and has created a special 'High-Level Negotiating Group' to handle reform in the key sectors of cereals, beef and dairy. It has also issued a threat to Ministers that the February Council will continue throughout the week of 22 February until agreement is reached.

CAP reform:

Although every negotiation implies the need for a compromise, I believe it is important to respect the integrity of the whole of the CAP reform package. What I mean by this is that it is not a good idea to agree only on a mini-package in beef and cereals, or to agree to price cuts which are considerably lower than the ones which were put on the table by the Commission. A price cut in dairy of less than 15%, for instance, makes no sense since it is not enough to make our cheeses and other high-value products competitive on world markets. Hence, it would not allow us to enter the WTO talks with a credible position. Smaller price cuts than the ones put forward by the Commission for dairy, cereals and beef will do little or nothing for our chances to export to growing world markets. To export, we would continue to need high levels of refunds and these would no longer be permissible due to the reduction commitments of the Uruguay Round. There is no credible alternative for Agenda 2000 unless we want to return to a system of strict production control through high set-aside rates and production quotas under which it would be impossible to compete on the world market. Such a policy would be a disaster.

As I pointed out earlier, agreement on CAP reform is unlikely without prior basic agreement between the Member States on its financial implications. In the run-up to the Vienna European Council, eight Finance Ministers suggested a freeze in the CAP budget from the year 2000 at its 1999 level of approximately € 39.5 billion. This would in fact make it impossible to finance the progress reforms, which cost more in the short run, because of the transfer of support from the consumer to the taxpayer. It would also not enable there to be enough money to cope with the cost of enlargement. As a former Treasury Minister and a proponent of budgetary rigour in general, I cannot hide my sympathy for the desire of the majority of EU Finance Ministers to bring CAP expenditure under control. There is clear logic in transferring the costs of the CAP from the consumer to the taxpayer as a result of the change from price support to income support. But it is increasingly difficult to explain to the EU citizens that every time you reform the CAP it costs more money. In the long run this is not a sustainable policy and there is no fundamental reason why CAP reform cannot be made neutral in its effect on the EU budget, painful though it will be undoubtedly to achieve that.

But doing this sadly does not refute the reality of European Union politics. Even the ECOFIN's Finance Minister would not agree to a freeze of CAP expenditure at the level of 1999 and other, more realistic ideas emerged from the Vienna European Council Member which may produce a way out of the dilemma. It would appear that Ministers might agree on an increase of the costs of the CAP in the first three years, as long as by the end of the period for the new financial framework (2006), spending falls back to a lower level, close to that of 1999. This would make it possible to keep the reform intact and to approve it under the German Presidency and yet still deliver budgetary savings under the new financial framework. But CAP expenditure will not go down by itself after 2003 and the Council still has to agree on how these savings could be realised. Although the EU has not faced up to this formally yet, it is clear that savings could only be realised by introducing an element of degressivity into the system of direct payments, i.e. by steadily reducing them. This would certainly make sense and would also make it easier to successfully conclude the next WTO round.

Blue Box payments:

The package to emerge from our internal negotiations will of course largely determine the position with which the EU will enter the round. Since the result of the reforms will lead to an increase in 'blue box' payments in beef and cereals and to the introduction of new 'semi-decoupled' direct payments in the dairy sector, it is obvious that the EU will have to fight hard for the maintenance of this box, in favour of the Americans saying that they longer need the 'blue box' and they and the Cairns Group also wanting to terminate it. But our point is not really that weak. Like the other elements of the present Agreement, the 'blue box' will not automatically expire in 2001 or necessarily ever. For it to be got rid of, WTO members would have to agree by consensus on a modification of the present rules. Moreover, if Agenda 2000 is adopted we will have plenty to put in the kitty. We will be able to negotiate further on our export subsidies and on our tariffs on agricultural products. We will have the flexibility to offer concessions to our trading partners, both in agriculture and in other sectors. There is absolutely no need to be defeatist or defensive in our approach.

The Cairns Group position on the 'blue box' is hardly a surprise and follows logically from their long-term objectives. But what about the US? Their 1996 'Freedom to Farm Act' introduced a system of degressive direct payments which are based on historic production and are de-coupled from current production. Although their claim that these aids qualify unconditionally for the 'green box' is contested by many, their legislation, to be fair, does amount to a fundamental and courageous change in US agricultural politics. At last year's Oxford Farming Conference, Secretary of Agriculture Glickman invited the EU to (and I quote) 'be principled and bold' and follow suit. But of course much has happened since then. Towards the end of 1997, market conditions turned out to be much less favourable and the Asian crisis is seriously harming US exports. This has led the US Congress to vote for a package of close to 6 billion dollars extra support for US farmers for the fiscal year 1999 in terms of 'disaster relief payments' and additional 'market loss payments'. This may turn out to be a 'one off' package, but leaves me in some doubt as to what the US position is really going to be at the end of the WTO round. Will they really be prepared to expose US agriculture completely to world market forces? I am far from persuaded that this will necessarily be the case.

On the other hand although we have a fairly clear idea where the EU will stand at the beginning of the negotiations, it is equally uncertain where we will be when negotiations enter their final phase. In my opinion, it is in fact likely (and desirable) that the EU will be in a position to make further changes to its system in the direction of more de-coupled and degressive aids. With regard to de-coupling, our current system is in fact not all that far removed from it. Opposition to the concept seems to be much more driven by politics and the fear that farmers will be perceived as receiving money for doing nothing, rather than by economics and common sense. The farming lobby should be reassured on this. In the long run I am convinced that taxpayers will find it easier to provide continuing support to agriculture if the money only goes to those farmers who really need it, because they cannot generate enough income from the market. This seems only possible if the structural side of the CAP is strongly reinforced, converting the CAP into a truly rural policy which does not just deliver food but also other public goods such as maintaining the countryside as the millions of town dwellers who enjoy it increasingly, want to continue to see it. If this is what is meant by the 'multifunctional role' of agriculture I can wholeheartedly support it.

Enlargement:

Fully de-coupling our direct payments would also make it easier to achieve some our other objectives. It would not only remove much of the pressures on the CAP in the next round. It would also make it easier to integrate the largely rural economies of the candidate countries of Central Europe. Bringing into the EU the five countries with whom we are currently negotiating will increase the Union's arable area by 30%. It would also greatly increase the number of people that are employed in agriculture and will force the new Member States to modernise and restructure their rural economies. Moreover, with GDPs per capita which are well below the EU average, consumers in the candidate countries would nonetheless have to spend a much larger share of their income on food. It would therefore be a mistake if we were to introduce the current high level of agricultural prices in the new Member States upon enlargement.

If border controls are to be avoided this can only be achieved through a Union-wide reduction in prices. Hence, the need to follow the logic of Agenda 2000 if we are to go beyond it.

As to the question of extension of the direct payments to farmers in the new Member States, it has been argued that this should not happen, because farmers in these countries will not suffer a loss in income as a consequence of accession to the EU and that there is therefore no need for any compensation. Paying these aids would, moreover, put tremendous extra pressure on the budget. Though economically and financially wholly justified, this position is in my opinion politically not sustainable as long as the farmers in the EU-15 continue to benefit from direct aids. Solving this conundrum will dominate the agenda in the years leading up to enlargement. There will be no easy solution but de-coupling of aids and strengthening the CAP's rural policy seem to be the best building blocks towards achieving this.

Other issues for the new round:

Let me conclude by setting out briefly some other points which will be discussed in the WTO round and what the EU would want to see come out of it. Besides securing WTO compatibility of Agenda 2000 reforms, we should also seek greater access to third markets for our exporters, in particular for our high value processed products in lucrative markets such as Japan's and Korea's. The Asian financial crisis is making access to these countries more difficult for the time being, but studies indicate that purchasing power will rise again and that consumers generally are ready to spend more money on high quality foodstuffs, not just in Asia but also in other parts of the world. European exporters should profit from this trend. In the longer run, there is no reason why we could not increase our share of the markets in South America, in Australia or the United States, provided we can export without refunds. It will, furthermore, only be possible to push for increased access if we also open up our own markets more. A further item which the EU will want to negotiate is disciplines on export credits. This is an area which is not directly covered by the Uruguay Round Agreement on Agriculture, and where we have a major interest in limiting export credits, because we did provide them. We can count on the support of all major exporters, with the notable exception of the US. Negotiations on disciplines for export credit regimes have been going on in the OECD for many years but are stalled because of disagreement with the US. It is time for us to go on the offensive in the WTO round on this issue.

There is also a whole raft of relatively new issues which are not generally included under the traditional themes for trade negotiations, but which nevertheless have an important effect on trade, and which are likely to dominate our agendas more and more in the years ahead. I refer to issues like standards for health and safety, animal welfare, biotechnology, labelling and consumer information and the relationship between trade and environment. Where we will get to in these issues is far from clear. Consumer groups, environmentalist and animal welfare activists are unhappy with the thrust of the past WTO rules which they perceive as an obstacle for the objectives they pursue. Equally farmers are concerned by the effect of high European environmental, health or animal welfare standards on their competitiveness and argue strongly in favour of the imposition of equivalent standards on imported products. These issues in fact matter more to the general public than import duties and subsidies, and in one way or another the WTO will have to address them.

On trade and environment the EU took the lead at the first WTO Ministerial Conference in Singapore. We will continue to work towards defining solutions such as the legislation of labelling within the multilateral system at a specially convened High Level meeting in Spring of this year.

Finally on consumer health and safety, the WTO Agreement on the Application of Sanitary and Phytosanitary Measures already requires WTO members to base their rules on science and to align them as much as possible to internationally harmonised standards. Members that wish to go further than the internationally agreed harmonised standards have to prove that this is borne out by science.

The present WTO rules therefore require policy-makers to distinguish between legitimate health and safety concerns based on science on the one hand, and other consumer concerns or ethical considerations, on the other. It is not always easy to draw the line between the two in particular in the wake of the BSE-crisis. Moreover, making a distinction on the basis of science does not mean that non-scientific concerns can simply be ignored. Nearly all these concerns can, however, be addressed by giving individual consumers a choice and by providing information about the background of the product through labelling or other information schemes. We may have to clarify the present WTO rules on these issues to provide more WTO cover for extensive labelling of, for instance, products derived from modern biotechnology. Once these products have been cleared by independent scientific committees on the basis of the most recent scientific knowledge, it is no longer appropriate nor necessary for regulators to decide whether or not consumers should eat them. I also do not think our consumers expect politicians should make that choice for them. But they are entitled to know what they are eating and then to make their minds up whether they want to continue to eat it.

The challenges facing European agriculture in the coming period are as complex as they are substantial. But if we complete our international reforms with a modicum of courage, I am convinced that we can negotiate on the world stage effectively and realistically. I am determined that in the next WTO round Europe should have clear objectives and that we should pursue those aggressively, rather than be the butt of gibes and prods from the rest of the world. That is a stance which is more fitting for a Europe which has had the self-confidence to launch the euro. Let us carry that self-confidence on to the world agricultural stage.

Text of a speech given by Sir Leon Brittan at the 53rd Oxford Farming Conference, Oxford, 5 January 1999.

Information sources on the reform of the Common Agricultural Policy are listed at Section 13.2 in 'Recent references' of each issue of European Access. References relating to the international aspect of agriculture are listed at Section 13.6.