The European Commission has proposed to increase the EU’s budget for Humanitarian Aid for 2021-27 by an additional 5 billion euros, from the European Union Recovery Instrument. The total budget would raise to 14.8 billion euros for the next 7 years.

Farm Europe welcomes this proposal. In the Commission own words:

“The increased budget reflects the growing humanitarian needs in the most vulnerable parts of the world. The Humanitarian Aid Instrument will provide needs-based delivery of EU assistance to save and preserve lives, prevent and alleviate human suffering, and safeguard the integrity and dignity of populations affected by natural hazards or man-made crises.”

“The coronavirus pandemic further increases already existing humanitarian needs. It has a major health, social and economic impact on societies around the globe, in particular on the poorest countries. It is estimated that up to 265 million people worldwide could be under severe threat of hunger by the end of 2020 due to the effects of the pandemic (OCHA humanitarian needs overview 2020). This requires strong reinforcements to the humanitarian aid budget to meet the growing needs.”

We could not agree more. The EU has a political, social and moral duty to assist those populations.

The EU Humanitarian Aid is provided under Council Regulation 1257/96. Aid is granted through accredited partners (NGOs, national and international agencies). There are no provisions as regards where and how food should be bought, each partner might follow its own rules.

Farm Europe believes there is a strong case for assuring that food bought with the EU Humanitarian Aid funds comes preferably from the EU, and not from other countries. There is little point in our view to use EU money to buy food in other countries, when food is available in the EU and easy to mobilize. All the more, as the European Union Recovery Instrument  main purpose is to sustain the recovery in the EU.

Operating the EU Humanitarian Aid with a community preference when buying food would not diminish or curtail the provision of humanitarian aid. The sole difference, and an important one, is that instead of providing an additional outlet for the agri-food sector in third countries, it would do so for EU farmers and agri-industries.

The US has announced a new package of support to help farmers cope with the brutal Covid-19 crisis. It will include $16 billion in direct payments to livestock producers, fruit and vegetable growers and other sectors, plus $3 billion in commodity purchases. The US government committed to buying every month $100 million in fresh produce, $100 million in dairy products and $100 million in meat products.

May I remind the readers that this package comes on top of a previous Covid-19 relief package, and two other specific packages to cushion the impact of the trade war with China.

The Covid-19 crisis is striking worldwide, and many commodity prices are sinking to farmers around the world. In the EU the crisis is already acute in the wine, dairy, beef, sugar and ethanol, flowers and segments of the fruit and vegetable sectors. It is brewing in other sectors. What has the EU response been so far?

The EU Commissioner for Agriculture told the European Parliament that the Commission had no additional available resources to help. However it would appear that this year’s CAP budget still has a few hundred million euros that could be mobilized. And next year’s budget could still accommodate the funds needed.

We need urgently two things to happen in the EU, if we wish to cope as best as possible with this crisis: we need first to change gear, and quickly move from a wait-and-see attitude to top speed in tackling the crisis, sector by sector; and second we need the additional resources.

Now that the Commission is redrafting its budget proposals for 2021-27, agriculture should not be left behind, just because it did not stop feeding the Europeans whilst most of the economy evaporated.

Before the outbreak of the Covid-19 pandemic we were working on the hypothesis that the transition period, mostly for UK political reasons, would only last till the end of the current year.

Covid-19 dramatically changes the landscape. Negotiations between the EU and the UK, already under a tight time schedule, were interrupted. Their resumption date is a question mark, as we haven’t as yet reached the peak of the pandemic.

Taking the European Parliament new meeting schedule as an example, face to face meetings are not expected to resume before September. It would therefore be impossible to conclude the negotiations on the future relationship, and in particular on the modalities of the Free Trade Agreement, in time.

In addition to that, the pandemic gives the UK Government a strong political argument to justify accepting a prolongation of the transition period, say of one more year till the end of 2021.

Those would be logical, rationale, decisions, and on top of that good news. And we all need good news in these times of distress.

That would mean “business as usual” for the EU/UK agri-food relationship for an extra year. The UK would stay in the single market till the end of 2021, which would give more time to negotiate the best possible future relationship.

I am also moderately optimistic that after the pandemic is over, the focus on the economic pain suffered and how to turn the economy around will make both sides concentrate on their core interests, and on the least possible disruptive arrangements.

The WTO suffered two successive blows: the Appellate Body is paralyzed and the US-China trade deal is a major departure from trade multilateral rules.

The impact might not be immediately felt, but it is potentially huge.

The Appellate Body is a WTO Supreme Court of the sorts that has the final word on adjudicating trade disputes. Without its rulings a party cannot request and eventually apply trade sanctions. The paralysis as from December,10 of the Appellate Body comes after a determined blockage by the US to the renewal of its Members.

What does that mean? A country can commit a violation of trade rules without facing the rule of international law. Blocking some imports, applying illegal subsidies, and other trade restrictive measures, can go on unchecked. The rule of law in international trade is no longer upheld by the highest trade court.

As the EU is the largest trading block in the world, it stands out to be the most potentially affected.

The Commission has taken the matter seriously. Other than attempting to unblock the US opposition, unfortunately to no avail so far, it has worked to create alternative mechanisms, like binding arbitration to settle disputes. But that needs the consent of both parties in a dispute.

The Commission is also proposing to get the power to sanction countries that are found by a trade panel in violation of WTO rules, plugging the whole created by the paralysis of the Appellate Body. That is a welcome move that strengthens the EU. However it will not be effective against the US, China or other emerging large economies, who will hardly accept unilateral trade sanctions from the EU without retaliating.

The other big blow to the WTO comes from the US-China trade deal. This deal foresees that China increases imports from the US in 2020 and 2021, against the reduction and suspension of some of the tariffs raised in the trade war.

On agriculture it foresees that China will increase imports in 2020 by 12.5 bn $ and by 19.5 bn $ in 2021, bringing total US agriculture imports to 40 to 50 bn $ in 2021. To put it in context, in 2017, the last year before the trade war started, the US exported 24 bn $ to China. So the deal foresees almost doubling that amount! Moreover it will have dollar amount allocations to specific groups of products. If China does not comply, the US might snap-back the additional tariffs, according to a specific dispute settlement arrangement.

The US-China deal also reduces SPS barriers to US exports, including accepting hormone treated beef. It streamlines the approval of GMOs in China to a maximum 2 year period. On GIs it allows the US to export products considered generic, and the US to oppose registration of GIs in China.

There are two serious implications from this deal: first, this is managed trade, not free trade under multilateral WTO rules; and second, this displaces other countries from the large Chinese market.

Some question the deal will ever be implemented, or that it will fall short on its promises. The deal might fall apart as a result of renewed US-China tensions, but the fact is that it is structured and equipped to stand. It goes well beyond a political declaration, it has targets and a dispute settlement mechanism that can be quickly activated. So we are well advised to take it seriously.

Although both the US and China claim that the deal respects WTO rules, it can only work through directed Chinese State trade purchases, which will displace normal free trade flows. Both the US have the capacity to double its agricultural exports to China, and China to accommodate those imports. What it takes is for China through its State controlled economy to direct more imports from the US to the detriment of the others – e.g. the EU, Brazil, Argentina.

When such large and powerful countries like the US and China flout multilateral trade rules and engage on managed trade, the WTO is seriously at risk.

For the EU, other than this systemic risk, comes the hard fact that its agri-food exports will to a large extent be displaced from the Chinese market to give way to US products. In 2018 we exported 10 bn euros worth of agri-food products to China, and trade was bound to be increased with the pork crisis. Now EU exports will come second after the US.

We have written before on the issue, underlining the difference of treatment between farmers in the US and the EU. In the US farmers were twice compensated for the losses that accrue from the trade war with China. In the EU farmers are left on their own after the US retaliation on the Airbus subsidies case, where whereas they were not part and parcel of the dispute, they were still the main target of the sanctions.

Now it is becoming clear the impact of the US compensation packages are having on US farmers. According to a host of economic analysis the US Administration has overcompensated farmers by about the double of the losses incurred. The Administration does not actually dispute that fact, they explain instead that they have made their calculations on gross rather than net trade losses, which miss the fact that the US found to a certain extent alternatives to the losses in the Chinese market.

The result of these compensation packages on farmers’ incomes is big. Across the US, farm income is expected to rise more than 10% this year, and 40% of that income will come from Government subsidies (both from the Farm Bill and the trade compensation packages). It is true that Presidential elections are coming in the US, but the fact is that farmers are looked after when they face collateral damage from trade disputes.

Meanwhile in the EU farmers are facing an expected drop in the CAP subsidies, and total inaction from the Commission to prop up the resilience of the sector.

The US trade sanctions following the Airbus case are already heavily impacting dairy and wine exports to the US. Unfortunately as late as last week the US opened up an internal consultation on whether to increase the additional tariffs to 100% from 25%, and on whether to enlarge the scope of the sanctions including to other agriculture products. Are in particular targeted cheeses (those not yet impacted), bulk olive oil and bulk wine, sparkling wines and whiskies, hams and pasta.

This potentially new round of sanctions is within the US WTO rights, as the first round was well under the maximum amount of additional duties authorized (7.5 bn $), and might be a warning shot against the determination of the EU to apply its own round of sanctions following an expected WTO determination against Boeing subsidies. If both sides do not find an agreement on the aviation subsidies the future is bleak for our exports to the US. Dairy, wine, olive oil will likely be completely blocked, along with other products.

I haven’t even mentioned here the threats to France from the GAFA taxation issue, nor the automotive dispute Damocles sword still hanging over EU-US trade.

Will the Commission go on looking the other way whilst trade sanctions pour on the agriculture sector? Will the gap on the way farmers are treated across the Atlantic go on getting larger?

THE HEAVILY IMPACTED AGRICULTURE SECTOR SHOULD GET MUCH NEEDED HELP

The US retaliation list has been published, and as unfortunately I had anticipated it is loaded against EU agriculture exports to the US.

Although the dispute is on aircraft subsidies, agriculture leads the list of the products targeted, with roughly the double of the trade impact than all the others products added together, including aircraft.

The retaliation list is also heavier on additional tariffs for the agriculture products than for aircraft – 25% as compared to 10%.

The US has been careful to minimize the impact on its economy by exempting some items that are imported bulk and bottled in the US. It has also left room for expansion and/or deepening of the sanctions, either by expanding the product coverage, or by increasing the amount of the additional tariffs. That might be a tactical move to prevent or anticipate any EU retaliation prior to the expected decision on the “sister” case against Boeing, and to increase its negotiation leverage then after.

Dairy is heavily impacted, as are wine and whiskey, olive oil and olives, pork, hams, biscuits, jams and some fruits.

The EU dairy sector, including many cheese GIs, bears most of the blunt. The impact of a 25% additional tariff on EU exports is not easy to anticipate. It will be a mix of lower exports as products become more expensive in the US, and a reduction of margins for EU exporters, eager to minimize loss of volumes and markets even if that means giving up on profits.

In the end there is little doubt that the negative impact will be passed on to the producers, negatively impacting their incomes.

What also strikes me as well is the lack of support to cushion the sector from this blow. Whereas in the US the negative effects of the US-China trade war on US farmers were compensated twice by sizeable subsidies, in the EU there is no such talk, no initiative on sight from the European Commission. Could the fact that the current Commissioner for Agriculture will be the next Trade Commissioner help in proposing a package of support to those affected, in particular to the farmers? Let us not forget that they had no part on the subsidies found illegal by the WTO, but they are the ones who will lose the most.

The European Commission should calculate the actual loss of agriculture exports targeted by the retaliation list to the US, in the months to come, and devise a support package that would compensate the farmers affected. It should not just monitor the EU domestic markets and intervene only when drastic price drops are on the record, as that will miss the actual losses of those affected by the trade retaliation.

By Joao Pacheco

The “hot autumn” for trade that we predicted in a previous post gets dangerously close, as it would seem the US got the WTO final green light to apply sanctions to EU exports, on the Airbus subsidies case.

The EU might also get the opportunity to impose its own sanctions when a final decision is reached in the WTO in the next few months on the Boeing subsidies case.

It would seem logical that the US and the EU find a compromise rather than sanctioning each other, but that hasn’t happened so far.

According to preliminary information the US might impose sanctions in between 5 to 10 bn euros. The list of targeted products is already known, and many agri-food products are on the spot. Wine, dairy (in particular cheeses), olive oil and olives, are the most significant.

With that high level of authorised sanctions the US can effectively block all EU exports of those products. The latest figures available show that for cheeses, wine and olive oil, the EU has exported yearly roughly 5.8 bn euros. It should be noted that the sanctions are accounted for in tariff value, not in trade value. The US can apply different tariffs to different products, and the calculated value of the tariffs can be as high as the authorized amount of sanctions, and thus the value of the trade actually sanctioned can be much higher.

The EU sanctions to come on the Boeing case are of little help to the sector. Although they concern a wide range of US agri-food exports, including wine and cheeses, the fact is that the EU exports more of these products to the US than what she imports.

The sector should push the European Commission to find a compromise with the US, but the fact is that you need two to tango and the Trump Administration seems to prefer confrontation first.

The autumn starts soon, and the streak of bad news could include a no-deal Brexit. Time to re-think the CAP reform and beef-up the resilience of the sector with a real crisis fund?