The Effects of EU’s CAP on Thailand’s Exports to Europe The Effects of EU’s Common Agricultural Policy on Thailand’s Exports to Europe Supansa Kajavong Introduction Agriculture is the basis of civilization and it continues to play an important role in international trade today. It has an historical and biological significance. Humans have to eat in order to survive. Societies and civilization occur because humans no longer have to spend the majority of time hunting and gathering food. Without food due to wars, droughts or floods, society is brought hardship, as well as political and social unrest. Farmers, therefore, hold a special role in the society, providing food and national security. Even one of the world’s most developed regions has a comprehensive common policy to support its small number of farmers and the rural areas. For the European Union (EU), agriculture is a necessity and thus the creation of a Common Agricultural Policy (CAP). The European Union is a major trader in the world, not only in services and industrial goods, but also in agriculture. It is the world’s biggest importer of agricultural trade and the second largest exporter of agricultural goods. With the size of the EU, it is inevitable that a domestic policy, such as the CAP, concerning agriculture and its farmers would affect the world. As the CAP became more and overly efficient, concerns were raised about the environment, budget, and the effect it has on developing countries that depend on agricultural exports. Through its measures, the CAP has distorted the idea of comparative advantage. The EU, with its high Community price, turned itself into a leading exporter, putting developing countries at risk and out of the competition. Thailand is one of the world’s traditional exporters of agricultural goods. It has cheaper labour costs and the climate is suitable for rice, tropical fruits and vegetables, and cereal substitutes such as tapioca or manioc. The EU does not produce these tropical products, but may produce other varieties that grow in a temperate climate. However, the EU has agreements with countries that do produce tropical goods, i.e., African, Caribbean and Pacific (ACP) countries and Least Developed Countries (LDCs), and gives them a better market access than other developing countries. Thailand is also a major producer of sugar, which was high on the EU’s list of protected agricultural goods. This research will try to find out about the CAP’s effects on Thailand’s agricultural exports. The research will be divided into four parts. The first section will cover the history of the Common Agricultural Policy, its mechanisms and the general effects it had both from within and outside the EU. The second section will look at Thailand’s trade relations with the EU. The third section will cover the effects of the CAP and other EU’s trade policies that affect Thailand’s specific goods, such as rice, sugar, fruits, vegetables, tapioca, 55

The Effects of EU’s CAP on Thailand’s Exports to Europe shrimps, and chicken. It shall also look at future implications from the latest Enlargement and the Doha Development Agreement and its effects on Thai exports. Lastly, the paper will conclude and give recommendations on how Thailand can improve its competitiveness in exporting to the EU. 1. Beginnings of the CAP European integration began after the Second World War. The European Coal and Steel Community (ECSC) were formed between six member countries with the Treaty of Paris in 1951: France, Germany, Italy, Belgium, the Netherlands, and Luxembourg. It was an attempt to boost the economy and promote integration that would also prevent future rearmament by any members. Further developments in integration were the Treaty of Rome in 1957 that created the European Economic Community (EEC). Already with the Treaty of Rome, plans for a Common Agricultural Policy in the common or single market were made. Article 38 mentions that “The Common Market shall extend to agriculture and trade in agricultural products” while Article 9 “The Community shall be based upon a Customs Union”. The two Articles have several implications. Firstly, it implies that there would be a common policy for agriculture, with common prices. Secondly, a Customs Union, which is a form of economic integration in which all trade barriers between member states are removed while maintaining a common barrier with third countries, would have implications in the future on the international world agricultural market (Goodman 1996). 1.1 Objectives and Principles of the CAP Article 39 of Treaty of Rome 1957 set the objectives of CAP as follows: 1. To increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilization of the factors of production, in particular labour. 2. To ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture 3. To stabilize markets 4. To assure the availability of supplies 5. To ensure that supplies reach consumers at reasonable prices. At the Stresa Conference in July 1958 the objectives were put into operation through these three principles: •

Market Unity: a single market with common prices and free trade; no barriers on trade within the Community in farm products.

56

The Effects of EU’s CAP on Thailand’s Exports to Europe • •

Community Preference, a system of tariff barriers to protect the internal market from the instability in world markets; preference for EC supplies rather than world supplies. Financial solidarity, to create a fund that would finance common expenditures in agriculture. Each member state has a financial responsibility for CAP policies.

1.2 Mechanisms of the CAP The Common Agricultural Policy came into working in 1962. In order to assure that the three principles are functional, the CAP adopted a set of mechanisms to control the markets for agricultural products within the European Community. For Market Unity, Common Organizations of Market (COMs) were set to govern the production and marketing of crop and livestock products such as wheat, barley, rye, corn, rice, sugar, dairy products, bovine meat, pork, lamb, wine and some fruits and vegetables. The CAP used a market or price support system to provide a guaranteed price or target price for farmers to sell their products. The market did not determine the price levels, but the Community civil servants and politicians at the European Council of Ministers did so each year for different products (Fouilleux 2003).

Source: Ritson and Harvey (1991)

The above diagram shows the main mechanisms of maintaining the target price, both through imports and exports. Although the target price differed with the product, the general workings of a CAP market support system are the same. If the prices fell below the target price to the intervention price, due to excess in supply over demand, the intervention agencies at the national level would step in and buy the surpluses to raise the price to the intervention level again. The surpluses would then be stored and re-released into the domestic market or exported to the rest of the world. Through this process, three of the CAP objectives were achieved. Firstly, it would boost agricultural production, thus fulfilling the first and fourth objective of Article 39 of Treaty of Rome. Secondly, it would support the farmers’ income, which is the second objective. Technically, the EC’s agricultural produce would not be able to compete on the world market, since the world price is much lower than the Community price. Farmers would have to sell at a loss, or much lower than the 57

The Effects of EU’s CAP on Thailand’s Exports to Europe target or intervention price in order to compete with the world. However, reducing farmers’ income was not needed. Farmers could receive export subsidies, which would cover the difference between the higher European intervention price and the world price, so producers could sell at world prices and not suffer a loss in income. The export model ensured that the internal market prices were kept near the target level and never below the intervention level. When the Community was not self-sufficient enough in a commodity, it needed to import. However, if cheaper world prices flooded the market, the Community agricultural products would not be able to sell, and might have to lower the target price. It is then better to raise the world prices to the level of the target price. An import levy is imposed on agricultural products. Imports could only enter the common market if it was priced at or above the entry price or the minimum import price level set by the Council of Ministers. It is set a little below the target price to take the transportation cost into account. The import levy is the difference between the minimum import price and the world market price and varies according to the fluctuations of the world market and supply (Ritson and Harvey 1991). Another instrument of the CAP is by subsidizing production. Subsidies were given to farmers for growing particular crops, so farmers could not choose what they wanted to produce, what the market wanted, what the consumers wanted, and what would be most profitable for them. They were encouraged to grow these crops and maintain homegrown supplies and were paid according to the area of land growing a particular crop, rather than the total amount of crop produced. Nonetheless, it encouraged overproduction (as more production of the specified crop would give farmers more money), environmental concerns, and dissatisfaction among farmers, which led to later reforms. For the last of the three principles, Financial Solidarity, a common fund was set up to finance the CAP. The European Agricultural Guidance and Guarantee Fund (EAGGF) is comprised of two parts, the Guidance part and the Guarantee part. The Guarantee part covers the costs concerned with the market system, such as the expenditure for export refunds or intervention actions. Since 1993, however, it included costs of measures that are not directly related with the market system, such as set-aside of land, income support, and environmental protection (European Parliament Fact 2000). The Guidance section is much smaller and funds socio-economic or structural policies, which is to help with the rural sector and the number of people working on the farm. Originally, the EAGGF covered the entire budget of the European Community, which is around 1% of the Union’s national wealth. Although it seems like a small amount, for an economic giant such as the EU, 1% is around one hundred billion Euros. It was only in the 1980s that the proportion of the budget spent on agriculture decreased to 65.1%, and finally to 53.8% in 2000 (Fouilleux 2003). It continued to fall and it is now 47% of the total EU budget 58

The Effects of EU’s CAP on Thailand’s Exports to Europe in the diagram below (Agriculture + Rural Development and Environment section).

Source: European Commission 2006

1.3 Internal Impact of the CAP and its Reforms The CAP came into force from 1962. The mechanism of a guaranteed price system was very costly and wasteful, causing criticisms both from within and outside the EU. There have been several reforms, such as the MacSharry Reform in 1992, Agenda 2000, and the June 2003 reform. Each of the reforms was to address the growing problems that arise with the CAP within the EC, some of which are oversupply and overproduction, budgetary problems, environmental concerns, social inequality, and dissent from developing countries that depend on agricultural exports for their economic growth. The reforms had not always been easy, as farmers’ unions had a very strong say in how the CAP was done. The first impact of the CAP is overproduction. As support was linked to production, the more farmers produced, the more support they got. The CAP was an incentive to produce, and with better technology, it became easier to overproduce. As the market could not absorb anymore, the products get exported through export subsidies, depressing the world market. The export expenditure grew yearly and outweighed import levies, which was to be a source of revenue. By 1991, the percentage of import levy as a percentage to the Guarantee expenditure was less than 5% EAGGF Guarantee expenditure (in ECU) 1976 5721 1980 11315 1984 16543 1988 28830 1991 33306 Source: Ingersent and Rayner (1993) Year

Import Levy Receipts (in ECU) 1040 1535 1947 1505 1218

59

Import Levy receipts as % Guarantee Expenditure 18 14 12 5.2 3.7

The Effects of EU’s CAP on Thailand’s Exports to Europe Consumers and taxpayers began to voice their discontent with overproduction and the spending of the CAP. The mountains and lakes of food surplus were wasteful. Food prices were higher for them than world prices. The CAP only benefited a particular group of workers: farmers. The CAP expenditure covered a huge part of the EC’s resources and it could have been used for other purposes. In addition, the CAP was thought to produce incentives for intensifying farming practices, causing harm to environment and creating diseases such as the ‘mad cow’ disease (BSE) and putting dioxins in chicken. These concerns affected both consumers and environmentalists. In order to cope with overproduction, the Delors Reform in the 1980s and the MacSharry Reform in 1992 provided some limits. The “guaranteed ceilings” and milk quotas were first introduced in 1981 and 1984. These quantitative restrictions on the production were meant to put a limit on production and help ease the budgetary problem. The MacSharry Reform in 1992 introduced direct payments to replace the high guaranteed prices for agricultural products to farmers for the first time. The direct payments “decoupled” or severed the link between production and support. The target prices have also been drastically reduced. The CAP no longer provided incentives to overproduce. Environment preservation became linked to support with Agenda 2000 and June 2003. Direct payments, or “single farm payments” are based on previous production levels and linked to environmental, food safety, and animal welfare. Farmers were to farm in an environmentally sensitive way or otherwise face reduction in their support (cross compliance). Other payments were given for “set aside” land, or land not being farmed within a period, in order to withdraw land from production. Payments were also made to encourage retirement and forestation. “Sustainable development”, “quality focus”, and “multifunctionality” meant that farming was not only about production, but also included “non-production” aspects, such as the social, cultural, territorial, and environmental dimensions (Fouilleux 2003). Social equality also became an issue with direct payments. It became transparent that the price support system was concentrated on the largest, most productive, and often the wealthiest of farms. Eighty per cent of support provided by the EAGGF went to 20 per cent of farms (Ingersent, et al. 1988). To address the issue, later reform made it compulsory for Member States to “modulate” or reduce direct payments for bigger farms and transfer them into rural development measures, based on the single payment scheme. Direct payments exceeding EUR 5,000 a year would be reduced, by 3% in 2005 to 4% in 2006, and 5% in 2007 and onwards. The CAP expenditure would still go mostly to direct payments to farmers and market management measures, but with a tight budgetary ceiling; it has been frozen, in real terms, until 2013.

60

The Effects of EU’s CAP on Thailand’s Exports to Europe 1.4 External Implications of CAP The CAP also had impacted world trade. For some countries, it had been beneficial, but for others, it had been harmful. The export subsidies and Community preference allowed the EC to export its agricultural products, while securing its agricultural market. For developing countries, that meant that they had trouble exporting their own goods to the EC, as they had to pay the import levy, and on the other hand, they had to compete with EC products in their own domestic markets. Unfortunately, the EC was a huge economic power, and state intervention involved huge amounts of support that the developing countries could not match. The overproduction and the export of surpluses depressed the world market prices. The developing countries could not export as much as they wanted to and experienced lower economic growth. It also de-motivated farmers from developing countries to produce and many eventually left the sector. The Community market was insulated against the fluctuations in the world market, while its fluctuations were felt worldwide. The world market price may rise and fall due to the changes in world production and use, but the import levy could vary and minimize the fluctuations. However, changes in the Community supply would be felt by the world market, due to its size and the lack of mechanism such as the CAP. The Community was thus, under international pressure to reform the CAP and also by its desire to strengthen its bargaining power. 2. EU and Thailand’s Trade Relations For Thailand, the European Union is a very important trading partner. It ranks in the top 4 of Thailand’s trading partners, along with ASEAN, the United States and Japan. Thailand has no Preferential Agreements with the EU, but more than half of its exports enter the EU duty free as a result of the Most Favoured Nation (MFN) treatment of the WTO or the General System of Preference (GSP) rate, which the EU gives to developing countries in order to increase their competitive edge with developed countries. This is important because Thailand’s economic growth is usually linked directly with its exports and the EU is a very attractive market. The EU is the world’s largest single market. It now has 25 member countries and a population of 450 million people with high purchasing power. As long as Thailand complies with the EU’s customs tariffs, standards and rules, it can export to all the countries in the EU. The EU is also the biggest importer in global agricultural trade (Delegation of European Commission to Thailand). Thai exports to the EU accounts for 12.9% of 110,883 million US dollars worth of total exports; it used to be as high as 15.8% in 2000. Thailand has a trade surplus of 3,829.3 million US dollars in 2005, a decrease of 19% from 2004 (Ministry of Commerce).

61

The Effects of EU’s CAP on Thailand’s Exports to Europe

Million US Dollars

Thailand's major export markets 30000 25000 20000 15000 10000 5000 0

Japan US EU ASEAN 1986 1989 1992 1995 1998 2001 2004 Year

Source: Ministry of Commerce

Thailand has experienced rapid industrialization in recent years. Between 1997 and 2002, the industrial sector’s exports increased the most by 5.2%, followed by 3.8% for services and 1.2% for agriculture (Agriculture and Agri-Food Canada 2004). The major Thai exports to the EU are manufactured goods such as machinery and automobile and electrical parts. As can be seen in the table below, the manufactured exports are worth about 5–6 times more than agricultural exports to the EU. The agricultural sector makes up only 8.7% of Thailand’s total GDP (preliminary result November 2005) (Bank of Thailand 2006).

Source: EU Commission (2005)

Despite these factors, agriculture still plays a very important role in Thailand’s economy. A lot of people depend on agriculture for food and living. Thailand’s agricultural sector produces enough for domestic consumption and there is less need to import. The sector, thus, contributes to the trade surplus. It also provides jobs for a lot of workers. During the financial crisis in 1997–1998, the sector absorbed a large number of displaced workers and evaded some of 62

The Effects of EU’s CAP on Thailand’s Exports to Europe the social costs (FAO 2003). Today, agricultural farming alone employs around 13 million workers or 37% of Thailand’s working population (NESDB 2006). Thailand depends on agricultural exports for economic growth, employment and living. As it is an exporter of agricultural products, Thailand would benefit from a global system of free trade without distortions, though not all trade distortions have been harmful for Thailand’s exports. Thailand was able to export a huge quantity of tapioca or cassava to the EU as a result of the CAP. Tapioca was a better animal feed than the expensive EU produced cereals under the guaranteed price system. However, the CAP did affect most of the other Thai exports, such as rice, sugar, poultry products, and fruit and vegetables (FAO 2003). 3. Effects of the CAP on Specific Agricultural Exports There are many factors that could affect trade between the EU and Thailand. The EU policies such as the CAP, the Enlargement in 2004, the GSP, Preferential Trade Agreements with African Caribbean Pacific countries (ACP) and Least Developed Countries (LDCs), and Sanitary and Phytosanitary Measures (SPS) could affect trade. The World Trade Organization (WTO), in turn, also affected some of the EU’s policies. Other factors include natural disasters, such as floods and outbreaks of diseases, which can influence the production of crops or the amount of consumption. Economic factors, such as a financial crisis and a devaluation of the currency, could also boost export demands, especially in 1997–1998. It is difficult to determine the exact effects of CAP reforms on Thai export figures for the years 1988–2005, as there are many factors, such as the ones above, that could influence the overall picture. Instead, this paper will look at specific agricultural exports of importance to Thailand—tapioca, rice, sugar, shrimp, chicken, fruit and vegetables—and look at the recent reforms and developments. Gradually, it will become clear that it is almost impossible to single out the CAP’s effects and the extent of its impact from other factors. 3.1 Tapioca Tapioca still accounts for a lot of Thai export value, 52.8 million US dollars in 2005. However, the number has been coming down since 1989, due to various factors. Droughts, cuts in the cultivated area (from 1.4 to 1.3 million hectares in 1995), harvesting of immature roots of low starch content, a shortage of farm labour, and a growth in domestic demand for tapioca starch and flour were some of the domestic factors that reduced the amount of export. External factors were the effects of the CAP reform, which brought the Community’s domestic grain prices closer to world market levels. It reduced the demand for tapioca as a cereal substitute, and high freight rates and an agreement in 1995–1998 with the EC fixed an annual quota and limited the total of exports to 21 million tons within the period of 4 years (FAO 1995). Thailand

63

The Effects of EU’s CAP on Thailand’s Exports to Europe never regained its peak in tapioca exports, largely due to the reduced demand in the EU.

฿1,500 ฿1,000 ฿500 ฿0 20 03

20 00

19 94 19 97

Tapioca

19 91

19 88

Million US Dollars

Thailand's Tapioca Export to the EU (1988-2005) in Million US Dollars

Year

Source: Ministry of Commerce

3.2 Rice Thailand is a major producer of rice. Thai rice faces competition from all over the world. The EU imports rice mainly from the US, ACP countries, Thailand, and India. The EU, mainly Italy, Spain and Greece, are also producers of rice. The EU is not one of the largest consumers of rice, but rice is one of Thailand’s major agricultural exports to the EU, worth around 100 million US dollars in 2005.

200 150 100 50 0

Rice

19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04

Million US Dollars

Thailand's Rice Exports to the EU (1988-2005) in Million US Dollars

Year

Source: Ministry of Commerce

Thailand faces competition not only from the EU itself that produces rice, but also the ACP countries and LDCs, which receive preferential agreements with the EU. ACP, in the past, received a 35% reduction of normal duty on milled rice and was granted a large sum of quota, in addition to TRQ or Tariff Rate Quota. The recent “Everything But Arms” Agreement in 2001 with the LDCs meant that their produce would be able to enter into the EU duty free. From 2006 onwards, LDC imports would receive significant tariff reduction and could contribute to a majority of EU rice imports and replace other rice exporters. An exception is the Basmati rice from India and Pakistan that enjoys 64

The Effects of EU’s CAP on Thailand’s Exports to Europe a huge EUR 250/t reduction in duty because it is of a very high quality and enjoyed an increase by 20% between 1998 and 2000. (See Annex A) The world trade negotiations also influence the rice import regime. In accordance with GATT Article 28, the EU negotiated with the US and Thailand for husked rice and milled rice, and India and Pakistan for husked rice. The agreement establishes bound rates for husked rice, broken rice, and semi-milled and milled rice. For the later two, the EU will adjust every six months the applied tariff rate to EUR 175/t, or EUR 145/t based on actual imports and reference import level. Thailand will receive 4,313 tons of 0 duty quota in the share of 13,500 tons. For broken rice, it will receive a duty of EUR 65/t (an increase from EUR 45/t) and an increased reduced duty quota from 80,000 tons to 100,000 tons (European Commission Press Release 2005). As a result of the Enlargement in 2004, Thailand faced increased tariffs as the new member states adopted the EU rates. As compensation for the lost exports in the past two years, the EU gave increased duty-free access for Thai exports in rice, canned tuna and sardines. For rice, there were additional quotas of 1,200 tons for white rice and 31,788 tons for broken rice, with no time limit. Additional annual duty-free quotas for paddy rice (7 tons), husked rice (1,634 tons), semi-or wholly milled rice (25,516 tons) and broken rice (31,788 tons) will be open to exporters worldwide on a first-come-first-served basis. The measures would be implemented this year before July (The Nation 2006). 3.3 Sugar The EU is one of the largest producers of sugar, following India and Brazil. Sugar is produced in almost all Member States of the EU-25 with a few exceptions. The CMO for sugar has not undergone any major changes for 40 years. It is supply managed (quota controlled), price controlled (intervention mechanism and minimum price), and high border protected (the EU revenue, in part, comes from sugar levies). The EU sugar producers enjoy the protection and the benefit from the high domestic prices, as they are 2–3 times higher than world market prices. The high MFN tariffs made exports to the EU difficult without preferential trade arrangements. The EU has many preferential trade arrangements with other countries. Since 2002, sugar from the Western Balkans can be imported to the EU at zero tariffs. The Everything but Arms Agreement in 2001 gave an increasing quota of sugar from the LDCs and a liberalized market in 2009. The Sugar Protocol is a bilateral agreement between 20 ACP countries and the EU, in effect since 1975. The EU is committed to import a fixed quantity of 1.3 million tons of sugar, duty free, at a guaranteed price (intervention price = 523.7 euro/t raw sugar). A similar agreement was made with India to import 10,000 tons. The Special Preferential Sugar allows Sugar Protocol beneficiaries and India to export 300,000 tons per year to the EU, duty free. In addition, the ACP and Indian exports of sugar to the EU could be re-exported to the rest of the world with the EU’s export refund, at a volume of around one million tons. 65

The Effects of EU’s CAP on Thailand’s Exports to Europe The WTO ruled in favour of Australia, Brazil, and Thailand’s complaint against the EU’s sugar export regime in 2003 (European Commission 2004). The latest EU CAP reform on sugar will be in compliance to the WTO ruling and will make its sugar sector more competitive in the future. There would be a 36% cut in the guaranteed minimum sugar price, the intervention system would be abolished, and the restructuring fund was to encourage uncompetitive sugar producers to leave the industry. As a result, EU production is expected to fall by 6–7 million tons from the current 18–20 million tons. EU– 25 sugar consumption is around 16 million tons. It is very likely that future domestic sugar needs would be met by European production and imports from the EU’s ACP and LDC preferential agreements (European Commission 2006). The new reform will have effect on 1 July 2006. For the year 2006, more sugar exports are expected for Thailand. Currently, five sugar mills are closed in Ireland, Poland, Germany and Slovakia. Italy’s 13 out of 19 mills are also expected to close. Australia also has a cut in raw sugar output of 500 000 tons due to Cyclone Larry. According to an article (Bangkok Post, April 7, 2006), the decline in supply from these sources will raise the price of sugar on the world market and benefit Thailand, as a leading sugar exporter. 3.4 Fruits and Vegetables The EU is an attractive market for fruits and vegetables. The consumers are affluent and there is demand for fresh fruits and vegetables all year round. The EU also imports a lot of fresh fruits and vegetables from the rest of the world. Thailand’s fresh pineapples and canned pineapples are major export items. Other fruits, such as mangoes and durians, as well as vegetables, are famous for their taste and are also used in Thai restaurants.

60 50 40 30 20 10 0

Chilled, Frozen, Dried Fresh Vegetables Chilled, Frozen, Dried Fresh Fruit

19 88 19 91 19 94 19 97 20 00 20 03

Million US Dollars

Thailand's Fruit and Vegetable Exports to the EU (1988-2005) in Million US Dollars

Year

Source: Ministry of Commerce

As can be seen from the graph, Thai fruit and vegetable exports to the EU have increased quite rapidly the past two years. Some challenges may come from the internal political pressure from the EU’s Mediterranean Member States 66

The Effects of EU’s CAP on Thailand’s Exports to Europe to limit imports, as they are themselves producers of fruits and vegetables. However, Thailand’s fruits and vegetables may not be in direct competition with the EU produce because the EU exports mainly potatoes, tomatoes, grapes, and apples, while Thailand produces tropical fruits, such as durian and mangoes, and vegetables not found in the EU. With regard to this sector, there are many “red tape” obstacles. The high MFN tariffs and the exceptions to countries with special arrangements with the EU might deter Thai exports, as they compete, for example, with ACP countries’ produce. The EU’s average bound tariffs are relatively low compared to the rest of the world; the “seasonal nature of tariffs and trade arrangements poses severe restrictions on increasing exports to the EU”. Although there is export subsidizing, Thai produce and EU produce are not in direct competition, so it would not affect Thailand’s exports (Kelch 2004). Thailand, however, has to be careful with the Sanitary and Phytosanitary Measures (SPS), as Thai products are facing tougher requirements on the international markets. Chicken, and fruits and vegetables need to be ensured that they do not have high insecticide remnants and are safe for the highly health conscious demand of the EU. 3.4 Chicken

Chilled and frozen chicken

03

00

20

94

97

20

19

91

Processed Chicken

19

19

88

350 300 250 200 150 100 50 0 19

Million US Dollars

Thailand's chicken exports to the EU (1988-2005) in Million US Dollars

Year

Source: Ministry of Commerce

Although chicken is part of the poultry CMO, the decrease in frozen chicken exports the past two years was not due to the CAP but due to the outbreak of the bird flu virus, or H5N1. Consumption and demand in the EU have decreased for raw or frozen chicken, from 170 million US dollars worth in 2003 to a mere 7.3 million US dollars in 2005. On the other hand, cooked and semi-cooked chicken became an attractive substitute, as it was less likely that the disease would be present after it was boiled or semi-cooked. It brought the demand for processed chicken to a new level. The export value to the EU jumped from 198 million US dollars in 2003 to 321 million US dollars in 2005. 67

The Effects of EU’s CAP on Thailand’s Exports to Europe 3.5 Shrimps Thailand exports a huge amount of shrimps to the EU. Although shrimps are not a part of the CAP, it clearly illustrates that a change in EU’s import tariffs could mean a difference to Thai exports. Thailand used to be a huge exporter of shrimps to the EU. In 1999, however, the EU believed that Thailand had “graduated”, which meant that Thailand no longer needed the Generalized System of Preference (or GSP). Instead of having a 4.2% rate, Thai shrimps then had the normal 12% rate. The number for 1999 was 71.5 million US dollars, compared to the previous year of 145 million US dollars; it was a 50% decrease because it could not compete with shrimps from Vietnam, Indonesia, and the Philippines, for example, which enjoyed the GSP rate.

250 200 150 100 50 0

Chillled and frozen shrimp

19 88 19 91 19 94 19 97 20 00 20 03

Million of US dollars

Thaliand's shrimp exports to the EU (1988-2005) in Million US Dollars

Year

Source: Ministry of Commerce

The shrimp business could also be influenced by a number of factors. It is highly elastic to income; the more money people have, the more they would eat shrimps. If the world economy were in recession, then it would lower shrimp export prices. In 2001, the EU increased its inspections on shrimp exports as a result of having found chemical residues in shrimp exports from other parts of Asia. In 2002, Thai shrimp production fell even further due to disease and unfavourable conditions such as the weather, high salt concentrations in water, and slow shrimp growth rates. The tsunami also hit Thailand in 2004, affecting the people along the coast and shrimp exporters. The EU decided to help the Thai shrimp industry and made the Autonomous Measure effective in September 2005, giving Thailand back its GSP rate, which increased Thailand’s shrimp exports by the end of last year (The Government Public Relations Department 2005). For this year, it is expected to be a year of revival for the shrimp industry. The Thai shrimp hatcheries damaged by the tsunami will function again by June. In addition to the GSP rate, Thailand was able to meet the EU’s food hygiene standards and should have an edge over competitors such as India and Bangladesh, who failed to meet them. Shrimp prices were expected to be high and exports should increase quickly in the second half of the year. However, Thailand will also be facing tougher competition from Vietnam, 68

The Effects of EU’s CAP on Thailand’s Exports to Europe India, Malaysia and the Philippines, countries that have difficulty in the US market. An article (ThaiDay, January 22, 2006) quoted the suggestions by a think tank that the Thai shrimps industry should try to explore new markets, such as Canada, Australia, and Switzerland. 4. Future Implications In a globalised world, a nation has to be even more aware of what is happening in the world. One event could trigger effects on another’s economy. With the EU, which is a large economic player, it is especially important to follow its developments and policies. Ambassador Friedrich Hamburger of the Delegation of the European Commission in Thailand once remarked, “It matters for Thai industrialists and politicians alike to identify today’s trends in Europe that may affect Thailand tomorrow” (Delegation of the European Commission in Thailand 2005). It is important to look at the EU’s position on the DDA and the CAP for the new Member States as a result of Enlargement. 4.1 Doha Development Agenda (DDA) The world is moving for a more liberalized market with the WTO’s DDA. As set out in the 2001 Doha Ministerial Declaration, the aim is to further liberalize agricultural trade by having “substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support” (WTO 2005). For market access, it meant cutting tariffs and expanding tariff quotas. For export subsidies, they must be eliminated and uncovered from hidden export subsidies in export credit, food aid, and state trading enterprises. For domestic support, those that are linked to production and stimulate over production by artificially raising or lowering prices should be cut. Those supports that could distort trade should be within well-defined terms. Countries should compete on quality and price rather than these distorting measures. The EU’s CAP used to be a much more protective agricultural policy. Recent developments and previous reforms showed, however, that situation and aims had changed. The EU believes in multilateralism and is a big supporter of the WTO. Its CAP reforms continue to move support away from production to the single payment scheme, with an environmental focus. It grants the largest amount of duty and quota free access to the products of least developed countries, more than any other developed countries (Commission 2005). It has also agreed to eliminate export subsidies by 2013 at the Hong Kong Ministerial. Thailand has never approved of export subsidies on agricultural products, as it is one of the traditional agricultural exporters. It is a part of the Cairns Group, a group of 14 countries, which calls for the prohibition on all forms of export subsidies. As a developing country, it is still possible to provide subsidies to lower internal transport and marketing costs, and external freight costs. As Thailand is self-sufficient in agriculture, it will benefit when trade in agriculture becomes liberalized (FAO 2003). However, by then the national 69

The Effects of EU’s CAP on Thailand’s Exports to Europe government might want to make sure that it would not result in a shortage of domestic supply. 4.2 Enlargement EU’s Enlargement in 2004 is the biggest enlargement yet, bringing in ten new Member States and four million additional farmers. Some of the new Member States are producers of tropical fruits, such as Cyprus and Malta. Some, like Poland, have a very large agricultural sector. As internal trade volume could be very high, the new members could be substituted for some of Thailand’s exports. In the future, the new member states could be very competitive as a result of the CAP and the EU’s cohesion policy. On the other hand, it could also be beneficial in providing a larger EU market for Thailand. The CAP reform was to be immediately effective, to stabilize and increase these farmers’ income, but with a number of restrictions. Firstly, the amount for new Member States was fixed at EUR 5,100 million for the years 2004 to 2006. Direct subsidies were to be phased in over the following 10 years, with an increase of 5% every year, starting from 25% in 2004. “Semisubsistence farms”, or farms that produce for their own consumption as well as market part of their production, would be turned into commercially viable units, which would be more efficient. Farm upgrades are encouraged by additional income support, with a maximum of 1,000 euros a year per farm. Special aid was also given to help farmers meet EU standards. The budget for Structural Funds in the new Member States over the period 2004–2006 was to be fixed at EUR 21,900 million. The new Member States would reach the CAP support level applicable in the rest of the EU in 2013. Thailand gains both benefits and disadvantages from the Enlargement. It is beneficial for Thailand when it can access a larger market using the same set of European customs duties, standards and rules. As the ten new members gain from being a part of the EU, they will, with time, be wealthier and have the capacity to import more, due to the spill-over effect. On the other hand, they could be competitors, competing with an advantage of being a part of the EU. However, their agricultural products are still rather of temperate climate and not of tropical climate like Thailand, with a few exceptions, so there would not be direct competition. Thailand does, however, lose at the moment with the increased import tariffs of the ten new Member States that adopted the higher EU rates when they joined the EU. Canned food products, such as tuna, pineapple and shrimp, previously enjoyed zero percent tariffs in the Czech and Slovak markets, but now have the same tariff of 20% as the rest of the EU (Josupeit 2004). However, compensations were made as the EU has expanded duty free access for the Thai goods that have been affected by the Enlargement. 5. Conclusion Agriculture is about food. Once it is put in the social context, however, it evolves into a complex system of trade, policies, and values. Looking at the 70

The Effects of EU’s CAP on Thailand’s Exports to Europe EU and the CAP, and how they interact on the global level, one can also learn about the EU values. They might be important to know because the EU has gotten bigger, and what it wants is what it is willing to import from Thailand and the rest of the world. The EU has fundamental values that are reflected in its policies and orientation. As seen with the CAP, the Europeans care for the environment, find overproduction wasteful, and wish to preserve the rural way of life. With European consumers, they are health conscious, have high standards, and enjoy fine food and dining. On the international level, it tries to help the poor by providing Preferential Agreements and is willing to negotiate and make concessions, as with the GSP and additional duty free quota. The EU and Thailand have very good relations. Thailand currently has an approximately 2% share of the total agricultural EU imports, which is not bad for a developing country. However, competition is getting more aggressive as other countries like Vietnam, China, and many other developing countries are raising themselves to EU standards. The new Member States and the ACP countries and LDCs could also be replacing some Thai agricultural exports. While the Enlargement provided Thai exports with more consumers, intra-trade is important and there can be trades of huge volumes. One possible way to strengthen the political and economic ties between Thailand and the EU is through a Closer Economic Partnership (CEP) or a Free Trade Area (FTA) Agreement between the EU and ASEAN, or the EU and Thailand. However, it is important to find out about all the possible consequences of the Agreement. Thailand should continue to improve and be one step ahead. As European consumers are health conscious, Thai exports should always meet the SPS measures and EU standards. These apply especially for fruits, vegetables, chicken, and shrimps. Thailand should also promote the quality of its products, because the Europeans like high quality goods and are capable of paying more for what they like. This has already been seen with Basmati rice from India and Pakistan, which enjoy reduced tariffs and high volumes of exports. It might be beneficial to promote Thai food and taste even further into a quality brand through Thai restaurants in Europe. More than ever, Thailand has to be more competitive, not only in the agricultural sector but also in all other sectors, as world trade continues to liberalize. As seen with the CAP, it is not only about free trade, but trade has much to do with national policies and state intervention. In a globalised world, one policy could easily have an affect on another. Thailand should take advantage of the benefits the EU has to offer and be aware and well informed of the policies that could affect its future trade.

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The Effects of EU’s CAP on Thailand’s Exports to Europe References Bangkok Post. 2006 Sugar firms gain on EU mill closures. April 7. http://www.ocsb.go.th/uploads/contents/16/attachfiles/F1282_07_30449.mht Bank of Thailand. 2006. Thailand’s Macro Economic Indicators. http://www.bot.or.th/bothomepage/databank/EconData/Thai_Key/Thai_KeyE.asp Delegation of the European Commission to Thailand. 2005. Opening Remarks by Ambassador Friedrich Hamburger Delegation of the European Commission in Thailand. The future of Europe- smooth sailing or rough ride ahead? http://www.deltha.cec.eu.int/en/eu_thailand_sea/thailand_trade.htm Delegation of the European Commission to Thailand. European Union-Thailand Trade. European Union Website. http://www.deltha.cec.eu.int/en/eu_thailand_sea/thailand_trade.htm European Commission. 2006. CAP Reform: EU agriculture ministers adopt groundbreaking sugar reform. February 21. http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/06/194&forma t=HTML&aged=0&language=EN&guiLanguage=en European Commission. EU budget at a glace 2006. http://europa.eu.int/comm/budget/library/publications/budget_in_fig/dep_eu_b udg_2006_en.pdf European Commission. 2005. Bilateral Trade Relations: Thailand http://trade-info.cec.eu.int/doclib/html/113454.htm European Commission Press Release. 2005. EU and Thailand agree on new EU rice import regime. 5 September. http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/05/1088&form at=HTML&aged=0&language=EN&guiLanguage=en European Commission. 2004. The common agricultural policy- A policy evolving with the times. http://europa.eu.int/comm/agriculture/publi/capleaflet/cap_en.htm European Commission. 2004. Sugar. http://trade-info.cec.eu.int/doclib/docs/ 2004/november/tradoc_120339.pdf European Commission. 2001. Generalized System of Preferences http://europa.eu.int/comm/trade/issues/global/gsp/eba4_sum.htm European Parliament. European Parliament Fact Sheets 4.1.4 EAGGF-Guarantee section. http://www.europarl.eu.int/factsheets/4_1_4_en.htm Food Agriculture Organization of the United Nations (FAO) Economic and Social Department. 2003. WTO Agreement on Agriculture: The Implementation Experience-Developing Country Case Studies. FAO Corporate Document Repository. http://www.fao.org/documents/show_cdr.asp?url_file=/DOCREP/005/Y4632E /y4632e0w.htm Food Agriculture Organization of the United Nations (FAO) Economic and Social Department. 1995. Food Outlook – October 1995: Cassava. FAO Document Repository http://www.fao.org/docrep/004/v9880e/v9880e03.htm

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The Effects of EU’s CAP on Thailand’s Exports to Europe Fouilleux, E. 2003. The Common Agricultural Policy. In European Union Politics, edited by M. Cini, 246-262. New York: Oxford University Press. Goodman, S. F. 1996. Agriculture-Successes, Failures, Reforms. In The European Union, ed. S.F. Goodman, 115-147. London: Macmillan. The Government Public Relations Department. Thai Shrimp Exports to the European Union. The Government Public Relations Department Website, September, 9, 2005. http://thailand.prd.go.th/the_inside_view.php?id=987 Ingersent K. A., Rayner A. J., Hine R. C., eds. 1998. The Reform of the Common Agricultural Policy. Basingstoke: Macmillan Press. Josupeit, H. 2004. Shrimp Market Access, Tariffs and Regulations. http://www.globefish.org/files/WTOshort_176.pdf Kelch, D. R. 2004. The Role of the European Union in Fruit and Vegetable Trade. Global Trade Patterns in Fruits and Vegetables, edited by Sophia Wu Huang. http://www.ers.usda.gov/publications/wrs0406/wrs0406e.pdf Ministry of Commerce Thailand. Statistics of Thai international exports. http://www.ops2.moc.go.th/tradeth/cgi/excountry1.asp Office of the National Economic and Social Development Board (NESDB). 2006. People aged 15 and above according to sectors. http://social.nesdb.go.th/nesdbsoc/modules/report/dbreport.aspx?module=rplab or&id=r045&refresh=1 Pratruangkrai, Petchanet. 2006. EU expands duty-free access for Thai goods. The Nation, March 31. http://www.nationmultimedia.com/2006/03/31/business/business_30000580.php Ritson C. and Harvey D. 1991. The CAP and World Economy essays in honour of John Ashton. Oxon: C.A.B. International. ThaiDay. 2006. Shrimp exporters have reasons to be cheerful. 22 January. http://www.manager.co.th/IHT/ViewNews.aspx?NewsID=9490000009101 World Trade Organization (WTO). 2005. Agriculture ‘Modalities’ would boost entire round. Hong Kong 6th Ministerial Briefing Notes Agriculture. http://www.wto.org/english/theWTO_e/minist_e/min05_e/brief_e/brief03_e.htm

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74

74,185

2,517

2001-2002

85,313

2,895

2002-2003

98,110

3,329

2003-2004

112,827

3,829

2004-2005

129,751

4,403

2005-2006

“EU Import 000 tons”

(1) marketing years September 2001 to September 2009 (2) marketing years July 2001 to July 2009

Sugar (2)

Rice (1)

Products

ANNEX A

149,213

5,063

2006-2007

171,595

5,823

2007-2008

Tariff Quotas for Rice and Raw Sugar from Least-Developed Countries (LDCs)

197,335

6,696

2008-2009

The Effects of EU’s CAP on Thailand’s Exports to Europe