Export subsidies recently introduced by the EU, and the threat of subsidies in the US, will hurt South African agriculture.
The European Union (EU)
recently reintroduced export subsidies suspended in 2007. This news shocked farmers, especially in non-subsidising countries like New Zealand, but it isn’t really surprising. When the EU suspended export subsidies for dairy products in 2007, it stated it was doing so with “regard for present conditions”. The drop in world food prices since 2008 has changed conditions, so much so that European processors can no longer pay the EU’s inefficient dairy farmers’ high producer prices and still compete on world markets.
European politicians are very sensitive to farmers’ opinions and the influential farmers’ lobbies. If producer prices drop, unhappy farmers react vehemently, so politicians fear lower producer prices.When the original members of the EU got together after the Second World War, Europe was in famine. They designed a plan to solve the problem called the Common Agricultural Plan (Cap), which worked so well the EU was soon producing surpluses. But surpluses lead to lower prices and as this was unacceptable, the EU developed a complicated system of export tariffs, producer subsidies and import tariffs to protect their farmers against competition.
When farmers receive prices higher than world prices, their processed products are also more expensive than those produced in other countries. The only way they can then compete internationally is if their selling price is lower. Government pays the processors back the difference between the going world price and the internal price, so the processors can maintain their higher producer prices. However, if your internal prices are higher than world prices, you create an opportunity for the more efficient producers in other countries. They can export to your markets at prices that are viable for them, but lower than your internal prices. Governments prevent this with high import tariffs and non-tariff barriers.
Impact on agriculture
The EU has only reintroduced export subsidies for dairy products to date, but chances are others will follow soon, as world prices stay depressed and EU stocks build up.
Export subsidies will impact on world prices, although probably by less than the total export subsidy per ton of about 10%, because EU prices are generally above world price levels. In the case of dairy products, the difference is higher than the introduced export subsidies. What’s more worrying than the subsidies is the signal this is sending to the international trading community about the EU’s intentions regarding the current round of trade negotiations (the Doha).
While the EU is taking part in the negotiations, it’s clear it will put its own interests before those of the international trading community. This is also nothing new – when the original Doha declaration was signed, the EU increased export subsidies to new, higher levels. It’s also worrying that other countries, like the US, will soon get on the same subsidising wagon and start a new series of protective measures, thereby destroying all the hard work to develop a new trade agreement done in Geneva in the past year. Luckily the EU can’t increase export subsidies above specific levels agreed within the World Trade Organisation. It’s also limited by the maximum subsidy levels set out in the Cap. But while EU subsidies are limited in this way, the same isn’t true for the US, which finds very clever ways to disguise their subsidies. There are even allegations the new financial rescue package includes some protective elements.
How should South Africa position itself?
The decrease in international prices since 2008 and buildup of stocks will renew import pressure on a variety of agricultural products. We’ll need to protect our local industries against this. In contrast, the International Trade Administration Commission (ITAC) recently changed the wheat import tariff to the old base-price formula, thereby effectively removing the meagre 2% tariff protection wheat producers enjoyed. It also dropped the import tariff on soya bean oilcake, apparently with very little industry consultation.
While the agriculture department stated recently we need protection against low-priced imports, ITAC and presumably the Department of Trade and Industry don’t agree. A trade and tariff policy was developed for South Africa two years ago, but is still lying on a desk somewhere between the agriculture and trade and industry departments, despite continuous questions about it from organised agriculture and the agro-processing industries. If we don’t protect our own industries against highly subsidised products, we may end up importing expensive food when prices return to their pre-crisis level. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw
