This policy briefing looks at the EU’s agri-food markets, their performances, trends, and their future trajectories. It also raises key relevant questions and discussion points with regards to these markets.
Summary: The EU-US Transatlantic Trade and Investment Partnership (TTIP) negotiations were launched on June 17, 2013. TTIP aimed at creating the largest Free Trade Area in the world, and at setting a host of harmonized standards between the two largest trading blocks. These common standards could, by the sheer size of the trade affected, become the de facto new world standards.
TTIP expected level of ambition surpassed anything achieved so far, setting the pace for further trade deals and hopefully prodding other countries to move forward in the stalled WTO negotiations. TTIP impact on the agriculture and food sector could be large, larger than any other free trade deal negotiated so far, and larger than what was expected out of the WTO Doha round (with the exception of domestic subsidies).
It is therefore hardly surprising that the reactions to the TTIP in the EU agriculture sector have been mostly cautious, defensive. The sector by far and large fears the impact of concessions that could be made to a more competitive US agriculture. This paper attempts at going beyond the usual positioning, and enable a more focused and detailed assessment of the deal. Some sectors might benefit, others will face additional competition. For those facing additional competition which are the dynamics of the negotiation and what could be done to improve the EU position?
The state of negotiations
Tariff offers were exchanged on February 10, 2014. However the initial drive to quickly conclude the TTIP negotiations (“in one tank” as it was put at the time) faced during 2014 a set of roadblocks in a number of areas.
There were misunderstandings on what should be the level of ambition of the tariff offers exchanged, with the EU accusing the US of presenting an offer that could hardly be accepted as a basis for negotiation.
Also a controversy arouse on the ISDS (Investor-State Dispute Settlement) chapter, with very active and vocal opponents in the EU, in NGOs and even some mainstream political groups, joined recently by some in the US Congress.
The EU also felt a lack of commitment from the US side, explained by the fact that the US would have prioritized the conclusion of the TPP (Trans Pacific Partnership) negotiations. The result of these drawbacks was that progress in the negotiations was lackluster, to say the least.
Agriculture issues were also contentious, in particular those perceived as consumer safety issues – e.g. hormone treated meats, GMOs. The EU at her highest level was obliged to reaffirm that she would never accept to import hormone treated meat, nor to lower her high safety standards.
After the change in the Commission late 2014 there was a new push to inject fresh momentum in the talks. It is still early days to evaluate the success of the new attempts to revive the talks, but there are indications that prospects are brightening.
The US and her TPP partners are moving to the end game of the negotiation, which would free the US to turn its eyes towards the EU.
In addition to that the US President and Congress leadership are now working to obtain TPA (Trade Promotion Authority), which is seen as essential to conclude TPP and TTIP. TPA as crafted in past occasions gives Congress the authority to only accept or reject in block a trade deal, preventing pick-and-choosing of parts of the deal, which is clearly a great concern for countries negotiating with the US. It is also to be expected that President Obama would like to leave as part of his legacy these two very large trade deals.
Therefore there are strong indications that TTIP negotiations are bound to resume and accelerate in the second half of 2015 with a view to its conclusion in 2016.
Agricultural market access and regulatory issues will continue to be a major challenge for U.S. and EU negotiators as they embark on more intensive negotiations in 2015. Also of interest to these negotiations are recent farm policy reforms in both the EU and the U.S. The results of EU CAP reforms, which have increased EU’s competitiveness for certain commodities (e.g., dairy and sugar), as well the outcome of other EU FTA negotiations, in particular with Canada, are of significance to TTIP.
How far will these developments inform the EU negotiating position?
It could be expected that it does not guarantee an ambitious result, in part due to concerns that further liberalization might jeopardize the EU’s still fragmented farm sector. Moreover, EU farm organizations have taken keen note of the results of the recently agreed FTA with Canada (CETA), in particular with respect to beef and pork access These groups are also taking into account the offers exchanged with Mercosur, another big agriculture player.
While conclusion of the Mercosur negotiations is not expected any time soon, there is a strong concern that in the future a deal might be reached including Brazil, a significant agricultural exporter and competitor.
In this context the negotiations with Japan could provide some breathing space for the most affected sectors, and help counterbalance the impact of TTIP to a certain extent. Japan is a significant importer of meat and grain products, and the EU will play an offensive role on agriculture in the FTA.
In March 2013 the United States adopted a new farm bill, which modifies support programs for most field crops (wheat, corn, oilseeds, cotton, peanuts) by eliminating decoupled direct payments and introducing new risk management programs and encouraging the use of crop insurance, coupled with conservation requirements. U.S. dairy support has become more market-oriented, reflecting the increasing competitiveness of this sector in world markets. Possible changes to U.S. biofuel policy, in the form of a reduced renewable fuel standard, could also impact U.S. crop production trends. While these policy reforms are unlikely to drastically change U.S. market conditions, they are worth considering in the context of U.S. farm sector expectations for these negotiations, particularly given that EU largely higher tariffs and regulatory barriers.
Both the United States and the EU have complex domestic support systems, but neither country has agreed to negotiate domestic support policies in FTAs. Ironically, the U.S. justification for not negotiating on domestic support is that it will not agree to new disciplines if the EU is allowed to continue to support at high levels. While this objection could be addressed in a negotiation, neither side is likely to be motivated to negotiate domestic support.
The following summary identifies some of the key sectorial issues facing the agriculture negotiation. They highlight the practical difficulties facing negotiators and the basic question posed to policy-makers on both sides of the Atlantic : How far will this Free Trade Agreement actually free up trade in protected agricultural sectors? Where do the most important EU offensive interest lie? Where is the EU more vulnerable? What are the most significant challenges?
General overview of Trade in Agriculture Products
In 2013 the EU had a nearly Euro 6 billion trade surplus in agriculture with the US. This reflected a long-term trend of expanding exports of EU products and stagnant U.S. imports, with the EU achieving a neutral trade balance in 1998, growing and maintaining a surplus for the next 8 years with no sign of change. In contrast globally the United States has an almost $40 billion agricultural trade surplus and the EU has traditionally had a balanced trade account across the agricultural sector, with a very small trade deficit in 2012, the latest year for which data are available (Source: WTO).
In 2013, top U.S. imports from the EU were spirits (Euro 3.3 billion), wine (Euro 2.6 billion), beer (Euro 1.2 billion), cheese and nonalcoholic beverages (Euro 0.7 billion each), and olive oil (Euro 0.6 billion). These are top EU exports globally, building on high quality food processing and strong brands.
Top U.S. exports to the EU were led by oilseed products (Euro 2.0 billion), fruits and nuts (Euro 1.8 billion), spirits (Euro 0.7 billion), wine and miscellaneous food preparations (Euro 0.4 billion each), and wheat (Euro 0.3 billion). Leading global U.S. agriculture exports, such as beef, pork, poultry, dairy, maize, rice, and various fruits and vegetables were all less than Euro 200 million.
The simple average of U.S. MFN agricultural tariffs is around 12%. The EU average is around twice that level. (Precise calculations are difficult, due to calculation methodologies for converting specific (e.g., Euro x/MT) tariffs into ad valorem equivalents (e.g., y %). Studies generally show the average EU tariff two to four times the average U.S. tariff for agricultural products).
The EU is facing a paradox in TTIP: it benefits from a large and stable trade surplus with the US, but it has in general a less competitive and more protected agriculture. Will freer trade increase trade opportunities more for the EU than for the US? Or will the opposite be more likely?
The EU and the United States are roughly in trade balance in beef, pork and poultry products. Globally, the United States has exported over Euro 13 billion in these products a year, but exports to the European Union have never exceeded Euro 400 million. EU meat exports into the United States in 2013 were around Euro 300 million. While the U.S. industry is a global leader in competitiveness, the EU focuses its exports on certain niches that exploit a strong reputation for high quality. In spite of the economic fundamentals, the surprising result of near trade balance in this sector is explained by high EU tariffs, low U.S. tariffs, gourmet consumers in the United States and SPS regulatory barriers.
U.S. tariffs are relative low for these products (26% for beef outside of the large TRQ, and substantially lower for pork and poultry). EU tariffs are substantial, ranging from 40% to over 100% for most products. In addition, all three of these products face serious trade restrictions through sanitary barriers. Additionally, exporters in both the EU and the US have an interest in updating the bilateral veterinary equivalence agreement signed over 15 years ago and the EU is eager to see BSE-related restrictions removed on its exports of beef products from all EU Member States. U.S. sanitary requirements are strong for pork and poultry also, but the EU has managed to service U.S. pork market niches with high priced products and is not considered competitive in poultry exports.
Tariff elimination in the meat sector would create a significant challenge for the EU meat and livestock sector, but only if sanitary barriers were removed as well. As noted above, high tariffs are a constraint for U.S. exporters, but sanitary barriers have effectively banned pork and poultry exports and limited beef exports to non-hormone production. The EU has aggressively protected this sector in other FTAs, including the ongoing negotiations with , as well as the recently-concluded agreement with received preferential duty-free TRQs for pork (80,000 tons), beef (50,000 tons; plus a 15,000-ton TRQ for high-quality beef), and bison (3,000 tons). It should be noted that the EU is adamant not to accept imports of hormone-treated beef, but, as with the case of the CETA, has accepted a TRQ for hormone-free beef.
The key question in this sector is how far the EU can go in tariff and quota concessions, and sanitary requirements, without creating too strong an impact in its meat and livestock sector. In this context by how far do the CAP livestock subsidies and decoupled direct subsidies actually shield the sector from the impact of increased US competition?
Dairy products are one of the leading EU exports to the United States, led by cheese (Euro 0.7 billion in 2013). U.S. dairy exports to the EU totaled less than Euro 0.15 billion in 2013. Both sides have market access through lower duties on tariff-rate quotas, with the EU having substantial access to the U.S. market through country-specific quotas obtained through the WTO. Out-of-quota duties in the United States generally range from 30% – 50%, while EU out-of-quota duties are generally in the 50% – 150%, with some as high as 250%.
Non-tariff measures are a problem for trade, but possibly the most contentious part of the dairy negotiation, after tariff negotiations, will be EU requests for the United States to claw-back the use of certain common names in the US market, such as parmesan or feta cheese, and to accept to market only geographic indications (GIs) made in Europe.
The EU has consistently pushed for the widest possible recognition of its GIs, particularly in the dairy sector.
However it is questionable whether the real value of that limited recognition of GIs, which in all but one case could already be exported without restrictions, is commensurate to the additional concessions given in more significant and exposed sectors.
The United States is a competitive dairy exporter, pushing other countries to remove tariffs aggressively in previous Free Trade Agreements. In contrast, the EU has been reluctant to include dairy in trade agreements, and excluded dairy even when negotiating with inefficient dairy producing countries.
Should this position change with the end of EU milk quotas in 2015, as this will increase EU competitiveness in world dairy markets?
Grain trade is largely composed of U.S. exports to the EU. The United States is a leading global exporter and imports only limited quantities, usually specialty grains or product from Canada. The EU is also a leading wheat exporter, but imports rice and coarse grains and protects all grain markets with substantial tariffs. Some access is afforded to the EU market through WTO commitments under TRQs and limits on the ‘margin of preference’ afforded to EU product compared to imports. U.S. exports to the EU have fallen substantially from thirty years ago. In 2013 U.S. exports were less than Euro 400 million. U.S. tariffs on grain are low. EU tariffs range from 40% to 90% (except for husked rice, which are 10% – 20%).
U.S. maize and maize by-product exports are constrained by the EU GMO policy. This has reduced the largest U.S. grain export and limited the ability of the United States to compete for the EU’s WTO TRQ for maize established as compensation for loss of access during the Spanish and Portuguese accession to the EU.
U.S. rice access to the EU has also benefited from terms negotiated in the Uruguay Round and the accession of the EFTA countries to the EU. Similarly, U.S. wheat exporters have been able to gain some access to the EU market, in particular for high protein and durum wheat. However, the EU soft wheat and rice markets are both protected by high tariffs and complex reference price schemes. Elimination of these tariffs in a bilateral agreement would be a substantial advantage to U.S. exporters. In the case of wheat, the results of the EU FTA with Canada, a direct competitor to the United States for this product, are particularly relevant as EU tariffs will be eliminated for durum and common wheat.
Agreement to eliminate EU tariffs would be a substantial result for the US, even though maize exports will still face EU GMO constraints.
What would be the impact in the EU? Isn’t the EU sector robust enough to face increased competition? What would be the most affected products- e.g. rice?
The EU is a significant importer of soybeans and soybean meal, driven by structural deficits in the EU animal feed sector and a MFN tariff bound at zero in the WTO. U.S. soybean oil exports face moderate tariffs, less than 10%, enough to slow U.S. exports. The United States imports negligible quantities of EU vegetable oils (other than olive oil, reported with the fruit and vegetable sector.)
Despite the zero or relatively low tariffs, U.S. soybean and products exports are restricted by EU GMO policy, as noted above. EU biofuel policy is an even bigger issue in the oilseed sector for biodiesel. The relevance of negotiations in this sector will depend on ongoing regulatory discussions.
Fruit and Vegetables, Nuts and Olive oil
The United States has a growing trade surplus with the European Union in this sector. In 2013, U.S. exports were led by nuts, in particular almonds, pistachios, walnuts), and dried fruits.
Leading EU exports are olive oil at over Euro 0.6 billion and olives at over Euro 250 million in 2013. Some leading global U.S. exports, such as oranges, orange juice, apples, grapes, and stone fruits have limited exports to the EU so far.
U.S. tariffs in this sector are generally low, but a few products are still sensitive to import competition (including olive oil and olives). Olive oil standards could however be a sticking point in the negotiations, as U.S. olive oil producers push for the approval of U.S.-specific standards, which EU exporters believe will disadvantage their exports. EU tariffs are moderate in general, but are substantial for some import sensitive products that are export priorities for the United States, such as citrus (30% tariff), apples and pears (40%), and fruit juices (50 – 150%). In addition, the application of the EU entry price system to these products effectively raises the tariff on low-priced imports to protect high prices in the EU, and reduces imported quantities even as it helps to preserve high prices in the EU market.
There are fewer high profile SPS barriers in this sector, although food safety laws are of growing complexity and concern on both sides.
While in past FTAs, the EU has protected the entry price system for these products, it is possible that the EU may view resolution of SPS issues affecting their products as a trade-off for the entry price system?
Wine and beer
The EU has a substantial trade surplus in wine and beer trade. U.S. wine exports have increased to the EU, but still lag significantly behind U.S. imports. Beer tariffs are zero in both countries (which is also the case for distilled spirits), but U.S. wine tariffs (around 20%) are higher than in the EU (10% or less).
Trade in alcohol products is highly regulated in both countries. The bilateral wine agreement of 2006 envisioned further negotiations to align the two markets, which may occur in the FTA. At the same time, the negotiations are also an opportunity for the EU to raise concerns with additional GI protection.
By how far could the EU wine sector benefit from tariff elimination? Are the remaining GI (use of generics and semi-generics) and regulatory issues a significant impediment to further EU exports?
Other Processed Products
The EU has a positive trade balance in processed products with the US. Exports are led by snack foods, roasted and instant coffee, spices and other consumer oriented products. U.S. exports are led by snack foods, pet foods, and other consumer oriented products. The trade flows reflect the strength of EU brands for quality and niche products and relatively open U.S. market for processed products.
U.S. tariffs on processed products are generally low, unless there are dairy or sugar components in the product. EU tariffs can be substantial, as duties are based on a complex formula takes into account sugar, dairy, and starch components and calculates a duty designed to ensure the level of protection for these base products remains high. This system is generally referred to as the “Meursing Table” and its reform has been a long-standing U.S. objective.
As with reforms of the entry price system, the EU has been reluctant to reduce protection for processed products in bilateral FTAs. This impulse may be shared in the United States with respect to sugar-containing products, an area traditionally protected in the United States and where both parties’ tariffs exceed 100% and where both parties will be concerned about importing third-party sugar incorporated into sugar-containing products.
However, could the elimination of EU sugar production quotas after 2017 point to a more ambitious EU position for sugar and sugar-containing products over the longer term, as more competitive sugar production should expand as a result of this policy? By how much could the EU gain by eliminating tariffs in this area? What would be the impact on ethanol?
Sanitary and Phytosanitary issues (SPS)
It is the inclusion of SPS issues that separates TTIP from other trade negotiations on agriculture. The problem is that the EU and the US have fundamentally different approaches to risk management.
The EU follows the “precautionary principle” which in its eyes justifies banning growth promoters or GMOs (now in many EU member states). The US asserts that it applies a science-based approach. It is difficult to conceive that the EU and the US will be able to agree on this entire chapter.
But it is equally difficult to conceive that SPS issues will be left aside in TTIP. The reason is quite straightforward: tariff concessions can be voided by SPS barriers. Some SPS issues can be addressed and a mutually agreed solution found. But issues like hormones and GMOs have proven far more resilient to agreement.
What are the potential consequences? The case of hormones in beef is illustrative. The EU lost the WTO case, and is now paying compensation to the US. But the compensation deal is being contested in the US, as the benefits have diminished (due to the increased exports of other countries). Beef is one of the sectors where the EU shows a significant gap of competitiveness vis-a-vis the US. Tariff discussions will already be of great consequence.
Will the hard stance of the EU on banning hormone beef make it even eventually harder for the EU sector to limit concessions?
 All 2013 data is for the EU-28.