Payment Decoupling and the Intra – European Calf Trade

The 2003 reforms of the Common Agricultural policy of the European Unionintroduced decoupled income transfers as the most prominent policy instrument.However, member states were given substantial discretion over the degree and timingof the reform implementation. As a result, different implementation schemescoexist within the EU, keeping certain parts of the income support coupled tocurrent production levels. This coexistence leads to distortions of production incentives,factor misallocations, and artificial trade flows. Here, we examine theseeffects in the beef sector where full decoupling was not obligatory for all memberstates. Based on a cost minimization framework, we derive a sector-specific trademodel with heterogeneous firms and quality differences. The model is used toexamine the effects of different implementation schemes on intra-European calftrade. Empirical results confirm that the expected distortions to trade flows occured,violating the fundamental CAP principle of Market Unity.