In the Uruguay Round (UR) of trade negotiations, agriculture largely determined the pace and progress of the talks, and the unwillingness of the European Union (EU) to make significant concessions on agriculture blocked agreement for a long time. The EU tried to defend its Common Agricultural Policy (CAP), as it had in previous discussions on the General Agreements on Tariffs and Trade, and to minimize any changes that might result from the UR agreements. For a long time the EU was not prepared to accept trade-related discipline on export subsidies in particular, and the 1990 Brussels ministerial meeting, which was expected to conclude the UR after four years of negotiations, broke down over the EU’s resistance to cuts in agricultural export subsidies. It took another three years of talks to find agreement on agriculture. During that period, the EU, under Commissioner for Agriculture Ray MacSharry, implemented its first real reform to the CAP and thereby put itself in the position of being able to accept limits and reductions on export subsidies. Without the MacSharry reform it would have been very difficult, if not impossible, for the EU to accept agricultural disciplines that were meaningful to the other negotiating partners, in particular the United States and the Cairns Group.
Will the EU be equally difficult in the “millennium round” of trade negotiations? Will it be prepared to accept further reductions of export subsidies and tariffs? The answers to these questions depend largely on the follow-up to the MacSharry reform, namely the Agenda 2000 proposals tabled by the EU Commission. Under the original proposal, price supports for cereals were going to be cut by another 20 percent, for beef by another 30 percent, and for milk by 15 percent. The final, scaled-down version includes 20 percent cuts for cereals and beef and 15 percent reductions for dairy products. These domestic reforms have important implications for the EU position in the millennium round talks because they relate to both export competition and market access.
Growing surpluses on EU markets mean that an unreformed CAP would have been in serious conflict with the EU’s World Trade Organization (WTO) commitments on export subsidies, for cereals and beef in particular. The availability of cereals for export had been projected to exceed the EU’s commitments on subsidized exports by a significant margin, especially in the case of wheat (see Figures 1 and 2). As long as EU prices exceed world market levels, as they were projected to do under unchanged levels of CAP support, the EU would be able to export only with subsidies and hence would be obligated to constrain its exports to the amount of its WTO subsidy commitments. Under these circumstances, in the next round of negotiations the EU would certainly try to avoid any further reductions of export subsidies and again would be a difficult negotiating partner. The original proposal of the Agenda 2000 allowed the EU the opportunity to export cereals and beef without export subsidies. Under this proposal European negotiators could agree more easily to further cuts of these subsidies in the upcoming millennium round. The final version of Agenda 2000, however, somewhat reduces the margin for flexibility that the EU would have had under the original proposal.
As far as negotiations on market access are concerned, cuts in CAP price supports would enable the EU to accept further tariff reductions because it would have less reason to fear that lower-priced imports would undermine its domestic price support measures. In other words, the EU position on the two central areas of agricultural negotiations in the millennium round—market access and export competition—depends crucially on the final form of the Agenda 2000 decisions and their implementation.
In the area of domestic support the EU is likely to insist on the need to maintain the “blue box” provisions that allow direct payments to farmers. Doing this will mean that subsidies that limit production do not have to be factored into commitments to reduce subsidies. The compensation payments to EU farmers that were introduced under the MacSharry reform, and that would be raised and extended under Agenda 2000, fall in the blue box category of domestic support. The blue box therefore is likely to be a difficult issue in the next round of negotiations even though the EU is pretty much alone on this front. The U.S., the other major user of the blue box after the Uruguay Round, has decoupled its compensatory payments to cereal growers so that they now fall in the “green box” of nondistorting or only minimally distorting domestic subsidies. The EU is still quite far from having fully decoupled its compensation payments and would not reach that point even under Agenda 2000. The scaled-down version of Agenda 2000 maintains blue box subsidies at slightly higher levels than the original proposal.
If the blue box were to be eliminated in the millennium round of trade negotiations and the EU had to factor all its compensation payments into its domestic support commitments, the CAP would be in serious trouble. With blue box subsidies included in total domestic support, the EU would surpass its level of commitment at the end of the current WTO implementation period. Domestic support would be even higher than commitments if further reduction in commitments were to result from the millennium round.
In the area of sanitary and phytosanitary measures, the EU is likely to raise the issue of how to take account of consumer concerns about food safety in cases where it is difficult, if not impossible, to provide scientific evidence of any health threat. After having lost the WTO dispute about beef hormones, the EU is concerned that it might have to open up its borders to imports of foods with characteristics that undermine consumer confidence and potentially cause a slump in demand for the entire product sector in question. Some vocal and politically influential EU consumer groups strongly resist the application of biotechnology to food.
Another growing concern the EU has relates to the treatment of agriculture in regional free-trade arrangements. The EU is engaged in a number of negotiations on the establishment of free trade (for example, with South Africa and the Mercado Común del Sur [MERCOSUR]). But major difficulties have arisen over agriculture, not only because the countries concerned have a strong interest in extending regional trade liberalization to farm products, but also because GATT requires that “substantially all trade” be included in such arrangements. If the EU’s relatively high tariffs on agricultural products had to be completely dismantled in these regional free-trade arrangements, not only would a major diversion in trade occur, but the sustainability of the CAP would be severely undermined. The EU may therefore try to use the millennium round of trade negotiations to arrive at a more precise definition of how much trade can legally be excluded from free-trade arrangements and possibly at some specific exceptions for agriculture in this context.
Overall, the place of the EU in the millennium round has been foreshadowed by the domestic debate about further CAP reform. The recent agreement on further reform, along the lines of Agenda 2000, may turn the EU into a more flexible negotiating partner than in the Uruguay Round, although less so than would have been the case under the original proposal. But the EU will still raise some controversial issues, such as consumer concerns about trade in food produced with biotechnology and the treatment of agriculture in regional trade arrangements.
Stefan Tangermann is a professor at the Institute of Agricultural Economics, University of Göttingen, Germany.