EU farm reforms and slaying the ghosts of Doha

In a recent development, and as a major step towards consensus on reforms to the more than 50 billion euro-a-year farm policy, EU negotiators provisionally agreed (awaiting final approval of the European Parliament and member states) that up to 30 percent of current direct subsidy payments to large farms will henceforth be conditional on farmers’ taking steps to improve their environmental performance, including leaving 5 percent of their arable land fallow as a haven for wildlife. Amid widespread concerns about the bloc’s food security and criticisms about agri-business-led watering down of environmental standards to the point of making them meaningless, the present proposal does affect direct subsidies allocation under the Common Agricultural Policy (CAP), which will continue to consume three-quarters of EU’s total farm budget from 2014-2020.

Since 1992 (and especially since 2005), the EU’s CAP has undergone significant change as subsidies have mostly been decoupled from production, or in WTO-speak shifted from the contentious Amber Box (that are subject to reduction discipline in the WTO’s ongoing Doha Round negotiations) to the Green Box and Blue Box categories that are not subjected to disciplines of reduction and elimination[1]. Direct payments are decoupled from current production and are not directly price-related, which makes them less distortionary than other types of indirect subsidies. However, they are still distortionary, and affect global farm prices leading to distortions in export opportunities and agro-market access for developing country farmers. The present proposal to make subsidy payments conditional on setting aside land for bio-diversity purposes (Blue Box) will also add to the distortions in market prices of agricultural products[2]. Also, a substantial amount of these direct payments benefit the large industrial farmers and are made to owners of land that is no longer even used for farming. This has been one of the major bones of contention between the industrialised countries and the rest in the Agriculture negotiations of the Doha Round.

Agriculture and the WTO

So what does this development mean for the moribund Doha Round of WTO talks? As a positive from the negotiation perspective, EU leaders also agreed to reduce overall CAP spending for 2014-20 by 13 percent compared to the 2007-13 period. This is a reversal of the earlier trend of increases in the overall farm domestic support in industrialised countries. As such this will go down well with the developing country trade partners and help EU to take a proactive stance at the Bali Ministerial of the WTO.

In the aftermath of the terrorist attack on US mainland, the Doha Round was launched in 2001 with the promise of boosting development and hence agriculture was given priority. Development was deemed to be an important component of proactive strategising to prevent future terrorist attacks on the west. The thinking around that time, and especially in view of the failed Seattle ministerial meeting of the WTO, was that prioritising development of the poorer countries would be imperative to enable the launch of a new WTO round of trade negotiations; this meant support for liberalisation in sectors and products of interest to them.

The other consideration that likely influenced the strong focus on agriculture in the Doha Round was that agriculture was considered an unfinished business from the Uruguay Round, at least in the developing country perspective, and including elimination of the rules and protection for agriculture in industrialised countries in the agenda was necessary to get a new round going. Following the Uruguay Round practice, and in the hope of ensuring that agriculture sector reforms don’t get scuttled in course of time, agricultural market access for developing countries was included as an important element of ‘the single undertaking principle’ of negotiation. Thus it is an unfortunate development that 12 years down the line agriculture has remained as the key stumbling block of conclusion of the Doha Round.

Several commentaries have identified the multiple reasons for the intractability of the Doha Round, ranging from the intransigence by key WTO members, the complexity of the negotiations and over-loaded agenda, the ‘single undertaking’ principle that binds the outcome together, lack of business-sector interest, lack of leadership, etc. However, it may be worth considering that a satisfactory agreement in the agriculture market access pillar in favour of the developing and least-developed countries could well turn out to be the most effective means to get the stalled Round moving again.

Notwithstanding their public posturing at the WTO, negotiators from developing countries, and in particular those from the larger ones with significant market access interest, agree that it is difficult to get over the feeling of deception over the unfulfilled Uruguay Round agricultural commitments of the industrialised countries. Thus, in order to assuage the feelings of this large group of stakeholders and make them amenable to showing flexibility in other areas, conceding in agricultural negotiations is necessary; and for the latter, agriculture sector reforms in industrialised countries are an imperative. With the recent agreement, EU has a better chance of appearing proactive in agricultural negotiations in the run-up to Bali. For sure, industrialised countries need to address this particular elephant in the room if they wish to lend serious support to the WTO beyond paying lip-service to the cause of trade multilateralism. 

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[1] The US has already redesigned its subsidy system and moved the bulk of its subsidies from the Amber to the Blue and Green Box types of subsidies.  

[2] The DSB panel on US cotton subsidies has ruled that direct payments ‘do not cause significant price suppression’. However, they still cause some distortions, as farmers receiving these subsidies are restricted in the alternate ways to which the farm land could be put to use (thus indirectly affecting prices and production) and hence these subsidies were deemed actionable.