The Common Agricultural Policy, (CAP) is up for debate again. By Spring 2003, members of the World Trade Organisation are supposed to make their suggestions for future agricultural policy, especially as it affects trade. The European Union (EU) is under pressure to go further with CAP reform and especially to stop subsidising agricultural exports which are so damaging to developing and transitional country producers.

Its current proposals are called 'a long-term sustainable policy for agriculture' (this used to be called the mid-term review). It includes proposals to transfer some spending from market support (keeping up prices) to rural development and environment subsidies to farmers (so-called de-coupling). The EU is hoping in this way to move enough of its spending out of the 'blue box' (spending which some members of the WTO want phased out because they distort market prices) and into the 'green box' (spending which is acceptable under WTO rules). Environmental spending is also likely to be a more acceptable way of helping farmers as far as the public is concerned, although it still represents a large reallocation of taxpayers' money.

A major goal of EU policy is to preserve the 'European Model of Farming'. In practice this implies retaining small family farms rather than allowing structural adjustment to substantially reduce the number of farms and secure economies of scale. However, the Council has capped the CAP budget at current levels, plus 1% per annum, through to 2013. Under the proposals made by EU Agricultural Commissioner, Mr Fischler, direct payments to larger producers will be reduced between 2006 and 2012 by 12%. Related to the 'European Model' is the EU position in pressing for non-trade concerns such as environment, food standards and labelling and animal welfare to be taken into account.

The EU faces an uphill struggle. Its proposed income payments may not be accepted by other countries as fully decoupled; they underpin continued farming and are still largely commodity-specific, so that farmers do not receive the right message in order to meet consumer preferences and EU output will be larger than under freer trade. The agri-environment programme may be challenged as a mechanism for keeping non-competitive farms in business. There will be concern that in seeking, in the name of food safety, to raise standards, the EU may discriminate against food imports.

And, although consumer organisations will be pleased that the non-trade agenda is being promoted, they feel that reforms do not go far enough in bringing down food prices or in eliminating export subsidies. There remains considerable protection for farming. According to OECD estimates, the total support to EU15 agriculture in 2001 amounted to 110 farm gate prices and almost the same size as the net value added of agriculture (113 billion euros). Despite the MacSharry reform of the CAP and the GATT-WTO Agreement on Agriculture, the nineties did not see a substantial reduction in support.

As a result 40% of all transfers to farmers via agricultural policies in the OECD countries are in the EU, followed by the US (22%), Japan (20%) and Korea (7%). Moreover, the EU is responsible for nearly 90% of all world export subsidies. These distort world prices downwards, worsen the misallocation of the world's resources and damage in particular low income countries whose taxpayers and consumers are not rich enough to subsidise farmers in order to offset the negative impact of EU farm subsidies and dumping on world markets.

In 2004 the Union will expand to 25 countries with the addition of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia and the two Mediterranean islands, Cyprus and Malta. Romania and Bulgaria are next in line. Applying the CAP of 2001 would lead to larger export surpluses for cereal crops, sugar, milk and beef. Such an outcome would be unacceptable to agricultural exporting members of the WTO; export subsidies are expected to disappear not to grow. Consequently, costly policies for limiting supply are needed.

However, of especial concern is the impact on consumers in these ten new member states, who are in general much poorer than those in the existing EU. Per capita incomes are low, the average for the EU 15 is over €20,000 whilst for the new members it is only just over €8,000.

The share of household income spent on food is very much higher than in the EU 15 where it is 16%. In the year 200 it ranged from 19% in Slovenia to 39% in Latvia. Especially households living on fixed incomes especially will find the adjustment to higher food prices very hard indeed.

European Research into Consumer Affairs and Consumers International have therefore commissioned research into the costs for Central and Eastern European consumers, from the internationally respected agricultural economists Professor Sir John Marsh and Professor Secondo Tarditi.

Their analysis of the effects of applying the CAP as it existed in 2001, to the CEEC 8, (the new entrants apart from Cyprus and Malta) shows market price support growing from 14% to 35% of the international value of agricultural production, whilst payments to producers rise from 10% to 36%. For the CEEC 8 as a group, this analysis suggests that consumers would spend 12% more on food. Such price increases would reduce the amount of food consumed by an estimated 3%.

Furthermore, for the majority of commodities, the 2001 CAP would offer incentives to produce more. This has important implications for the EU 25 as a whole. Given the limits on export subsidies in the Uruguay Round Settlement, higher production, and possibly reduced consumption, suggest significant 'surplus' production. This would affect both consumers and taxpayers in the EU of 15. An additional € 7.8 billion, under the assumption of unchanged supply, up to € 9.7 billion if a moderate expansion of supply is assumed would need to be spent on agriculture, mostly in the form of higher tax rather than increased prices.

Although farmers would earn more with net transfers per employee rising from €1675 to €4600 if supply is fully constrained or to € 5381 otherwise, their incomes probably would not rise by that amount. Experience in the existing member countries suggests that much of the higher revenue would be swallowed up in higher costs, as the price of land and other inputs rose.

This shows that adopting the Commission's 'long-term sustainable policy for agriculture', or indeed improving on it, is essential for the WTO process. Applying the CAP of 2001 would lead to larger export surpluses, the opposite of what is asked by the WTO, or to a waste of available agricultural resources if supply is constrained. The proposal to phase in direct payments in the new member states, would reduce the incentive to produce more than if CAP 2001 had been immediately applied in full. But in general, the proposed reforms do not go far enough to answer either the concerns of our trading partners or the needs of consumers and taxpayers in the CEEs.

For example, whilst some transfers from Pillar 1 (market support and direct subsidies) to Pillar 2 (environment and rural development) would help meet society's expectations for the rural environment, there is scope to save taxpayers' money. 'It would be astonishing', says Professor Sir John Marsh, 'If the funds withdrawn from public support corresponded perfectly to the additional funds needed to meet the demand for public goods from farmers'.

1st April 2003