IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Of all the economic implications the European Union has on the world market, few policies have been debated and criticised more than the EU’s Common Agricultural Policy (CAP). Through this policy, farmers within the EU receive €45 billion in subsidies each year, with the intention of keeping European agriculture stable, ensuring fair pay and prices for European farmers, and keeping agricultural development between Member States sustainable. In reality, the policy does little more than promote overproduction, consume 35% of the overall EU budget, and keep developing economies down. Rather than serve any real economic benefit, this policy is little more than an example of state interference distorting and damaging the market. Quite frankly, the CAP’s retirement date is long overdue.
One of the main issues with the CAP is that it is inherently protectionist, both as a result of deliberate tariff barriers against non-Member States installed by the EU, as well as those which exist as a result of negative externalities. While the CAP presents numerous barriers to trade, they can be divided into two main categories: Access Restrictions, in which tariff barriers deter entry from cheaper, third-party producers to the EU market, and Externality Restrictions, in which the subsidising of European farmers produce knock-on effects on the world economy, such as overproduction and subsequent ‘dumping’ of overproduced goods onto third-party economies at lower-than-market prices. Barriers in these two categories negatively impact both the home market and the world market.
An example of an effect these barriers have on the home (EU) market is that it is entirely dominated by European farmers. As pointed out by Dr Kristian Niemietz from the Institute of Economic Affairs, this results in European consumers paying as much as 17% more than the world price for agricultural goods. On average, households with a lower income spend a greater percentage of their income on agricultural goods such as food than wealthier households, meaning that poorer European consumers are most affected by the higher prices brought on by CAP.
With agricultural development playing such a crucial role in the overall economic development of poorer countries, the negative implications of the CAP hit the third world particularly hard. Two implications of the CAP are especially damaging: the dumping of overproduced goods from European producers, and tariff barriers which prevent them from entering the European market.
Dumping is a result of the overproduction which occurs due to subsidisation. Since European farmers receive a great deal of their income from the EU itself, they are able to produce far more than if they were reliant solely on profits - resulting in the infamous ‘wine lakes and butter mountains’ of the early CAP. While some overproduced goods were dealt with via schemes such as free milk in public schools, the rest is either wasted (especially in the case of perishable goods, common in the agricultural sector), or ‘dumped’ onto other markets at below cost.
Tariff barriers in Europe only exacerbate the issue; while Member States of the EU are able to trade with one another without tariff barriers (due to the existence of the EU Single Market), nations who are not Member States can be made subject to such barriers. Thus, domestic producers in developing economies often unable to compete not only within their own markets, but face barriers from entering the European one as well. As a result, the CAP participates in the dissuasion and blocking of participation from developing economies in the global agricultural market, and thus plays a role in stunting prospects of stable economic development.
In contrast to the CAP, one can find good examples of functional, free-market agricultural economies in New Zealand. Here, farmers and other workers in the agricultural sector thrive without intervention from the state - no subsidies, no handouts. Today, New Zealand agriculture is efficient, diverse, and booming; productivity in the agricultural sector is actually growing faster than the NZ economy as a whole. On top of improved efficiency, agricultural products from New Zealand have diversified exponentially (this can be observed in the rapid emergence and growth of the NZ wine industry, which barely existed prior to the decision to free the market).
Thus, we can see not only that the CAP negatively impacts both European consumers as well as the development and participation of developing economies, but we can also learn from New Zealand’s example that agricultural markets thrive without interference from the state. Currently, the only beneficiaries from the CAP are the farmers themselves, who are artificially placed at an unfair advantage on both the European and world markets. Freeing the market through the removal of these statist measures, however, would likely result not only in increased consumer welfare, but also without much long term damage to the producers. Reforms to CAP are susceptible to regulatory capture by vested interest groups who exert significant influence over policy design, and decades of these reforms have resulted in little improvement. It’s time for the nuclear option - scrap the CAP, and let the free market thrive.