The European Union and Developing Countries’ Non-trade Concerns: An Uneasy Alliance?

By Aileen Kwa
Introduction

From Europe, to the US, to countless developing countries, traditional-style agricultural production has, and continues to be dismantled. Small farmers are being squeezed out as they find themselves out-competed by the giant food producers based in their own countries as well as overseas.

A large part of food production today is now industrialised. That is, with the help of technology, chemicals and biotechnology, animals and crops are the products of huge factories, and farmers are the workers in the production line. Furthermore, production is often geared towards exports, i.e. cash crops and high value crops rather than diversified production for subsistence or local consumption. This is true in both developed and developing countries. Big operators, integrators, agribusinesses are the new players. The industrialisation of agriculture has been sold to consumers as the necessary step to ensuring food security – so that there will be enough food to feed the rapidly increasing world population.

At the international trade and policy level, the stage for this radical change has been set by the various free trade arrangements between countries and regions, as well as by the loan conditionalities of the International Monetary Fund (IMF) and the World Bank. Many of these conditionalities or agreements have forced developing countries to take on structural adjustment policy changes. Twenty years of IMF and World Bank policies have eliminated or drastically reduced subsidies in developing countries. Tariffs and other protective mechanisms have also been dismantled, so that the markets of developing countries are already very open, with tariff levels on major agricultural products much lower than those of OECD countries.

The WTO’s Agreement on Agriculture (AoA) came into force in 1995 and reinforced the Bretton Woods adjustment policies for developing countries. Limits on tariff levels and subsidies are now binding, permanent and continue to be reduced. Countries in breach can be taken to the WTO Dispute Settlement and face trade sanctions from other members.

Not surprisingly, these sweeping policy changes have ignited intense concern and debate within communities and amongst WTO member countries, especially those that see agriculture as more than a pure business venture. The preamble of the Agreement on Agriculture refers to the fact that these reform measures should have ‘regard to non-trade concerns, including food security and the need to protect the environment’. However, the umbrella term ‘non-trade concerns’ (NTCs) has become a catchall phrase within trade circles, meaning something different for everyone. The EU defines NTCs as multifunctional agriculture – the need to protect the environment, particularly the rural and cultural landscape, and to ensure the long-term viability of rural communities. Given the different cultural, socio-economic and political contexts, developing countries’ NTCs differ. NTCs for developing countries include food security, agriculture as the main source of employment and livelihood, as well as the need for a basic level of food self-sufficiency since this is usually synonymous with access to food. Food self-sufficiency is also the means to ensure the economic and political sovereignty of countries.

While each region or country in theory is entitled to look after its own needs, the problem at hand is that with international trade policies such as the Agreement on Agriculture, world trade is shrinking into one single market place, so that one country or region’s subsidies and policies can impact heavily on another country or region’s agricultural sector, sometimes even to the extent of completely destroying the agricultural production capability in certain products. Due to the subsidised exports (exports sold at below costs, also known as dumping) by OECD countries to developing countries over the last twenty years, the structure of many developing countries’ agricultural economy has changed, so that increasingly, countries that used to be net-food exporters are now becoming net-food importers.

Non-Trade Concerns and the Agreement on Agriculture

Even when the WTO’s Agreement on Agriculture was being negotiated between 1987 and 1994, some governments were already anxious about the impact of agricultural trade liberalisation and its non-trade effects, hence the mention in the preamble of the AoA that the reform programme should give regard to non-trade concerns.

The other reference to non-trade concerns is in Article 20, which stipulates that WTO members will reconvene negotiations for continuing the liberalisation process. This process will take into account inter alia, ‘non trade concerns… and other objectives and concerns as mentioned in the preamble to this Agreement’.

Five years following the implementation of the Agreement on Agriculture, non-trade concerns continue to be a very contentious and highly politicised issue both in developed and developing countries. The farm lobby particularly in Europe is politically strong and has been exerting immense pressure on EU governments to ensure that the multifunctional uses of agriculture is not jeopardised in the name of free-market efficiency.

A group of ‘like-minded’ developing countries have also been fairly vocal at the WTO about the need to ensure continued food security and also a certain level of self-sufficiency. India, for example, has argued that the country does not have sufficient foreign exchange in order to procure its food needs from the global market. Furthermore, it has argued that agriculture is the prime source of rural employment. If this sector is destroyed in the face of global competition and in the name of market efficiency, millions would be plunged into poverty and food insecurity due to lack of alternative sources employment for so many.

Developing country governments (with the exception of a few at the WTO that have special trade privileges with the EU) have shown deep suspicion of the term ‘multifunctionality’. As a developing country diplomat explained ‘We do not share the same concerns of preserving the rural and cultural landscape’. Furthermore, even though some countries supporting multifunctionality have brought in food security as an important aspect, there is a sense amongst developing country governments that food security concerns in the first and third world are of quite a different nature.

The other argument, which has been raised at WTO discussions, has come from the Cairns Group. Argentina (an active member of the Cairns Group, which advocates dismantling the high OECD subsidies and opening up agricultural markets) made the argument at an Analysis and Information Exchange (AIE) session of the WTO that

‘There are economic and environmental reasons to avoid ‘exporting’ our own ‘Non-trade concerns’ to our trading partners’.

Argentina argued that while some countries provide subsidies to address environmental concerns, the bulk of the several hundred billion in subsidies did not actually get into the pockets of farmers. Rather most of the subsidies were captured by input suppliers i.e. providers of fertilisers, herbicides, and pesticides, energy and irrigation. This means high intensity production and more environmental degradation.

Purpose of this Paper

The aim of this paper is to attempt to objectively evaluate if indeed, there is valid ground for the EU to push forward its multifunctionality agenda and subsidy programmes. Indeed, the concerns of especially small European farmers are very important. Ideally, countries that want to sustain a viable population of farmers should be free to do so, as well as those concerned about maintaining the rural environment and landscape, and a certain level of food security for strategic reasons.

The complication arises because the European Union’s Common Agricultural Policy (CAP) has already done much damage on developing countries’ agricultural sector. There are many examples whereby the dumping of cheap EU surplus has destroyed the livelihoods of farmers in the South, for example, the often quoted illustration are the beef farmers of West Africa in the 1980s.

Making the status quo even more problematic is that the WTO’s Agreement on Agriculture endorses such huge subsidies for those who had traditionally provided them (primarily European countries and the US), while prying open markets in the South, therefore endorsing and exacerbating unfair competition. How can developing countries survive open markets in the face of total subsidies amounting to $335 billion from the OECD countries a year?

The enormity of OECD subsidies is captured in UNCTAD’S observation, that the annual cost of support for agriculture in industrialised countries in 1996-98 was double the level of agricultural exports from developing countries during those three years.

Brussels provides European agricultural companies and farmers about 80-90 billion Euro annually in the form of services and direct payments. The result is that most EU products are being directly or indirectly subsidised. Indeed, subsidies account for over 40 per cent of total agricultural output. In fact, supports provided to some products which are of export interest to developing countries is several times the value of world trade in these items. In 1997, the OECD producer support to rice and meat was 4.11 and 6.18 times the value of world exports of these products.

The reality in the single world market today is that subsidies for one group is decimating and destroying the ‘non-trade concerns’ for another group. This should not be the case.

This study therefore attempts to take a closer look at the nature of non-trade concerns for both the EU as well as for developing countries. Is there a possibility of striking a balance within the AoA that could take into account the concerns on both sides, and still be beneficial and fair for all? Or does the AoA need to be changed substantially in order for both sides to protect their non-trade concerns?

Part I

Developing Countries’ Non-Trade Concerns:

The Impact of Liberalisation, the AoA and the CAP on Small Farmers in Developing Countries

On the Agreement on Agriculture:

‘Imagine a few people living in an apartment building. Two of the more affluent are in the habit of playing football in the courtyard and, in the process, break the windows of their neighbours. The two get together and agree that breaking windows in the courtyard is bad. They decide to do something about it. However, since they have been playing in the courtyard for so long, they argue that it would be difficult for them to stop all of a sudden. So they set the rules such that they will continue playing for six more years but will break only 80 windows rather than 100. As for the other residents, they can play but they cannot break any windows. If they do, the affluent two will call the police’.

Brief History of the CAP and the AoA

Although agriculture has always been part of the General Agreement on Tariffs and Trade (GATT), agricultural trade operated outside of GATT rules. This was because both the US and the EU were fiercely protecting their markets. In the 1950s, a GATT Working Party found that the US had failed to remove import restrictions in dairy products and authorised retaliation. US responded by threatening to withdraw from the GATT. On that basis, US was granted a non-time-limited waiver on Article XI (this article prohibited quantitative restrictions on trade). Similarly, the EU blocked the adoption or refused to implement panel decisions that threatened its Common Agricultural Policy. This led to GATT’s lax enforcement of Article XI.

After World War II, the EU set up the CAP with the aim to become more self-sufficient in food production. Farmers were given subsidies in food production. The policy freedom in the GATT allowed the EU to develop its CAP policies based on tightly protecting the EU market. As a result of CAP subsidies, the EU was transformed from being a net food importer to a net food exporter by the 1970s. By this time, the CAP had already developed into ‘a complex web of price and sales guarantees, subsidies, and other support measures that largely insulated farmer’s incomes from market forces’. For most agricultural products, a minimum price was set to apply to all sales within the EU. Lower price imports were charged a variable import levy, which would bring the cost up to par with the Union price. In the face of guaranteed prices above world prices and no production controls, coupled with technological advances, EU surpluses expanded. There was no clear way about how to dispose of these surpluses. The EU resorted to paying exporters the difference between the high EU price and the world price. This enabled them to dump their excess food on the world market. By the 1980s, about 80 per cent of the EU budget was spent on agricultural programmes.

Experts Trebilcock and Howse (1999) concluded that

‘What is certainly true is that the CAP went from a programme that affected trade by keeping foreign producers out of the EU market to one that, at the same time, because of the massive surpluses being disposed of through the rebate scheme, made it increasingly difficult for foreign producers to sell their agricultural products in third-country markets’.

The central problem that remains today, is the disposal of these surpluses. By the late 1970s and early 1980s, the US and the EU were both increasing their supports in a ‘beggar-thy-neighbour’ subsidy war against each other in the attempt to capture third country markets (also largely markets in developing countries). It reached the point by the start of the Uruguay Round where clearly the costs were too high and were still increasing. It made sense for both the US and the EU to come to a truce about how to divide up third country markets between themselves, and at less cost for both parties.

The final Blair House Accord was therefore such a truce. It was an agreement between only the US and the EU, which was then presented for the wider GATT membership for agreement. While on paper, the final Agreement on Agriculture seems to be about liberalisation, there are countless loopholes, which seem to mandate liberalisation for developing countries but allow those countries, which have provided protection and subsidies before, (i.e. the OECD countries) to continue doing so.

Therefore while the EU today talks about multifunctionality and agriculture as not just a business concern, and the need to upkeep the viability of rural communities, it must be kept in perspective that the EU has been dumping its subsidised surpluses on to developing countries for over twenty years. In so doing, the EU has radically changed the structure of agricultural production in many developing countries, with devastating results (as will be illustrated later). From being previously fairly self-sufficient, in recent years, many developing countries’ domestic producers have not been able to compete with the subsidised imports. As a result, domestic production of traditional crops has collapsed. Some developing countries which used to be net-food exporters are now net-food importers.

By creating the rather unfair rules of the present AoA, both the US and the EU have provided themselves with an international policy environment, which guarantees agricultural markets for their products in developing countries. Countries that do not open up according to the rules will find themselves facing trade sanctions. At the same time, that same set of policies legitimises the huge subsidies these OECD countries provide, as well as the high tariff barriers that are also in place.

The Special Place of Agriculture in Developing Countries

Agriculture is not just another sector of the economy for developing countries. The crucial role it plays in the majority of developing countries is that it continues to be the main source of employment and livelihood for most of the population. According to Amartya Sen, access to food depends on people’s access to entitlements – either land or inputs for food production, or employment and income that can be used to purchase food. For countries, which are largely agrarian, and with many surviving under or just around the ‘poverty line’, employment and income is scarce and the most accessible means to food is through production.

In India’s submission to the WTO ‘Food Security – An Important Non-trade Concern’, India makes the case for a minimum level of self-sufficiency due to macro-economic reasons. Importing food to meet local needs is not viable when many countries have foreign exchange constraints. Governments should therefore be given the freedom to support farmers in their food production. Furthermore, ‘agricultural self-reliance forms a vital underpinning for the growth of the GDP of agrarian developing economies since good agricultural production provides purchasing power to a large majority of a population, which in turn spurts industrial growth. Self-sufficiency in food production has therefore a specific developmental perspective as opposed to a purely commercial perspective’. The paper concludes that ‘it is our view that developing countries need to be provided the requisite flexibility within the AoA to pursue their legitimate non-trade concerns’.

In a similar vein, the FAO makes the observation that for a many developing countries, the agricultural sector remains largely underdeveloped in production both for domestic market and for exports. At the same time, in most of these countries, agriculture lies at the center of their economies. It

accounts for a large share of Gross Domestic Product (GDP),
employs a large proportion of the labour force,
represents a major source of foreign exchange,
supplies the bulk of basic food and provides subsistence and income for large rural populations.
FAO concludes that for developing countries, ‘significant progress in promoting economic growth, reducing poverty and enhancing food security cannot be achieved in most of these countries without developing more fully the potential capacity of the agricultural sector and its contribution to overall economic development’ (our emphasis).

Agricultural production in developing countries is therefore important in ensuring people’s access to food, livelihoods and employment, as well as improving the larger economy in a country.

Key Differences Between Developed and Developing Countries’ Agricultural Sector

It is important to note that are vast differences between the agricultural sector of developed and developing countries. It is not the case that environmental issues and the EU’s rural landscape concerns are not shared by developing countries. Rather, they are of less priority as more immediate, basic needs issues top the agenda. The urgency for developing countries is due to the place of agriculture in developing countries’ economies, as highlighted above, as well as the socio-economic position of most developing countries. These differences are highlighted below:

Levels of Agricultural Support

The agricultural sectors of the rich industralised countries are well endowed. There is access to information, good infrastructure, access to local and foreign markets, as well as the availability of technology.

The situation is very different for many developing countries, especially the lower income countries, where farmers work with little capital, resources or technology. Many do not even have the infrastructure -- for example, the roads and transportation providing access to markets -- that is taken for granted in the developed world.

The subsidies given to producers in the OECD countries have been increasing, from US$247 billion a year in 1986-88, to US$274 billion in 1998. The protection and support given to the farmers throughout the years have enabled them to make significant technological and economic gains.

In contrast, the farmers of developing countries have traditionally been taxed rather than subsidised. Agriculture has been treated as just another facet of the economy from which taxes are collected.

Importantly, the average per capita income for farmers in developing countries is only a drop in the ocean of the income and the subsidies received by developed country farmers. For example, in the main maize-producing areas of Mindanao in the Philippines, average per capita income for farmers is about US$300 a year.

Due to the low level of resources, developing countries’ farmers have far less flexibility in shifting to other crops. With tariff levels coming down and cheap imports of major agricultural products flooding the local markets, many farmers in developing countries have been advised to shift towards high value cash crops or luxury products such as asparagus, cut flowers etc. Unfortunately, many such projects have failed as these crops generally require large financial outlays and technological know-how, which they have little access to.

Population Involved in Agriculture

The other stark difference between developed and developing countries is the numbers involved in agriculture. While developed countries have at most 5 -10% of their population involved in farming, agriculture on the other hand is the source of employment for up to 50- 90% of many developing countries, including those countries that are net-food importers. The majority of these are small farmers produce for subsistence. Farming is therefore their source of livelihood. Alternative sources of employment would be difficult to attain. Moving towards food imports for food security would mean the importation of massive unemployment.

Food Security / Insecurity

Food shortages are unheard of in the developed world. However, this is the reality for over one-fifth of developing countries. 21 countries experienced shortfalls in food in the marketing year 1997/98 and required exceptional and/or emergency food assistance.

The percentages of the undernourished are also staggering, at about 40% in LDCs (48 out of 95 developing countries are LDCs). According to the FAO, this figure has been unchanged since the 1970s. For the 18 NFIDCs, the numbers of undernourished make up 28% of their population. That is, for two-thirds of the developing world, food insecurity is a reality for over a third of the population.

Trade Deficits

In almost half of developing countries, the trend today is one of widening trade deficits, with falling or stagnant growth rates. Where trade balances have improved, there has generally been a slowdown in economic growth and imports. UNCTAD notes that only a very small number of countries, notably China and Chile have been able to buck this trend by combining faster growth with improved trade performance. For lower income developing countries (particularly LDCs and NFIDCs), balance of payments deficits have increased i.e. become more negative.

The reasons for this trend are complex, but one of the key factors has been the falling terms of trade for developing countries. For non-oil developing countries, the decline in the terms of trade has been steady, at about 1.5 per cent per annum since the early 1980s.

Faced with a situation where their exports are not enough to pay for imports, and where more and more exports are needed to pay for a fixed amount of imports, the majority of developing countries end up borrowing increasing amounts of hard currency in order to buy food from the world market for their peoples. This situation is not only politically and economically unsustainable, but also puts peoples’ access to food in developing countries in a very precarious situation.

Due to the very different circumstances of people and the economy in developing countries, the problems that arise from agricultural liberalisation for developing countries are more immediate and pressing. The very basic needs of people – such as access to food - is dependent, often solely dependent, on the viability of the sector.

The General Impact of Agricultural Liberalisation and Trade Disciplines on Developing Countries

Agricultural liberalisation policies mandated by the Bretton Woods for developing countries were reinforced by the Agreement on Agriculture in terms of reducing subsidies, lowering tariffs and the elimination of other types of market access barriers.

The results of implementing the AoA have been varied, but in general, the impact has not been positive, particularly when NTC issues are taken into account. In a study of 14 country case studies, the FAO makes the following conclusions:

Few studies reported improvements in agricultural exports in the post UR period. The typical finding was that there was little change in the volume exported, or in diversification of products and destinations.
Food imports were rising rapidly in most cases. Some regions were facing difficulties coping with import surges due to ‘detrimental effects on the competing domestic sectors’. On the whole it was observed that while liberalisation brought about an almost instantaneous surge in food imports, these countries were not able to raise their exports due, amongst other factors, to supply-side constraints.
There was a ‘general trend towards the concentration of farms in a wide cross section of countries’. While the concentration of farms led to increased productivity and competitiveness, in the absence of safety nets, the FAO found that this process marginalised small farmers and added to unemployment and poverty.
For many developing countries, key agricultural sectors that were vital for the economy in terms of food supply (i.e. also food security), employment, economic growth and poverty reduction, were being seriously eroded due to the inability to compete with cheap imports.
On the grounds of food standards and quality, ‘trade harassment’ has been a common problem for developing countries’ trade with developed countries. The FAO reports that there has been a lack of mutual recognition of inspections and standards, with several large importing countries often asking for ‘sameness’ in the process rather than ‘equivalence’.
Therefore, the evidence emerging so far is that developing countries on the whole are not benefiting economically from agricultural liberalisation. In fact, the balance of payments situation has worsened. From a socio-economic perspective, the levels of food insecurity, unemployment and poverty have deteriorated.

The case studies below illustrate this point:

Case Study 1: Liberalisation Dismantles the Philippine Agricultural Sector

Since becoming a WTO member in 1995, the Philippine government stepped up its campaign to embrace the free trade agenda. Sweeping policy changes have been made to the agricultural sector. While previously there was legislation in place to encourage local food production, particularly of staples such as rice and corn, these have been dismantled. Significant amongst these were the Magna Carta for Small Farmers, 1991, which prohibited the importation of agricultural products that were produced locally in sufficient quantities. This legislation offered blanket protection to small farmers through measures such as quantitative restrictions.

The other major policy shift central to Estrada’s food programme has been the encouragement of farmers to convert lands from staple foods to non-traditional ‘high value crops’ for export. Acreage planted to rice and corn have been slashed by more than half, from 5 million hectares to 1.9 million hectares, freeing up land for the production of cut flowers, mangoes, eucalyptus, asparagus etc.

Concurrently, as tariffs and quantitative restrictions have been dismantled, the Philippines has been inundated with imports of staple foods that they have traditionally produced themselves. Rice imports have skyrocketed, from 200,000 tons in 1993, to 2.2 million tons in 1998. A similar scenario is true for corn, beef and pork.

At the same time, the already minimal amounts of government subsidies for staples have dropped further, from 6 to 3 per cent in rice from 1995-98, and for corn, from 2 per cent to zero.

Income from exports has not materialised. Many of the experiments with high-value crops have failed miserably. For small holder farmers who have lost the markets in rice, corn or pork, conversion to these crops requires too high a financial outlay, and knowledge that is foreign.

That the high-value agricultural exports have not been successful can be gleaned from the numbers. While in the 1980s, the Philippines was in fact a net food exporter, (there was a $6.7 million surplus in 1988), the trend has now been reversed. Instead the trade deficit has been increasing every year, from 42 million in 1994, to 670 million in 1998.

Poverty is on the rise as farmers of staples, such as rice and corn are being out-priced and are quickly losing their hold on the local markets to imports. Imported corn is only half the price of locally produced corn. It is not uncommon to find Mindanao corn farmers leaving their harvest to rot in the fields because the prices have sunk so low that it would not be worth their while harvesting and selling the corn. The other phenomenon is that corn and rice lands are left empty as small farmers cannot afford conversion to higher-value export crops.

As of 1998, 75 per cent of peasant families in corn production have been living under the poverty line. The situation is set to worsen as 12 million corn-producing families are facing further drops in income. When pressed for specifics, the Philippine government has admitted that 350,000 jobs are being lost annually, mainly from the labour intensive traditional crops like corn, rice and sugar. In the corn sector alone, 45,000 jobs are being replaced each year. The result of dismantling the traditional agricultural sector is evidenced in the high migration rate to the city from the rural areas, as well as the stream of women migrant workers that leave the country for employment abroad.

Sources: Integrated Rural Development Foundation, 1999, ‘Five Year After GATT: What have we got?’, Occasional Paper No. 1-99.

Mendoza 1998 ‘Gender, Growth and Globalisation: Women in a Changing Rural Landscape’, Philippine Peasant Institute Briefing Paper Vol VI No. 1, July.

Bello 1998 ‘The GATT Agreement and Food Security: The Philippine Case’, Paper presented at the International Workshop on WTO Agreement on Agriculture, New Delhi, April 30-May 2.

Various interviews with Philippine NGOs, Feb 2000.

Case Study 2: Thailand - Hunger, Poverty and Debt Amidst Plenty

Thailand is well known for its bounteous food production, particularly the export of its Jasmine rice. It is in fact Asia’s only net food exporter, accounting for at least 35 per cent of the world’s rice exports. In addition, Thailand exports rubber, sugar, cassava and chicken meat.

However, behind this abundance, the flip-side is that the majority of Thai farmers have been putting up with very low standards of living. By the early 1990s, 40 per cent of the rural population lives below the poverty line. Food insecurity is a reality even for the rice farmers. According to the FAO, daily food supply on average is about 2,400 calories, with an estimate 25-30 per cent of the population chronically undernourished. The rural crisis has been going on for several decades, set in motion by the commercialisation of agriculture as well as the subordination of this sector to industrial development. However, the crisis has worsened in recent years as a result of further liberalisation coupled with the on-going effects of the 1997 financial crisis.

There are a total of 5.7 million farming families. Of these, 4.7 million have no land or inadequate land to sustain them. Because of price volatility and the increasing costs of inputs, most Thai farmers find themselves in a chronic cycle of debt. The Ministry of Finance has estimated that the total farm debt is at Bht 15 billion (or $405 million), with 4.77 million families owing money to the banks. This figure does not include debt owed to loan sharks. About one third of farmers owe debts to loan sharks amounting to 5 billion baht, with interest rates as high as 25 per cent. (These are official figures published in the media. NGO estimates are much higher, with about 12 million farmers in debt, as of 1998, owing a total amount of Bht 400 billion, or $108 billion, i.e. an average of $9,000 per farmer).

A typical story is like that of the 62-year-old farmer who hung himself outside the government house in Bangkok in 1998. He had borrowed Bht 200,000 (or $5,405) and pledged to pay back the loan at Bht 270,000. However, because he was not able to pay off the loan on time, the amount increased to Bht 370,000. He borrowed the Bht 370,000 from a relative to repay the loan, and lost his land to the relative. Most small farmers are in a similar debt trap where one loan is taken to pay off the previous loan.

One of the main reasons why farmers cannot make ends meet is that farm gate prices have been falling to chronically low levels. In 1997 - 98, the price of palm oil was Bht 4 per kg. In 1999, the price dropped to Bht 0.75 per kg. The price drop is due to opening up of the Thai market to palm oil from Malaysia. Similarly, the price of rice before the economic crisis was Bht 8,000-10,000 per kg. It is now Bht 4,000 per kg. Rice was also one of the items that Thailand had to liberalise due to AoA commitments. The tariff on rice is being lowered by 0.2 per cent every year until 2003. In addition, prior to the AoA, importation of foreign rice was prohibited unless it was imported by the government. This is not the case today. Thailand must import up to 250,000 tones of rice a year by 2004. In a similar vein, the price of milk has also been greatly depressed in the last 2 years as a result of opening the market to EU subsidised milk powder (see case study 4).

As farm gate prices are on a rapid decline, the cost of farm inputs – fertilizers, pesticides and herbicides – have risen by as much as 40 per cent between 1997-1998.

Farmers are finding it impossible to make ends meet. Rice farmers are lamenting that when all the bills are paid, there is not enough left over to buy food or look after their families’ needs. Rural public health clinics saw the number of cases of stress-related illnesses increase by more than 100 per cent in 1997-98, with many suffering from an overdose of low-quality alcohol or mind-numbing drugs.

Sources: Bello et al 1999 ‘A Siamese Tragedy: Development and Disintegration in Modern Thailand’, Zed Books, London.

FAO forthcoming, ‘Implementation of the Agreement on Agriculture in Thailand’.

Bangkok Post Feb 8 1999 ‘BAAC has extended B7.4 bn to almost 124,000 farmers’, 25 Jan 1999 ‘Jobless farmers issue dire threat: Plan to seize forest land to make a living’, 25 June 1998, ‘Shattering the rice bowl: Thailand’s farmers are suffering, will the ‘nobility’ ever pause to care?, 25 June 1998 ‘Northeastern farmers groups muster 2,000 for city rally’.

Interview with Phitthaya Wongkul, Chairperson of Thai Development Support Committee (TDSC), Feb 2000.

Impact of EU’s CAP and Multifunctionality on Developing Countries

The EU’s 1992 CAP reforms as well as the latest Agenda 2000 have not benefited developing countries. In fact, the reforms to the CAP which were made in order to comply with the Agreement on Agriculture have led to an even more protected EU market, as well as to higher levels of subsidies.

According to an ESCAP study, the EU final tariff bindings for the year 2000 are almost two-thirds or 60 per cent above the actual tariff equivalent for 1989-93. For some products, tariffs are in the range of 250 per cent to 390 per cent.

Similarly, as mentioned above before, subsidy levels too have increased, rather than decreased. The Producer Support Estimate, the OECD measure of agricultural supports to producers show that support levels have increased by 28 per cent in 1998, as compared to the base 1986-88 period, from 90 billion ECU to 116 billion ECU. Supports in terms of percentage of production have remained more or less constant, at 46 per cent of production in 1986-88, it was 45 per cent in 1998.

The CAP and AoA reforms have also not lowered export subsidies in the EU, as illustrated in the chapter above. The EU is the largest provider of these subsidies, accounting for 84 per cent of the $7.6 billion used by all exporters.

Effects of the CAP on Developing Countries:

What are the main effects of the CAP on developing countries’ agricultural sector? The chain effect can be summed as follows:

EU subsidies lead to over-production that is dumped on the world market.
Over-supply in the world market depresses world prices.
With lowered tariffs in developing countries (as a result of the AoA or Bretton Woods conditionalities), EU subsidised imports enter developing countries’ markets.
Farmers in these countries cannot compete and go out of business.
Local agricultural production is destroyed, sometimes even completely. Importation of ‘cheap’ subsidised food replaces local food production.
A representative of the UK government, commenting on this process has noted that ‘Over-production in Europe has resulted in under-production in the rest of the world, particularly in developing countries’.

As a result of opening up developing countries markets to such unfair competition, the FAO has in fact estimated that by the year 2000, developing countries will be importing $225 billion worth of food. This is a 62 per cent increase over their import bill in 1988. African countries will be most negatively affected especially as food aid is declining.

Examples of the destructive effect of the CAP on developing countries can be seen in the case studies below:

Case Study 3: Dumping Beef in Africa

A well-documented case of EU dumping is that of beef in West Africa in the late 1980s

and early 1990s. Due to overproduction, the EU exported beef using subsidies of almost

1.60 pounds per kg. In 1991, the EU spent 70 million pounds in subsidies to dispose of fatty beef valued at only 18.9 million pounds. The EU exports to West Africa undercut prices by 30 – 50 per cent the price of beef produced in Burkina Faso, Mali and Niger. These countries had been exporting beef to neighbouring coastal countries for several decades.

In 1993, Christian Aid and NOVIB ran a campaign highlighting the incoherence of EU’s agricultural and development policies. This led to cuts in export subsidies towards West and Central Africa by 25-40 per cent for beef.

However, the dumping was then redirected to South Africa. Between 1993-95, beef exports to South Africa increased by 600 per cent. Exports severely undermined the beef sector of Namibia, which traditionally has been the main beef exporter to South Africa. At the peak of the crisis, the EU beef imports were half the wholesale price of local South African beef. EU farmers were receiving three times the price that was charged to South African wholesalers.

The livelihoods of Namibian cattle farmers were severely affected. Prices dropped by an average of 5 per cent every year from 1994 - 1996 and there was also a severe drop in the sale of cattle.

Sources: Stevens, Kennan and Yates, 1998 ‘Leveling the Field: Will CAP reforms provide a fair deal for developing countries?’, CIIR discussion paper, UK.

Shihepo, 1999 ‘The Impact of EU Beef Dumping on Namibia’s Beef Market’, in Farewell to Lome? The Impact of Neo-Liberal EU Policies on the ACP Countries’, Terri Des homes, Germany, KOSA, WEED. Bonn, July.

Case Study 4: EU Subsidies Destroy Milk Production in Jamaica and Thailand

EU’s milk production exceeds consumption by over 10 per cent. About 15 million tones of milk are exported each year. Although EU producers are amongst the world’s highest-cost producers of dairy products, they have a 50 per cent share of the world market. The cost to the EU is 1.7 billion Euro (in 1997) a year for diary alone. Since the EU is the largest supplier to the world market, the level of export subsidies in fact determines world market prices. In fact, subsidies on butter even surpass the world market price.

World Market Prices and Export Subsidies (as of Sept 1999)

EU export subsidies

(Euro/ton)

World market prices (Euro/ton) average 1999

Subsidy/ value

(%)

Skimmed Milk Powder

Whole Milk Powder

Butter

Cheddar

900

1200

1700

1180

1160

1380

1320

1800

78

87

129

65

The current experience of Jamaica and Thailand are alike. Tariffs for dairy products have been lowered in these countries. EU subsidised dairy is significantly cheaper than locally produced milk. Local processors have switched to the cheaper imported milk power. Many dairy farmers in these countries are facing a crisis situation whereby their livelihoods are threatened.

Due to a World Bank loan to Jamaica in 1990, import tariffs were removed. The subsidy for local dairy farmers was also abolished. As the processing industry switched to buying the cheaper imported milk, fresh milk production fell by more than a quarter. In 1998 and 1999, more than half a million liters of milk were disposed by farmers. Farmers have also been de-stocking by selling or slaughtering animals. At the same time, EU exports of milk power to Jamaica between 1990 and 1998 has doubled, from less than 2000 tones per annum between 1990-93, to over 4000 tones in 1998. In Jamaica, 80 per cent of dairy farmers are small-scale producers, owning up to 10 dairy cows. This crisis is destroying the employment and livelihoods of these farmers.

The situation is similar in Thailand, which had attained self-sufficiency in milk production. As a result of AoA commitments, tariffs on dairy products have been reduced from the 40-60% before, to the present 20% (within-quota tariff rate). Even more significant is the abolishment of the local content requirement. Prior to the AoA, importers of sterilised milk for further processing were required to purchase locally produced natural milk at a ratio of 2: 1. Importers of unconcentrated milk for further production were required to buy local milk at a ratio of 20:1. These commitments were eliminated by the end of 1999 in accordance with the AoA.

In the past two years, the milk processors in Bangkok have preferred to buy the cheaper milk power from the EU. In 1999, over 1000 tons of milk were disposed off in various parts of the country. The price of locally-produced milk has drastically dropped, catapulting Thai dairy farmers into deep crisis.

Sources: Eurostep 1999 ‘Dumping in Jamaica: Dairy Farming Undermined by Subsidised EU Exports’, Brussels.

FAO, forthcoming. ‘Implementation of the Agreement on Agriculture in Thailand: A Case Study’.

Interview with Phittaya Wongkul, Chairperson of Thai Development Support Committee, Feb 2000.

From the above studies, it is clear that agricultural liberalisation, either as mandated by the Bretton Woods or the WTO, has opened developing countries’ economies and peoples to being very vulnerable to the dumping and unfair competition from the OECD countries, and specifically from the effects of the CAP.

The case studies illustrated the impact of EU dumping on developing countries. Ironically, it seems that EU dumping is destroying in developing countries, the very non-trade concerns that the EU is attempting to protect within the Union. Even the basic needs of people in developing countries are put in jeopardy.

The ‘multifunctional character’ of agriculture which is being destroyed in developing countries are precisely those which the EU had listed in an EU paper submitted to the WTO in September 1999, (AIE/73), entitled ‘Safeguarding the Multifunctional Role of EU Agriculture’. Agriculture’s multiple functions were:

producing food, feed and fibre (including industrial use of agricultural products;
preserving the rural environment and landscape
contributing to the viability of rural areas and a balanced territorial development.
For developing countries, the impact of the CAP has been negative in all of the above areas. In addition, other detrimental impacts include:

rendering a large number unemployed, with no alternative sources of employment or income
exacerbating food insecurity and people’s inability to access food
adding to countries’ macro-economic difficulties – in terms of increasing the trade deficit and foreign exchange constraints
diminishing the sovereignty of developing countries by making them much more vulnerable politically and economically to the countries on which they are dependent for food.

Part II

The Problem With Multifunctionality

Is there a possibility of striking a balance within the AoA that could take into account the concerns on both the EU and developing countries, and still be beneficial and fair for all? Or does the AoA need to be changed substantially in order for both sides to protect their non-trade concerns?

This section will critique the EU’s decoupled green box and blue box payments in the light of how it is distorting trade and therefor