CAP Subsidies Impinge on Australasian Free Trade

Patrick Hall // 12 November 2018

In a world of increasing economic protectionism, the EU claims to remain committed to free and fair international trade. Yet, the Common Agricultural Policy (CAP) impinges on the idea of free and fair trade by creating tariff and non-tariff barriers. Non-tariff barriers, with regard to CAP, are particularly interesting to investigate.

Non-tariff barriers are a significant obstruction to free and fair international trade today. There are multiple types of non-tariff barriers. Non-tariff barriers are any restrictions to international trade which are not a customs tariff. Industry subsidies are a particularly relevant type of non-tariff barrier vis-à-vis CAP. By subsidising local producers in a particular industry, government’s make it difficult for importers to compete. The EU is creating a non-tariff barrier in agriculture by offering subsidies and payments which equate to €58,82 billion from the EU budget this year via CAP.

The free trade agreement currently under negotiation between the EU and New Zealand exemplifies the challenge that industry subsidies present in international trade. Agriculture is a major industry in New Zealand; contributing 5% of GDP to the country’s economy. According to the Dairy Companies Association of New Zealand, dairy products made up 21 percent of New Zealand’s exports in 2015, and currently account for 3 percent of dairy products globally. Based on these statistics, it is evident that free and fair market access for agricultural products would be a high priority for New Zealand in any trade agreement that they are signatory to.

However, the European Commission outlined in a factsheet on the EU-New Zealand free trade negotiations that “the EU does not envisage full liberalisation of trade in sensitive agricultural products”. As such, EU Trade Commissioner, Cecilia Malmström, has conceded that agriculture is going to be the difficult part of the negotiations, as it has been in previous EU trade negotiations as well.

Agricultural products are a major export industry in Australia as well, albeit to a lesser extent than in New Zealand. As such, EU-Australia free trade negotiations are also constrained by CAP subsidies like they are in New Zealand. The Australian Department of Foreign Affairs and Trade stated in reference to the EU-Australia free trade negotiations  that “negotiations on some agricultural products will be particularly difficult”.

To reduce non-tariff barriers in agriculture and make trade negotiations easier, policy makers should consider reforming CAP. One option is to abolish CAP altogether; replacing it with a market system where farmers make revenue by selling products for which there is consumer demand for, and not being reliant on EU subsidies. The removal of subsidies would subsequently remove the non-tariff barrier that CAP creates. Countries such as Australia and New Zealand’s agricultural markets operate successfully on this premise, and have witnessed large gains in productivity as a result of free market reforms in agriculture.

The Public Debate Summary Report on CAP highlighted desires among groups for a more free market approach to agriculture, but strong concerns surrounding environmental issues. The environmental concerns had a particular focus on sustainable and green farming. Subsidies can contribute to environmental degradation by encouraging wasteful resource management. In light of this, another option for reform is the removal of the income support component of CAP. CAP is broken down into three areas of finance; income support (direct subsidies made to farmers), market measures (rules which regulate agricultural markets in the EU), and rural development measures (including innovation and environmental protection programs). By removing income support (which is costing €41,74 billion in 2018), the bulk of CAP subsidies would be removed whilst environmental protection initiatives would be retained as part of the rural development measures. This would be consistent with the desires and concerns expressed in the Public Debate Summary Report on CAP, whilst freeing up trade through the removal of subsidies.

In its current form, CAP challenges the idea of free and fair international trade by creating non-tariff barriers through direct subsidies to agricultural producers in the EU. The difficulties that this creates are seen in the cases of the EU-New Zealand and EU-Australia free trade agreements. Policy makers should give thought to the case put forward for removal or reform of CAP. This is in the interests of creating a more open European economy, greater wealth for agriculture in Europe and the developing world, and freer and fairer trade in the future.

The opinions expressed in this article belong to the author only, not EPICENTER or its members. 

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).


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