The Future Common Agricultural Policy of the EU: Consequences for Non-EU Regions

The European Common Agricultural Policy (CAP) is scheduled to undergo major changes in the coming years, as the EU is enlarged with ten new member countries and the Mid-term Review (MTR) of the CAP is implemented. These changes will obviously have significant impacts on European agriculture, but how will they affect other countries? The purpose of this paper is to provide a quantitative assessment of the impact these reforms will have on non-EU countries, focusing particularly on implications for trade, production, and welfare. The analysis is conducted using a CAP specific version of the GTAP model and an adjusted version 5 of the GTAP database. The analysis is based on a baseline for 1997-2013. Two scenarios are then analyzed to illustrate the effects of the Eastern Enlargement and the MTR-reform on non-member regions. The first scenario features the Eastern Enlargement of the EU under the new MTR-reformed CAP thus capturing the future realities in European agriculture. However, in order to decompose the results from this scenario, a second scenario is constructed featuring an Eastern Enlargement of the EU under the old Agenda 2000 CAP. Comparing the results from these two scenarios subsequently allows us to distinguish between implications deriving from the Eastern Enlargement, such as trade diversion effects, and outcomes attributable to the MTR-reform, such as the trade effects derived from decoupling of the EU direct payments. The analysis shows that the Eastern Enlargement and the MTR-reform do have significant impacts on EU agricultural production as for instance the decoupling of direct payments under the MTR-reform results in a significant reduction in the European production of cereals and bovine animals, while the introduction of milk quotas in the new EU member countries results in a reduction in raw milk production. The changes in EU agricultural production are subsequently reflected in EU trade with non-EU regions, but the derived effects on agricultural production in non-EU regions are generally minor. Finally the analysis also shows that the impacts on welfare in non-EU regions are negligible, all in all making the Eastern Enlargement and the MTR-reform primarily a European matter.