The Common Agricultural Policy and the French, European and World Economies

The Common Agricultural Policy (CAP) has undergone significant changes under the 2003 reform. This study provides estimates of the contributions of the CAP to the farm and food sectors and of some of the costs associates with reallocating resources to these sectors. The study concentrates on the effects of some of the most distorting tools: direct payments, border protection and export subsidies (components of Pillar I funding) in 2007. Despite attempts to cut the link between support and production, the CAP contributes to maintaining farm and food sectors up to 8 per cent larger in the EU than if the CAP did not exist. The economic efficiency costs of allocating additional resources to the farm and food sectors amount to some €38 billion, with the EU15 supporting more than €34 billion in allocative efficiency costs. Although the cost of distortions in the new member states (NMS) is smaller, they are expected to increase as direct payments are phased in. Parts of the costs suffered by the EU are compensated by an improvement in its terms of trade in the order of €17 billion, at the expense of the EU’s trading partners. The benefits of the CAP are allocated very unevenly across the farm and food sectors, depending on the effective rate of protection that affects each operation. In France, allocative losses are estimated to exceed €3.5 billion. The estimates are static and do not account for any dynamic effect such as the lack of research into activities whose returns are lowered by the CAP. The estimates also abstract from the fact that the CAP maintains marginal farms in production, thus reducing the productivity of the sector as a whole. An alternative way of interpreting the results is that eliminating the parts of the CAP modelled is likely to increase the production potential of the EU by at least €38 billion. Further gains could be possible if liberalisation in the EU prompted other economies to liberalise their farm and food sectors.