The Common Agricultural Policy (CAP) was introduced by the European Union in 1962, at a time when agriculture was the principal focus of the Common Market. The initial aims of the policy were to prevent widespread food shortages in post-war Europe and to ensure that farmers were encouraged financially to continue to farm and subsequently receive fair prices.

The result was that the EC, as it was then, created its own marketplace by manipulating the price of foodstuffs. The local farming industry, supported by a variety of subsidies, was protected from the world market by import taxes called levies that discouraged imports and made them more expensive, whilst export refunds helped to offset the often higher prices of EC goods. In order to compete in the world marketplace the EC paid exporters when goods were exported. This had the effect of bringing the EC market price closer to the world market price.

The demographics of the EC and subsequently the EU have changed considerably – now less than 1 in 20 Europeans is working in agriculture, compared to 1 in 5 in the 1960s. But the Common Agricultural Policy has remained and still consumes more than 40% of the EU budget – although this is in itself an improvement on the 62% reached in 1988.

The CAP faces a future of substantial reform. With the enlargement of the EU in May 2004 taking in a number of countries with large agricultural sectors, there is a clear need to reduce the administration and expense of CAP to avoid a massive increase in budget. But besides this, there is pressure from global trade organisations to reform CAP as it is perceived as being unfair on developing nations outside the EU.

If your company is importing or exporting food products into and out of the enlarged EU, you may benefit from some of the advantages of the CAP scheme. But you must also be mindful of the potential pitfalls and administrative requirements.