WTO Constraints and the CAP: Domestic Support in EU 25 Agriculture

Abstract

The most recent EU notifications to the World Trade Organization regarding domestic support refer to the EU-15, i.e. before significant reforms of the direct payments as well as the reforms of the Mediterranean products, hops, sugar, etc. that took place after 2003. We estimate the actual level of domestic support, as measured by the WTO Aggregate Measure of Support (AMS), given the 2004 EU enlargement and the recent reforms of the Common Agricultural Policy (CAP). We then compare the different proposals for a new discipline on domestic support that were recently issued under the Doha Development Round and we assess the constraints imposed on the Common Agricultural Policy (CAP). The EU proposal prior to the 2005 Hong Kong WTO ministerial meeting was that the EU would cut its present AMS and Overall Trade Distorting Support (OTDS) ceilings by 70% in either case. We find that such a cut mainly consolidates under the WTO the significant changes made to EU domestic support policies since the conclusion of the Uruguay Round. However, there are some downside risks for the EU and much depends on the further negotiations on the details of the disciplines to be agreed (e.g. the base period for the OTDS reference). In addition, a 70% cut leave no freedom for counting some potentially controversial subsidies against the AMS if needed. Accession of Bulgarian and Romania will make the constraints more binding. The ability to meet the domestic support discipline of the EU offer relies on the assumption that its market access component will lead to a significant reduction in the remaining AMS (particularly important in the case of fruits and vegetables). Overall, the EU proposal regarding a cut in the AMS is binding, even though it requires rather minor and sectoral changes to the CAP. Proposals that beyond the EU "Hong Kong" offer require reforming some common market organizations, but could be dealt with if the EU implemented a significant reform of the fruits and vegetables sector, that might give a larger degree of freedom regarding the AMS ceiling.

Keywords: Common Agricultural Policy, World Trade Organizations, Trade Negotiations

JEL Classification: F13, Q17