In most of sub-Saharan Africa agriculture accounts for the vast bulk of employment, is the foundation of industrial development, provides most of export earnings and is central to social and economic life. Agriculture is far more important in African economies than is the case in Europe where only around 3% of the population of EU25 countries now gain a livelihood from agriculture. If trade relations with the EU that are supportive of a process of structural economic transformation in sub-Saharan Africa are to be developed, then agriculture must be central.
Yet the external effects of the process of the EU's reform of its Common Agricultural Policy (CAP) overshadow the African commercial agricultural sector and threaten to undermine any agriculture-based process of economic transformation. This is of particular relevance in the current context of the economic partnership agreement (EPA) negotiations in which the European Commission (EC) is seeking to dismantle tariff protection around African food and agricultural markets. Now that Europe has enhanced the export-price competitiveness of its food and agricultural sector through shifting the basis of agricultural support from price support to direct aid to farmers, tariff protection of African markets might well be argued to be more necessary rather than less. This basic reality is compounded by the failure of the Doha round to effectively discipline agricultural-sector support in rich countries and consequently its trade consequences.
Precisely why this is the case, when the EC claims that CAP reform is eliminating all forms of trade distortions, is the subject of this paper. However, before beginning this exploration of the external effects of CAP reform, it is necessary to review the current EU-African agricultural-trade situation.
The Africa-EU Agricultural Trade Relationship
Sub-Saharan African agricultural exports account for about a fifth of the region's total exports to the EU (compared to an average of 10% for all developing countries). Agricultural products account for about a quarter of the exports of African ACP countries (excluding South Africa) to the EU. The significance of agricultural exports in total trade varies considerably across the regions of Africa. The region with the highest dependence on agricultural exports is the UEMOA (Union Economique et Monétaire Ouest-africaine – the West African Economic and Monetary Union), where they account for an average of over two-thirds of total exports to the EU.
The second most agriculture-dependent region is the ESA (Eastern and southern African) region with agricultural exports accounting for over half. The ESA region is significant in that it is one with the highest dependence on agricultural exports that are also covered by the CAP (notably sugar, fruit and vegetable and beef exports) and hence it is the region that is most affected by the price-reducing effects of the process of CAP reform.
The regions with the least dependence on agricultural exports in their trade with the EU are the CEMAC (Central African Economic and Monetary Community) and SADC (Southern African Development Community, which excludes the DRC, Malawi, Mauritius, Zambia and Zimbabwe in the EPA negotiations) regions, with agricultural exports accounting for an average of 11.2% and 18.3% of total exports respectively. This is explained by the importance of oil and precious mineral exports in these regions' overall trade with the EU.
Looking at the other side of the coin, EU food and agricultural exports to the sub-Saharan Africa region are of growing importance to the EU. While globally exports of food and agricultural products accounted for only 6% of total EU exports, they accounted for 9.8% of EU exports to sub-Saharan Africa or 14.9% if trade with South Africa is excluded (South Africa accounts for 42% of total EU exports to sub-Saharan Africa, only 2.6% of which are of food and agricultural products).
| 2004 | 2005 | Ave. 2004/05 | |
|---|---|---|---|
| Sub-Saharan Africa | 22.2% | 19.0% | 20.5% |
| ACP Africa | 28.9% | 23.4% | 25.8% |
| UEMOA | 71.7% | 63.6% | 67.6% |
| ESA | 51.8% | 54.4% | 53.2% |
| ACP SADC | 20.2% | 16.8% | 18.3% |
| CEMAC | 11.9% | 10.7% | 11.2% |
Exports of food and agricultural products were most important in the UEMOA region, accounting for 20% of total EU exports. Indeed there is a noticeable difference between the importance of these products in total EU exports to the franc zone (18.0% in 2004/2005) and to sub-Saharan Africa as a whole (9.3% in 2004/2005). It may well be that the currency link has an important bearing on trade in food and agricultural products; however, it could rather be the case that the closer economic integration of which the currency link is only a reflection, is the key factor in fostering higher levels of these exports. Whether the currency link or the wider level of closer economic integration is the key factor in fostering higher levels of EU food and agricultural exports is potentially of considerable importance when trying to look at the likely impact of any EPA on Africa-EU agricultural trade. The region where EU food and agricultural product exports are least important is the ESA region.
These products also account for a high percentage of total imports from the EU for African LDCs, only a couple of percentage points below its importance to the franc zone. The trend in EU exports of food and agricultural products overall to LDCs is rather revealing. EU agricultural exports to LDCs are concentrated in the cereals, dairy, livestock and food preparations sectors.
In the past ten years notable increases in EU exports to LDCs have occurred in processed agricultural products (up by 147% in value from 1995 to 2004). Within this category the two largest areas of expansion have been in cigarettes and tobacco products (up 350% in value terms), food preparations (up 129%). In 2004 processed food products accounted for 40% of EU exports of food and agricultural products to LDCs up from 21% in 1995.
The increasing level of EU exports of processed food products to LDCs is a matter of concern, particularly given the importance of agriculture to LDC economies (which accounts for from 30% to 60% of GDP; from 40% to 90% of employment; and 25% to 95% of export earnings). This is particularly the case since with the value of LDC agricultural production declining, it is essential that LDCs are assisted in moving up the agricultural value chain, so that more value is added locally for food and agricultural products destined for national, regional and international markets. Indeed, this issue of moving up the value chain has a much wider relevance. In many respects one of the keys to the economic transformation of Africa is fostering a progressive movement up the agricultural value chain, so that more value is added to goods destined for all markets (including the EU). The consequent increases in employment and rural incomes could provide the domestic and regional basis for a much more broadly based process of economic development. Against this background the question arises what will be the impact of CAP reform and the current EPA negotiations on the prospects for African agricultural dependent economies moving up the value chain?
Impact of CAP Reform on the EU's Trade Relationship with Africa
The Areas of Impact
We have seen how important the agricultural sector is to Africa's export relationship with the EU and how important the African market is to the EU's food and agricultural exports. We now consider what impact the process of CAP reform is having on this relationship. The four main impacts are:
1) A reduction in the value of traditional trade preferences enjoyed by African agricultural exporters;
2) The increasing costs of supplying the EU market as a consequence of the establishment of a stricter EU food safety policy, with a consequent squeeze on profitability in the face of declining EU market prices induced by the process of CAP reform;
3 The emergence of a greater market differentiation within the EU which requires a shift from trading goods into the EU market to marketing goods into particular components of the EU market;
4) An increase in the price competitiveness of EU-produced simple value-added food products (for both the EU and export markets).
We consider these impacts in the following four sections.
CAP-induced Preference Erosion
The impact of CAP reform on the value of traditional trade preferences is best known in the sugar sector. Table 5 sets out the likely income losses arising as a result of the full implementation of EU sugar-reform proposals by 2009/10. While some 13 African countries will be affected, the worst direct financial impact is concentrated in Swaziland and Mauritius. While financially Mauritius suffers by far the largest income losses, Swaziland suffers proportionately more severely since a far larger percentage of its total exports to the EU are affected, and the Swazi economy is much more heavily dependent on sugar. The majority of African sugar-exporting countries have income earnings losses of less than 1.5% of the value of their total exports to the EU in 2004 and in the case of LDCs these losses can easily be compensated for by an expansion of exports of sugar to the EU under the EBA (‘Everything but Arms’, the EU's system of duty-free entry for goods from LDCs) initiative. This is even the case for Malawi, Zambia and Ethiopia, where income earnings losses as a percentage of the value of exports to the EU in 2004 exceed 1.5% (5.07%, 2.22% and 1.67% respectively). We can thus see that the direct impact of CAP reform in the sugar sector in terms of the value of traditional trade preferences is concentrated in a limited number of African countries.
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|---|
| EU exports | 3,152,868 | 3,602,938 | 3,695,592 | 3,670,639 | 3,324,551 | 3,389,078 |
| EU imports | 6,466,762 | 6,954,604 | 7,509,216 | 7,610,539 | 7,124,426 | 7,239,005 |
| EU trade balance | −3,313,894 | −3,351,666 | −3,813,534 | −3,939,900 | −3,799,875 | −3,849,927 |
| EU trade balance, | ||||||
| 2 years | −6,665,560 | −7,753,434 | −7,649,802 |
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|---|
| EU exports | 21,617,240 | 23,206,655 | 22,695,296 | 22,558,128 | 22,251,373 | 25,328,625 |
| EU imports | 24,780,366 | 27,623,452 | 26,581,557 | 25,071,476 | 24,647,812 | 31,001,229 |
| EU trade balance | −3,163,126 | −4,416,797 | −3,886,261 | −2,513,348 | −2,396,439 | −5,672,604 |
| EU trade balance, | ||||||
| 2 years | −7,579,923 | −6,399,609 | −8,069,043 |
| Annual losses from 2009/10 | Total value of exports to EU in 2004 | % impact | |
|---|---|---|---|
| Mauritius | €107.725m | €1,125.115m | 9.57% |
| Swaziland | €29.383m | €139.299m | 21.09% |
| Zimbabwe | €10.604m | €451.336m | 2.35% |
| Malawi* | €7.968m | €157.048m | 5.07% |
| Zambia* | €3.944m | €177.945m | 2.22% |
| Sudan* | €3.552m | €254.171m | 1.40% |
| Ethiopia* | €3.255m | €194.553m | 1.67% |
| Madagascar* | €2.979m | €841.135m | 0.54% |
| Tanzania* | €2.821m | €674.843m | 0.42% |
| Kenya | €2.663m | €868.949m | 0.26% |
| Côte d'Ivoire | €2.080m | €2,189.452m | 0.10% |
| Congo | €2.080m | €261.707m | 0.79% |
| Mozambique* | €1.793m | €841.135m | 0.21% |
| * LDC benefiting from duty free quota free access under EBA |
The impacts on the sugar sector however are only the best known of the consequences of preference erosion; income losses are also occurring for beef (see below), and fruit and vegetables.
As a result of CAP reform, earnings on ACP beef exports to the EU have fallen by 20% since 2000, with the rate of quota utilisation emerging under the beef protocol in the period 2001-2004 at 39.6% being the lowest, except for that in the major drought in southern Africa two decades earlier (37.3%). Indeed, since the start of CAP reform in the 1992-1995 period, the absolute volume of beef exports under the beef protocol has continued to fall. The decline in the prices of lower-quality cuts of beef under the impact of CAP reform, when combined with a weakening of the euro against the rand, has made exports of these cuts of beef commercially non-viable. This process could even extend to higher-quality beef cuts, should the EU's trade relations with Brazil and Argentina evolve towards the granting of tariff-free access to current beef exports (300,000 tonnes). This would exert a strong downward pressure on EU beef prices. This would not be a problem for EU beef producers who receive direct aid payments to compensate for lower prices through the single farm payment scheme, but it would be potentially disastrous for African beef exporters and could make exporting all beef cuts to the EU commercially non-viable (see Table 6 above).
| Years | Average annual quota /t | Average annual utilisation /t | % utilisation of average annual quota |
|---|---|---|---|
| 1977–79 | 18,916 | 12,037 | 63.63% |
| 1980–82 | 30,000 | 11,199 | 37.33% |
| 1983–85 | 32,700 | 18,827 | 57.57% |
| 1986–88 | 38,000 | 18,252 | 47.90% |
| 1989–91 | 41,667 | 16,686 | 40.05% |
| 1992–94 | 49,600 | 37,782 | 76.17% |
| 1995–97 | 52,100 | 32,632 | 62.63% |
| 1998–2000 | 52,100 | 27,915 | 53.58% |
| 2001–2004 | 52,100 | 20,650 | 39.64% |
This situation is being compounded by the increasingly strict application of EU food safety standards (see next section). It is far from clear whether in the context of CAP reform and the EU's evolving trade relations with highly-competitive developingcountry agricultural exporters, there is now any future for African beef exports to the EU.
However, for African countries the area of greatest concern with regard to the impact of the erosion of the value of preferences (outside of the sugar sector) is the fruit and vegetable sector. This arises from the fact that many African countries have sought to diversify out of dependence on traditional commodities such as coffee, by moving into the production of a range of fruit and vegetable products for export to the EU. In countries such as Kenya, fruit and vegetable exports alongside cut flowers have come to far surpass the value of traditional exports such as coffee and tea in their trade with the EU. In all, some 18 African countries now export fruit and vegetable products to the EU.
There are thus concerns about the price implications of EU plans for the reform of the EU fruit and vegetable regime, along the lines of past patterns of CAP reform in other sectors. If the aim of the impending reform of the EU fruit and vegetable regime is to take these products into the single farm payment scheme (see box opposite), then this is likely to exert a downward pressure on EU fruit and vegetable prices, to the detriment of African fruit and vegetable exporters.1 With EU prices falling across a range of agricultural products as a direct consequence of the process of CAP reform, the question arises: what will the future value of preferential access be for African food and agricultural exports to the EU market (see Table 7 over)?
| Fruit | ACP Share | |
|---|---|---|
| Tamarind/lychee | Madagascar (52%), Mauritius (3%) | 55% |
| Pineapples | Côte d’Ivoire (13%), Ghana (6.6%), | |
| Cameroon (0.7%) | 24.5% | |
| Passion fruit | Kenya (10.5%), Zimbabwe (5.5%) | 17% |
| Guavas/mangoes | Côte d’Ivoire (6.5%), Senegal (1.7%), | |
| Mali (1.6%), Burkina Faso (1.3%) | 12.2% | |
| Papayas | Côte d’Ivoire (4.5%), Ghana (4%) | 9.5% |
| Avocadoes | Kenya (7.6%) | 7.9% |
| Oranges | Zimbabwe (3.30%), Swaziland (1.1%) | 4.5% |
| Grapefruit | Swaziland (2.2%), Zimbabwe (1.2%) | 4% |
| Grapes | Namibia (2%) | 2 % |
| Vegetables | ||
| Peas / beans | Kenya (35%), Senegal (4.4%), | |
| Zambia (3%),Zimbabwe (2.5%), | ||
| Ethiopia (2%), Tanzania (2%) | 49% | |
| Eggplants | Kenya (26%), Ghana (3%) Cameroon (0.5%) | 30.3% |
| Capsicum/chillies | Ghana (6%), Kenya (4%), Uganda (3%), | |
| Zambia (2%), Zimbabwe (1%), Tanzania (0.8%) | 19.4% | |
| Sweet maize | Kenya (5%), Zambia (4%), Tanzania (1.3%), | |
| Senegal (1.2%) | 12% | |
| Tomatoes | Senegal (2.5%) | 2.5% |
| Yams | Ghana (43%), Togo (0.5%) | 53.7% |
| Taro | Niger (38%), Burkina Faso (5%), Ghana (3.5%), | |
| Côte d’Ivoire (2.5%), Mali (2%), Togo (1.5%), | ||
| Cameroon (0.5%) | 54.1% |
Current EC Consultations on Fruit & Vegetable Sector Reform
The recent EC consultation document (EC, 2006) on further fruit and vegetable sector reform noted that to date the sector has been prohibited from receiving direct income support and that ‘the exclusion of fruit and vegetable producers from the single payment regime, as well as raising questions of fairness, could also give rise to control problems that would complicate the management of the regime’. It further expressed the view that in the light of recent WTO rulings this exclusion should be re-evaluated. It noted that decoupling may be more attractive for those fruit and vegetable products ‘subject to reduction commitments in the WTO’ (i.e. where there are ‘production aid and aid to producers where the raw product is destined for processing; refunds to ensure competitiveness on export markets; and payments for ad hoc withdrawals, in order to reduce excess supply on the market’). In this context one of the three options for further reform put forward was ‘the decoupling option: under which fruit and vegetable producers are integrated into the decoupled payment regime’. Given the comments made in this consultation document it looks as if the EC is leaning towards the adoption of this option. Indeed in January 2007 the EC published proposals along these lines.
The Impact of Stricter EU Food Safety Standards
Although food safety has been an important consideration in the EU for several decades, in response to recurrent food crisis in the 1990s the whole policy has been reviewed and been made more systematic. This has included: harmonisation of regulations across all the countries of the Community; the introduction of traceability and the general application of the precautionary principle; the introduction of a new package of hygiene standards; and to top it all, the introduction of a regulation governing food-and-feed safety control measures, compliance with which is required in order for foodstuffs to be placed on the EU market. One major consequence of these higher EU food safety standards has been to increase the costs of placing food on the EU market. While the EU standards and hence the costs are applied equally to EU production and third-country production, they have a differential impact. Many of these food safety measures involve high fixed costs and require high volumes of throughput to reduce unit costs. While largescale European producers can afford to carry these costs, African producers which generally operate on a much smaller scale, can find the unit cost onerous.
What is more, as an integral part of the reform process in the EU, agriculture ministers have insisted that financial assistance be extended to European food and agricultural enterprises to help them meet these stricter food safety standards without loss of competitiveness. Substantial levels of EU funding have duly been made available both directly in the form of dedicated food safety related financial instruments and indirectly through rural development programmes and direct aid payments to farmers.
African producers have no such access to publicly financed support programmes and need to meet the costs of compliance with EU food safety standards from the market price obtained for their products when exported to the EU. These costs are not insignificant: studies undertaken for the CTA2 have suggested that ‘sanitary and phytosanitary (SPS) measures can represent between 2% and 10% of a company's export turnover’. In the case of the Namibian beef sector, it is estimated that the costs of meeting EU food safety standards are now equivalent to between 8% and 10% of the value of beef exports to the EU.
With the application of the new EU food-and-feed control regulation since 1 January 2006, new responsibilities have been laid on African governments to ensure that all food products for export to the EU meet EU food safety standards. If the concerned government department cannot verify full compliance with EU food safety standards, then the EU market may be closed to food products from that country. This is placing new budgetary burdens on African governments as they have to establish or strengthen their national food safety control capacity. It is by no means certain that in the coming years African governments will be able to meet this challenge in a cost-effective manner.
With EU prices for a range of products falling and private-sector operators in Africa also having to make substantial new investments to meet EU food safety standards, it is by no means clear whether in the long term the commercial benefits will outweigh the immediate costs across a range of traditional export sectors. These commercial considerations could lead to an effective closure of the EU market to a range of traditional African agricultural exports.
It needs to be borne in mind that stricter EU food safety standards are an integral part of the CAP reform process. They form part of an effort by EU policy makers to shift EU food and agricultural production to serving quality markets, not just in Europe but across the globe. It has been recognised that EU producers cannot compete head-on with low-cost agricultural producers in advanced developing countries, hence the emphasis is being placed on differentiating EU products from imported products (see later section for how this relates to general market developments in the EU). Food safety, animal welfare, environmental standards – all form part of this quality differentiation policy of the EU and all of these developments pose new challenges for traditional patterns of African food and gricultural exports to the EU.
Responding to Increased Market Differentiation
Traditionally, African exporters have largely traded undifferentiated bulk commodities into the EU market. This posed no problems when EU agricultural policy was based on high market prices. Provided they met minimum standards, African exports could attract high prices, regardless of broader quality considerations. Price differentials existed based on quality considerations but these were not so significant. With the process of CAP reform leading to a dramatic decline in floor prices for a range of commodities, quality considerations have however taken on more and more commercial significance.
Within the EU market there are now not only price differentials based on quality considerations but also divergent price trends between general commodities and ‘quality’ products. The prices of quality products are rising while those of undifferentiated commodities are stagnating or declining.
African food and agricultural-product exports are facing an increasingly critical challenge, namely shifting their patterns of production away from serving undifferentiated markets within the EU towards serving ‘quality’ markets in the EU. This does not mean producing caviar and champagne; rather, it means responding to the growing differentiation within the EU market for food and agricultural products.
According to the United States Department of Agriculture (USDA) there are now two distinct components to the EU market: ‘necessity purchases’ and ‘luxury purchases’. ‘Necessity purchases’ are those for which purchase decisions are made exclusively on the basis of price considerations. For ‘luxury purchases’ in contrast purchase decisions are not based primarily on price, but on some perceived ‘quality’ attributes of the product. It might be organic, or artisanly produced, or it might be a ‘fair trade’ product, or have some particular geographical designation of origin to which a particular value is attributed. Whatever the reason, the consumer is willing to pay more, often substantially more, for the ‘luxury purchase’ product compared to the ‘necessity purchase’ product. Shifting EU food and agricultural production into serving this ‘luxury purchase’ component of the market is a central tenet of agricultural reform in the EU as it progresses into the 21st century. The EU's ambition in serving this ‘luxury purchase’ component of the market is not just restricted to the EU. The aim is to serve this component of the market globally, with EU trade policy being designed to break down barriers and respect EU standards, so that the commercial value of these quality aspects can be realised throughout the globe. Ultimately the opposite side of this particular coin is an increased EU openness to the imports of agricultural raw materials and food products serving the ‘necessity purchase’ component of the EU market.
This increased differentiation within the EU market, fuelled as a conscious policy choice by the process of CAP reform, is transforming the context of Africa-EU agricultural trade. If African producers and traders are to maintain a commercially profitable trade with Europe – which sustains a thriving rural economy – then increasingly the transition will need to be made from serving the ‘necessity purchase’ component of the EU market to increasingly serving the ‘luxury purchase’ component of the EU market. If this can be achieved then opportunities for the structural transformation of African economies will arise. However, making this transition will by no means be a simple proposition, since it requires a strong human resource input and considerable highly selective investments in picking winners and shifting to new ‘winners’ when the field becomes crowded. African exporters will need to either develop the capacity to differentiate their products on quality grounds and market them into particular ‘niches’ within the EU, or move up the value chain by adding value to basic agricultural products before export, so as to reduce their vulnerability to declining basic commodity prices, if they are to continue to export profitably to the EU.
Considerable assistance will be needed in helping African producers get to grips with the range of options open to them in developing products which serve the ‘luxury purchase’ component of the EU market, and there is potentially a major role for targeted ‘aid for trade’ support in this area. However, since it will encourage patterns of production which directly compete in areas into which the EU is seeking to take its own food and agricultural production, the EU is unlikely to be a willing source of support in this area. Nevertheless, it is essential that African producers get to grips with this challenge if there is to be any future in trading into the EU market.
CAP Reform, Enhanced Export Price Competitiveness & Regionalmarket Development
Under the process of CAP reform the shift from price support to direct aid payments allows prices of EU-produced agricultural commodities to fall without undermining farm incomes and production. By making raw materials cheaper, it expands domestic use of agricultural raw materials in the processing industry, expanding price-competitive production for both EU and international markets. This is an explicit objective of the whole process of CAP reform.
For the EC this is seen as simply removing past distortions created by the old CAP policy which placed EU food and agricultural producers at a disadvantage in global markets and necessitated the use of trade-distorting export refunds. By removing these old distortions, it sees CAP reform as contributing to the elimination of trade distortions in global trade. The reality unfortunately is quite different: the provision of direct aid payments to EU farmers has in many sectors sustained EU production levels above those which would arise at the prices offered EU farmers in the absence of direct aid payments. Since in the absence of these payments EU production would be lower, then either EU prices would have to be higher or imports would have to be increased in order to establish a market equilibrium. Direct aid payments effectively shift the level of production at which a market equilibrium is established at any given price level. These production effects of direct aid payments have important trade consequences. In July 2002, the then EU Agriculture Commissioner Franz Fischler acknowledged in a speech in Japan that ‘direct aid payments still stimulate the quantity’ although he maintained that they are less trade-distorting than previous forms of support. He went further, acknowledging that as a result of CAP reforms ‘European products have become more competitive [and that consequently] over the last decade, our exports of processed products have more than doubled in value, while raw-product exports increased by less than a half. And there is a high potential for further growth in this sector’ (Fischler, 2002).
This ‘high potential for further growth’ largely arises from the fact that the process of CAP reform allows EU food and agricultural exporters to increasingly escape the confines of WTO disciplines on export refunds. These constrained the level of exports which could occur, since without such a subsidy EU exports were not price competitive. By reducing and eliminating the gap between EU and world market prices, CAP reform has allowed EU food and agricultural products to be exported without any need for export refunds, thereby removing the constraint. Where such WTO constraints have been reduced or removed, either directly or indirectly (e.g. for poultry meat), EU exports have risen phenomenally (in the case of poultry meat up by 137% between 1991 and 2003). In some of these simple processed food products, as we shall see, Africa has become a major market for these expanded EU exports (see Table 8 below).
| Year | EU poultry exports (tonnes) | Year | EU poultry exports (tonnes) |
|---|---|---|---|
| 1991 | 478,000 | 1998 | 1,032,000 |
| 1992 | 519,000 | 1999 | 1,022,000 |
| 1993 | 663,000 | 2000 | 1,010,000 |
| 1994 | 683,000 | 2001 | 964,000 |
| 1995 | 849,000 | 2002 | 1,133,000 |
| 1996 | 856,000 | 2003 | 969,000 |
| 1997 | 927,000 | 2004 | 1,029,000 |
It would thus appear that the elimination of the need for export refunds, far from reducing EU exports may in fact fuel an expansion of them, since the enhanced price competitiveness arising from the implementation of CAP reforms has led to the elimination of export refunds. Thus given appropriate sequencing with the process of CAP reform, the elimination of export refunds does not remove trade distortions, it simply reflects a shift in the basis of the trade distortion.
Recent analysis of the EU cereals regime (commissioned by the EC itself) suggests that direct aid payments maintain production levels far higher than the post-reform market prices would warrant and consequently help maintain lower domestic prices. Further analysis suggests that since direct aid payments in the cereals sector sustain production at higher levels but lower prices than would otherwise be the case, there are cross-subsidisation effects. While this can reduce and even remove the need for export refunds (as in the poultry-meat sector), this does not mean that no export subsidisation is being provided – it is merely being provided in a less direct way. Analysis by the Solidarité Association (France) argues that in the beef sector for example, even if export subsidies are eliminated ‘considerable dumping could be maintained’, since in 2002 ‘domestic subsidies to the exported bovine meat were almost twice as large (93.8% more) as the export refunds’.3 Furthermore, ‘prices of EU bovine meat are no longer prices of a “market economy“ since they are much below their “normal value“ which would prevail “in the ordinary course of trade”’.
This provides a clear indication of the broad direction in which CAP reform is taking EU trade in food and agricultural products. It is supporting the expansion of exports through enhancing its price competitiveness and shifting patterns of exports away from basic agricultural products to value-added food products. As the process of CAP reform is rolled out to more and more sectors, the cumulative effect on the price competitiveness of EU value-added food products will be greatly enhanced (all other factors being equal), further fuelling the expansion of EU exports of value-added food products. This is particularly the case for simple value-added food products, where the price of the agricultural raw materials is proportionally far more important to the price of the final product than for more sophisticated value-added food products. Unfortunately, it is precisely these simple value-added food products that have been the starting point for agriculture-based industrial development. This reality needs to be taken on board in conducting EPA negotiations in the light of the African objective of structurally developing their food-and-agriculture sector through regional market integration. If the new forms of direct aid payments provide a high level of indirect export subsidisation, then moves towards free trade via tariff elimination will generate some perverse trade outcomes, so long as these other impediments (high levels of direct public payments to EU farmers) to free and fair trade remain. These outcomes could serve to undermine the development of regional production for emerging regional markets for food and agricultural products, particularly simple value-added food products. This could then have serious implications for efforts in Africa to promote investment in value-added production within key agricultural product chains based on emerging regional markets.
CAP Reform & EU Exports: Some Concrete Examples
As previously indicated CAP-induced price reductions reduce raw material costs of EU food and drink manufacturers. This allows EU food processors to fully exploit economies of scale, improving EU export-price competitiveness (particularly for simple value-added food products) and stimulating EU exports. In some agricultural-product chains the process of CAP reform has already seen a major expansion of EU exports of simple value-added food products to ACP markets, with ACP markets taking on a growing significance to EU exporters. With CAP reform being most advanced in the cereals sector the effects have been most marked in simple cereal-based value-added products and in products which use cereals as an input (e.g. poultry). According to a composite table on the DG Agriculture website covering the period from 1995 to 2004, over this period EU exports of ‘preparations of cereals’ to ACP countries rose in value terms by 182%, with the ACP now taking nearly 1 in 10 EU exports of these products in 2004 compared to just over 1 in 20 in 1995.4
Similarly, since 1995 EU exports of poultry meat (see over) to ACP markets have risen 113% in volume terms, with ACP markets now taking nearly 1 in 4 EU exports of poultry meat compared to slightly more than 1 in 8 exports in 1995. This expansion of EU exports was largely concentrated in the west African and central African markets, with severe disruptions of local markets and production occurring in the poultry sectors in Cameroon and Ghana. In addition, in west Africa exports of EU tomato paste has begun to break the link between local food-processing industries and their agricultural hinterland, with some industries on the coast now increasingly sourcing a range of inputs from Europe rather than locally or regionally.
| Year | To ACP | To World | %ACP |
|---|---|---|---|
| 1995 | 127 | 2,387 | 5.32% |
| 1996 | 152 | 2,712 | 5.61% |
| 1997 | 202 | 3,022 | 6.68% |
| 1998 | 228 | 2,948 | 7.73% |
| 1999 | 233 | 2,830 | 8.23% |
| 2000 | 285 | 3,242 | 8.79% |
| 2001 | 373 | 3,700 | 10.08% |
| 2002 | 356 | 3,659 | 9.73% |
| 2003 | 347 | 3,568 | 6.92% |
| 2004 | 358 | 3,682 | 9.72% |
There are fears that the closer economic integration between the EU and Africa which EPAs are intended to foster could lead to a replication of the agricultural trade patterns which characterise EU-west Africa trade (particularly in the franc zone) elsewhere in Africa. It is not lost on African trade negotiators that the upsurge in poultry exports to Ghana was directly linked to tariff elimination processes entered into in the context of structural adjustment programmes agreed with multilateral institutions (see Table 10 below).
| Year | To ACP | To world | % to ACP |
|---|---|---|---|
| 1995 | 115 | 840 | 13.69 |
| 1996 | 101 | 824 | 12.26 |
| 1997 | 133 | 938 | 14.18 |
| 1998 | 158 | 1,018 | 15.52 |
| 1999 | 191 | 1,040 | 18.36 |
| 2000 | 223 | 1,069 | 20.86 |
| 2001 | 215 | 1,018 | 21.12 |
| 2002 | 245 | 1,169 | 20.95 |
| 2003 | 268 | 986 | 27.18 |
| 2004 | 245 | 1,037 | 23.63 |
| Sources: EU exports to ACP countries and the world by value and volume can be found at http://ec.europa.eu/agriculture/agrista/tradestats/index_sem.htm |
There would appear to be some grounds for these fears if one considers recent developments in the SACU sugar sector following the conclusion of the EU-South Africa TDCA. This agreement committed South Africa to the progressive elimination of tariffs on a range of sugar-containing value-added food products. Tariffs were to be halved by 2008 and completely eliminated by 2012 (see Table 11 opposite).
| Tariff Line | Tariff 2000 | Tariff 2008 | Tariff 2012 |
|---|---|---|---|
| 18062010 | 27.5% | 13.5% | 0 |
| 18061000 | 20.0% | 10.0% | 0 |
| 18062010 | 27.5% | 13.5% | 0 |
| 19053006 | 25.0% | 12.5% | 0 |
| 18062090 | 20.0% | 10.0% | 0 |
This is transforming the basis of investment decisions in the sweet-and-chocolate sector in SACU (see Table 11). Following the signing of the EU-South Africa free trade area agreement, Cadbury South Africa, which had established chocolate production in South Africa over 60 years previously, announced that it no longer considered itself primarily a manufacturer of chocolates and sweets but rather as a trader in chocolates and sweets which has some local manufacturing capacity. Other companies and entrepreneurs followed suit. The owner of South Africa's largest independent chocolate manufacturer, Beacon Sweets, sold out to Tiger Brands – a major South African food conglomerate – and established a sweet and chocolate importing business (Galloway). Galloway rapidly emerged as a major player in the SACU sweet and chocolate sector. A sweets and chocolates company in Swaziland also closed down. There appears to have been a recognition that, in an increasingly liberalised trading environment, the economics of local sweet and chocolate production have been transformed.
Trade with the EU of course was not the only factor in the dramatic 25% decline in sweets and chocolates production in the SACU between 1997 and 1999. The upsurge in sweets and chocolate imports came from a variety of sources: quality branded products were imported from the EU; individually wrapped sweets for sale through the hawker trade were imported from Brazil, while non-branded quality sweets and chocolates were imported from ‘export platforms’, such as the United Arab Emirates. What was apparent was that global sourcing for food-product inputs, in a context of agricultural market distortions, was a key factor in these trade flows and the transformation of the investment context for sweets and chocolate production in the SACU. It is this factor which ironically means that if you want to be a competitive producer of value-added food products, and you do not have access to public subsidies, then it is better not to have an agricultural base on which you build your production, but it is better to source all your inputs globally at world market prices. This is the ultimate logic of the globalisation process to which the EU has been responding through the process of agricultural reform.
However, it is a logic that the EU itself creates as a result of its changing domestic agricultural policies and as sociated policy instruments – notably the shift over to direct aid payments to farmers. The EU approach to agricultural reform thus has serious implications for African food and agricultural production. Indeed, it could well serve to lock African agricultural production into an externally oriented system of production where prices received are either stagnant or declining.
Conclusion
These external affects of the process of CAP reform would appear to have very real implications for the Africa-EU trade negotiations. If EPAs are to support the structural development of African food and agricultural product sectors, it would appear to be important to maintain a tariff regime that encourages investment in value addition based on agricultural production, rather than dismantling tariff protection in an indiscriminate manner and leaving markets open to the perverse effects of the consequences of new forms of agricultural support in OECD countries.
Recognising this, African negotiators will need to take as their starting point the fact that new forms of CAP support enhance EU export-price competitiveness through the indirect provision of export subsidies. They should therefore aim to retain tariff protection in the affected food ‘product chains’, until such time as this basic distortion to free trade has been eliminated or competitiveness in supplying regional markets for the affected value-added food products has been developed sufficiently to warrant a progressive dismantling of tariff protection.
The importance of thinking in terms of ‘product chains’ cannot be under-estimated. As the South African experience illustrates, maintaining protection for basic agricultural products (in the foregoing case sugar), while opening up associated value-added products to duty-free access (e.g. sweets and chocolates), is a recipe for undermining the competitive position of local value-added processing companies on national and regional markets. This can undermine regional efforts to move up the value chain and wider efforts in Africa to foster a process of structural transformation based on moving up agricultural value chains.
This situation is compounded by the accelerating process of preference erosion, which could well create a situation in which at the very time African countries are granting duty-free access to EU food and agricultural exports (trade preferences not extended to other WTO members), the value of the trade preferences that African exporters have traditionally enjoyed on the EU market will be disappearing, as EU prices are brought down to world market price levels.
Addressing the Issue of Preference Erosion Under EPAs: the Outlines of a Response Strategy
In formulating a response to the process of preference erosion which is underway in ACP trade, six concrete areas for action can be identified, three of which relate to trade measures and three of which relate to aid interventions in support of trade adjustments. Specifically on the trade side, the kind of measures required include:
- •
The early removal of all remaining tariff and quota restrictions on ACP food and agricultural exports to the EU, so that full advantage can be taken of what margins of preference remain for as long as they remain;
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Cooperation on administrative arrangements to reduce transaction costs on exports to Europe, particularly for small ACP suppliers and countries undertaking diversification; the establishment of clear time-bound procedures for the resolution of SPS disputes, including the establishment of arbitration arrangements in case of non-resolution of the SPS dispute within the agreed time-frame.
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The establishment of ‘aid for trade’ packages to assist in production adjustments to meet ‘quality’ standards, improve marketing and facilitate movement up the value chain;
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The establishment of aid instruments to support diversification out of the affected sectors (involving the provision of both technical and financial support);
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The provision of support to social adjustments in affected sectors and communities to reduce the transition costs and support the maintenance of an investment friendly environment.
It is this impending disappearance of the price differential between the EU and world market prices for basic agricultural products which makes it imperative that African producers increasingly shift to servicing value-added and ‘quality’ conscious components of the EU and regional markets. EPAs potentially offer an opportunity for Europe to assist African producers in making this transition by setting in place a comprehensive programme of aid-and-trade measures to address the problem of preference erosion. Unfortunately, there is no evidence that the EC is contemplating using the EPA process in this creative way, despite its recognition of the importance of addressing these issues in the context of the EU's relationship with north Africa (Fischer Boel, 2006). In this context, prospects do not look good for the future of Africa's agricultural trade relations with the EU.