International Trade
US-EC Farm Confrontation

At a Brussels lunchtime meeting with the European Centre for Advanced Research in Economics (ECARE), Université Libre de Bruxelles, on 24 June, Kym Anderson presented results of recent research on the agricultural policy confrontation between the US and the European Community. Anderson is Professor of Economics and Director of the Centre for International Economic Studies, University of Adelaide, and a Research Fellow in CEPR's International Trade programme. His remarks drew on his CEPR Discussion Paper No. 849, `US-EC Farm Confrontation: An Outsider's View' . The meeting was part of CEPR's research programme on `Market Integration, Regionalism and the Global Economy', supported by the Ford Foundation. The views expressed by Professor Anderson were his own, however, not those of the Ford Foundation nor of CEPR.

Anderson first reviewed the better-known wasteful effects of the current agricultural export subsidy war on the US and EC economies: consumers pay unnecessarily high prices for food; governments make large budgetary outlays to farmers; these are inefficient in redistributing income because larger, richer farmers capture most of the benefits, and the transfer process entails large administration costs and sometimes corruption. The confrontation also imposes substantial direct costs on other traditional exporters of agricultural goods by reducing the average levels and increasing the variability of world food prices. Subsidies to agricultural exports also reduce the competitiveness of US and EC non-agricultural producers by keeping resources within agriculture which would be better employed in other sectors. Those producers also tend to face higher retaliatory trade barriers so long as farm subsidies remain in place. The emphasis on production is also damaging the US and EC rural environment, since increased output in turn requires greater use of pollution-generating inputs. These subsidies are damaging development prospects in traditional exporting countries such as Argentina, Australia and Thailand and in many other poorer countries. And the continued US-EC confrontation is delaying the conclusion of the Uruguay Round and keeping the world economy in a deeper and longer recession than is necessary.

Anderson nevertheless dismissed the case for taking agriculture off the Uruguay Round agenda to help secure a speedy conclusion: this would be unacceptable to the Cairns Group and probably to the US, and not in the Community's interest. Reform of the CAP is now inevitable on account of its ever-rising budgetary costs and the Community's ever-closer ties with the Central and East European countries (CEECs). By accepting the Blair House accord as a basis for the agricultural component of a Uruguay Round agreement, the Community stands to gain since it would secure reductions in barriers to its non-agricultural exports to its GATT partners. It would also have to undertake less adjustment, since cuts in farm protection abroad would raise the international food prices towards which EC prices would have to move.

All European countries have interventionist farm policies. EFTA members currently provide substantially greater support than the EC(12), while even the most advanced of the CEECs provide substantially less. EFTA members' integration into the Community may raise CAP prices slightly, but ignoring the CEECs' membership bids into the next century will only increase their demands for free trade in EC agriculture. The Community is therefore likely to continue granting them limited preferential market access, even though this is probably less efficient than direct aid. Anderson suggested in conclusion that the other GATT contracting parties are likely to accept the Blair House accord, which involves only modest reform, as the basis for the agricultural component of the Uruguay Round. The remaining challenge is to resolve differences in other sectors early enough to ensure that a Uruguay Round agreement reaches the US Congress before the `fast-track' legislation expires in mid-December.