Chances of the Hungarian Agriculture in the light of negotiations for EU-accession

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1 Szent István University Chances of the Hungarian Agriculture in the light of negotiations for EU-accession Thesis Miklós Somai Gödöllő 2002

2 2 Name of the PhD School: Szent István University, PhD School for Economic Sciences Subprogram of Macro-economics for Food Discipline: Economics Head of the PhD School: Dr. István Szűcs Professor of the Agricultural Sciences Head of the Subprogram: Dr. László Lőkös Professor of the Agricultural Sciences Supervisor: Dr. Gyula Varga Professor of the Agricultural Sciences Read and approved by the. Head of the PhD School... Supervisor

3 3 1. PRELIMINARIES AND OBJECTIVES The Copenhagen European Council (1993) allowed the associated countries of Central and Eastern Europe to become members of the Union. It also defined the main political and economic criteria to meet by applicants before they could join the EU. Since then, both in the Union and the candidate countries, a multitude of reports and papers trying to evaluate the possible scenarios of the agricultural accession had been published. At the outset, these analyses were not free of extreme opinions. On the one hand, European experts used to estimate the costs of enlargement too high. On the other hand, there were exaggerated expectations related to EU-membership in the CEECs. Later in the time, professionals opinions got closer to the reality on both sides. But the Commission s proposals of 30 January 2002, dealing with the most important issues of agricultural accession (direct payments, production quotas, etc.), has put everybody into a passion again. In such a situation, it is perhaps useful to make a step backward, as to be able to examine the EU, which we want to join, at a wider and historical distance of time. How and by what stages has the EU arrived to the above mentioned proposals it offered the candidate countries? The evolution of the CAP had never been independent of exterior mostly American influences. Hence, this thesis is not a simple and umpteen description of the CAP story, but aims to examine it in a broader, international context. The goal of the examination is to have an answer to one of the most important questions concerning Hungary's accession to the EU: namely, what will the European common agricultural policy be like at the time of our accession, i.e. under what circumstances will our integration be realised? According to this goal, the paper contains four big chapters. In the first one, I focus on the birth and the evolution of the CAP, underlining the importance of relationship between France and Germany on the one hand, and between the EU and the USA on the other. Above all, I'd like to clear up whether a radical reform timed at the moment of the eastern enlargement or just afterwards would be a logical outcome of the CAP-story. Whether a radical shift in the agricultural policy, i.e. a deep change in the forms and mainly in the volume of subsidies is to be expected in the near future? If it is, granting these subsidies to the new member-states for only a couple of years would really make no sense. Clearing up of this issue is of utmost importance, since the above-mentioned scenario has always been a favourite argument of some EU member-states as well as of the Commission in the negotiation process. In the second part of the paper, I'd like to discuss another argument often cited by the EU concerning the eastern enlargement. This argument says that there is a great pressure put on the EU by the international community - and especially by the USA - to change the CAP and reduce the subsidies. In order to find out the truth about this argument, I give a survey of the historical development of the US agricultural policy, presenting its turning points and main tools. I pay special attention to the last two farm bills, the Federal Agricultural Improvement and Reform Act of 1996 (FAIR Act) and the Farm Security and Rural Investment Act of 2002 (FSRIA), which contradict one another in many aspects. Such a survey of the historical and particularly the recent evolution of the American agricultural policy can help us to find out whether Washington will in the short or middle term be in a position to put pressure on Brussels to cut down the CAP internal support. The third chapter leads us to the scene of EU-USA conflict, the WTO. I give an account of the agriculture-related events of the international trade negotiations, of preliminaries and results

4 4 of the Uruguay Round and of the main topics of the Doha Round. In this chapter, I had to answer two important questions: - first, whether a WTO-agreement - and here the URAA is the only good example - results when implemented automatically in more liberal trade and less distorting national policies; - second, what are the prospects of Doha Round like, i.e. how radical the outcome of the ongoing negotiations could be. It's important to answer these questions, for there is a tendency in the EU to present the Doha Round as if the negotiations could only results in the same radical way as the Uruguay Round did. In other words, as if the EU would have to change and reduce the CAP-subsidies according to the obligations arising from the expected WTO-agreement. Finally, in the fourth chapter, I give an overview of the problems I consider to be the most important in the process of agricultural accession of Hungary and of Eastern Europe in general. Lacking enough knowledge about the Hungarian agriculture, I could not set myself to look for strategic responses concerning the EU-accession, nor could I present alternative scenarios for it. The only I could was to support my views by presenting facts in some utterly discussed issues such as e.g. quotas, subsidies and competitiveness. I would like to emphasise that my intention was not solely to give a historical summary of the above mentioned topics. The question is more complex than that. I try to show factors and connections between factors that have never been duly treated in scientific papers and which could explain problems appearing on the surface. In Western Europe, the enlargement is sometimes considered as a budgetary disaster. In Hungary, the EU-accession is regarded either as a last remedy for the agriculture, or as a threat because of secondary membership conditions. I would like very much if we could come back to the reality. 2. SOURCES AND METHODOLOGY The fact that my goal is to foresee the circumstances which will be prevailing in the European and American agricultural policy as well as in the WTO at the time of Hungarian accession, determines roughly the sources and the methods used to analyse them. My leitmotif throughout the work was to show the influence the given topics might exert on the Hungarian agriculture and its European integration. Also, I gave a short summary of the lessons to be learnt on Hungarian accession at the end of each chapter. Due to my method to examine phenomena not through the eye of Hungarian experts but by exploring the publications and official documents of several institutions (e.g. Commission, USDA, WTO, OECD, etc.), there are only a few Hungarian references in my paper. Most of the cited references are available to anybody on the Internet. In my paper, I used the following methods: - Overview of scientific literature both in Hungary and abroad; - Analysis of documents, like Commission, USDA, OECD and WTO papers, in situ (i.e. in the libraries of the mentioned organisations) or on the Internet; - Statistical analyses, which generally means the developing of tables presented elsewhere, based on my own calculations;

5 5 - Theoretical analyses, which first means analysis, systematisation and presentation in graphics of the information produced by the above methods, and second drawing of conclusions; - Participation to conferences, workshops and debates both in Hungary and abroad, having resulted in deepening of my professional knowledge and broadening of my researcher acquaintances; - Professional consultations which could take place during my fellowships in Paris, Rome and Montpellier and shorter visits in London, Brussels, Paris and Geneva. These journeys helped to refine my discernment as a researcher; - Giving of scientific lectures, mainly in Hungary but also abroad (e.g. in Paris and Rijeka), which by way of the preparation process and the questions received helped me to make some problems clearer. In the course of my work, the 14 years spent at the Institute occurred to be the most determining factor. During this time, I had the opportunity to participate to several research projects, for some of which I was the co-ordinator. Thanks to these projects, I could become acquainted with both the European and the American agricultural policy and with problems resulting from the rivalry of the two big powers. In 1997/1998, as the co-ordinator of the agricultural team of the so-called ISM 1 -project of the Institute, I also had a say in the direction of the research work. Which was most beneficial to my professional discernment, my fellowships helped me to get acquainted with Professor Pouliquen, one of the main regular reporters of the Commission. Appeared 3 months before, his background paper [Compétitivités et revenus agricoles dans les secteurs agro-alimentaires des PECO] had probably the decisive influence on Commission s proposals of 30 January I m also thankful for the many consultations to Mme Delorme (CNRS), expert of world trade conflicts, and to colleagues at French Agricultural Chamber (APCA) in Paris and to representatives of national WTO agencies of some countries in Geneva. Finally, I have to mention that since 1998 I have been a subscriber to Agri US Analyse, a periodical which helps me to complement the information on American agricultural policy available from the Internet and other sources. 3. RESULTS The fundamentals of the European Common Agricultural Policy (CAP) had been shaped in the late 50s and the early 60s when, due to the political division of the Continent, the big cereal belts of Eastern Europe were out of the reach of the member-states of the Common Market. Also, Western European people had still quite well in mind the starvation and rationing of years during and after the Second World War. Hence, it s not surprising that the experts, who worked out the CAP, concentrated on enhancing the production and the productivity. As further objectives of the CAP, we can find the stabilising of the markets, assuring incomes for farmers on a par with other sectors of the economy, and supplying the consumers at reasonable prices. For achieving these goals, there have ever been three main 1 Integration Strategic Working Group

6 6 principles: trade of products on a single market, coupled with community preference and common financial responsibility for intervention expenses. From the beginning of the 60s, one could assist to the setting up of CAP institutions, the main products Common Market Organisations (CMOs). During the first 20 years, the CAP had been very successful as for the first and most important goal: the increase in production and productivity. Within a historically short period, i.e. by the end of the 70s, the Community became self-sufficient of all main commodities from the Temperate Zone (cereal, meat, dairy and sugar). Those years, the agriculture, as by filling the order-book of other sectors, occurred to be one of the most dynamic part of the economy. But the system of guaranteeing high intervention prices for unlimited quantities of products soon turned to be unsustainable. At the time of its creation, the Western European integration was based on a tacit commercial agreement by which the customs union would open up additional markets for both the French agriculture and the German industry. One could logically expect the growth of the French agricultural export towards the other member-states and the shift of the bulk of production into low cost zones of the Community, like France. But it was not to be. For the main CMOs, the customs union turned more and more into a price-guarantee union which pushed farmers to produce unlimited quantities at high guaranteed prices. Production went up not only in low cost areas but in every region of the Community where the given product could be produced. Under this scheme there was no winner: - France could not get a market share corresponding to his capacities in Europe, - Germany (and since 1973 also the UK) could raise self-sufficiency. But the price of this improvement has been paid twice: first, by their customers in high food prices, second, by their taxpayers in French food-export subsidies. By the early 80s, problems related to unmarketable stocks and structural overproduction became more and more acute. Member-States agreed upon that the CAP could not be financed without being adjusted. However, there was no agreement among them as for how to get rid of surpluses. In theory, there were two options: to cut the prices or to introduce supply management with quotas. In debates of the 80s, the French argued in favour of cutting the guaranteed prices. On the basis of their undoubtedly competitive agriculture, they were interested in producing as much as possible and in marketing both in and outside Europe. The price-liberalisation would have resulted in a return to the original principles of the integration, i.e. the customs union where production should have concentrated in the lowest cost regions. But the German feared of price competition as their agriculture was based on small family farms. The latter were considered to be socially important and had therefore been greatly subsidised. During the 80s, the German were several times able to achieve their objectives and to shape the CAP as they wanted to (milk quotas, voluntary set aside, the switch over mechanism, etc.) However, the achievement of the German goals has never crossed the French interests. France has unvaryingly remained the main beneficiary of the CAP. We should note that by forcing the introduction of milk quotas the German implicitly recalled for further supply restrictions. Obviously, freezing the milk production and the bovine livestock at a certain level would sooner or later necessitate feed supply control as well.

7 7 It was the culmination of German-French co-ordination when the two countries could come to a compromise about the 1992 CAP-reform and later on about its further developed version, the Agenda In these programs, cutting down of institutional prices (a French interest) runs parallel with supply control realised by producer quotas (a German interest). The elements of this compromise are as follows: - the introduction of direct payments granted for a number of arable crops and cattle following the support price cuts, - compulsory set-aside and introduction of ceilings for the cattle-premia by member-states, - and the maintaining of the milk quota system, the export refunds and the financial solidarity. It is to be noted that these reforms - like any other previous one - did not result in a cheaper CAP. On the contrary! As, unlike price support, direct payments are independent of the current market situation, in periods of high market prices producers can realise extra income. The French-German compromise about the 1992 CAP-reform could be allowed (and accelerated) by the following facts: - The German re-unification. The big entities of East-German agriculture needed a change in priorities of the German agricultural policy. - The giving up of supporting the agriculture by the German policy and industry. - French agricultural policy becoming more diversified. Instead of the predominance of productiveness and expansion, the emergence of a new approach about the role of the agriculture with growing consideration for landscape and rural employment. - And last but not least, the strengthening of external impacts that affected the EU: the increasing arm-twisting of the international trading partners, especially that of the USA under the aegis of the WTO. In the United States, there has been public intervention in agricultural markets since the Great Depression of Agricultural acts voted between , in order to restore farmers income, introduced high guaranteed prices simultaneously with a system of direct payments. New guarantees and supports were, however, available only for producers who were ready to participate to supply-management programs. Through these acts, the Americans wished to raise the producer prices up to the so-called parity-levels, ensuring farmers a very high purchasing power which had only been prevailing for a few years before the First World War. The 1949 Agricultural Act together with the 1938 Agricultural Adjustment Act remains the permanent farm legislation to this day, i.e. the legal background for American agricultural price and income support policy. Since 1949, periodic farm commodity legislation has usually taken the form of temporary amendments to the 1949 Act. These amendments have mainly concerned the level of price and income support and the method of supply control. In other words, what had begun as a temporary response to a perceived emergency became a permanent legal basis. Debates about the agricultural policy to be adopted resumed at the mid-50s. Some experts advocated high prices and severe supply management. Others thought that farm prices should be allowed to fluctuate according to market supply and demand, and the resulting lower market prices would automatically lead producers to self-limitation. In this way, surpluses

8 8 would not be generated and if they were they could be easily sold on world markets due to lower level of producer prices. Debates closed by a compromise for farm policy. Although supply-control has been maintained, the 1965 Farm Act made set aside voluntary and set fixed guaranteed prices closer to world market prices. A system of direct income support ( deficiency payment ) compensated farmers for lower support prices. From 1973 on, publicly financed programs had not ensured farmers of purchasing power and standard of living at levels comparable to the high levels achieved before World War I. any more. Replacing the parity-prices, the annually fixed target-prices were based on changes in input prices, average wages and interests rates. Still in the 60s, when CAP most protective CMOs had been shaped, the United States made a pact with the Community within the GATT. According to this pact, Washington would not contest the CAP provided their feed exports could enter the European market duty free. During and after World War II, the USA had been considered as the World s storeroom. The country had been the World s biggest exporter of wheat, coarse grain and soybean for long decades. However, by the mid-80s, American exports have substantially fallen both to Europe and to other solvent regions of the world market. Under such circumstances, considering the pact of the 60s as null, the USA insisted on putting the question of agricultural policy on the agenda of the GATT Uruguay Round that started in For the first 6 years of the Uruguay Round, negotiations did not score a great success. In the meantime, both the EU and the USA spent higher and higher subsidies for their exports. The Community s main weapon was the so-called export-refunds that filled the gap between guaranteed and world market prices. Whilst the USA, beyond their special programs (EEP, DEIP etc.), gradually applied the marketing loan to all main commodities. This redoubtable weapon could be considered as an indirect export subsidy. It worked as follows: in addition to deficiency payments they received as a complement of the market price up to the target price, the producers were allowed to repay the commodity loans at less than the original rate when market prices were below the loan rate. Thus farmers could continue to market their products even if prices began to fall. This method boosted the competitiveness of the American export a lot. On GATT Uruguay Round, most exporters heavily criticised the Common Agricultural Policy and the USA threatened the EU with a trade war. Finally, the Community was compelled to fundamentally change the CAP: to shift the past system, in which producers incomes were financed by the consumers through high prices, towards a new one where the burden of subsidisation was partly put on the taxpayers through direct payments. The 1992 CAP-reform allowed concluding successfully the Uruguay round. In November of 1992 the EU made a bilateral agreement with the US on the main subjects of the GATT (Blair House Agreement). The agreement deserves a particular attention on two points: - it excludes the other GATT member states (so the Cairns group) from agricultural discussion; - it practically exempts the major part of internal market support measures in application by the two contracting parties (i.e. the compensatory payments of the CAP-reform and the deficiency payments of the US farm bill) from the obligation of gradual reduction.

9 9 Although there were some lately modifications about the EU-US agreement, other member states had no much to say as to the terms of the Final Act signed in April of 1994 in Marrakech. In the main subjects (market access, internal support, exports subsidies) the Final Act repeated the provisions of the Blair House Agreement. Contracting parties transformed the GATT into an organisation (WTO) and committed themselves not to attack each other agricultural policies, i.e. each other internal supports and export subsidies compatible to WTO-agreement until end-2003 ( peace clause ). The Uruguay Round did not come up to expectations. Recovery of world agricultural trade did not take place. WTO member states were trying to sabotage their obligations. Promises appearing as important on paper, in reality resulted in a liberalisation at a much smaller extent than projected. Renewal of protectionist reflexes provoked by globalisation was inevitable even in the richest countries. At present, it seems that the Doha-round - in activity since November of even on paper will not be very successful. Trade opportunities in the near future could come far more from regional co-operations than from global agreements. In the meantime, in the late 90s, on both side of the Atlantic further agricultural policy reforms have been prepared. The European Union, when creating the programme of Agenda 2000, kept the essential features of the 1992 CAP-reform (price reduction - supply control - compensation). For it (the EU) supposed that in the WTO - remaining within the framework of the preceding round (market access - export subsidies - internal support) - there would be discussions only about the degree of liberalisation. But the US stepped forward in the direction taken since the mid-1980s. The main characteristics of this direction are as follows: - to increase the planting flexibility for the main commodity programmes; - to increase the world market presence of the American products; - and to reduce the Federal budget deficit. The agricultural legislation (FAIR Act) in force for the period has given producers almost completely free hand in choosing their planting structure: there were no compulsory set-aside, one could produce almost anything. The other new thing was the suppression of the target price and simultaneously that of the deficiency payment. Instead, the so-called Production Flexibility Contract (PFC) payments were introduced; that is a sort of support at a fixed amount but decreasing in tendency (especially after 2000), and completely independent of (decoupled from) product and production. But the FAIR Act proved to be too ambitious - as to the degree of liberalisation and the separation of supports and production. The system, while functioning at the time of favourable market prices, with decreasing prices it collapsed. Farmers, exempted from setaside obligation, were not duly orientated by market signals and automatism, and especially, were not prevented from over-production. From 1998 on the American government was constraint to help them with several billions of dollars. As a consequence, the money paid to farmers as commodity program payments rose to more than 5.5 times between The failure of the FAIR Act made obvious that instead of the price guarantee suppressed in 1996 (through the elimination of the target price and the deficiency payments) there is a need for a kind of income guarantee. This priority has been reflected in the preparatory discussions

10 10 of the Farm Bill for the period after 2002, although Government and Congress had quite different ideas (on the subject). The USDA officials thought that neither ad hoc measures nor automatic regulators within the system (for example marketing loan) had not been efficient enough to prevent income losses caused by unforeseen market price fluctuations. Those measures are not only expensive (from the taxpayers point of view), but they endanger the US' WTO obligations, too. According to the USDA the real solution would be a system where farmers themselves put aside a part of their incomes to survive such a situation. The idea has already taken shape in a draft-bill entitled Farm and Ranch Risk Management. According to this project producers would place a part of their incomes on a separate tax deferred account that could be drawn on during economic downturns. But the Congress refused to accept this draft-bill. The new Farm Bill approved in May 2002 makes a step backwards on the road characterised by the concept of more market, less budget and pursued since It defines institutional frames for special supports applied between (FAIR Act). The legislation restores target price assuring farmers returns, for a number of commodities it rises price and income support levels, reinforces the natural resources conservation programs for which it envisages much more support than previously. So, the amount of direct support that - due to special provisions - rose already during the preceding period continues to grow. Events of the last 4-5 years and regulations of the Farm Bill adopted in May 2002 seriously erode the US' negotiating positions in the WTO Doha-Round. Therefore, the EU - in difference of Uruguay - can look forward to world trade negotiations from a much better position. Meanwhile it is a fact that although the pressure from the USA to change the CAP is not as strong as it was ten years before, the common agricultural policy should not remain intact: the opportunity of a new reform occurs this time in connection with the eastern enlargement. Institutional relations between the European Union and the ex-socialist Eastern European countries have been established since the late 80s. The aim of the association agreements concluded between was trade liberalisation. These agreements, however, ensured free trade only in the case of industrial products: for agricultural and food products there was only a partial market opening. Trade agreements - deceiving Eastern European countries' expectations - have not resulted in a spectacular increase of agricultural exports into the EU. It is true that this was partly caused by the fact that in the countries affected by economic transition, the crisis of agricultural sector was much longer and deeper than in the industry or services. In any case, in bilateral trade, the EU producers and exporters have taken better advantage of trade preferences than their fellows working in the associated countries. This situation has not been changed by the multiple revisions and adjustments of the agreements. The Union indicated for the first time at the 1993 Copenhagen European Council that those associated countries that want to could become members of the European Union provided they satisfy basic conditions of democracy and market economy. Eastern European countries were rather quick to answer: between 1994 and 1996 all ten associated countries applied officially for accession.

11 11 After the Copenhagen statement, a number of expert's reports - prepared mainly at the Commission's request - have been published on the subject of eastern enlargement. The earliest readings of developed world scientists on expected costs of the enlargement were necessarily exaggerated and impregnated with block-approach. The first paper containing an objective analysis appeared in the summer of 1994 (Nallet - Van Stolk Report). The report denounced prejudices against production potential of associated countries and emphasised that the developing of the agriculture cannot be separated from the growth of general welfare. Yet, later when the Commission worked out its ideas about eastern enlargement, it relied on other papers (written by Tangermann, Tarditi, Mahé, Buckwell, etc.). In these studies returned the block-approach, the threatening with the agricultural potential of the associated countries, exaggerated cost estimation of the enlargement, and also emerged mistrust and discrimination of Eastern European countries. The Fischler report prepared for the 1995 Madrid Summit, and the first variant of the Agenda 2000 published in summer of 1997 proposed for applicants a transitory period of a non-determined length, a pre-accession assistance and - instead of direct payments - a rural development aid. The Agenda approved in his final version at the Berlin Summit of March is nothing but the EU's budget programme for It includes further reforms of the two most expensive common policies: that of the CAP and of the structural policy. Permanent adjustments of these two policies have been taking place simultaneously since the late 80s because among the most important countries of the EU, France benefits from the agricultural policy, while Germany and Italy from structural funds. So an eventual unilateral modification of any of the common policies would result in a clash of interests. If the EU-accession is carried out on the basis of the Agenda 2000 scenario - that is direct payments will not concern new members -, efficiency and profitability differences among old and new members will persist in the long term. Unfortunately, in Western Europe it is a widely accepted opinion that in Central and Eastern European applicant countries the relatively cheap and abundant labour and land constitute comparative advantages. This approach, however, underestimates capital-intensity of modern agriculture's technical and technological functions. If, on the other hand, the enlargement is realised according to the Commission's January 2002 proposals, with gradual involvement of the new members in direct payments, the modernisation of Eastern European farms could begin already in the medium term. It is true that even with this favourable scenario the producers of the new members in some branches (e.g. pig, poultry, eggs) will have to face up to an important challenge of competitiveness NEW SCIENTIFIC RESULTS The idea itself according to which the Hungarian EU-accession and its future conditions are to be examined with a stand back in time and space. Since its creation the European common agricultural policy has not been independent of the French-German interests on one hand, and of the American influence on the other. When foreseeing the conditions of Hungarian agricultural accession one cannot leave aside the policies of the most important countries of the integration and future developments in the USA and the WTO. The critical analysis of the CAP, the clarification of the essential questions. The demonstration of the conflicting interests of the French and German as to the future and

12 12 multiple reforming of the CAP (price reduction versus supply control) that helps to reveal the real interests relationship of the Hungarian agriculture. In our country, for historical and cultural reasons, the Bavarian land structure based on relatively small family exploitations is readily considered as a model to follow. Whereas, for a region capable to produce at world price level it is much more advantageous to reduce guaranteed prices than to limit the production with quotas. The system of production quotas is always unfavourable for competitive economies possessing modern technology and good geographic conditions. This means that in the discussions about the future of the CAP, in the longer term, Hungary must side with France and not with Germany. I point out that the decisions on the CAP's future should be based essentially on a French- German compromise. It is impossible to change the financing background of the CAP without reconsidering the whole Community budget. The eastern enlargement in itself does not represent a sufficient "threat" or a push to change fundamentally the present agricultural policy. To do this, the majority of the member states - but chiefly both Germany and France - should come to an agreement on it. The general and historical survey of the US' agricultural policy from the beginnings to the new, 2002 Farm Bill, the detailed description of the regulatory mechanisms. I point out that in the present WTO Round the USA will not be in a position to constrain the other member states (mainly the EU) to such a liberalisation as in the preceding Uruguay Round. Causes behind this are the evident failure of its excessively liberal agricultural policy applied since 1996 and the new Farm Bill including growing supports again. The success or the effect of Doha will be questioned by the world-wide spreading regionalism and by the attempts to circumvent the decisions of the preceding Round. The liberalisation appearing radical on paper, in practice usually fails because of the resistance of the producers' lobbies. The clarifying of that in WTO Doha Round it will be the EU who attacks Americans at many points because of their measures for subsidising exports both indirectly through direct payments and directly through exports credits. The American direct payments result as usual in artificially low domestic market prices, so in practice there is no need of export subsidies. When a product, rendered artificially cheap by direct payments, arrives on external markets, it can be sold at the same low price as if its exports had been directly subsidised at an extent corresponding to the measure of the domestic price complement. Since the introduction of the marketing loan (in 1985) in the American market regulation the indirect (disguised) export subsidies are much more important than in the traditional system based on the deficiency payment. That is producers do not abandon to sell their products even if the market price level is under the loan rate. The new farm bill, in force from 2002, in addition combines the marketing loan and the deficiency payments, while there is a possibility for producers to update their acreage and yields serving as a base for payments. Concerning the future of the CAP, the failure of the American "experiment" is of capital importance from what the EU certainly will draw a lesson. On the other hand, the total decoupling of supports and their radical elimination would result in a depreciation of the means of production, among them of the land which constitutes the farmers' wealth, and so politically this is impracticable.

13 13 4. CONCLUSION, PROPOSALS 4.1. CONCLUSION This paper has been prepared with the aim of presenting the circumstances that would prevail in the European Union when - hopefully within 2-3 years time - Hungary will access to it. The paper revealed the unsustainability of excessive liberalism of the US agricultural policy. Nowadays, Washington has to return to a policy mix in which reappear both income support to producers and the possibility for actualisation of reference areas and yields being the basis for the support itself. The fiasco of the FAIR Act should serve as a warning to the European Union not to go too fast and too far with CAP-reform. Today, neither the US nor the WTO or even the Eastern enlargement put pressure on the EU to change the CAP radically. If there is a will to shift the common agricultural policy it is inside the EU. This is in tight connection with the internal policy problems of some Memberstates that - taking things on pure budgetary basis - are net contributors of the EU, indeed. But the EU is more than a single country. The Member-states have to come to an agreement about any change in policy matters. Agreements take time, a lot of time About the European agricultural policy Since the end of the 80s, any reform in agricultural policy is no longer independent of the distribution of structural policy aids. The interdependence of the two policies became entirely evident with the Agenda 2000 in which decisions on their reforms were taken within the same program. When trying to foresee the future of the CAP, one must not forget the above connection. It's a fact that relating to Eastern enlargement, in some countries - especially in net contributors - there are fears of an increase in the common financial burdens and in their net contribution. It's a fact that certain Member-states are inclined to take the opportunity of Eastern enlargement as a pretext to change and cut back radically the system of the common agricultural policy they consider old-fashioned and expensive. It's also a fact that at WTO negotiations the EU's main competitors (the United States and the Cairn's Group) are fighting against the very existence of the blue box that by now represents nearly 60 per cent of CAP market measures. Nevertheless, there is little probability that the EU-15 will decide to change the CAP radically in the near future. The reasons are as follows: A new and radical reform of the CAP is conditional upon reshaping of the structural policy. But such reshaping can only be obtained in a relatively longer time regarding the diverging interests of the Member-states. A fast reduction in agricultural subsidies would meet with the resistance of the farmers, since the subsidies they received during several decades turned into capital in their lands, buildings, machines and tools. A sudden cut in subsidies would depreciate the fortune of millions of producers whose equipped farms represent the bulk of their personal wealth. Although their share in employment and GDP has become insignificant by now, farmers as owners of the land and as producers of raw material have directly and indirectly an effect on the employment and living standard of a lot of people in other sectors of the economy. This is a fact that politicians must not forget.

14 14 In present WTO-negotiations, the so-called Doha Round, there is no such a pressure put on the EU to change its agricultural policy as there was at the Uruguay Round. The problems occurred recently in their agricultural policy and the answers they have just given to these problems prevent the United States of moral authority to call on the EU, their main competitor, to moderate the use of subsidies. Finally, the EU is this time about to admit such countries that - almost without exception - are poorer than the less developed of the present Member-States. Therefore, instead of reshaping the CAP quickly and taking advantage of the unequal negotiation capacity, it seems from the EU point of view much more practical to charge, by way of long transition period and partial access to subsidies, the expenses of the Eastern enlargement to the new Members themselves. The common agricultural policy will probably never cost less. Like in a family where foodexpenses grow up parallel with children, there is no real possibility to spare with CAPsubsidies. US example can show us where such sparing does lead. On the other hand, as the share of food-expenses in a family-budget goes down in the course of time, the share of the CAP-subsidies has a good chance - in the course of time and parallel with economic growth - to become less important within the common European budget. The latest reform of the CAP decided in the Agenda 2000 arrived at half-time in 2002 and is to be revised. Further changes in and new regulations of the common agricultural policy which will be in force for the budgetary period beginning in 2007, are going to be determined in the coming years. As far as one can foresee the future, the following scenario seems to be likely: The CAP direct payments will not be re-nationalised or linked to co-financing. Subsidies and regulations effecting directly the marketability of the products should remain supranational for ever, otherwise the single market would have to be given up for food products. Instead of pushing through a radical reform, what is rather to be expected that the Commission will work out a longer-run program with slowly changing priorities. Beyond a certain size, marketoriented farms will be accustomed to the idea that the direct and indirect supports of the common agricultural policy will be gradually reduced. So, subsidies are going to be reduced, and what is more, instead of being linked to production they will be more and more conditional on other prescriptions (e.g. on environmental, food safety, animal health and welfare, agricultural employment and occupational safety standards etc.) At the same time, there will be a shift of emphasis of CAP-finance from price and income support to rural development. As the latter falls into the member-states competence, it is to be co-financed from national budget, too. In other words: it is not by co-financing the direct payments that the often debated renationalisation of the CAP and the cutting down of the expenses of the EAGGF Guarantee Fund will be implemented, but by the shift of emphasis of CAP-finance in favour of rural policy developments. The primacy of market production will be gradually weakened. In parallel, the support for rural development is to be gaining ground. It should be noted that the above process will probably be very long, and its pace will have an effect on the pace of the eastern enlargement, too.

15 About US agricultural policy Despite changes in priorities and regulations, throughout the first two hundred years ( ) of the American agricultural policy, a remarkable consistent public consensus had been persisting: that because of its inherent problems farming warranted public support. But in 1985, the reaganomics also attained to the agriculture. As main objectives set were to cut back the agricultural policy expenses and to get farmers decisions oriented more by the market than by subsidies. Accordingly, consecutive farm bills contained less and less stipulations about the planting structure on which the support was conditional. A new policy tool, the marketing loan made its first appearance in 1985 (for rice and cotton), for being generalised later on for all program commodities. At the time of low market prices, this measure gave an incentive to farmers to sell their crops on the market (hence the term marketing loan ) rather than to default on loans and forfeit their crops to the Government (intervention). The 1996 FAIR Act has even renounced of the use of compulsory set-aside, the most important tool of supply control. The system had been running well at favourable market prices but collapsed when prices went down. During the first four years of the FAIR Act ( ), direct payments were by USD 28 billion beyond schedule. The fiasco of the FAIR Act made it evident that the price guarantee which was given up in 1996 should be replaced by a sort of income guarantee, a counter-cyclical payment working as a safety net. The FSRIA, the new American farm bill voted in May 2002, tries to resolve the agricultural crisis by increasing and extending to new commodities all the subsidies that were operating permanently or temporarily at the time of the FAIR Act. In the new system, the marketing loan will work as a price guarantee, the direct payment as an income support and the counter-cyclical payment as an income guarantee. As for the last two subsidies, the reference areas and yields determining their levels maybe updated according to more recent data. The fact that subsidies are to be frozen at their high level reached during the crisis will probably have a positive effect on production safety and will hence raise the producers' confidence. The only thing preventing over-production is that long term conservation and other agro-environmental programs were allocated 80 per cent more money in order to make them even more attractive to farmers. Nevertheless, what seems to be more probable is that production pushed up by the subsidies would lead to lasting low prices on the internal market already in the medium term. Also, this would improve considerably the competitiveness of American products on world markets. Consequently, in the present WTO Doha Round the USA will be much more interested in pursuing trade liberalisation (i.e. in reducing duties and export subsidies and increasing minimal market access) than in dismantling the internal support, the latter being so beneficial to the competitiveness of their exports. The reasons for all this is important from the Hungarian point of view are that: - firstly, as for the internal development of the EU or that of the CAP, none of them will lead to a radical agricultural reform; - secondly, following the turning back in the US agricultural policy, the EU will not be under (American) pressure during the WTO Round to essentially reshape or reduce the internal support.

16 16 In other words, the arguments raised by the Commission to justify the level of support (and the long transition period) proposed to the applicant countries by the radical cut in the CAP direct payments in the near future, are hardly defendable About WTO agricultural chapter Officially, the current WTO Round of Doha started in November 2001 in the capital of Qatar after which it is named. Preparatory work of experts had of course been started earlier. Up to now, the member states could become acquainted with each other s standpoints about the most important questions. It would be premature to forecast what the outcome of the negotiations will be. What is to be sure that on technical ground it will be easier to come to an agreement than it was in the Uruguay Round, for the framework of liberalisation does already exist. Therefore in Doha, without prejudging the outcome, WTO member states committed themselves to comprehensive negotiations aimed at: market access: substantial reductions of the administrative barriers to imports, exports subsidies: reductions of, with a view to phasing out, all forms of these, domestic support: substantial reductions of trade distorting supports. It will be much more difficult to arrive to an agreement about the content. The Uruguay Round is a too recent experience yet. Also, a much greater resistance of the national agricultural lobbies is to be expected as concerns further liberalisation than it was the case in the previous round. The experience shows that WTO member states strove even to sabotage their obligations imposed by the Uruguay Round. The engagements appearing radical on paper, in reality have led to much less a liberalisation than expected. Renewal of protectionist reflexes provoked by globalisation was inevitable even in the strongest economies. At present, it seems that the Doha Round even on paper will not be very successful. Trade opportunities in the near future could come far more from regional co-operations than from global agreements. However, the Doha Round is not necessarily doomed to failure. If realistic objectives are set, minor results may count more. Such objectives may be: - to reduce substantially or eliminate disparities in tariff levels among countries, - to cut back the highest tariffs (écreter les pics tarifaires), - to make the Tariff Rate Quotas administration more transparent, - and, in general, to make the understanding of the Uruguay Round achievements more homogeneous About Hungary's accession to the EU Officially the EU opened negotiations about accession with Hungary - like with the other associated countries of the so-called Luxembourg Group, originally treated as first-waiving candidates - in June Although the present member states have not yet arrived to a common position about the direct payments which for Hungary count for more than three

17 17 quarters of the relevant CAP-subsidies, in the middle of summer 2002 the following scenario seems to be most likely: there is a lack of political intention of the Union to treat future members on an equal footing from the moment of accession; at the same time, the EU is aware of that the proposals - or more precisely the plans which were intentionally leaked out in the Commission's paper of the 30 th January will not put the agriculture of the future member states - except for Slovenia - into worse conditions than they are today; inasmuch as in several member states of the EU there is a continuous pressure on politicians to change the CAP, the Commission is inclined to treat the candidate countries as experimental rats. This means that the Commission tries: firstly, to turn green (in WTO-sense) temporarily the direct payments offered to the candidates, secondly, to raise rural policy up to equal level with market policy. If the experiment turned out to be a success and the candidates' agriculture "survived" it, the Commission will probably be given a green light to reshape the CAP according to the above sketched direction. Under present and future CAP - as it is foreseeable now - Hungary has all the abilities to become a net beneficiary of it, and to put the agriculture on the way of modernisation. On the other side, the accession itself cannot be automatically considered as a guarantee for development. In order to take full advantage of CAP-subsidies and of opportunities on the European single market, there is a need for a change of attitudes and of expectations both from the bureaucracy and the producers. Otherwise, opportunities will remain missed PROPOSALS At the time of writing the thesis (this paper) the latest source at disposal on the possible scenario of the Hungarian agricultural accession was the Commission's so-called Issues Paper of 30 January On the basis of the balances of power within the European Union we can suppose that the final official proposal will not be substantially different of the published document. One can be aware of that the Commission does not offer equal rights to new members immediately from the moment of accessing. However, it seems reasonable for Hungary to accept the proposal as to the essential. My arguments are as follows: We shall be inside the EU which means an immediate advantage from at least two points of view: The single market will open up for us. We shall be allowed to export our products without any restriction within the Union, and not only to the Fifteen but also to neighbouring and nearby countries becoming members at the same time as us. We shall have our say in the future shaping of the CAP. According to our interests, hand in hand with the French and other beneficiaries of the CAP, we shall be able to slow the initiatives aiming at excessive cutting down of subsidies or/and at transforming them into rural development aid. The producers will be at last in a stable regulatory framework for a relatively the long term.

18 18 We shall have access, even if only gradually, to direct supports constituting the essential component of the CAP. So, it will be not the Agenda 2000 scenario to come true that does not envisage to extend directs supports to new member states. According to the Commission's proposal, during the first three years of his membership Hungary will receive - in the optimal case - 43, 140 and 161 billions of HUF as support. In the first year nearly the half, in the second and third years the 3/4 of these sums will consist of direct and intervention supports to the producers' incomes. The remaining part will be made of rural development aids. Of course, it is to be decided what seems to be the best choice for Hungary: to become EU member as soon as possible, or rather to wait in the expectation that, as time goes by, we could obtain better accession conditions. Accepting the essential terms of the Commission's proposal does not mean that we cannot propose amendments in the negotiations of the accession conditions. As to this, the following things are to be considered: The transitory period should not be longer than that applied at the enlargement by countries less developed than the Union's average, that is at the accession of Ireland, Greece, Spain and Portugal. At that time, for the majority of the CMOs the transitory period was between 5-7 years. The Hungarian agriculture today is not farther from the Community acquis than was the agricultural sector of the above mentioned countries on the eve of their accession to the EU. A longer transition is not justified even by the differences between Hungarian and European production costs and prices. In the CMOs concerned by the transitory period and in those utilising such products as inputs, in the case of an excessive increase in imports from the Fifteen - because of different support levels - we should have tools to neutralise the effects of the unequal competition (safeguarding clause). In the CMOs concerned by the transitory period, the measures to restricting the supply should be applied to new members only at the same pace and proportion as their access to direct supports increases to approach Community level. During the 1-2 years remaining until the accession, the "CAP-compatible" land-based supports have to be generalised and substantially increased (to thousands of HUF per hectare). The low-capitalised large exploitations have only a few years left until they face the challenges of the single market. In practice, this is the last opportunity to put them on a competitive level by means of public aid. The Commission's January 2002 proposal allows new Member States to complement producers subsidies from their national budget to the pre-accession level maximum. It is true that this level in theory can only be that of 2001, but we can argue as follows: Primarily, the EU cannot take offence at the fact that applicant countries try to harmonise their agricultural supporting system with that of the EU until the last moment. Secondly, after the accession some support tools lacking from the CAP policy instruments may not be utilised any more, and in exchange of their suppression, producers have to be compensated.

19 19 Thirdly, there has already been a precedent of pumping up the supports in the last few years before the accession (the example of Ireland) and this contributed to the agricultural integration of that country and to the adoption of the common agricultural policy smoothly. 5. PUBLICATIONS ON THE SUBJECT Scientific articles In English - Agricultural aspects of Hungary s accession to the European Union MTA VKI, Budapest 1998, 17 p. IWE Working Papers, ISSN , 1998 (93) - Agricultural aspects of Hungary s accession to the European Union - in Hungarian Responses to Global Change MTA VKI, Budapest 1998, pp ISBN In Hungarian - Széllel szemben? avagy az Európai Unió esélyei a millenniumi WTO-fordulón, az amerikai agrárpolitika és az USA érdekérvényesítési erejének ismeretében (Against the current? - or the chances of the European Union in the millenium WTO Round, in) MTA VKI, Budapest 2001, 16 p. VKI Kihívások 2001(147) - A csatlakozás egyik kulcskérdése: mezőgazdasági árak a társult országokban és az Európai Unióban (A crucial question of the accession: farm prices in the associated countries and in the European Union, in) MTA VKI, Budapest 1998, 19 p. VKI Műhelytanulmányok, ISSN , 1998(10) - A GATT-ból a WTO-ba: az Uruguay-i Forduló előzményei és eredményei (From GATT to WTO: preliminaries and results of the Uruguay Round, in) Külgazdaság 1997(10) pp A GATT-egyezmény és az Európai Unió agrárpolitikája (GATT Agreement and the European Union's agricultural policy, in) Európa Fórum 1995(2), pp A WTO agrárfejezetében megfigyelhető és várható feszültséggócok, különös tekintettel az EU-USA iszapbirkózásra (Present and future points of tension in the agricultural chapter of the WTO, with a special attention to EU-USA conflict, in) MTA VKI, Budapest 1997, 23 p. VKI Műhelytanulmányok, ISSN , 1997(2) - Áldás vagy csapás? Szubvenciókra alapozott fejlődés vagy a másodrendű tagsággal járó stagnálás? (Benediction or calamity? Development based on subsidies or stagnation due to secondary membership?,in) MTA VKI, Budapest 2001, 12 p. VKI Kihívások, 2001 (143) - Francia érdekek a magyar agrárcsatlakozás kapcsán Integrációs Stratégiai Munkacsoport, Budapest 1997, 11 p (French interests about Hungarian agricultural accession - Working Group on Integration Strategies, in) Európai tükör: műhelytanulmányok, ISSN , 1997(24), pp Mezőgazdasági csatlakozás - pénzügyi kérdőjelekkel (Agricultural accession with financial question marks, in) - Európai Tükör 1998(4), pp Újból megjelent: Gazdaság 1998(2) pp

20 20 Speciality articles In French - L adaptation nécessaire de l agriculture hongroise á la PAC réformée en vue d une intégration á l Union européenne la moins douloureuse possible (The necessary adaptation of the Hungarian agriculture to reformed CAP in order to an integration in the European Union in the least painful possible way, in) INRA-Montpellier 1995, 33 p, 15 t In Hungarian - A brüsszeli csomó: a közös piaci agrárreform esélyei (The Brussels knot: chances to reform the CAP, in) Figyelő 36. Évf. 1992(6), p.32 - A CAP-reform és a magyar mezőgazdaság (CAP reform and Hungarian Agriculture, in) NETI (Nemzetközi technológiai Intézet) A magyar agrárcsatlakozás esélyei (The chances of the Hungarian agricultural accession, in) Európa Tükör 1998(4), pp A magyar EU-csatlakozás agrárgondjai (Agricultural concerns of the Hungarian accession to the EU, in) Bank és Tőzsde 1998(6) - Agrárfórum kérdőjelekkel (Agricultural forum with question marks, in) Bank és Tőzsde 1999(20), p Agrárgazdálkodási struktúra az EU-ban, EU-támogatások (Structure of agricultural sector in the EU, EU subsidies, in) Cégvezetés 2000(10), pp Agrárpolitika és integráció (Agricultural policy and integration, in) Cégvezetés 1998(8), pp Az agrármodernizáció és az EU-csatlakozás (Agricultural modernisation and accession to the EU, in)- Bank és Tőzsde 1999(40), p Az EK közös agrárpolitikája és az Uruguay-i GATT-forduló (The Common Agricultural Policy of the EU and the GATT's Uruguay Round, in) In: Integrációs modellek és integrációs erők a 90-es évek Európájában MTA VKI, 1992, pp Az EK-USA agrárvita a GATT Uruguay-i fordulóján (The EU-US agricultural debate in the GATT's Uruguay Round, in) In: Az európai integráció néhány aktuális kérdése ben MTA VKI, Budapest 1994, pp Integrációs Füzetek 1994 (1) - Egyensúlyok és egyensúlytalanságok: Az EU agrárpolitikájának változásai (Equilibrium and disequilibrium: changes in the agricultural policy of the EU, in) - Cégvezetés 1996(3), pp Eltérő érdekek: Francia és német EU-bővítési szempontok (Diverging interests: French and German considerations on EU enlargement, in) Cégvezetés 2001(5), pp Fordulóponton a nemzetközi agrárkereskedelem (International agricultural trade at a turning point, in) - MTA VKI Kihívások 1993(8) - Közös agrárpolitikai reform (Reform of the Common Agricultural Policy, in) Világgazdaság 1995(183), p Magyarország és az Európai Unió agrárkapcsolatai (Agricultural relations between Hungary and the European Union, in) - MTA VKI Kihívások 1995(60) szeptember - Megoldódik a GATT-patt? (Breaking the GATT-stalemate? In) Magyar Nemzet Gazdasági Melléklet 55. Évf. 1992(282) - Új amerikai farmtörvény (The new American Farm Bill, in)- MTA VKI Short Notice 2002(28) június, 2 p.



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