Bridges • Volume 14 • Number 2 • May 2010

EU Farm Payments on the Rise, but Less Distorting

New subsidy figures from the European Union show a sharp increase in total support levels, to over €90 billion in the 2006/2007 marketing year, despite a drop in production-linked payments that are deemed to distort trade.

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The latest official notification to the WTO shows that total EU support levels have returned to levels not seen since the previous decade, with €90.7 billion of support being reported to the global trade body for 2006/2007 - up from €75.6 billion in 2002, when support was at its lowest in the last fifteen years.

The most trade-distorting payments, classified as Amber Box at the WTO, were however at a historical low in 2006/2007, with the EU reporting only €26.6 billion under this category. Amber Box payments have been falling steadily and now stand at about half the level they were at a decade previously. The deal tentatively on the table in the Doha Round would require the EU to reduce its Amber Box support to €20.1 billion over five years.

The sharpest decline in the latest figures occurred in the Blue Box category of production-limiting payments, which dropped to €5.7 billion from €13.4 billion in the 2005/2006 marketing year, and from €27.2 billion the year before that. While still considered to be trade-distorting at the WTO, Blue Box payments are generally considered less damaging than Amber Box support.

Green Box Spending Swells, but Doha Targets within Reach

The drop in Blue Box support has been more than compensated for by an increase in Green Box payments, which are not limited under WTO rules since they are considered to have no, or at most minimal, effects on trade or production. The EU’s Green Box support in marketing year 2006/2007 rose to €56.5 billion - up from €40.3 billion the previous year, and more than twice 2004/2005 levels (see Table 2).

In the Doha Round negotiations, several countries have argued for a ceiling on Green Box spending, but all they have obtained are some additional disciplines meant to ensure that the support really does not distort trade. In the cotton dispute (see page 10), Brazil managed to show that some US support reported under the Green Box did not fulfil the criteria.

A small amount of trade-distorting support is also exempt from reduction commitments at the WTO, so long as the support amounts to no more than 5 percent of the total value of production. According to the new notification, in the 2006/2007 marketing year, the EU provided €1.85 billion of this type of ‘de minimis’ support.

Overall, the EU appears to be on target for meeting the domestic support reductions envisaged in the December 2008 draft agriculture ‘modalities’ tabled under the Doha Round. Amber Box spending would have to be reduced by a further €6.5 billion to reach the new ceiling of €20.1 billion. While the EU’s overall trade-distorting support (OTDS) - composed of its Amber Box, Blue Box and de minimis spending - was as high as €34 billion in 2006/2007, ongoing reforms are expected to reduce this figure to close to the proposed €22.06 billion OTDS ceiling by the time the new cap would actually apply.

CAP Reform Looms

From the start of the Doha Round, the EU has calibrated its negotiating position on farm subsidies on the gradual implementation of reforms to the bloc’s Common Agricultural Policy (CAP). Since 2003, the EU has moved steadily away from the most distorting forms of subsidisation to ‘decoupling’ payments from production, leading to a shift from ‘amber’ to ‘green’ support.

Bruising battles now loom as EU member states are to approve the next phase of CAP reform by 2013. To the delight of the bloc’s powerful farm lobby, the new agriculture commissioner Dacian Ciolos has vowed to defend a ‘sizeable’ future CAP budget. The huge programme currently accounts for nearly half of the EU budget, or some €55 billion in 2009.

Fault lines in the CAP talks are expected to centre on two issues: the size of the budget and the allocation of the money.

A handful of countries, including the UK, Denmark and Sweden, want to drastically slash the CAP envelope and to reorient support toward the provision of public goods and rural development. Many others are ferociously opposed to any reduction in the budget and want to keep the programme more or less as it is. President Sarkozy of France has linked acceptance of any cuts to a more rigorous ‘community preference’ that would defend EU farmers against imports.

The other fight will oppose new member states, which currently receive less support, to traditional beneficiaries of EU largesse, loath to see their own share diminish.