The EU common agricultural policy and its effects on trade

Abstract: The common agricultural policy (CAP) is a much discussed policy in the European Union (EU). It allocates great sums to the European agricultural sector every year and has been accused of being trade distorting and outdated. This thesis takes a closer look at what protectionist measures the CAP has used. The policy’s effects on trade will be assessed employing the sugar industry as a reference case. Sugar is heavily protected and is one of the most distorted sectors in agriculture. The CAP effects on trade in the sugar industry for ten countries in and outside the EU from 1991 to 2011 are estimated using a gravity model. This particular type of estimation has, to the author’s knowledge, not been performed for the sugar industry before, which makes the study unique. The results of the empirical testing indicates that trade diversion occurs if one country is a member of the CAP and its trading partner is not. When both trading partners are outside the CAP cooperation, they are estimated to have a higher trade volume. This result indicates that the CAP decreases trade. Current economic theory, in particular the North-South model of trade developed by Krugman (1979), suggests that protectionism of non-competitive sectors should be abolished and funds should instead be directed to innovation and new technology. The CAP is in this sense not adapted to modern economic thought.