Decoupled Payments toEU Farmers, Production, and Trade:An Economic Analysis for Germany

After an extended process of reform the European Union has introduced direct payments tofarmers which are decoupled from production decisions as a central element of its CommonAgricultural Policy. They are also referred to as Single Farm Payments. In this paper weanalyze the production and trade effects of this policy and its compatibility with WTOinternational trade rules. A survey of the literature suggests that the system of direct paymentsin its present form has effects which are analogous to a subsidization of agricultural land.Thus, they act to increase production and trade.Furthermore we quantify the total economic cost of production of selected commodities in theEuropean Union and compare them to the price at which EU production is sold in foreignmarkets. Our analysis suggests that the costs of production in the European Union forkey agricultural commodities are below international prices. It can be established thatcommodities for which the European Union is a net exporter are sold below cost, for extendedperiods of time and in substantial quantities. The EU system of decoupled payments tofarmers, thus, acts to inflict economic injury to third countries.Under WTO rules, dumping can only occur when a country is an exporter. In this paper wedemonstrate that on the markets included in the analysis dumping occurs on the market forwheat. The extent of injury is exemplified for Australia....