Trade Negotiations Insights • Volume 7 • Number 5 • June 2008

Aid for Trade: key issues in the ACP agricultural sector

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The international community recognises that trade liberalisation per se does not automatically lead to economic growth and development. It is also broadly accepted that many ACP countries, especially least developed ACP countries, have not been able to fully benefit from enhanced market access opportunities because of non-competitive production capacity, lack of the necessary exporting infrastructure and an inability to meet prevailing standards in high-value export markets. These countries have also been crowded-out of some markets by the domestic support and export subsidies of developed countries. It is in this context that ‘Aid for Trade’ (AfT) initiatives have emerged within both WTO and EPA negotiations as a mechanism for assisting ACP governments to address supply-side constraints and effectively adjust their economies to trade liberalisation.

In the agricultural sector, these include:

• Upgrading ACP productive capacities and developing traderelated infrastructure in ways that enable ACP producers and processors to take advantage of the economic opportunities created under EPAs;

• Assisting ACP producers and processors to adjust to new market conditions that are emerging at the national and regional levels due to the restructuring and liberalisation processes;

• Supporting ACP governments in the establishment of appropriate legislative and regulatory frameworks for the implementation of new rules governing trade in food and agricultural products with the EU.

In this context, it is important to look at how AfT support can be made operational in the agricultural sector so that ACP countries can successfully undertake this process of structural economic change. Drawing lessons from the existing experience in the ACP and the EU in supporting restructuring in the agricultural and food product sector in the context of the market changes which are underway in the EU constitutes an important starting point for this process.2

This article focuses on the major challenges emerging in the ACP food and agricultural sectors and the need for a coherent and integrated response with regard to AfT deployment.

The major developments: CAP reform

The first major development impacting ACP-EU agricultural trade is the EU reform of its Common Agricultural Policy (CAP). This serves to reduce the value of traditional ACP trade preferences (market prices in the EU are allowed to fall, as farmers are increasingly supported through direct aid payments) and to enhance the price competitiveness of EU agricultural and simple value-added food product exports. One of the clearest current examples of erosion of the value of preferences is the 36% price reduction offered for ACP sugar, which is a direct consequence of administratively determined reform measures. This process of preference erosion will be compounded by the EU’s future bilateral and multilateral commitments to eliminate tariffs in the coming years.

The impact of enhanced competitiveness of EU export prices can be seen in the phenomenal growth in EU exports of food and agricultural products to ACP markets since 1999. Figures show that the value of EU exports has increased by 38.9% compared to a 1% decline in the value of ACP food and agricultural exports to the EU. The same period saw the ACP surplus in food and agricultural product trade with the EU decline by 28.2%.

In many respects, CAP reform is a long-term structural adjustment programme for the EU food and agricultural sector designed to prepare it for food and agricultural trade liberalisation. Reducing the need for both export refunds and tariff protection has a strong influence on the scope for trade negotiations that the EU has undertaken in the international arena. Indeed, on July 25 2001, the then EU Agriculture Commissioner, Franz Fischler, went so far as to declare that in the future “protecting our farmers need not mean protecting our markets. We believe that preserving our agricultural system can be done without trade barriers.”

There are other important dimensions to this CAP reform process, including the growing importance of food safety compliance and verification issues in ACP-EU trade. This is making it increasingly expensive for ACP suppliers to export to the EU market, in some cases leading whole sectors to discontinue exports to the EU (e.g. the Namibian game meat sector). However, there is a further dimension to this food safety issue, namely the extent to which it allows European producers to differentiate their products from imported ones in ways that carry real commercial advantages for EU producers. This development is closely linked to the evolution of food consumption patterns in the EU.

The major developments: changing EU markets

There are now two distinct components to the EU market: ‘necessity purchases’ and ‘luxury purchases’. ‘Necessity purchases’ are those products where purchase decisions are made exclusively on the basis of price considerations. For ‘luxury purchases’, in contrast, purchase decisions are not primarily based on price, but on some perceived ‘quality’ attributes of the product. According to a European Commission-funded study, the EU’s underlying demographic means there will be no expansion of overall demand for food and agricultural products in the coming period.4 Rather, as EU citizens become more affluent, patterns of food consumption will change, with consumers increasingly favouring high-quality products and convenience foods (‘luxury purchase’ products). In contrast, in the face of a progressive liberalisation of imports of agricultural products, it is expected that prices of undifferentiated agricultural commodities in Europe (‘necessity purchase’ products) will fall in real terms in the coming years.

It is against this background that a conscious effort is being made within the CAP reform process to shift patterns of European food and agricultural production towards serving this ‘luxury purchase’ component of the market, not only in the EU, but also globally. EU trade policies aimed at promoting the extension of protection for geographical indications need to be seen in this context. However, critical to the broader thrust is the scheduled deployment of over €70 billion in support to enhancing the competitiveness of EU food and agricultural sector enterprises over the 2007-2013 period. This is taking place under axis 1 of the EU’s programmes, with total scheduled rural development spending at €213.2 billion for this period. Measures under these axis 1 programmes are explicitly targeted at supporting a shift in production towards serving expanding ‘luxury purchase’ markets. Put simply, by shifting EU production towards serving these markets, EU producers will not have to compete on price with lowcost advanced developing country suppliers such as Brazil, Argentina, China and Thailand.

The opposite side of this coin will be an increased EU openness to the import of basic agricultural raw materials and food products serving the ‘necessity purchase’ component of the EU market. However, this openness will occur against a backdrop of declining real prices for these ‘necessity purchase’ products on the EU market.5

This provokes a dual challenge for ACP agricultural producers:

a) Getting to grips with improving competitiveness in existing ‘necessity purchase’ exports or finding new markets;

b) Getting to grips with developing production to serve ‘luxury purchase’ markets in the EU, which face much more favourable price trends.

The major developments: the EPA challenge

The final area of change impacting ACP-EU agricultural trade will be that resulting from the conclusion and implementation of Economic Partnership Agreements, involving the progressive elimination of import duties on substantially all imports from the EU into regional groupings of ACP countries. In a context where EU CAP reform aims at enhancing the price competitiveness of EU products on domestic and international markets, removing tariffs on EU imports constitutes a major potential threat to food and agricultural product sectors.

The experience in west and central Africa, where the expansion of EU food and agricultural exports to ACP countries is concentrated, has raised questions elsewhere in Africa as to whether the closer economic integration between these two regions and the EU (notably via metropolitan France and the inherited currency arrangements and corporate ownership patterns) has been a critical factor in fuelling this expansion of EU exports. Such questions were raised during the elaboration of tariff offers by those African countries looking to promote increased local value-addition within agricultural and food product value chains. Indeed, there are deep and profound concerns in some African regions over the impact that any process of tariff elimination on imports of European food and agricultural products could have on African efforts to promote movement up the agricultural and food product value chain.

Key issues for AfT

In the context of AfT discussions this raises the following questions:

• How can ACP efforts to enhance competitiveness, diversify markets or make the transition to serving ‘luxury purchase’ markets best be supported in the context of the planned expansion of EU AfT support?

• What lessons can be learned from the EU’s own internal experience of agricultural restructuring?

• What financial instruments of support are required?

• What are the best modalities for the efficient and effective delivery of this support?

• What are the organisational prerequisites for effectively designing targeted support programmes linked to making this transition to serving increasingly differentiated EU markets?

This would appear to call for targeted programmes of AfT support to:

• Assist in production adjustments to enhance efficiency and reduce costs;

• Improve marketing to increasingly target ‘luxury purchase’ components of the EU market;

• Facilitate movement up the value chain;

• Assist in cost effectively meeting ‘quality’ standards;

• Assist in the development of public institutions for the assurance of food safety compliance;

• Assist the private sector in meeting EU food safety standards (including smallholder farmers).

The challenge of meeting the increased competitiveness of EU food and agricultural product exports first needs to be addressed through domestic and regional tariff policy. However, targeted AfT support could assist ACP producers in developing alternative products for alternative markets, where the competitive threat from EU imports is significant. This is certainly the kind of restructuring that the deployment of rural development instruments in the EU encourages.

Internal EU support to production and trade adjustment in the agricultural sector and the ACP experience to date, both demonstrate a central policy that has been internally effective but that constitutes a fundamental problem in EU relations with ACP countries: namely, how to deploy public aid in support of market-led, private sector based production and trade adjustments designed to achieve public policy objectives (e.g. the promotion of employment and income growth, structural economic change and poverty eradication) in the context of moves towards global trade liberalisation? The EU routinely resolves this question in the deployment of axis 1 rural development support, yet insists on working almost exclusively through public sector bodies when dealing with production and trade adjustments in ACP countries. Until this issue of the role of the private sector (including farmers organisations) in designing and implementing marketled production and trade adjustments in ACP countries (in pursuit of public policy objectives) is systematically resolved, the EU AfT support measures will remain partial and largely ineffective in the changed context that now conditions ACPEU agricultural trade flows.

1 Vincent Fautrel works for the Technical Centre for Agricultural and Rural Cooperation (CTA) and Dr. Paul Goodison is an independent analyst based in Brussels.

2 It is against this background that CTA, in partnership with ECDPM, took the initiative to organise a two day dialogue meeting in order to reflect on how to assist ACP agricultural stakeholders in this process of structural change. See https://aidfortrademeeting.pbwiki.com for meeting report and papers.

3 For EU exports see: http://ec.europa.eu/agriculture/agrista/tradestats/ 2006/eur25ch/page_071.htm For EU imports see: http://ec.europa.eu/ agriculture/agrista/tradestats/2006/eur25ch/page_072.htm

4 Scenar 2020 – Scenario study on agriculture and the rural world http://ec.europa.eu/agriculture/publi/reports/scenar2020/index_en.htm

5 Or if world market prices remain high and above internal EU prices, EU prices will be aligned with world market prices.