Europe 1992: implications for food and agriculture

Europe 1992: implications for food and agriculture – includes related article on EC governing bodies

David Kelch

Europe 1992: Implications for Food and Agriculture

The 12 members of the European Community (EC) have embarked on an ambitious and historic program to eliminate national borders between their countries by the end of 1992. The goal of “Europe 1992,” as the program is known, is to achieve a true common market as envisaged by the EC’s founders nearly 33 years ago. Until now, physical, technical, and fiscal barriers have prevented the EC from achieving greater economic efficiency and benefits.

The program, which began in 1985, will phase in EC integration over a 7-year period. All barriers that impede the free movement of goods, services, people, and capital among member countries – Belgium, Denmark, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, the United Kingdom, and West Germany – are scheduled to be eliminated by 1992. The result will be a powerful trading bloc, whose sheer market size will exceed that of the United States. The new unified EC will have 320 million consumers with a purchasing power of $4 trillion.

The potential economic impacts are enormous, both within the Community and among its trading partners. According to a 1988 study commissioned by the EC, the internal benefits of integration could mean a 4- to 7-percent increase in gross domestic product, a 6-percent reduction in consumer prices, and 2 million to 5 million more jobs. The EC Commission (see box) acknowledges that the changes implied by this comprehensive program will cause considerable difficulties for some member countries, but the benefits are great and should not be denied to their citizens.

EC Governing Bodies

The EC Commission is the Community’s executive body. The Commission proposes legislation, implements EC policy, and enforces EC treaties. It has investigative powers, and can take legal action against companies or member governments that violate EC rules. It manages the EC budget and represents the Community in trade negotiations. There are 17 EC commissioners: two each from Frances, Italy, Spain, the United Kingdom, and West Germany, and one each from the other members about 11,000, divided into 20 Directorate Generals, each covering an area of expertise.

The EC Agriculture Council is composed of the 12 ministers of agriculture from the member countries. It acts on Commission proposals, and is the final EC decisionmaking body for agriculture.

The European Parliamnet is the EC’s only directly elected body and has 518 members chosen every 5 years. Its members debate issues, question the Commission and Council, review the budget and propose amendments, and have final budget approval.

The EC Court of Justice is the Community’s “Supreme Court.” Its 13 judges interpret EC law for national courts and rule on matters pertaining to EC treaties raised by EC institutions, members countries, or individuals. Its ruling are binding. The court is helping create a body of EC law, and has been particularly important in making judgments where EC and national laws conflict. It has consistently ruled in favor of EC law, thus paving the way for 1992 harmonization

Europe 1992 will also affect the Community’s trading partners, particularly the United States. The EC and United States are the world’s two leading economic blocs, together accounting for about one-half of the world’s gross domestic product and about one-third of world trade. The EC is the largest importer of U.S. goods and services ($130 billion in 1988), the largest recipient of U.S. direct investment ($126 billion in 1988), and accounts for nearly half of all foreign sales of U.S. affiliates ($442 billion in 1988).

Besides being the largest supplier of agricultural products to the EC, the United States also occupies a prominent position in food processing and distribution within the Community. U.S. firms own several of the top food companies in the EC. Thus, the United States has a large stake in the outcome of Europe 1992 and would benefit if the program enhances trade, which seems the likely outcome.

Costly Trade Barriers

By the early 1980’s, many EC officials and national leaders realized that trade barriers within the Community and different standards and regulations among member countries were limiting the EC’s effectiveness as a trading bloc. A 1988 report by Calingaert mentions some of these barriers and points out the severe conditions they were creating. For example: * Clearing customs at each national border. EC shipments across internal borders have to be inspected to ensure that products meet the specifications of the importing member country, and EC citizens have to show national passports at all border crossings. A 750-mile trip by a commercial vehicle from London to Milan, going through five countries, can average 58 hours (excluding the channel crossing), compared with 36 hours for a similar distance in the United Kingdom. The 22-hour difference is due to the customs checks required at each national border. Such delays often endanger perishable agricultural produce. * Different national currencies. A person traveling through 10 EC countries and returning home would end up with only 53 percent of the money he or she began with because of the cost of changing currencies from one country to the next. * Separate standards and regulations. An EC manufacturer has to make seven different types of television sets to meet distinctive member country standards. This can require as many as 70 engineers to adjust new models to the various requirements, at a cost of $20 million.

The EC’s food and drink industry is its largest economic sector. Annual household expenditures on food and beverages top $400 billion, and the industry employs over 2 million people.

Yet, food and beverage firms also face the most trade barriers. In 1988, a partial survey by the EC Commission of the food sectors in the five largest member countries found that there were over 200 nontariff barriers that restricted the movement of food (table 1). Such barriers can be classified into five general categories.

Table : The EC’s Food Processing Industry Faces Over 200 Nontariff Trade Barriers

Barrier Number Percent

Specific import restrictions 64 29.4

Labeling and packaging laws 68 31.2

Bans on specific ingredients 33 15.1

Rules governing

product descriptions 39 17.9

Taxes 14 6.4

Total 218 100.0

First, specific import restrictions limit the flow of goods across borders. For example, in Spain, imported foods have to undergo a health registration process, which makes imports more expensive.

Second, labeling and packaging laws specify what types of information must appear on food labels and what kinds of containers are allowed in each country.

Third, bans on specific ingredients, such as aspartame in Spain, exclude imports that have those ingredients.

Fourth, rules governing product description do not allow imported items to use generic names. For instance, beer in West Germany cannot be called beer unless it meets specific purity laws, and pasta in Italy has to be made of durum wheat to be labeled as pasta.

Fifth, imported goods can be taxed as final products when they enter a country, while domestic goods can be taxed at an earlier stage of processing. This may result in higher taxes for imported products. The Commission estimated that these barriers cost the industry $600 million to $1.2 billion annually.

Removal of nontariff barriers – especially those related to packaging, labeling, and ingredient requirements – should lead to reduced prices and greater variety of food for EC consumers. For example, eliminating some of these barriers could mean the sale of diet soft drinks in France, less expensive pasta products in Italy, and a wider range of beers and beer prices in West Germany, Italy, and Spain.

However, the major benefit to EC consumers should come from eliminating physical and technical barriers at national borders. This would open the EC to companies that previously only served their respective national markets. A complete restructuring and consolidation of EC food companies is envisaged, as only 1 in 10 currently serves the entire EC market. Lower production costs, larger sales areas, and greater competition should lower consumer prices.

Economic Integration

The blueprint for the 1992 program is contained in a report entitled Completing the Internal Market, issued by the EC Commission in June 1985. The report contains some 300 directives regarding the removal of physical, technical, and fiscal barriers between member countries, as well as a timetable for action with an overall deadline of December 31, 1992. Of the 300 directives, 105 pertain to food and agriculture.

The Community’s legislative process for achieving economic integration is complex. A directive begins as a draft proposal submitted to the EC Commission by its appropriate Directorate General, after consultations with the relevant EC industry. After approval by the Commission, it is submitted to the EC Council and Parliament. The directive is debated in these two bodies, which are open to public input. The EC Parliament can only comment on the directive. The Council may adopt the directive or return it to the Commission for revision. The last step is the national legislatures, where laws must be passed to conform with the directive.

Of the 105 directives affecting agriculture, 80 have been approved by the Commission, and 25 have not yet been proposed. Of the 80, 47 have been adopted by the Council.

The driving force behind the single market is the removal of physical barriers, such as border customs posts. Abolishing these types of controls will affect agriculture the most. Eliminating fiscal and technical barriers – such as sales taxes on consumer goods, which vary considerably among member countries, and different standards regarding food safety and quality – will influence the food industry more and agriculture only indirectly.

The issues affecting food and agribusiness can be classified into four fundamental areas.

Harmonizing plant and animal health standards and food labeling, ingredient, and packaging laws among member nations. The agreement to abolish internal borders by the end of 1992 means that standards and regulations must be harmonized and nontariff barriers eliminated.

EC members have agreed in principle to harmonize essential minimum health and safety standards. However, debate continues on what the standards should be. Some member countries, such as West Germany, wish to establish standards at the strictest level possible, while others advocate adopting an average level. For example, most northern EC members advocate low tolerance levels for pesticide residues in food. Southerntier countries, on the other hand, prefer relatively high tolerances because their gentler climate allows more pests to flourish.

Member countries have concurred on the principle of mutual recognition, whereby national governments would recognize one another’s regulations after agreed-upon essential minimum requirements are met. Theoretically, given mutual recognition, EC companies should only have to satisfy one country’s regulations to have access to the other 11 countries’ markets.

The EC Court of Justice has consistently favored “supranational” (Community-wide) legislation when national laws have been in conflict with EC directives. The court has ruled that if a product is legally manufactured and distributed in one country, it can be exported to any other EC member.

Whether future directives will cause major problems for EC imports remains unclear. Many difficult animal and plant health proposals – regarding such concerns as livestock diseases, animal drugs, and feed additives – have not yet been drafted. On January 1, 1989, the EC did implement a directive banning production and imports of meat from hormone-treated animals. The EC Commission and Council have recently been debating a proposal to outlaw the use of bovine Somatotropin (bST), a growth hormone that enhances milk production. This issue is of interest to the United States, where bST was developed. (See National Food Review, July-Sept 1989, for information on the 1989 ban.)

The United States is particularly concerned that the EC continue its acceptance of the principle of equivalent standards, which has served as an unwritten guide for U.S.-EC trade. This means that the mechanisms to safeguard plant and animal health can vary among countries – recognizing differences in climate, soil, dietary patterns, and other factors – but still provide an equivalent degree of protection. Thus, standards and regulations would not have to be identical, just equivalent.

In addition, during the latest round of negotiations on the General Agreement on Tariffs and Trade (GATT), all GATT members agreed to move toward the use of international standards for food safety and plant and animal health. Conflicts over these standards could arise between the United States and the EC and within the Community itself because Europe 1992 calls for new laws and regulations that could conflict with world standards or set new ones.

The EC’s hormone ban has already generated much debate, and the proposed moratorium on bST may also create some controversy. The possibility of the EC using economic and social needs – in addition to safety, quality, and efficacy – as criteria for evaluating production-enhancing innovations is another potential source of conflict. Recent talks between officials in Washington and EC headquarters in Brussels, however, have helped alleviate U.S. qualms about new EC standards, particularly for testing and certification procedures.

According to Export Now, a U.S. Department of Commerce newsletter, and many business reports, exporters to the Community generally believe that harmonizing EC standards and regulations will be a positive development if the same rules apply to imports. That is, products imported into the EC would have to meet one set of standards and cross the external EC border only to gain access to all member markets. Of course, the standards would have to be reasonable and based on scientific evidence.

Harmonizing taxes on agricultural inputs, bulk commodities, and finished food items. As a part of Europe 1992, the Community has agreed that national taxes on items such as food, cigarettes, and fuel can no longer diverge as they do now. EC member governments levy two major types of taxes on food and agricultural supplies: value-added taxes (VAT) and excise taxes. Value-added taxes are levied on all products on a percentage basis at each stage of production. Excise taxes are levied at a flat rate at retail and only apply to a few items. Both are important sources of revenue in EC member nations, particularly in those countries where income tax does not generate sufficient government revenue. Currently, VAT rates on food range from zero in the United Kingdom to 38 percent in Italy. Excise taxes vary considerably. For instance, Greece levies a 13-cent per-carton tax on cigarettes, while the Danish tax is set at $16.60 per carton.

There have been intense negotiations among EC members about the harmonization of VAT rates so that neither consumption patterns nor government revenues will change after borders are eliminated. Health concerns also are involved, as reflected by the high Danish tax on cigarettes.

Current discussions center around creation of a two-tier VAT system, which would allow some VAT differences between items. Proposed VAT rates fall into two bands: from 4 to 9 percent for basic goods – such as food, books, and newspapers – and a standard 15 percent for other goods not considered essential, such as candy. Exceptions to the two-tier system might be made for food in the United Kingdom, which imposes no VAT on those products.

Eliminating border taxes and subsidies for agriculture. The EC denominates farm support prices in European currency units (ECUs). The value of an ECU is a weighted average of the 12 national currencies. (Each currency is valued at its U.S. dollar exchange rate and then weighted by the country’s gross national product.) Because national currencies vary daily against the ECU, which would have resulted in daily fluctuations in farm prices, the EC created – through its Common Agricultural Policy (CAP) – separate exchange rates for agricultural products, called green rates. (CAP is the EC’s centralized policy for the organization of agricultural markets, which guarantees a preference for EC products. CAP is the only current example of a common market in the EC.)

Green rates resulted in different commodity prices in various countries. To compensate for these price differences and prevent trade distortions, the EC introduced border taxes and subsidies that exactly offset the price differences. These agricultural border taxes and subsidies are called monetary compensatory amounts (MCAs).

However, member nations have been able to influence the decisions on green rates to some extent to control agricultural prices, and thus influence farm income and food prices. For example, since 1985 average support prices for agricultural commodities measured in national currencies have gone up 8 percent. However, when measured in ECUs, they have dropped less than 1 percent.

In addition, commodity groups in some countries have been powerful enough to have separate green rates established for their commodities – such as grains in most countries, beef and veal in Britain, and pork in France – giving them a price advantage.

The problem is that green rates – there are 40 in the EC – have allowed price differences among countries to continue and have thus undermined the goals of a common market with common prices. For instance, the support price for feed wheat for the 1988/89 season was $179 per ton in Greece and $232 per ton in West Germany (in national currencies). The common support price would have been $201 (in ECUs) if green rates had not been applied.

When national borders are abolished, the green rate and MCA system will have to be revised because MCAs are collected at the border. The resulting changes could lead to true common prices and at lower levels. Toward that goal, MCAs are already being phased out.

Adjusting nationally based agricultural support with Europe 1992. There are a number of other CAP programs that need borders to function. The most prominent of these are national production quotas for sugar and milk and some nationally allocated import quotas for beef, lamb, and butter. However, with elimination of borders under Europe 1992, the quotas will become difficult, maybe even impossible, to administer. The dairy quota will probably remain intact for a few years, albeit not necessarily in its present form. In the past, the EC has also provided special payments to Italian calf producers and British calf and sheep farmers, but conflict with the 1992 program forced revisions in these arrangements.

In addition to CAP programs, individual EC countries operate their own support programs for agriculture. They range from poultry export subsidies in France to early retirement programs in West Germany, and a tax break on fuel and other inputs in most member countries. These national programs, which represent about 40 percent of total aid to agriculture in the Community, will be difficult to remove or reduce significantly. In fact, national aid to agriculture could even increase, given the push to separate payments from production (providing support to farmers without raising output). National support that enhances output would be against the goals of Europe 1992 to the extent that the support was not harmonized among members.

Cultural and Economic Differences

Will Remain

People in the EC speak nine languages and have different income levels and food consumption patterns, all of which will prevent the Community from becoming a “United States of Europe” in terms of food processing and marketing. Regional and national tastes will still dictate food sales regardless of the changes Europe 1992 brings.

On average, EC citizens spent nearly 22 percent of their incomes on food, beverages, and tobacco in 1986. About 17 percent went for food, about 2 percent each for alcoholic beverages and tobacco, and 0.5 percent for nonalcoholic beverages (table 2). However, these averages mask wide variations in expenditure patterns among member countries, reflecting differences in tastes, food prices, and disposable income.

In 1986, consumers in Ireland, Greece, and Portugal devoted a sizable part of their incomes to food, beverages, and tobacco, unlike the West Germans, British, and Dutch. Portuguese and Greeks each spent about 33 percent of their incomes on food, compared with about 13 percent for German and British consumers. Alcoholic beverages accounted for approximately 12 percent of household expenditures in Ireland, in contrast with only 1 percent for Belgians. Nonalcoholic beverages made up around 1.5 percent of Irish and Greek expenditures and less than 0.5 percent in Portugal, Italy, and Spain. Consumers in Luxembourg spent over 6 percent of their incomes on tobacco products, compared with about 1 percent for the French.

Table : [Tabular Data Omitted]

EC member countries also displayed a wide variation in their consumption of agricultural products. In 1985/86, the differences were particularly pronounced for dairy products, potatoes, fruits, and vegetables. Consumption of dairy products ranged from a low of 136 pounds per person in Greece to a high of 429 pounds in Ireland, a difference of 215 percent (table 3). Consumption was less varied for eggs, sugar, meats, fats and oils, and grains. The Portuguese consumed 119 pounds of meat per capita in 1985/86, while the French ate 211 pounds, a 77-percent difference.

Table : [Tabular Data Omitted]

Bright Prospects for Consumers

Economic integration will mean lower costs for EC food companies because administrative expenses at the border will be eliminated and per unit costs will decline because of larger volumes. Transportation costs will drop because delivery times will be significantly reduced and the practice of “back hauling” – picking up another load after delivery of the first and returning home – will be legal. For example, a French truck making deliveries to West Germany will be able to return to France with another load of goods.

Much of the responsibility for regulating food safety and quality has been transferred from national governments to EC headquarters in Brussels. The EC Commission is in the process of harmonizing these standards and regulations into an overall EC policy. This effort comes at a crucial time when consumer confidence has been shaken by recent scares over Salmonella and Listeria out-breaks in the United Kingdom and by hormone scandals in West Germany. Creation of an EC institution to oversee the development and distribution of products related to food and plant and animal health, along the lines of the U.S. Food and Drug Administration, is expected, but not in the near future.

When the 1992 program is completed – most observers think it will be sometime after 1992 – EC consumers should be able to buy a greater variety of safe and healthy foods at lower prices. This is a realistic prospect because the EC intends to intervene in the food trade only when health, safety, and the free movement of products is threatened. This strategy is not expected to result in a bland concoction of “Eurofood” but will allow for the sale of legally manufactured items across borders without barriers erected on grounds of national tradition or vested interests. Greater market access for EC food imports should also contribute to more variety at lower prices.

Will the United States Benefit?

The United States is the largest foreign supplier of agricultural and food products to the EC, with 1987 sales reaching $8.68 billion, or 15 percent of EC agricultural imports (table 4). U.S. farm exports to the Community, however, declined during the 1980’s, while shipments from most other countries increased. EC imports from the United States in 1980, $13.77 billion, were 31 percent greater than in 1987 and accounted for 22 percent of the EC market.

While Europe 1992 is aimed at internal barriers only, the adjustments in investment, production, consumption, and trade will be felt well beyond the Community’s borders. There will be increased opportunities for those able to compete in a deregulated EC economy, and market access from outside should be enhanced by the harmonization of standards. Already, U.S. food companies either completely or partially own 12 of the largest 20 EC food companies and stand to profit when borders are eliminated. The U.S. food industry may also find the EC market more promising when it only has to meet one set of standards, instead of 12.

Table : Table 4. The United States Is the Largest Supplier of Agricultural and Food Products to the European Community

EC imports Market share

Exporting region

1980 1987 1980 1987

Million dollars Percent

Industrialized

countries 28,310 23,661 46.1 40.3

United States 13,769 8,685 22.4 14.8

Canada 2,435 1,749 4.0 3.0

Australia 1,196 1,740 1.9 3.0

Sweden 1,461 1,685 2.4 2.9

New Zealand 1,497 1,535 2.4 2.6

Japan 270 251 0.4 0.4

Developing countries 28,371 29,681 46.2 50.6

Brazil 3,886 4,343 6.3 7.4

Ivory Coast 2,073 1,856 3.4 3.2

Argentina 2,239 1,791 3.6 3.1

Thailand 1,002 1,524 1.6 2.6

Colombia 379 1,369 0.6 2.3

Centrally planned

countries 4,659 5,339 7.6 9.1

Soviet Union 1,261 1,271 2.1 2.2

Poland 785 906 1.3 1.5

Yugoslavia 659 816 1.1 1.4

Hungary 817 715 1.3 1.2

Total 61,443 58,682 100.0 100.0

Source: The Agricultural Situation in the Community, Commission of the European Communities, various issues.

A successful 1992 program will have profound implications for the EC and the world economy. No one knows at this juncture how successful the program will be or even its ultimate scope because Europe 1992 is a complex political process. The United States has consistently supported greater economic integration in the EC and believes that the 1992 program represents both an opportunity and a challenge, not a threat.

The EC, in turn, has tried to calm U.S. fears about a more protectionist EC. At this stage, potential benefits to the U.S. food and agriculture sector – greater market access and the favorable position of U.S. food companies – appear to outweigh potential costs, such as a more competitive EC with higher quality and safety standards. References 1992: The Implications for the Agrifood

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PHOTO : Eliminating physical, technical, and fiscal barriers between member countries is the goal of Europe 1992.

PHOTO : When Europe 1992 is complete, EC consumers should be able to buy a greater variety of foods at lower prices.

COPYRIGHT 1989 U.S. Government Printing Office

COPYRIGHT 2004 Gale Group