Agricultural Policy Seminar Paper Topic: International agricultural policy and their impact on markets

EXPORT REFUNDS OF THE EU:

IMPACTS ON TRADE WITH AFRICA

By: Xuan Lam Duong (21168870 email: xuanlam.duong@stud.uni-goettingen.de) Supervisor: Msc. Thelma Brenes

Content

List of tables and graphic Table 1 Name Table 1: European Union, Trade with Africa (million of euro, %) 2 Table 2: AFRICA, Trade with the European Union (millions of euro, %) Graphic 1 Name Figure: Processor/wholesale data and prices: EU subsidies (Euro/100kg) 7 9 Page 8

List of abbreviations

EU GATT CAP WTO SMP WMP

European Union General Agreement of Tariffs and Treaties Common Agricultural Policy World Trade Organization Skimmed Milk Powder Whole Milk Powder

ACP FTAs EPAs OECD

African, Caribbean and Pacific Free Trade Agreements Economic Partnership Agreements Organisation for Economics Co-operation and Development

I. INTRODUCTION: The European Union (EU) is a major trading partner of the Africa. In value and volume, the destination of most Africa agricultural exports is the European Union. In terms of value added agricultural products, the EU has the potential to become a major source of imports to the African markets. In other words, agriculture is the mainstay of African economies and it is the largest employer, a source of foreign exchange earning and a means of livelihood to a majority. Thus, any internal or external factor that affects the sector will affect the livelihood of the entire African economies. For these reasons, the agricultural policy pursued in the European Union has consequences to the African countries. Specifically, the usual sale of European agricultural products to Africa using export refunds has been heavily discussed in recent decades. This paper aims to give some main ideas about the impacts of export refunds of the EU on trade with Africa. Research questions:

Does export refunds have impact on trade? If yes, that are bad or good impacts? To what extent does export refunds affect on trading with Africa?

Methodology: Review previous studies about export refunds combined with collecting some secondary data to get answers for above mentioned research questions. II. RESULTS: 1. Export refunds literature review In general, export subsidies (or export refunds as the EUs food industry prefers them to be called) is a government policy to encourage export of goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters, or government financed international advertising or rural and development. When effective, export subsidies reduce the price of goods for foreign importers and cause domestic consumers to pay relatively higher prices. They thus distort the pattern of trade away from production based on comparative advantage and, like tariffs and quotas, disrupt equilibrium trade flows and reduce world economic welfare. The most common product groups where export refunds are applied are agricultural and dairy products. (David Collie, 1990) mentioned trade policy is analyzed as a multistage game. He described at the first stage the foreign government sets its export subsidy to maximize its national welfare. Then, in the second stage, the domestic government responds to the foreign export subsidy by setting its import tariff and production subsidy to maximize its national welfare. In the final stage firms set outputs to maximize profits given the trade policies set by the two governments in the previous stages. The crux of the problem depend upon which policy instruments are used by the domestic country in response to the foreign export subsidy. In reality, governments only use tariffs to respond to foreign export subsidies, this is the case that is relevant to policy-making. In this case if the domestic country sets its tariff optimally, then it will always gain from a foreign export subsidy. By pursuing an optimal policy the domestic country ensures that a foreign export subsidy will not reduce domestic welfare (David Collie, 1990). The optimal domestic response to a foreign export subsidy is a less than fully countervailing tariff. In practice, most governments use fully countervailing tariffs, but this is never optimal. One of his significant conclusions is that poor implementation lead to delay and uncertainty which reduces the nominal value of the subsidy. There are positive impacts of the export refunds rate on the market and the import share (Herzfeld T., 2004). This seem to contradict to (Arvind Panagariya, 1999) findings. Based on reviews briefly of Latin America, East Asia and India with respect to export refunds, he concluded that export refunds are more costly instrument of achieving export expansion than other policies. (James A. Brander, 1984) implied export subsidies can be used to carry out the profit-

shifting policies. Non-cooperative behavior provides incentives for such policies, but these policies are jointly suboptimal from the point of view of producing nations taken together. He also argued that export subsidies can appear as attractive weapons because they improve the relative position of the domestic firm in non-cooperative rivalries with other firms, and allow it to expand its market share. In that case, the terms of trade will move against the subsidizing country but price still exceeds the marginal resource cost of exports so that the resulting expansion of exports can actually raise domestic welfare (James A. Brander, 1984). This statement then was confirmed by (Kyle Bagwell, 1988) as a research to explore the role of export subsidies when foreign goods are initially of unknown quality to domestic consumers. Absent export subsidies, entry of high quality firms may be blocked by their inability to sell at prices reflecting their true quality. Export subsidies can break this entry barrier and increase welfare. Specifically, he said even when high quality firms find it possible to signal their quality to consumers through an introductory pricing strategy, a role for government policy can arise. The signal (low introductory price) transfer surplus from foreign producers to domestic consumers and can be avoided with an appropriate export tax/subsidy policy. When the importing country has domestic firms in the relevant industry, the successful entry of a foreign firm can cause a loss in domestic producer surplus, and so the optimal policy for an importing country becomes more complex. (Kyle Bagwell, 1988) While export subsidies remain a controversial and unresolved issue of international trade, there have been recent calls for the elimination of subsidies. Article XVI of the General Agreement of Tariffs and Treaties (GATT), for example, states that If any contracting party grants or maintains any subsidy, including any form of income or price supportit shall notify the contracting parties in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making subsidization necessary. Most studies analyzed the impacts of the elimination of export refunds found that elimination of export subsidies would lead to an increase in world prices, but would have a limited impact on the trade volumes and welfare of developing countries (Cesar Revoredo Giha et al. 2011). However, these impacts will still be significant if combined with the elimination of tariffs and domestic support. Specifically, the impacts on different sections of the population in developing countries (e.g. producers and consumers) will differ in sign and magnitude depending on whether the country is a net importer or net exporter of the product under consideration or whether it has the potential to become a net exporter (through appropriate infrastructure, marketing policies, etc.) (Howard K. Gruenspecht, 1987). Practically, in some countries, where domestic production does not compete with imported production (because they serve different markets), or where the domestic market is

isolated from the international market through government regulations, elimination of export refunds will have limited impacts on the welfare of producers, at least in the short term. It may be the case that this could change in the longer term due to changes in policies, investment in infrastructure, etc. 2. Export refunds in the European Union The European Unions Common Agricultural Policy (CAP) was first implemented in the 1960s. After several reforms, the CAP is now more complex, including single farm payments, tariffs, quotas, payments per hectare/animal, agri-environmental support, price support and various commodity-specific measures. There were some ideas proved that the CAP has no effect on markets of third countries besides depressing world market price (Herzfeld, T, 2004), hence, its reform portends consequences to the developing countries. For example, the reform will lower prices of products in the EU and this means the earnings of developing countries will reduce. The implications are that the Africa and other developing countries export to the EU will attract less earnings and thus result to income loss (Roland Schwartz & Otieno Odek, 2002). An important component of the European Unions CAP has been the export subsidies. These export subsidies recompense Europeans farmers for the additional costs they have incurred sourcing raw materials at CAP-supported prices, allowing them to compete on world markets. However, export subsidies on processed food products are potentially problematic in the World Trade Organization (WTO). Prior to 1995 they were probably illegal. After that, the provisions of the Uruguay Round Agreement on Agriculture (URAA), and in particular the so-called Peace Clause (Article 13 of the URAA), probably made them legal. Export refunds then were reintroduced for all dairy products on 22 January 2009 after a gap of 18 months, reflecting the dramatic fall in world market prices in 2008. However by 19 November 2009, all EU export subsidies had been reduced to zero. Prior to the 22 January 2009, changes to export refunds for butter and cheese had been set at zero at the management committee of 14 June 2007, reflecting a shortage of supplies both on the world market and in the EU. Between June 2006 and July 2007, EU subsidies, both internal and for export, had been gradually eliminated. Graph 1: Processor/wholesale data and prices: EU subsidies (Euro/100kg)

Export Refunds 140 120 Euros / 100kg 100 80 60 40 20 0

Source: DIN Consultancy

Butter SMP Cheddar As can be seen from the above graph, export subsidies were setWMP for skimmed milk at zero
powder (SMP) on 15 June 2006. Export subsidies for whole milk powder (WMP) and condensed milk were reduced to zero on 25 January 2007. The subsidy on butter for food manufacturing and concentrated butter was reduced to zero on 26 April 2007. Tenders were suspended from 12 September 2007 and the scheme finished on 1 July 2009. The subsidy on SMP for animal feed was reduced to zero on 19 October 2006 and the skim for casein subsidy was reduced to zero on 10 October 2006. It is needed to mention that the EU has defined about 400 products for which export refunds are paid in which about 50% of these definitions concern butter, milk powder and cheese. Until 2004 export subsidies were fixed weekly on the basis of the difference between domestic and world market prices. The European Unions sugar policy uses production quotas, import controls and export refunds to support producer prices at levels well above international prices. Import duties are used to prevent lower-priced imports from the world market, and export refunds are paid to exporters to cover the gap between the EU price and the generally lower world market prices when commodities are sold from intervention stocks. 3. Impact of export refunds on trade with Africa The EU is the largest trading partner and largest export market for every almost every country in Africa. After six year of steady growth, the EU trade in goods with Africa dropped in 2009, with exports falling by 10% and imports by one third, compared with 2008. As a result, the EU deficit in trade with Africa, which reached a peak of 40 billion

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EUR in 2008, turned into a small surplus of 1bn in 2009. The first nine months of 2010 showed a renewed growth in EU trade with Africa. Exports rose from 79 bn in the first nine months of 2009 to 90 bn in the same period of 2010, and imports from 79 bn to 96 bn. As a result, the EU trade balance with Africa moved from in balance in the first nine months of 2009 to a deficit of 6 bn in the same period of 2010. In the first nine months of 2010, Africa accounted for 9% of the EU's total trade in goods. Table 1: European Union, Trade with Africa (million of euro, %)
Share of Period Imports Variation (%,) total EU Imports (%) 2006 2007 2008 2009 2010 126,362 129,681 158,509 107,430 133,642 14.5 2.6 22.2 -32.2 24.4 9.3 9.0 10.1 8.9 8.9 92,794 103,728 120,137 108,639 125,529 6.4 11.8 15.8 -9.6 15.5 Exports Variation (%) Share of total EU Exports (%) 8.0 8.4 9.2 9.9 9.3 -33,568 -25,953 -38,371 1,209 -8,113 219,157 233,408 278,646 216,069 259,170 Balance Trade

Source: EUROSTAT, 2011 Among the EU Member States, the largest exporters to Africa in the first nine months of 2010 were France (20 bn or 22% of EU exports), Germany (15 bn or 17%) and Italy (13 bn or 14%). Italy (22 bn or 23% of EU imports), France (16 bn or 17%), Spain (15 bn or 16%) and Germany (11 bn or 12%) were the largest importers. The largest deficits in the first nine months of 2010 were registered by Italy (-9 bn) and Spain (-7 bn), while Germany (+4 bn), France (+3 bn) and Sweden (+2 bn) had the biggest surpluses. Machinery and vehicles2 accounted for 40% of EU exports to Africa in the first nine months of 2010, while energy made up nearly 60% of EU imports. At the detailed level, the main EU exports included petrol, medicine and cereals, while the main imports from Africa included oil, gas and diamonds. Table 2: AFRICA, Trade with the European Union (millions of euro, %)
EU Share Period Imports Variation (%) of total Imports (%) 2006 2007 2008 97,269 116,102 126,603 11.3 19.4 9.0 37.4 38.3 36.2 110,782 112,436 141,828 17.3 1.5 26.1 Exports Variation (%) EU Share of total Exports (%) 40.6 39.1 39.5 13,513 -3,666 15,225 208,050 228,538 268,431 Balance Trade

2009 2010

108,736 127,783

-14.1 17.5

35.8 35.1

94,772 116,618

-33.2 23.1

37.8 35.3

-13,964 -11,166

203,508 244,401

Source: EUROSTAT, 2011 Among the African countries, South Africa (16bn or 17% of the total) was the leading destination for EU exports in the first nine months of 2010, followed by Algeria and Egypt (both 11 bn or 12%), Morocco (10 bn or 11%), Tunisia and Nigeria (both 8 bn or 9%). The leading source of EU imports from Africa was Libya (20 bn or 21%), followed by Algeria (16 bn or 16%), South Africa (14 bn or 14%) and Nigeria (10 bn or 10%). The largest EU deficits in trade in the first nine months of 2010 were recorded with Libya (-15 bn), Algeria (-4 bn), Nigeria (-2 bn), Equatorial Guinea and Ivory Coast (both -1 bn), and the highest surpluses with Egypt (+6 bn), Morocco (+4 bn), South Africa (+2 bn), Senegal and Tunisia (both +1 bn). Annually, the EU provides more than 40 billion Euro as subsidy to agriculture sector. As a result, about every agricultural product the EU's exporters have on offer is directly or indirectly subsidised: from Dutch powder milk and butter to Italian tomato concentrate and pasta, from French wheat, sugar and sunflower oil to Irish beef or German pork. Even the sugar in British marmalade or the sugar and milk in Belgium chocolates qualifies for export subsidies when sold outside of the EU (Eurostep, 2010). But, it should be make clear that the use of export refunds by the EU has been declining strongly over time: In 2010, the expenditure for export refunds for agricultural products from the EU was 166 million EUR, while in 2000 the refunds were 5.6 billion EUR. This level is well below 1% of CAP expenditure. (European Commission, 2011). The most common product groups where export refunds are applied are agricultural and dairy products. The EU is the largest importer of agricultural products from developing countries (importing more than the next five importers combined) and has several tradefriendly regimes in place to facilitate market access such as the duty free access granted through Free Trade Agreements (FTAs), including the negotiated Economic Partnership Agreements (EPAs) with African, Caribbean and Pacific (ACP) countries and the Everything But Arms Initiative (EBA), under the Generalised System of Preferences (GSP) (European Commission, 2011). In addition, numerous trade-related assistance activities are put in place. But, while the African market was opened to goods from Europe, even after the signing of the EPA, according with the text of those partnership agreements, it would take 12 years for the European market to be opened to agriculture produce from Africa. For Nigeria and Cameroon, opening their markets to Europe would cause a loss of $ 427 millions and $ 149 millions respectively. For a smaller country as Zambia, the potential deficit is valued at $ 16 millions, or the equivalent of yearly government expenses in the

fight against HIV/AIDS (OECD, 2010). Various small developing countries cannot afford to subsidize exports. Export subsidization distorts trade and discriminates against small developing countries. How can small developing countries compete when developed countries provide export subsidization to commodities that compete in markets of export interest to developing countries? The consequences of these measures is that all the efforts made by developing countries are futile and hinder the very policies aimed at alleviating poverty and improving the livelihoods of the rural population. In the other side, in many developing countries, while there was a positive link between export orientation and responsiveness to export subsidies, the policy had not achieved the results that might have been expected of it. It was clear that a number of eligible exporters had not claimed the subsidy, and others had claimed it but treated it as a windfall gain (Patrick Low, 1982). Manufacturing firms have responded poorly to the availability of export subsidies. These poorly responses have resulted from the delay and uncertainty surrounding disbursement procedures. The combination of delay and uncertainty clearly makes the real value of the export subsidy worth less than its nominal value of 10% of export proceeds, and goes some way in explaining the low response level of manufacturers (Patrick Low, 1982). On the other hand, the EU imposes general higher food safety standards which are particularly challenging for smallholder producers and developing countries. In addition, export refunds seriously damage African agricultural markets. The introduction of reciprocity in ACP-EU trade relations through EPAs could amplify these implications, which affect Sub-Saharan African agricultural markets negatively (Clara Weinhardt, 2006). Sub Saharan Africa countries experience a smaller increase in exports than most other developing countries due mainly to the erosion of preferences on the EUs market. Overall, exports of the poorest countries (sub-Saharan Africa and South Asia) increase significantly less than the average exports of the rest of the world (Howard K. Gruenspecht, 1987). III. CONCLUSIONS Export refunds have been a subject of discussion and controversy in last decades. Overall, whilst the different analyses show that export refunds may have the possibility to create distortions on developing (including African nations). The results from the literature review indicate that the export refunds elimination may have small impact in terms of prices, production and welfare. The presence of export refunds may create in developing countries disincentives either to exports, to domestic production or may help to create and maintain industrial sector that are import dependent and do not invest in integrating domestic resources into the supply chains. The EU is comprised of strong economies and Africa of weak developing economies. The relative poor export performance of the African countries can be partly attributed to their export structures. The African countries exports mainly

consist of raw materials (mainly agricultural and mineral commodities and petroleum products) while the share of manufactured goods remains comparatively low. A large number of African countries export performances still depends on these unprocessed agriculture and mining products and these countries still depend on the EU market to import its products while the EU remains the largest purchaser of African countries. With export refunds, the EU has achieved much advantages resulting in the trade balance with the Africa. EU goods enter into African markets easily with less subject to the binding of tariffs as well as other sticky requirements in terms of quality and food safety issues. By contrast, smallholder producers in Africa and other developing countries have to face with challenges imposed by the EU relating to higher food safety standards. In order to minimized the harmful effects to the domestics economy, African exporters need more proactive in responding flexibly to market and policy changes, especially import and export related-policies in order to obtain profit maximization. Furthermore, African governments should negotiate and develop reasonable policies to protect the domestic economy and ensure the poverty alleviation. As a result, export subsidies will continue to be a challenging issue in future trade deals.

LIST OF REFERENCES 1. Patrick Low (1982): Export subsidies and trade policy: the experience of Kenya, World Development, Vol. 10, No.4, pp. 293-304. Printed in Great Britain. 2. James A. Brander (1984): Export subsidies and international market share rivalry, Journal of International Economics 18 (1985) pp. 83-100. North-Holland 3. Howard K. Gruenspecht (1987): Export subsidies for differentiated products, Journal of International Economics 24 (1988) pp. 331-334. North-Holland. 4. Kyle Bagwell and Robert W. Staiger (1989): The role of export subsidies when product quality is unknown, Journal of International Economics 27 (1989) pp. 6989. Horth-Holland.

5. David Collie (1990): Export subsidies and countervailing tariffs, Journal of International Economics 31 (1991) pp. 309-324. North-Holland 6. Arvind Panagariya (1999): Evaluating the case for export subsidies, World Bank, 1818 H Street NW, Washington DC 20433. 7. Daneswar Poonyth et al. (1999): Impacts of WTO restriction on subsidized EU sugar exports. Elsevier Science B.V. 8. Roland Schwartz and Otieno Odek (2002): Impact of EU-CAP reforms in East Africa, Friedrich Ebert Stiftung (FES), ISBN: 9966-957-02-2 9. Herzfeld, T. (2004): The trade distorting effects of export refunds: the case of beef exports to Africa. In: Acta Agriculturae Scandinavica Section C: Food Economics, Vol. 2(2); pp.77-86 10. Thomas Herzfeld (2005): Export refunds of the European Union and their effects on developing countries: the case of beef exports to Africa, Acta Agriculturae Scandinavica Section C - Food Economics, Vol. 2, No. 2, pp. 77-86, 2005 11. Clara Weinhardt (2006): Food security and economic partnership agreements a view from Brussels, German Development Institute 12. Kerstin Bertow and Antje Schultheis (2007): Impact of EUs agricultural trade policy on smallholders in Africa. http://www.germanwatch.org/handel/euaf07.htm 13. OECD, (2010): Evaluation of Agricultural Policy Reforms in the European Union, TAD/CA/APM/WP (2010)26/FINAL 14. Alan Renwick et al. (2010): Analysis of impacts of the EUs export refunds on developing countries since 2003, Final report, Land economy and environment research group, Scottish Agricultural College. 15. OECD (2010): Evaluation of agricultural policy reforms in the European Union, OECD Publishing. 16. Cesar Revoredo-Giha et al. (2011): An analysis of the potential impact of the elimination of EU export refunds for developing countries, Paper prepared for presentation at the EAAE 2011 Congress Change and Uncertainty, ETH Zurich, Zurich, Switzerland. 17. European Commission (2011): Commission staff working paper impact assessment: Common agricultural policy towards 2020, SEC (2011) 1153 final/2 18. EUROSTEP: CAP reforms will hit Souths poor farmers. http://www.twnside.org.sg/title/farm-cn.htm

LIST OF APPENDICES Appendices 1: Figure 1: European Union imports from Africa by product grouping
70% 60% 50% 40% 30% 20% 10% 0% 2006 2008 2010 1100 - Agricultural products 2100 - Iron and steel 2200 - Chemicals 2300 - Other semi-manufactures 2500 - Textiles 2600 - Clothing 2700 - Other manufactures

1200 - Fuels and mining products

2400 - Machinery and transport e

Source: EUROSTAT (Comext, Statistical regime 4); World excluding Intra-EU trade and European Union: 27 members. Update: 8-Jun-2011

Appendices 2

Figure 2: European Union exports to Africa by product grouping

50% 40% 30% 20% 10% 0% 2006 2008 2010 1100 - Agricultural products 2100 - Iron and steel 2200 - Chemicals 2300 - Other semi-manufactures 2500 - Textiles 2600 - Clothing 2700 - Other manufactures

1200 - Fuels and mining products

2400 - Machinery and transport e

Source: EUROSTAT (Comext, Statistical regime 4); World excluding Intra-EU trade and European Union: 27 members. Update: 8-Jun-2011

Appendices 3

Table : Export refunds by product usage, EU budget (million EUR) Product Cereals and rice Sugar Milk and butter Eggs Total Source: Agritrade (2006a) 2004 36.0 183.0 193.0 3.0 415.0 2005 31.0 193.0 186.0 5.0 415.0

Appendices 4

Figure 3: Development of extra EU-27 trade with Africa, 2001-2009 (EUR million)

(Source: EUROSTAT, 2010)

Appendice 5 Figure 4: Estimates of CAP impacts on EU exports, 1986-2008 (million tonnes)

Source: OECD (2010)