The European Union system of common agricultural policy (CAP) was introduced in 1962 following the creation of the European Economic Community (EEC, the “Common Market”) in 1957 by Belgium, France, the German Federal Republic, Italy, Luxembourg, and the Netherlands. The CAP has remained through the development of the EEC into the European Union (EU) of 12 countries in 1992 and its expansion to 27 countries as of 2008. The initial objectives of the CAP were to increase agricultural production, ensure a fair standard of living for farmers and the agricultural community, guarantee availability of food supplies, provide food at reasonable prices, and stabilize food markets. These objectives were to be achieved primarily by subsidizing agricultural production and maintaining agricultural commodity price levels within the EEC. The CAP has developed in response to a range of factors including overproduction of a range of agricultural products, market pressures, environmental concerns, and expansion of the EEC into the EU.

The CAP is the oldest and most costly common policy of the EU, utilizing approximately 60 percent of the total EU budget in 1992, 40 percent in 2007, and a projected 32 percent in 2013. Initially, the CAP subsidized agricultural production and maintained agricultural commodity prices within the EU by providing a direct subsidy payment for cultivated land, guaranteeing a minimum price to producers and imposing tariffs and quotas on certain goods from outside the EU. These measurements resulted in increased, and subsequently surplus, production of the major farm products in the 1980s. In some cases, goods were stored or disposed of within the EU but, generally, surplus goods were exported to the world market with subsidies given to traders who sold agricultural products to foreign buyers for less than the price paid to EU farmers. Disposal of surpluses had a high budgeting cost. In 1984, the surplus of milk was contained by the introduction of production quotas and in 1988, a limit was set on EU expenditure to farmers.

In 1992, reforms of CAP were established to limit agricultural production of specific products (e.g., wheat and milk) that attracted subsidies in excess of market prices. The prices farmers received for their products were reduced but they were given direct payment compensation for these reductions. Also, “set aside” payments were introduced in which farmers were paid to withdraw land from production and limit stocking rates, the number of animals per unit area. These measures were linked to environment and rural development–related objectives. For example, reduced production required reduced inputs of agrochemicals such as nitrogen fertilizer that had been shown to have adverse effects on the environment such as the eutrophication of nutrient-poor land habitats and waterways, a decrease in biodiversity inside and outside the agricultural systems, and emissions of greenhouse gases into the atmosphere.

In 1995, in response to the World Trade Organization agricultural agreement, use of export subsidies to exporters was reduced. Also in 1995, rural development aid was introduced with the objective of diversifying the rural economy and making farmers more competitive. In 1999 the “Agenda 2000” reforms set in place reductions in market support prices for several products including wheat and milk. These measures were partially offset by an increase in direct aid payments to farmers. The Agenda 2000 reforms also introduced several rural development/regeneration measures including support for younger farmers and further aid toward the diversification of farms and the implementation of more “environmentally friendly” farming systems.

A major reform of the CAP (Regulation EC No. 1782/2003) which decoupled direct payment from production of particular crops and agricultural commodities was introduced in 2003. A new “Single Farm Payment” was established that is dependent on farmers adhering to environmental, food safety, and animal health standards that were previously in place: This is termed “cross compliance.” The bulk of subsidies will be paid independently of the volume of production of specific crops, and farmers’ decisions on which crops to produce should be based on market needs. As of 2008, set-aside payments are suspended. The reforms will be phased in from 2005 to 2012. The overall EU and national budgets have been capped and the proportion of the total agricultural budget spent on rural development will increase to around 25 percent over this period.

Bibliography:

EUROPA, “CAP Reform—a Long-term Perspective for Sustainable Agriculture,” www.ec.europa. eu (cited March 2009).

Common External Tariff

A common external tariff is an agreement among two or more countries to adopt identical tariff schedules for all goods being imported from other trading partners. Having a common external tariff is the central feature of a customs union, which is an agreement among countries to eliminate internal tariffs and establish a common external tariff. A common external tariff may also include the homogenization of nontariff trade barriers such as quotas and other trade preferences.

When countries participate in the process of regional economic integration, they most often begin by forming a free trade area that eliminates all internal tariffs on imports and exports between the partners. A free trade area, however, may provide incentives to nonmember trading partners to engage in the practice of exportation (also known as entrepôt trade). A company from outside the free trade area may import products into the member country with the lowest external tariff, and then reexport to another member country tariff-free. This situation provides incentives for countries in a free trade area to manipulate external tariffs in order to gain trading advantages. In order to eliminate this activity, countries in a free trade union may form a customs union, in which a common external tariff is instituted.

The European Economic Community (now known as the European Union) established a common external tariff in July 1968. The elimination of most internal tariffs had been completed 11 years earlier with the signing of the Treaty of Rome by member countries Belgium, France, Italy, Luxembourg, the Netherlands, and the Federal Republic of Germany. Just a few weeks after the common external tariff was established in Europe, an agreement to allow the free movement of workers within member states was also adopted. The acceptance of the free movement of labor and capital within member countries is the next stage of regional economic integration and is referred to as a common market.

Mercosur, a trading bloc consisting of Argentina, Brazil, Paraguay, and Uruguay, is another example of regional economic integration that includes a common external tariff. These countries began their formal efforts toward fuller economic integration with the signing of the Treaty of Asunción in 1991. The common external tariff was adopted with the signing of the Treaty of Ouro Preto in 1994. Other examples of economic cooperation initiatives among countries that include a common external tariff are the Caribbean Community (Caricom), the Southern Africa Development Community (SADC), the East African Customs Union, the Andean Community (CAN), and the Gulf Cooperation Council. The European Union has expanded its common external tariff to include San Marino, Andorra, and Turkey, none of which are EU member states.

The North American Free Trade Agreement (NAFTA) eliminated internal trade barriers between Canada, Mexico, and the United States but stopped short of creating a common external tariff. Another prominent trading partnership, the Association of Southeast Asian Nations (ASEAN) Free Trade Area, has also not yet implemented a common external tariff. Countries are sometimes reluctant to adopt a common external tariff because of the loss of flexibility and control over national trade policy that it implies.

Bibliography:

“A Free-Trade Tug-of-war,” Economist (2004);
Bagwell and R. W. Staiger, “Multilateral Tariff Cooperation During the Formation of Free Trade Areas,” International Economic Review (1997);
Ghosh and S. Rao, “A Canada–U.S. Customs Union: Potential Economic Impacts in NAFTA Countries,” Journal of Policy Modeling (2005);
T. Hanson, “What Happened to Fortress Europe?: External Trade Policy Liberalization in the European Union,” International Organization (1998);
E. Hojman, “The Andean Pact: Failure of a Model of Economic Integration?” Journal of Common Market Studies (1981);
Hoy and J. Fisher, “Latin America and the European Common Market,” Geographical Review (1966).

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