Moving Money from One Pocket to Another

BRUSSELS: European Union trade chief Pascal Lamy heads for world trade talks in Cancun, Mexico, in September with a new spring in his step. EU trade officials say last month's shake-up of the 45-year Common Agriculture Policy (CAP) agreed by European farm ministers marks a "new era" in EU farm policy, ending trade-distorting farm subsidies and with them the bloc's reputation as the chronic bad guy of global farm trade. With the farm revamp in his bag, Lamy is hoping to secure more clout in the World Trade Organization, switch the WTO focus to the US Farm Bill - which the EU says is production-distorting - and make big gains on cutting industrial tariffs, liberalizing services and kick-starting WTO talks on investments and competition. Despite the triumphant mood in Brussels, however, recasting the EU as world trade hero rather than villain will not be easy.

Critics are already up in arms against a pact which they say will do little to help poor countries' farmers or slash food prices in the EU. And while they have given an encouraging nod to the EU package, WTO members are waiting for Lamy to turn the complex and much-hyped up deal into new proposals for tariff cuts and export subsidy reductions.

The EU farm shake-up is important, however. Clinched after a year of acrimonious discussion, the reform package breaks a long-standing and much-disputed link between EU subsides and farm production. Instead of production-related handouts, farmers will get a single, direct payment, rewarding them for meeting food safety and environmental standards. By "decoupling" the subsidy-production link, the EU will in effect be doing away with millions of euros in financial incentives which have encouraged European farmers to produce the EU's notorious wine lakes and butter mountains. With less surplus food to dispose of, there are hopes that the EU will stop dumping its excess products on world markets and in poor countries.

The hard-fought deal is expected to breathe new life into flagging WTO negotiations on the Doha Development Agenda, launched by trade ministers in the Qatari capital in November 2001. Brussels' costly farm payments - swallowing up to half of the EU's annual budget of almost 100 billion euros ($115 billion) - have long been a bone of contention at the WTO, with the US, Australia, Brazil and Argentina as well as many poor nations accusing the EU of holding up world farm trade liberalization by insisting on retaining farm subsidies. The Doha discussions have been in virtual limbo for the past few months, while negotiators waited for the EU to deliver on farm reform.

Not surprisingly, initial reaction from Geneva to the EU deal has been cautiously optimistic, with WTO chief Supachai Panitchpakdi predicting the agreement will help move the stalled negotiations forward

But despite the many EU victory speeches, the reform picture is less than perfect, with EU farm chief Franz Fischler being forced to accept several compromises to win EU states' backing. Although the severance of subsidies from output will start from 2005, EU states which fear that farming may be abandoned in the absence of handouts may delay the move until 2007. In addition, as much as 25 percent of direct payments to cereal farmers and livestock producers will still take the form of production-linked subsidies.

As Europe's dominant agriculture producer and exporter, France has long-played a key role in setting the bloc's farm agenda - and sabotaging efforts at reform. French politicians from both the right and the left sides of the political spectrum have traditionally courted votes in the country's farming community. However, the love-affair between French politicians and farmers may be fading. Demographic trends disfavor farmers, who now make up only about 4 per cent of the French population, down from 20 per cent in the 1960s. As a result, the government has more leeway to make policy changes. The link between the EU farm agenda and the WTO as well as pressure from industrialists unwilling to remain hostage to farming interests have also helped spur a new French approach to the problem.

Aid experts, however, have panned the EU package as a "magician's trick", unlikely to help European consumers or farmers in developing countries. The deal makes no dent in CAP spending, which under a Franco-German bargain struck last year will remain at a high 45 billion euros annually until 2013, with the money still going to subsidize farmers. Instead of rewarding surplus production, however, post-reform subsidies will focus on promoting higher quality farm products, rural development, and environmental protection. "The EU is massaging the figures to make it look good for Cancun. But this agreement is a bad deal for the world's poor," says Duncan Green, trade policy analyst at the Catholic aid agency, CAFOD. "Dumping will go on. It beggars belief that the EU can continue to pump billions of euros a year and it will not lead to dumping."

Crucially for WTO members, there are no new EU moves to reduce border barriers, and the impact of the reform on export subsidies remains unclear. The CAP reform directly impacts only one of the three pillars on which the Doha negotiations are based - domestic support - says David Woods, head of the Geneva-based independent consultancy World Trade Agenda. But, he warns, such commitments will only win WTO credit points for EU negotiators if they "rebound to create cuts in export subsidies and increase market access," the other two crucial WTO farm issues.

EU officials, however, are in no mood to listen to such criticism. Lamy insists that the farm reform has given the EU the upper hand in the WTO and it's now up to other members to start making equivalent concessions. "Unilateral disarmament is not on," he insisted recently, warning: "The US Farm Bill cannot remain untouched." Trade officials in Brussels say the farm package also puts the EU in a strong position to secure concessions on key issues, including a deal on protecting geographical indications - like Bordeaux wines and Champagne - further service sector liberalization, and launching talks on investment and competition rules. "We have to be able to tell our governments and parliaments that we've got something in exchange, that our efforts in agriculture were not in vain," says a senior EU trade official.

That may be wishful thinking. With the US unlikely to fall into line so easily, the next few months could see even more transatlantic squabbling over trade. Most developing countries, meanwhile, remain opposed to calls for talks on non-trade issues. Still, with only eighteen months to go before the end-2004 deadline for the Doha talks, the EU farm package has managed to provide a much-needed fillip to Geneva-based negotiators. And once crucial farm talks restart, there are hopes that the logjam in other WTO sectors will also start to ease. Discussions in Cancun may be heated - but world trade ministers will finally have something to talk about.