EU in the Headlights: Blair's Challenge

Fighting in the Family

United Kingdom and EU rotating President Tony Blair has a tough road ahead of him as he seeks to get the 25 nations of the European Union to agree on a seven-year budget.  The Common Agriculture Policy or CAP is loathed by the British, loved by the French, and attractive to the 10 new members of the union.  Margaret Thatcher, in 1984, was faced with a Britain that was much poorer and with little farming compared to the other EU members.  She negotiated the British rebate on UK membership dues, loathed by the French, loved by the British, and a growing drain on EU coffers. 

What complicates the entire framework of discussion is the current Doha round of trade talks that is stalled after Jacque Chirac killed even the lackluster EU offer to reform agriculture trade policies [see DEL: "Note to Brazil and India:Blame France!"].  According to The Economist, Tony Blair:

"proposes to increase Britain’s net contribution by a total of €8 billion ($9.4 billion) over the six-year budget period, either through a lump-sum payment or a reduction of the rebate. In exchange, he wants to see the overall budget cut. His plan trims about €24 billion off the €871 billion figure proposed by Mr Juncker, largely through cuts in rural-development aid and assistance to the EU’s new members in central and eastern Europe.

But though the proposal avoids direct confrontation on the CAP, the issue still looms large. Britain wants to keep the bulk of its rebate as compensation for the EU keeping the CAP. And Mr Blair’s plan calls for a review of all EU revenue and spending in 2008, when Britain will presumably once again go after the CAP with a carving knife."

To put the CAP in perspective, only 2% of the European workforce farm, the CAP sucks up 40% of Europe's budget (did you think it was going towards technology?), while 80% of the subsidy goes to 20% of the richest farmers. 

Why do people not in the EU care about how the Europeans want to misguidedly spend their citizens' taxes?  Because the subsidy significantly impedes development in the third world and is blocking an agreement on free trade.

What EU Stagnation Means to the Developing World

In 2003 the Europeans attempted a compromise that demonstrates how far the divide still is.  The Economist writes:

"In 2003, the EU agreed to replace a blizzard of farm-support payments with a single payment scheme, which subsidises farmers' incomes directly, rather than by paying higher prices for their crops and livestock. This should remove the worst trade-distorting aspects of the CAP. Farmers now get paid an average of only one-third above world market prices, compared with 80% in the mid-1980s. Overall subsidies are down: from over two-fifths of farm receipts in the 1980s to one-third and falling in 2004.

The trouble is that the 2003 changes were a classic case of only partial reform, as everyone knew at the time. They were too little both for Europeans and for Europe's trading partners. They did not affect tariff levels, which are now the main subject of dispute between the EU and the rest of the world. Nor did the 2003 reforms do enough to resolve looming budget problems. Even so, they went too far for many farmers, who now see themselves as an endangered species."

Given the recent French rejection of the EU Constitution and their desire to not create more political turmoil to compete against the Paris riots, there is little likelihood of any political willingness to promote change.

However, farm subsidies in the developed world are not constrained to just Europeans.  Another Economist article illustrates how beholden the OECD is to farm subsidies.

"There is, though, wide variation between OECD members. Producer support is worth less than 5% of farm receipts in New Zealand and Australia, but amounts to roughly 20% throughout North America, 34% in the European Union, and a whopping 60% in Japan. And while the overall value of support has fallen from 2.3% of GDP in 1986-88 to 1.2% now, the reductions have been uneven. Canada and Mexico have made deep cuts in their farm supports, for instance, while Turkey has actually increased its supports."

The developed world is worried about the spread of AIDS, radical Islam, avian bird flu, and a host of other troubles in the developing world.  However without radical farm subsidy reform, starting in Europe (as proposed by the United States) and followed by Japan, the Doha round will accomplish little.  If the developing world continues without the opportunity for sustainable development and the ability to trade for hard currency with the industrialized world, it will find other exports that may be far more costly to the world.

Terrorism, drugs, diseased and impoverished immigrants are the likely exports the third world will trade with the industrialized nations if a fair trade round is not concluded.  This will be far costlier than sustaining 2% of the European workforce.

Comments

[Marvin]

Bill,

Excellent and well rounded coverage. The significance of events and challenges such as this are largely unreported - and, unfortunately, when covered are done so in a way that does not lend to broader understanding. It's good to see some are framing the discussion in proper context with regard to the real exports of the developing nations should we fail to provide alternatives in the form of free trade.

[Bill Rice]

Marvin,

You said in a much more concise way my point. If I could get my posts down to your level of terseness and clarity, I could cover so much more!

Thanks for your kind comment.

Kind regards,

Bill Rice
Dawn's Early Light

[Dan tdaxp]

A very solid piece. A very dangerous form of protectionism.

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