Europe throws lifeline to world trade talks

By BRIAN FALLOW economics editor

Prospects for the Doha Round of world trade talks have brightened after European agriculture ministers agreed to a far-reaching reform of the Common Agricultural Policy (CAP).

Though festooned with fish-hooks and encrusted with qualifications, carve-outs and delays, the package, which emerged from three torrid weeks of negotiations, largely preserves the central thrust of the reforms sought by the European Commission: decoupling domestic subsidies from production.

The aim is to switch off production which occurs only to garner a subsidy.

In theory that should reduce the amount of produce coming off European farms which either has to be protected from cheaper imports or which is liable to be dumped on world markets, with a further subsidy.

For a while it looked as though opponents of reform, led by the CAP's largest net beneficiary, France, would prevail, leaving the European Union with no negotiating coin to bargain with in the Doha talks.

Those negotiations have been stalled by lack of progress in the key area of agricultural trade.

But the deal that emerged could plausibly be described by European Union Farm Commissioner Franz Fischler as trade- friendly.

"We are saying goodbye to the old subsidy system, which significantly distorts international trade and harms developing countries," Fischler said.

He went on to warn that the EU would be ready to use its increased negotiating capital in the Doha talks only if it got something in return. "Unilateral disarmament is not on."

New Zealand Trade Minister Jim Sutton said decoupling was a significant change of direction, moving European agriculture on to a more market footing.

"But we will have to see how the reforms are translated into a new position in the WTO agriculture negotiations in two areas not covered by the CAP package, market access and export subsidies," Sutton said.

"On its own it does not go far enough to ensure a successful and ambitious result for agriculture in the Doha Round. But it is certainly a step that needed to be taken.

"It should breathe new hope and new energy into the Doha negotiations. I'm extremely pleased."

The reform package does not reduce the total subsidy flowing to Europe's farmers. It is set to rise from €40 million ($79 billion) a year now to €48 billion by 2013.

But over the same period the millions of farmers added by the eastward enlargement of the EU will progressively move towards equal entitlement with their western European counterparts.

The reforms change how the subsidies are distributed, replacing the bulk of subsidies linked to production with single farm payments.

In deference to French concerns, the decoupling is only partial for cereals and there has been no change to the intervention or floor price at which the EU steps in to buy, building up stocks that must later be disposed of.

France also won the right to delay implementation of parts of the agreement until 2007, two years after the commission's proposed deadline.

Some subsidies linked to the number of livestock survive for beef and sheep.

The system of milk quotas, which limits European production, will be retained until at least 2014 and will continue to increase, though more slowly. That suggests there will be no reduction in European milk production.

But the mix of what is done with the milk should change.

The intervention price for butter will be reduced by 25 per cent by 2007, and that for skimmed milkpowder by 15 per cent by 2006.

That should mean lower prices within the EU for those commodities, encouraging production to shift to other products.

In principle it should mean less European butter and skimmed milkpowder released into the world market, and less need for export subsidies because the gap between European and world prices will be smaller.