Summary
The timing of the EU’s decision to relax the requirements for the deployment of voluntary coupled support (VCS), which de facto removes the link between such payments and maintaining existing production in disadvantaged areas, could well fuel calls for a formal WTO challenge to VCS payments in the sugar sector under Articles 5 to 7 of the WTO Agreement on Subsidies and Countervailing Measures (SCM). The EC and some member states had opposed the amendment of the scheme ‘citing in particular WTO implications’, while an analysis from the European Parliament suggested the ‘market distorting effects …of the introduction of coupled support in the CAP 2014-2020’ should be addressed. The findings of modelling undertaken by Wageningen University Research on the impact of VCS payments in the sugar sector would appear to strengthen the basis for an effective challenge to EU VCS payments under the SCM provisions of the WTO agreement.
Analysis from Professor Alan Matthews has highlighted the growing flexibility being introduced to the deployment of EU voluntary coupled support payments in the recently agreed Omnibus Agricultural Provisions Regulation (EU 201/2393). This regulation came into effect on 1st January 2018 and represents ‘a significant relaxation of the conditions that Member States must meet in gaining approval for their VCS schemes’ (1).
Under the 2013 CAP review ‘coupled support was restricted …to those sectors or to those regions of a Member State where specific types of farming or specific agricultural sectors that are particularly important for economic, social or environmental reasons undergo certain difficulties’ (Article 52.3). Being in difficulties was defined as there being ‘a risk of abandonment or of decline of production’ in ways which negatively affect the economic, social or environmental structure of a region or sector. The revised CAP allowed VCS to be granted to the extent needed to avert a decline in production. More specifically it allowed payments to sustain production at a maximum of the highest level in one of the previous five year (1).
Limits were set on how much of the national direct aid payment envelop could be deployed in the form of VCS (with the norm being 8% but up to 13% in exceptional circumstances and 15% in very exceptional circumstances). In reality all member states except Germany have some form of VCS scheme in place, with around 10% of the total direct aid envelop being directed to VCS payments (around €4.2 billion) (1).
However since 1st January 2018 changes have been introduced which have brought the regulation into line with evolving practices. This has seen the removal of the constraint that VCS payments could only be ‘granted to the extent necessary to create an incentive to maintain current levels of production in the sectors or regions concerned’ (1).
According to Professor Matthews ‘the consequence of these changes is that coupled support can now legitimately be given even where it leads to an increase in production beyond historical levels’. He further argues ‘the justification for coupled support, that it provides a way of supporting sectors or regions in ‘difficulties’…has been retained in principle but abandoned in practice’. Overall EU member states governments are now ‘at liberty to use coupled support to promote increased production, subject only to the financial ceiling for VCS measures as a whole’.
In support of this view Professor Matthews cited a European Parliament press service statement which highlighted how the draft legislation would ‘allow member states to grant coupled support to their ailing sectors, which are particularly important for economic, social and environmental reasons, regardless of whether or not they experienced a drop in their outputs’. It noted how under the pre-existing regulation coupled support was ‘limited to sectors struggling with maintaining previous levels of production’ (2).
Professor Matthews pointed out how the retroactive nature of the new provisions serves to ‘legitimise what was presumably illegal state aids at the time’. Professor Matthews also noted how during the inter-institutional debate on the modification of Omnibus Agricultural Provisions Regulation several member states representatives and the EC opposed the amendment of the scheme ‘citing in particular WTO implications’ (1).
It is suggested the new provisions may be just the beginning of the process of securing even greater flexibility in the use of VCS. An information note to the Council from the Hungarian delegation, supported by the Czech, Croatian, Polish and Slovakian delegations dated 12 February 2018, highlighted how VCS ‘provide an essential contribution to maintaining economic activity in rural areas and bolster rural employment’ and underlined the importance of maintaining VCS payments with ‘a wider scope and more ambitious financial resources’ (3).
Professor Matthews cited a report on the use of VCS in the sugar beet sector by Wageningen University Research (4) as one of first serious academic analysis of the impact of VCS payments. He cited the Wageningen report to the effect that ‘VCS provides an effective price subsidy ranging from approximately 5 to 50% of the price paid by the sugar industry concerned’ in the countries reviewed, with this leading to ‘a higher supply of sugar beet in the EU and therefore a lower price for sugar beet’. The VCS is increasingly provided not only to marginal farmers but country wide, with this resulting in non-marginal farmer growing more sugar than they otherwise would do. This then serves to compound the disruptions to existing trade patterns and market conditions arising from the abolition of EU sugar production quotas.
The Wageningen University Research report recommended the deployment of VCS should be restricted to ‘areas in countries in which it is truly needed’(1).
Concerns about the impact of VCS were also expressed in a February 2018 European Parliament research report entitled ‘The impact of the Common Agricultural Policy on developing countries’ (5). This report highlighted how ‘coupled support creates distortions both in the internal EU market and externally, displacing production to some member states (MS) either from other MS or from third countries’. It is this effect of the displacement of ACP sugar exports to the UK market by increased imports from EU27 member states following the abolition of national sugar production quotas which ACP states have highlighted in recent submissions to the UK Parliament on future post-Brexit UK sugar policy (6) (see epamonitoring.net companion article ‘EU Sugar Quota Abolition Begins to Eat at ACP/LDC Export Volumes and Earnings’, 10 May 2018).
The European Parliament analysis suggested the ‘market distorting effects …of the introduction of coupled support in the CAP 2014-2020’ should be addressed.
| Comment and Analysis
There can be little doubt that in the context of the abolition of national sugar production quotas, voluntary coupled support payments have supported a large scale expansion of EU sugar production. The maintenance of VCS payments has ensured that the expansion of sugar production in the more competitive sugar beet producing regions of the EU has not been balanced by any corresponding decline in sugar production in less efficient sugar production area. Indeed, the wider use of voluntary coupled support in regions which are not disadvantaged has allowed these farmers to further expand their sugar beet production. Current analysis commissioned by those affected by the market and price effects of the rapid expansion of EU sugar production which has taken place, suggest the use of voluntary coupled support and the basic payment scheme in the sugar sector are inconsistent with the WTO prohibition under the Subsidies and Countervailing Measures Agreement on measures which cause serious prejudice to the interests of other WTO members and thus are actionable. These EU support measures are seen as giving rise to an expansion of EU sugar production which adversely affects EU imports of sugar (both refined and raw cane sugar) and results in expanded EU exports of sugar which impact adversely on both individual 3rd country sugar markets and the global market sugar price. It is these effects which are held to amount to ‘serious prejudice’ against this interests of other WTO members. The recent reforms to the EU regulations governing the deployment of voluntary coupled support will not have helped the EU’s case in defending the use of such payments, since the reforms de facto remove the link between the extension of support and particular disadvantaged areas, by allowing VCS to be deployed as EU member states determine provided they remain within the agreed overall financial allocation levels. While the EC has serious reservations about the use of voluntary coupled support measures the pressure on the European Commission to vigorously defend the scheme will be intense. All but one EU member state makes use of VCS payments in one form or another. Indeed the use of VCS measures has increased not decreased in recent years. While in 2015 no less than 254 schemes involving VCS payments were notified to the EC by EU member states by 2017 this had risen to 264 schemes. Against this background any successful WTO challenge to the use of voluntary coupled support (VCS) as a trade distorting subsidy in the sugar sector could carry profound implications across EU agriculture. |
Sources:
(1) capreform.eu, ‘Brakes removed from voluntary coupled support’, 19 February 2018
http://capreform.eu/brakes-removed-from-voluntary-coupled-support/
(2) European Parliament Press Service, ‘Omnibus: Provisional deal on simpler and fairer post-2018 EU farming policy’, 12 October 2017
http://www.europarl.europa.eu/news/en/press-room/20171012IPR85941/omnibus-provisional-deal-on-simpler-and-fairer-post-2018-eu-farming-policy
(3) Council of the European Union, ‘Joint declaration of the Ministers of Agriculture of the Visegrad Group and Croatia on the Commission Communication on The Future of Food and Farming’, 12 February 2018
http://data.consilium.europa.eu/doc/document/ST-6060-2018-INIT/en/pdf
4) Wageningen University Research, ‘Impact of coupled EU support for sugar beet growing: More production, lower prices’, December 2017
https://library.wur.nl/WebQuery/wurpubs/fulltext/430039
(5) European Parliament Directorate General for External Policies, Policy Department, ‘The impact of the Common Agricultural Policy on developing countries’, February 2018
http://www.europarl.europa.eu/RegData/etudes/STUD/2018/603862/EXPO_STU%282018%29603862_EN.pdf
(6) ACP/LDC Sugar Industries Group, ‘Written evidence ACP/LDC Sugar Industries Group to the Environment, Food and Rural Affairs Committee’
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/environment-food-and-rural-affairs-committee/postbrexit-trade-in-sugar/written/78499.pdf