The European Union’s Crazy Agricultural Policy

Commentary, Globalization, Johan Norberg

Although the western world has paid lip service to free trade, in one major respect it has not done much to aid the process. Agricultural markets remain riddled with subsidies and import restrictions, most of which directly damage the prospects for economic advancement in the poorest Third World countries.

World trade in agricultural produce is growing far more slowly than trade in other commodities, mostly due to a startling level of protectionism on the part of affluent countries. Most of them are determined at all costs to maintain a large-scale agricultural industry of their own, even if they have no comparative advantages in this sector. They subsidize their own farmers and exclude those of other countries by means of trade barriers.

These agricultural policies squander a lot of resources. Affluent countries are drenching farmers with money through protectionism, subsidies and export grants. The total cost of these restrictions in the 29 OECD countries is about $US 360 billion, a staggering burden for taxpayers and consumers. For that money one could send all the 56 million cows in these countries around the world on first-class air tickets once every year, with plenty of change left over. Alternatively, the cows could fly business class, and also receive US$2,800 dollars in pocket money each to spend in tax-free shops.

The European Union’s CAP – which stands for Common Agricultural Policy, not the more understandable Crazy Agricultural Policy – involves quotas on foodstuffs and tariffs of about 100 per cent, for instance, on sugar and dairy produce. The EU wishes to exclude processed products which can compete with European ones. Tariffs on basic foodstuffs average only half of those on value-added ones. Coffee and cocoa, not produced in Europe, can slip in without any serious customs mark-ups. EU tariffs on meat are several hundred per cent.

Not only is the EU excluding foreign products, but production and transport by European farmers are subsidized to a fantastic degree, by something like half the EU budget. Since these grants are paid according to acreage and head of livestock, they mainly subsidize the wealthiest, largest-scale operations. It has often been said that the foremost recipient of such grants is the British royal family. They have created a huge surplus of foodstuffs. The EU partly disposes of these by paying farmers not to grow anything.

Worse, through export subsidies the EU dumps its undervalued surplus on the world market, at prices that make poor countries unable to compete. The CAP not only prevents Third World farmers from selling to Europe, it knocks them out in their own countries. This is no ordinary price dumping, but a systematic undermining of the very type of industry in which the developing countries have comparative advantages and which most of them must expand before other sectors can be developed. The CAP is estimated to cause the developing countries a welfare loss in the region of US$20 billion dollar annually, twice Kenya’s entire GDP. The EU’s trade policy is both irrational and shameful. It protects a small circle of lobbying enterprises and farmers who ignore the fact that these trade walls are condemning people in other continents to poverty and death. It is a moral disaster.

The cynicism of the policy is all the more apparent when you realize that the EU as a whole gains nothing by it either. The Swedish government’s calculations suggest that a Swedish household with two children could gain about US$250 dollars a year absent the EU’s duties on garments, and no less than US$1,200 a year if all agricultural barriers disappeared. European taxpayers pay millions of dollars in tax every year for their shops to have a smaller selection of food at higher prices. EU government’s subsidize agriculture to the tune of about US$90 billion a year and the manufacture of basic industrial products by about the same amount. All cracks through which goods from the developing countries could sneak in are promptly plugged with anti-dumping tariffs and technical stipulations about issues like packaging and hygiene, rules exclusively tailored to EU enterprises.

Using statistics from the European Commission, French economist Patrick Messerlin has estimated the cost of all EU trade barriers, including tariffs, quotas, export subsidies and anti-dumping measures. His findings indicate a total annual between five and seven per cent of the EU’s GDP. In other words, completely free trade would allow the EU to add nearly three Swedens to its prosperity every year. Messerlin maintains that protectionism rescues roughly three per cent of jobs in the sectors he investigated. Each job saved costs about MSEK 2 per annum, roughly ten times the average wage in these industries. For that money, every protected worker could receive an annual Rolls Royce instead, and it would not come at the expense of the world’s poor.

“Either a branch of enterprise is profitable, in which case it needs no tariff protection; or else it is unprofitable, in which case it deserves no tariff protection,” Swedish economist Eli F. Heckscher once said. With tariff protection and subsidies, manpower and capital which could have added to the EU’s competitive strength linger on in sectors with no comparative advantage. The EU ties the developing countries to poverty, not for the benefit of its people but for the sake of a narrow, if vociferous vested interest.

It is harder to quantify the loss which protectionism confers on developing countries. The United Nations Trade and Development Programme claims that, with greater access to affluent markets, exports from developing countries would grow by approximately US$700 billion annually. The British Labour government’s white paper on globalization asserts that a 50 percent reduction of import duties countries would lead to a growth of prosperity in developing countries on the order of US$150 billion a year, about three times as much as global development assistance.

Johan Norberg in Winnipeg on April 28th, more details..