How EU Subsidizes Unfairness - Coursework Example

How EU Subsidizes Unfairness Agricultural exports are one of the most important parts of the global trade. Recent statistics placed the total of world agricultural exports to $852 billion and this accounts for approximately 9 percent of the global trade. (1) It affects one third of the earth’s land surface, more than any other human enterprise.(2) Currently, agriculture has been the single most controversial trade issue in international trade. Specifically, the agricultural subsidy has been behind much of the disagreements, with countries with such policy, such those comprising the European Union, accused of unfair trade practices. This paper will examine the European Union’s agricultural subsidy: whether it does more harm than good. Subsidizing Agriculture According to Myers and Kent, there are several reasons why countries subsidizes agriculture: first is that governments consider it a prime responsibility to keep their citizens fed, so there is the perceived duty to support farmers and double crop production; secondly, farmers worldwide have often been included in the poorest sector of society so policymakers feel that they deserve help.(2, p. 40) All in all, the rationale behind agriculture subsidies is to ensure that there are adequate food supplies, the prices for farm products remain stable and to help the farming sector more competitive and in the process help the poor and develop rural communities. In the European Union, agricultural subsidies rake billions of dollars of expenditures each year, constituting nearly three-quarters of the annual total budget of the EU. (1, p. 339) Support for agriculture is handled by a Common Agricultural Policy or CAP. Here, the policy uses a variable levy to bring the world price of an agricultural import up to the domestic price level as well as subsidizes exports of its surplus commodities on world markets, driving down prices for other potential exporters. The diagram below demonstrates this: Fig. 1: The EU Agricultural Market Support System (3, p. 28) What effect does the subsidy has on international trade in agricultural products? Agricultural subsidies such as those of the EU’s have devastating effects on the international market, especially on the poor countries. Subsidies lead to over-production that is dumped on the world market, depressing world prices; and these subsidized imports enter developing countries’ markets with lower tariffs as a result of the AoA and IMF and World Bank conditionalities. (4) It is impossible for farmers from poor economies to compete with the low prices of agricultural products and usually go out of business. Unfortunately, this destroys local and rural production as imported and considerably cheaper agricultural products flood the local market. The Food Agricultural Organization, in its study conducted in fourteen countries in Asia, Latin America and Africa, found that the agricultural subsidies are directly related to the displacement and marginalisation of farm labourers, which led to the growing poverty among farmers as well as food-insecure groups.(5) Subsidies also work the same way as tariffs in destroying potential market access in EU. Even if a country in the European Union had low tariff bindings and applied rates in a particular product, imports may still be nonexistent if such country has sufficient generous subsidy policies, since this increase domestic production at the expense of imports. (6) Then there is the fact that EU agriculture tariffs are four to five times more than manufactured goods and much higher for processed agricultural products, which makes it more difficult for developing countries to capitalize on value-added production of their own farm products. (7) This is especially significant because the agriculture sector in developing and poor countries occupy a significant portion of the population, with a huge number of people depending on agriculture for livelihood. In Europe, as in all developed countries, agriculture is a very small share of employment, which is about 2% or less. (7, p. 3) The injustice, hence, committed by the EU agriculture subsidies impacts millions of farmers and their families. Finally, critics argue that that EU’s agricultural subsidies are mostly on purchasing, storage and exporting processes. The consequence of this is that there is a generation of vast agricultural surpluses, which are politely called “intervention stocks.” If CAP continues on its present course, it will generate surpluses of 58 million tonnes of cereals and 1.5 million tonnes of beef by early next century with estimates for dairy and wine products not close behind. (8) CAP Benefits Agricultural subsidies have certainly benefited European farmers and agriculture industry. The top 25 percent of farmers in terms of size in EU gets about 75 percent of the total support, the top 4 percent of farms receive 21 percent and that in France, Denmark, and the Netherlands, the average income of farm households is more than 50 percent above the average income of other households. (9) In regard to the aims of the subsidy on agriculture, CAP is beneficial especially in the context of protecting the agriculture sector. However, the advantages of the agricultural subsidy vary according to country in the European Union. Some countries benefit from it tremendously because they receive a big chunk of agricultural support, while some are at a disadvantage because they are forced to contribute more. Table 1, for instance, demonstrates that France has been the recipient of huge agricultural subsidies since the CAP was established and that as smaller countries rely more on EU-funded subsidies, taxpayers from countries that are forced to contribute more, have to bear the brunt. A case in point is the United Kingdom. Percentage of EU Subsidies (10, p. 88) Starting from the mid-1990s, the economic cost of CAP programme to UK was estimated at some £17 billion per year and that on top of the direct net financial or nominal cost of the EU’s agricultural subsidisation programme, additional massive real economic or opportunity costs were incurred through loss of the benefits of investing scarce resources in more productive areas. (11) And so in theory, UK farmers should receive subsidies out of the British contribution to the agricultural subsidy budget. However, this is not the case since UK has, in effect, been forced to support comparatively small and inefficient farmers and uneconomic crop production in Europe. This dimension to CAP has encouraged the failure in introducing fundamental agricultural reforms because it institutionalized inefficiency to the point of rewarding them. Will consumers in EU be better off without this subsidy? All in all, CAP has kept thousands of unprofitable European farm enterprise in business for decades and that while EU farmers benefit from agricultural subsidies, this gain has been achieved at the expense of taxpayers, household consumers, overseas producers and the long-term interests of the agriculture industry itself as CAP now accounts for about 85% of the world’s agricultural subsidies. (11, p. 136) Today, EU households have to pay for the CAP twice over: first: through higher taxes, and then, through higher food prices. (11, p. 136) Through a complex system driven by the policies, regulations and treaties spawned by the European integration, taxes on individuals and taxes on food and agricultural products were imposed, with much of the revenues funnelled into the pockets of EU’s farmers and land owners. Furthermore, in 2002 and 2003, the prices of sugar, veal, and beef in the EU were about 300 percent more than the prices on world markets, while pork costs 31 percent more, poultry, 56 percent more and milk was 85 percent more expensive. (12) According to the Agriculture and EU Enlargement Report (13, p. 44): The CAP is costing to the EU-15 households (as consumers and taxpayers) more than the whole EU budget, on average over 1,000 Euro per four-member household. The largest parts are still oriented to producers of specific commodities. These income transfers to farmers (over €16,000 a year for equivalent full-time worker) take place while the excess of resources in agriculture is already very high. And so, it makes sense to say that consumers are better off without such agricultural subsidies. Conclusion Agricultural subsidies are part of the general welfare-oriented economies in Europe. This is particularly important in the case of the farmers and the agriculture sector because they are pivotal in the assurance of adequate food supply and stable food prices. However, after CAP was established, agricultural subsidies have been doing more harm than good. Yes, farmers and the agriculture sector have extensively benefited but this has resulted to adverse consequences both in Europe and its citizens as well as in the objectives of free trade. Today, Europeans must pay more taxes and higher food prices for agriculture that is at times inefficient and currently overproducing. The cost of subsidies has so far outweighed the benefits for EU. Then, agricultural subsidies hinder free trade and drive the commission of injustices for other farmers across the globe. The protectionist dimension in agricultural subsidies has left many people marginalized and without jobs as EU’s cheap agricultural produce floods the international market, distorting the idea of fair competition. There is a need to review and reform EU’s agricultural subsidies because, presently, it is unfair and unproductive in most respects. Bibliography 1. Schaffer, R., Agusti, F. and Earle, B. International Business Law and Its Environment. 7th ed. Mason, OH: Cengage Learning, 2008. 2. Myers, N. and Kent, J. Perverse Subsidies: how tax dollars can undercut the environment and economy. Washington D.C.: Island Press, 2001. 3. Gardner, B. European agriculture: policies, production, and trade. London: Routledge, 1996. 4. Jawara, F. and Kwa, A. Behind the scenes at the WTO: the real world of international trade negotiations: Lessons of Cancun. London: Zed Books, 2004. 5. FAO (Food Agriculture Organization). Agriculture, Trade and Food Security: Issues and Options in the WTO Negotiations from the Perspective of Developing Countries, Vol. II, Country Case Studies. Rome: FAO, 2000. 6. Brown, C. Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement. Brookings Institution Press, 2009. 7. Wise, T. “The Paradox of Agriculture Subsidies. Global Development and Environment Institute, Working Paper No. 04-02, 2004, pp. 3. 8. Krebs, J., Wilson, J., Bradbury, R. and Siriwardena, G. “The Second Silent Spring?” NATURE, Vol. 400, 1999, pp. 612. 9. Beghin, J. and Aksyo, A. Agricultural Trade and the Doha Round: Lessons from Commodity Studies. Briefing Paper, Center for Agricultural and Rural Development, 2003, pp. 2. 10. Organization for Economic Co-operation and Development. Agricultural Policies in OECD Countries: Monitoring and Evaluation. Paris: OECD, 2000. 11. Abott, L. British withdrawal from the European Union. Manchester: Industrial Systems Research, 2002. 12. Sinn, H. Can Germany be saved?: the malaise of the worlds first welfare state. Massachusetts: MIT Press, 2007 13. Michael, J. Agriculture and EU Enlargement: Seventeenth Report of 2003-2004 Report,Together with Formal Minutes,Oral a Written Evidence. House of Commons Papers 2003-04 421, The Stationery Office, 2004, pp. 44. Read More