Is the EU toying with liberalism in its trade policy? Signs are it is increasingly tempted by embracing global market forces, leading to new compromises in trade agreements. By Iana Dreyer.
It’s not quite a full crush, but the EU is flirting with trade liberalism for its agricultural sector. This is a direct result of its agrifood’s impressive export prowess after its latest Common Agricultural Policy reforms. It has translated into concrete outcomes in recent trade negotiations.
Though agriculture is only a fraction of the EU’s overall output and employment, the sector has a disproportionate influence over the EU’s trade strategy and also a disproportionate role in EU exports: the category ‘Food, drinks and tobacco’ accounted for 6.3 percent of EU exports in 2014, according to our calculations based on Eurostat data.
Trade professionals of my generation have grown up with an EU that is overall protectionist in its agricultural trade policies, combining dirigiste management of the domestic agricultural economy, mercantilist export policies (including export subsidies), and protectionist trade barriers in the form of restrictive quotas, entry price mechanisms, and high import tariffs. If there’s ever been a fortress Europe (I don’t think there has), the agricultural sector has come closest to resembling it.
But the EU is changing.
The world of the early 1990s in which the EU reluctantly did its first CAP reform to respond to the pressure from its GATT (pre WTO) partners in the Uruguay Round of trade talks now lies far in the past. What has happened since then is the following: other CAP reforms followed, which were not prompted by the WTO but by domestic budget and environmental concerns. The agricultural sector has been emboldened by the reform’s successes as it has boosted the EU’s export prowess in global markets. The EU has recently become the world’s top agrifood exporter.
An unprecedented export boom
Certainly, the last round of CAP reforms of 2013 – which has led to the end of milk quotas and to trimmed subsidies – has not only galvanised the agriculture sector, but also traumatised it. It hase been exposed to several shocks : the 2014 Russian food embargo, low demand in a stagnant domestic EU market, consumers switching to quality products and less meat and dairy. In the restive agriculture politics of the moment, agriculture lobbies are both shouting for more action to find foreign outlets for their produce, while some continue clamouring for trade protection to stave off steep price falls.
Yet despite the current hype about the ‘agricultural crisis’, the graph above speaks for itself: the sector is doing rather well. EU food exports have shot up, and done extremely well. Exports of food products have continued growing throughout the economic crisis. Even the current economic slowdown in China, the Russian food embargo, and the general emerging market slump are not stopping this growth. In 2015 EU agricultural product exports to the US grew by 18% and to China by 41 %.
It is thus not surprising to find that European exporters start seeing the world like Brazilians, Chileans, or New Zealanders used to view the EU or the US, or Norway, Japan, Switzerland, during the Uruguay Round in the 1990s: as protectionist bastions and market distorters through subsidies.
Also as the EU is seen from outside as a real trade fortress when it comes to the way it manages its sanitary and phytosanitary standards (SPS), now EU exporters are facing a similar phenomenon of ever stricter – and divergent – SPS measures across the world, be it in the advanced economies like the US or Japan, or in emerging markets, who seem to be catching up with the habits of rich countries. They want to see these growing barriers tamed, or go.
It is thus not surprising to see that the EU is increasingly offensive in trade negotiations involving agriculture, be it in the WTO or the many regional agreements it is negotiating (TTIP, EU Japan) or has recently finalised (CETA, EU Vietnam FTA). This also means the EU is ready to drive a bargain on agriculture and to offer significant tariff cuts, quota eliminations or at least offer some first duty free quotas in FTAs.
Let it be clear: the EU is not yet New Zealand, with its free-market subsidy-free agricultural market model. What we are witnessing is rather a gradual but significant change of course of a huge and heavy tanker. Overall, EU agriculture remains a coddled and protected sector. And few agriculture and food producers are rejoicing at the idea of having to liberalise tariffs or open up quotas.
The recent heavy lobbying of Mediterranean producers and meat producers against plans to expand a 30000 tonne duty free quota on Tunisian olive oil and against the planned launch of an EU New Zealand and an EU Australia FTA attest to this. The TTIP talks are wreaking havoc in some agricultural milieus and French farmers are back in their role of saying no to open markets in meat and milk. Nonetheless, its seems the course towards more rather than less trade liberalism in EU agricultural trade is set.
Bargaining chips and regulatory compromises
How does this translate concretely in current EU trade policy?
At WTO level, the EU is suddenly highly interested in addressing subsidies. The EU wants to tackle domestic support in agriculture as a priority post-Nairobi topic. This, for any long-standing observer of the WTO, is a truly interesting development. Ahead of the December 2015 Nairobi ministerial meeting the EU allied with former opponents in the Uruguay Round and early years of the Doha round – e.g. Brazil and Australia – to propose and hammer out a deal to phase out export subsidies.
In its FTAs, the EU is also increasingly demanding on its partners. It insists the removal of tariffs on food, wine, cereals, meat, dairy and dairy products (such as on cheese in the US and Canada). It increasingly pushes for the removal of non-tariff barriers against its products: discriminatory meat inspections (TTIP, Japan), discriminatory fruit and vegetable inspections (US, India), grade A milk (US), recognition of its organic products, to name just a few.
In return, the EU is ready – at least partly – to meet the reciprocal market access demands of its partners. It even has started to put dents into the heretofore tightly sealed markets in ‘sensitive’ sectors, such as those run by the EU’s Entry Price system (Mediterranean fruit and vegetables), sugar, bananas, meat (beef, poultry, pork), rice and cereals, fats. In the latest FTAs such as EU Ukraine, CETA, EU Vietnam, this generally takes the form of duty free quotas (tariff rate quotas, or TRQs) which are often gradually extended over time, and in some cases fully phased out.
The key challenges ahead for the EU in its coming trade negotiations is to find ways to tame some of its ‘rules imperialism’ to make it more compatible with legal systems abroad, and to find ways to make its costly SPS system based on the ‘precautionary principle’ more interoperable with others – while maintaining it.
Under EU ‘rules imperialism’ one can count the EU’s habit to have its FTA partners protect ever-longer lists of geographical indications (GIs) – the latest record is the 169 EU GIs accepted by Vietnam in late 2015. The EU’s GI system often clashes with the trademark-based system of its trading partners. The US, Japan, most Latin American countries, are wary of EU GIs. In CETA GIs were among the most contentious topics. But the CETA GI chapter shows that there can be pragmatic compromises that respond to the desire of EU trading partners to be able to continue to produce foods with the European names (feta, mozzarella) that describe a generic product while protecting products that are directly tied to a specific location (e.g. Noix de Grenbole).
With the US in TTIP, the negotiation on GIs (which hasn’t even started yet) is expected to be extremely tough. The US Congress is highly reticent to the idea of adopting EU-style GIs. TTIP, if it succeeds, can also probably show the way on how science-based sanitary, health, environmental risk assessment and precaution can actually work together. The negotiations on the matter are sensitive. But if they succeed, this approach will be interesting from the perspective of global trade governance.
