Mar 3, 2010

How EU dumps cereals in the global markets

Under the ongoing WTO discussions, somehow an impression that goes around in the academic circles (and in public policy) is that the European Union does not subsidise exports anymore. Any so-called trade expert visiting India, and our own breed of economists, will say that very loudly. With no questions asked, the view is gaining strength.

My friend Jacques Berthelot in Paris has never accepted what is doled out to him when it comes to agricultural subsidies. He is an amazing researcher and analyst, always one up on anyone who thinks he/she understands the political economy of farm subsidies and more so its nitty-gritty. I admire his work, which he does independently, and I am aware that his analysis is respected worldwide.

His latest brief analysis "The dumping rate of EU-27 exported cereals in 2006" is another eye-opener. The point he is trying to make is that dumping is not only limited to export refunds but is largely influenced by domestic subsidies. Something that I have been saying for long. Mere removal (or shifting into another box) of export subsidies does not mean that agricultural exports will become prohibitive. Domestic subsidies have an equally harmful impact on exports, allowing dumping by the rich countries.

This report has tremendous implications for India and for that matter other developing countries. More so, considering the ongoing negotiations on the FTA between India and EU, this analysis assumes importance, something that each member of the Indian negotiating team must go through.

Jacques begins his brief paper with the following story. Let me share this:
"On 27 February 2010, four French academic economists have been debating aboutagriculture in the France Culture programme 'The economy at stake': Jean-Christophe Bureau – the only agricultural economist, teaching at AgroParisTech –, Nicolas Baverez,Olivier Pastré and Dominique Plihon. The two first have underlined that the EU was no longer subsidizing its agricultural exports, an assertion that the other two did not challenge.

If this is an assertion largely circulated by the media – and corroborated by the fact that the export refunds have actually collapsed from €10.2 billion in 1993 to €5.9 billion on average from 1995 to 2000, €3 billion in 2005 and €926 million in 2008 –, this does not take into account the domestic subsidies to the exported products which have largely compensated the disappeared export refunds."

He illustrates this with the example of cereal exports in 2006. Why 2006, and not 2008 or 2009 is because 2006 is the latest year for which the EU has notified the WTO of its domestic support in agriculture. I am not going to take you through the detailed analysis, but draw your attention to the sub-section on direct payments.

Direct payments: the fact that the majority of the blue box direct payments have been transferred to the allegedly green box Single Payment Scheme (SPS) since 2005 does not change anything to the fact that the SPS remains based on the average amount of blue box direct payments allocated from 2000 to 2002. Hence, despite that the SPS has been notified in the green box at €14.734 billion for 2005-06 (at €30.672 billion for 2006-07) and the blue direct payments to arable crops at only €7.256 billion Md€ (at €1.851 billion for 2006-07),which matters really are the average €14.465 billion of blue box direct payments to the EU-15cereals from 2000 to 2002, including the share of the set aside payments attributable to the average production of 211 Mt of cereals.

Indeed these blue box payments incorporated into the SPS remain fixed over time. As for the 12 new Member States of Eastern Europe (EU-12),they had produced 71 Mt of cereals in 2006 and, as they are in the Single Area Payment Scheme (SAPS), they have received in 2006 a direct payment of €70 per hectare, which multiplied by the 22.021 M ha of cereals in the EU-12, has represented €1.541 billion. Therefore the direct payments to cereals have been of €16.006 billion in 2006 and those to the exported cereals of € 1.436 billion (16.006x8.97 %).

What Jacques tells us is simply mind boggling. In 2006, cereal farmers in EU-12 countries had received direct payments @ € 70 per hectare, which total to € 16.006 billion. I hope the Indian farmers are listening !

He concludes that in 2006, the total cereal exports from the EU-27 countries was subsidised to the tune of € 1.921 billion, of which export refunds were to the tune of € 206 million, which is a mere 10.7 per cent of the total subsidy. The large chunk, € 1.715 billion is derived from domestic support, which was 89.3 per cent of the total subsidy on exported cereals. He calculates the dumping rate to be 61.3 per cent, which means that EU was subsidising its cereals exports by 61.3 per cent of the prevalent international market price.

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