When standards replace subsidies: EU farm regulations, protectionism and trade

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Hello from Brussels where there’s another temporary truce in a trade dispute between the US and its allies, following the EU’s decision not to raise tariffs on the US in retaliation for steel and aluminium duties. Yesterday Washington announced, but immediately suspended, tariffs on six countries — Austria, India, Italy, Spain, Turkey and the UK — over digital services taxes (DSTs). (We wrote about this case here.) Hooray, we suppose, though it would have been better to have brought a World Trade Organization case against governments over DSTs rather than acting unilaterally. Anyway, as with the EU-US ceasefires on steel/aluminium and Airbus/Boeing, we’ve now got a chance to see how well the negotiating route can do instead, in this case via a broad agreement on international taxation in the OECD. A bit of hopeful news on that front ahead of a G7 finance ministers’ meeting this weekend: the EU has agreed new rules on forcing multinationals to reveal where profits are booked and tax paid.

Today’s main piece steps back from the wrangling in Brussels over the budget for the EU’s common agricultural policy and notes that while CAP subsidies are not the big deal in global trade they used to be, EU farming regulations are much more so. Charted waters looks at forecasts for trade for the rest of 2021.

We want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com

The cost to global farming of Europe going green

It wasn’t all that long ago when the renegotiation of the common agricultural policy was the biggest event in Brussels, the Champions League final of the European bureaucratic game. The outcome was not just of domestic interest. The CAP’s price-support schemes, with their quotas, massive official intervention and export subsidies, dumped surplus food abroad and distorted markets worldwide.

Well, the latest CAP talks broke down the other week (don’t panic, they will be back on soon) and it would be an exaggeration to say that the world shuddered, celebrated, or indeed even noticed. EU agricultural policy is still globally important, but it is an excellent example of what nerds like us bang on about all the time: trade is now more about standards and regulations than tariffs and subsidies.

In case you were lying awake worrying about the traditional river of cash from taxpayers and consumers to European farmers running dry, do not worry. It is still flowing merrily, together with high tariffs to keep out low-cost imports. But over the decades, helped by deservedly losing a big case at the World Trade Organization, the EU has done a lot to make those subsidies less distorting of trade.

The EU now shells out “single farm payments” that are largely unrelated to production — “green box” in WTO-speak, as opposed to the trade-distorting blue and amber boxes — and instead are often conditioned on meeting environmental and other worthy goals. These days the EU generally uses less than 10 per cent of its WTO allowance of trade-distorting subsidies, which contrasts sharply with the US, which is quite likely to go way above its limits thanks to Donald Trump’s programmes to bail out American farmers from the consequences of his own idiotic trade policy.

So is the EU (a net exporter of food, as it happens) now a champion of agricultural free trade? Not if you ask the frustrated farm exporters of the US. They have moaned incessantly for decades about EU food safety rules (GMOs, hormone beef, the usual) keeping out their produce, and now an even bigger threat has heaved into view.

Related to its Green New Deal, the EU is proposing a “Farm to Fork” strategy that aims to promote practices kind to the environment, climate and animal welfare, including restrictions on pesticides, fertiliser, antibiotics in animal feed and so on. And here’s the trade angle: mindful that the extra costs will disadvantage European farming and encourage allegedly inhumane and chemical-soaked production to move abroad, there is a growing movement, pushed by environmental and consumer campaigners and the European parliament, to require all agricultural imports to be produced to EU farming standards.

As Trade Secrets discussed last week with the UK-Australia deal, this goes beyond the “sanitary and phytosanitary” standards aimed at food safety towards trying to export EU “processes and production methods” (PPM) to global agriculture. It is quite an ambition — either a bold moral crusade or a protectionist neocolonial imposition, depending on your standpoint. The US is already charging at Farm to Fork like a hormonal bull at a gate, claiming that global adoption of these standards could nearly double food prices worldwide, possibly a slight exaggeration.

Widespread use of PPM requirements is likely to expose the EU to great broadsides of WTO litigation. The European parliament’s proposal has been downgraded into an aspiration after opposition by the European Commission and the member states but, in general, it does seem to be the direction of travel for farm policy.

There are some interesting political cross-currents here. It is commonplace among free-trade types (as we have noted before) to claim that European farmers form an unholy protectionist alliance with trade-sceptic campaigners. Things are not so simple in this case. The biggest association of European farmers, Copa-Cogeca, is fine with technologies which most environmental campaigners oppose, such as certain GMOs, and is sceptical of a lot of Farm to Fork.

Where Copa-Cogeca does agree with the green types is that the international playing field must be levelled if their members are going to be burdened with extra costs. But they are much more concerned about the resistance and potential litigation that internationalising EU regulations would engender from trading partners. “We would have to implement this in a trading environment that’s already open,” the association’s secretary-general, Pekka Pesonen, told Trade Secrets. “We are already trading with these guys, and we don’t expect they would just copy-paste our new rules. We would have a struggle.”

So there it is. The CAP budget negotiations will get done one way or another. But the real action for trade is in the rules and regs that come alongside. The EU can adopt whatever farming standards it wants, but there is a cost to bear, and these days the big bureaucratic tussle is over who ends up paying that price.

Charted waters

We have had some great figures for world trade of late, with data showing that the surge in volumes that began during the second half of last year continued into the opening three months of this one. But what is set to happen for the rest of the year?

Joanna Konings, a senior economist at ING bank, expects volumes to stay strong. Her expectations are set out on the dotted line below and show trade outpacing the 2016 to 2019 trend. “Trade will still receive a boost this year in spite of higher costs and barriers in the background, as economies open up and congestion eases. Even though it is services still mostly affected by lockdowns, there are imported goods involved in say, hospitality,” Konings said.

Chart showing that World trade will still grow strongly in 2021. World trade volumes (rebased to 100), 2019-2021.

Beyond this year, however, she is less optimistic, expecting growth to fall back to the relatively low levels seen from 2016 to 2019. “In the near term, not much will change while EU and US policymakers build up a picture of their selected supply chains, and China continues down its path of upgrading its manufacturing capability. Reshoring won’t happen while firms face higher costs to source from homes,” she said. “But in the longer term, the reality of new trade barriers may mean trade is unable to improve on its relatively weak growth in 2016-19 when uncertainty and costs increased markedly.” Claire Jones

Trade links

Hosuk Lee-Makiyama of ECIPE says US and Japanese attempts to challenge Chinese dominance of 5G by subsidising “Open RAN” technology risk Balkanising 5G networks.

On a related subject, the global pushback against Huawei in 5G has given new impetus to Beijing’s goal of increasing domestic tech capability, according to Alexander Brown at the Merics think-tank.

The latest report from the Global Trade Alert project notes that foreign direct investment was weak even before it dropped sharply in the pandemic, as many governments made business environments less welcoming for companies from abroad.

The UK and Australia are trying to finalise an agreement in principle for the bilateral deal between the two countries by the week after the G7 summit in Britain, which takes place June 11-13.

US ports are slow and inefficient compared with those in other countries, creating repeated hold-ups in supply chains, according to the vice-president of maritime and trade at the information provider IHS Markit, writing in the Wall Street Journal.

The US is trying to reduce its dependence on imports of lithium, used extensively to manufacture electric vehicles, but increasing domestic production has challenges (NYT).

Finally, Nikkei Asia takes a look into what brought Taiwan Semiconductor Manufacturing Co, the world’s biggest chipmaker, to Arizona, where it broke ground on a $12bn facility this week. ($, Nikkei)

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