As a result, their calculated income support payment would be comparatively low. In addition, there was no risk that, as these farmers gained access to improved resources and technology enabling them to improve their output, the CAP would have to fund larger payments. Instead, income payments would be tied to a low historic yield. Cross-compliance would serve as a further check on the amount of funds dispersed to the new member states. Eastern Europe already lagged behind the West in terms of existing environmental practices. Farmers in new member states would have difficultly meeting and adhering to these new standards, resulting in reductions in the funds paid to them. Countering some of these effects, modulation would allow some funds to be redirected from richer to poorer countries The MTR was the last opportunity to reform the CAP before the candidate countries would be full members of the European Union, and thus party to CAP negotiations. Unlike previous reforms, it would be much risker to put off or delay making reforms to the operation of the CAP. Even adopting reforms that were optional but not binding, as had been done in the past, was risky. If these changes, ones that were necessary to save the CAP but were deeply unpopular in the East, were not taken immediately, they would not be in the future because the new member states would band together to block them. The only component of Fischler’s proposal that was significantly revised by the Commission was dynamic modulation. The Commission altered the rules governing eligibility for modulation and income payment limits. Though the revised proposal maintained an exemption for farms earning less than €5,000, it added a provision stating that only those farms earning over €50,000 would be subjected to the full 19% reduction in direct income payments prescribed by modulation in order to ensure that small holders would not be targeted.

In addition, the final version of the Commission proposal removed the €300,000 limit on total income payments. The Commission also revised how the money collected under dynamic modulation would be redistributed. The new version significantly reduced the amount of money that would be directed to general rural development objectives and increased the amount that was to be set aside to fund future CAP reforms. This change was made in order to accommodate the rules that emerged from the Chirac-Schröder deal at the Berlin Summit in 2002. Specifically, it ensured that there would be some funds in reserve to uphold the agreement from the deal that allowed for a 1% annual increase in the CAP budget. These amendments to the Commission’s proposal were important victories for both larger and small farmers. Larger farmers avoided a cap on how much support they could receive and small farmers were granted important exemptions and protections from reductions in their income payments under dynamic modulation. After review and revision by the Commission, the official package of proposals was sent to the European Council on 23 January 2003. Among the member states, France and UK were the key players. France led the effort to block the reform while the UK was the primary member state that Fischler worked with to achieve the necessary votes to pass his reforms via Qualified Majority Voting . France was the leader of the anti-reform camp and used its relationship with Germany to cement a blocking minority, while the UK proved central to breaking the French-led blocking minority. Three groups emerged after the reforms were announced. The first group, the pro-reform coalition, consisted of the Denmark, the Netherlands, Sweden, and the UK. This group of countries favored reforms that would make the CAP more market-oriented. Sweden was a vocal new partner of the pro-reform club.

Upon joining the EU, Sweden had been required to reintroduce subsidies, which the government had removed in the early 1990s after a period of substantial agricultural policy reform . Sweden was thus a strong supporter of reforms that would move the CAP in a market-oriented direction. Other members of this group had long been proponents of market-oriented reforms. Agriculture in each of these countries was marked by the predominance of large holdings and/or highly efficient farming. Agricultural and political elites expressed the belief that their farmers, in general, would benefit from freer competition and the removal of support programs that served to prop up inefficient competitors in other member states. Within this group, the UK also objected to modulation. As one of the member states with the largest farms, the British felt that this policy, if adopted, would disproportionately negatively affect its farmers. The second group was the anti-reform alliance consisting of France, Germany, Ireland, Italy, and Spain. These countries took issue with nearly every aspect of the reform package, in particular decoupling and modulation. Germany, with large farms in the east and highly efficient farms in the west, opposed a limit being placed on total CAP payments. Both of these sets of farmers would be adversely affected by a limit on the total payment a farmer could receive. German farmers in both the east and west were already receiving more in direct payments than the proposed payment cap would allow. These member states also opposed the timing of the reforms, arguing that Agenda 2000 should be fully implemented before any further reforms were adopted . France’s position became even more staunchly anti-reform after a leftist cabinet was replaced by a center-right government in 2002, and Hervé Gaymard, a member of Chirac’s own party, was installed as minister of agriculture. Several agricultural lobbies posed three main reform critiques of their own. The lobbies argued that the new system of payments would not allow farmers “in the least-favoured regions, where low productivity and lower competitiveness” predominates to earn a livable income . The result, they argued,10 litre plant pots would be land abandonment and an increase in unemployment. Second, they voiced the concern that paying farmers regardless of production would negatively affect public opinion and could ultimately result in the complete termination of direct payments to farmers . Third, the proposal to base the direct payment on historical yields would serve to perpetuate past discrimination in favor of certain products, producers, and regions . The third group represented those countries in the middle that, while not completely opposed to the reforms, had some specific objections. Countries in this group were Austria, Belgium, Greece, Finland, and Luxembourg . Finland and Austria were traditionally protectionist agricultural countries and thus supported subsidies as a means to help their farmers. However, because Austria and Finland each had an agricultural sector that was predominantly small-scale and high value added, they favored strategies for rural development, greening, and multi-functionality, as opposed to production-based subsidies that favored large scale cultivation of commodity crops . At a meeting of the Council of Ministers on 8 April 2003, decoupling was discussed for the first time. Only the UK, the Netherlands, Sweden, and Denmark expressed support for Fischler’s proposal to completely disconnect payment from production . Most of the other member states preferred partial decoupling, whereby a portion of a farmers’ income payment would continue to be linked to how much he or she produced, but no member state offered any concrete ideas or proposals for how partial decoupling could be carried out .

While many countries were neither fully opposed nor fully in favor of the reform, no agreement could be reached without breaking the French-led blocking minority. Under the rules of QMV, a blocking minority consisting of a minimum of 4 countries that represented at least 35% of the population could prevent the passage of a proposal. Given the existence of this blocking minority, member states in the middle had no incentive to officially back reform, particularly since their formal support might provoke the ire of the farming community at home. There was no incentive to express support or even negotiate on the terms if the blocking minority could thwart the whole package. Though the Commission preferred to pass reforms with unanimous support, with the continued expansion of the EU, it was no longer feasible to pass reforms only with unanimous support. The adoption of QMV facilitated a faster negotiation process than was possible under unanimity rules, and ensured that a single country could not use a veto to stymie reform. Ireland ended up abandoning the anti-reform group early. Irish farmers’ unions opposed the reforms, but their members did not. The farmers supported the reforms because they felt they would provide them with adequate income support while also giving them the freedom to farm a greater diversity of crops . The Irish farm minister ultimately sided with the grass-roots farmers and against the farmer unions. Even without Ireland, however, the other four countries, France, Germany, Italy, and Spain, could form a blocking minority on their own under the rules of QMV. In order to break this minority alliance of France, Germany, Italy, and Spain, Fischler targeted the Spanish delegation, as it was believed that “Spain joined the French to gain some breathing space” rather than because of outright objection to the reforms . Fischler asked British Prime Minister Tony Blair to reach out to Spanish Prime Minister Aznar . Spain was a crucial country to flip, because it would break the blocking minority led by France.These caps, which would be applied primarily to big farms, would hit the UK especially hard . Fischler agreed and Blair began working with Fischler to swing the other member states in support of reform. One of Spain’s central demands was to amend the decoupling proposal to allow for partial decoupling in certain sectors, at the member states’ discretion. Partial decoupling would allow the Spanish government to continue allocating a percentage of income payments based on production in sectors important to Spain, namely sheep and goat farming. Once that concession was made, Spain shifted in favor of the reform. With the blocking minority broken, France and Germany quickly followed suit, hoping to grab some concessions in exchange for their support of the reform Similar to Spain, Germany and France also received a concession that allowed them to keep a certain percentage of income payments coupled to production for sectors of importance. The French switch was also motivated by pressure from the Association Générale des Producteurs de Blé , the cereals division within the FNSEA. Chirac’s opinion was strongly influenced by that of France’s national farming union, the Fédération nationale des syndicats d’exploitants agricoles , with some Commission officials describing Chirac as “entirely beholden” to the FNSEA . Chirac completely opposed decoupling until he was approached by AGPB leaders, who told him that they supported the policy change .

The law states that “the Secretary may require that any person that…distributes a covered commodity for retail sale maintain a verifiable record keeping audit trail…to verify compliance” for a period of up to two years . This includes foreign and domestic farmers and ranchers, distributors and processors, and retailers. We discuss the ramifications of this audit trail requirement for the cost of compliance below.The cost of COOL implementation can only be estimated at this time. The major direct costs of the program include the costs of segregating and tracking product origins, the physical cost of labels, and enforcement costs. AMS itself projects that domestic producers, food-handlers, and retailers will spend $2 billion and 60 million labor hours on COOL in the first year, though these figures were questioned by the GAO in a 2003 report. The GAO reports that the Food and Drug Administration has estimated that the cost of monitoring COOL for producers will be about $56 million annually. The costs of implementation for produce will likely be lower than the costs of implementation for meats as some fruits and vegetables are already labeled by country of origin. From a policy perspective, whether these uncertain costs outweigh the benefits to society of the program, and the extent to which retailers, producers and consumers will share these costs, are of equal importance. The extent to which COOL may benefit domestic producers depends on two considerations, whether country-of-origin information will induce and/or allow consumers to demand more domestic products relative to their foreign counterparts , and whether the costs of COOL implementation will be differentially higher for foreign suppliers than domestic suppliers.

If COOL costs foreign suppliers more to comply than domestic suppliers, the transaction costs imposed by COOL will be lower for domestic suppliers than for foreign suppliers. Even if the price elasticity of demand for foreign and domestic goods is the same, demand for foreign products will fall more than demand for domestic products, and some consumers who previously bought foreign goods will switch to buying domestic ones. This effect will be exacerbated to the extent that labels themselves affect consumers’ preferences or allow them to act upon preferences that were unsatisfied before mandatory labeling. If consumers truly prefer domestic products relative to foreign ones, all other characteristics being equal, COOL will be accompanied by increased demand for domestic goods. If this effect and the differentially higher compliance costs for foreign goods are large enough, this could theoretically offset the reduced demand for labeled goods occasioned by the transactions costs imposed by COOL. Gains to domestic producers are limited by the size of the market share claimed by foreign producers prior to the introduction of COOL, but in this case domestic producers would benefit from the regulation. Consumers could be net beneficiaries as well if mandatory labeling satisfied a preference that the market previously failed to serve. Economic theory and empirical evidence both suggest that the benefits of COOL are unlikely to outweigh the costs of compliance. Both consumers and suppliers are likely to be worse off as a result of this regulation.

The major support for this conclusion comes from the concept of “revealed preference.” In the absence of market failures, the fact that producers have not found it profitable to provide COOL to customers voluntarily is strong evidence that willingness to pay for this information does not outweigh the cost of providing it. If the benefits outweighed the costs, profit maximizing firms would have already exploited this opportunity. Of course, this argument depends on whether the market for agricultural products functions well and would be responsive to consumer demands for COOL if it existed. In this section, we argue that this is indeed the case, and provide empirical support for the theoretical argument that the costs of COOL exceed its benefits. These findings are consistent with the conclusion of the U.S. Food Safety and Inspection Service , that there is no evidence that “a price premium engendered by country of origin labeling will occur, and, if it does, [that it] will be large or persist over the long term.” There is little evidence that imperfections in the food market prevent producers from providing country-of-origin-labeling. Asymmetric information, where one party in a potential transaction has better information than the other, can indeed lead to inefficient outcomes. However, in standard economic theory this result arises either because a seller would like to signal that his product is of high quality but is unable to do so convincingly, or because a seller that has a low-quality product can pretend that it is high quality.But this situation does not plausibly apply in the case of COOL in agriculture. There is nothing now that inhibits producers from “signaling” the national origin of their products. Whatever their revealed preference, do consumers have a stated preference for country-of-origin labeling? The GAO summarizes survey evidence as indicating that American consumers claim they would prefer to buy U.S. food products if all other factors were equal,40 litre plant pots and that consumers believe American food products are safer than foreign ones. However, surveys also suggest that labeling information about freshness, nutrition, storage, and preparation tips is more important to consumers than country of origin . Revealed preference arguments in their simplest form suggest that if consumers truly preferred domestic food products, it would only take one grocer to limit store items to domestic-only products before other stores saw this grocer’s success and followed suit.Producers of organic products have voluntarily labeled their products to attempt to capture a premium, as have producers of “dolphin-safe tuna.” If demand for information exists, agricultural producers have generally been adept at seizing this opportunity. Similarly, many lamb imports from Australia and New Zealand already bear obvious country-of-origin labels going beyond legal requirements because consumers prefer this product to domestic lamb and lamb from the rest of the world . Thus, Australian and New Zealand suppliers have an incentive to label their lamb products because they infer a positive net benefit to doing so, while producers and retailers who abstain from the practice must know that sales will not increase enough from offset labeling costs. There are other non-economic arguments used to support mandatory COOL that relate to food safety. It is possible that COOL would make tracing disease outbreaks easier, thus reducing the health costs of food-related diseases. This is less likely than might initially seem to be the case, because of the long delay between disease outbreaks and the shipment of contaminated products .

If domestic products are systematically safer than foreign products, substitution towards domestic goods could also increase the average safety level of food consumed. However, there is little evidence that foreign food products are systematically less safe than domestic products.Foreign fruits and vegetables do not systemically carry more pesticide residue than their domestic counterparts . There is insufficient evidence to determine if bacteria levels differ between foreign and domestic produce . 8Not surprisingly, in light of revealed preference arguments, many retailers have argued that the cost of COOL implementation will be excessive and burdensome. As noted above, AMS has forecast an annual cost of $2 billion to implement the regulation. These costs will be borne by the private sector as the Farm Bill provides no funds to alleviate industry costs for developing and maintaining the necessary record-keeping systems . In addition, the statute prohibits the development of a mandatory identification system for certification purposes. Instead, USDA must “use as a model certification programs in existence on the date of this Act” . As discussed earlier, USDA is also allowed to require a verifiable record keeping audit trail from retailers to verify compliance.” These seemingly contradictory directions to the USDA—no mandatory identification system is allowed, but an audit trail from retailers may be required—could limit the AMS’s ability to implement the COOL legislation, but is likely intended to act as a prohibition against any efforts to mandate full-scale “trace back” requirements that would track products from the farm gate to the grocery store . Such a formal trace back requirement would impose costs with legal incidence on producers in the field unlike a certification program, where the legal incidence of the costs of regulation falls mostly on retailers and processors. Of course, the economic incidence of the costs of this regulation will be determined by the price elasticity of demand for products, as explained in the discussion that conceptualized COOL as a transaction cost. While retailers’ organizations, like the Food Marketing Institute, have generally been against mandatory COOL, perhaps the loudest complaints about the cost of COOL have come from the meat packing and processing industry. In particular, the costs of tracking and labeling the origin of ground meat products are expected to be relatively high. For example, the president of the American Meat Institute, a trade group representing meat packers and processors has claimed that COOL regulation will be costly and complicated and that it will “force companies to source their meat not based on quality or price, but based on what will simplify their labeling requirements” . The National Pork Producer’s Council also opposed COOL legislation , and has since funded a study that estimates that the cost of COOL implementation will translate into a $0.08 per pound increase in the average retail cost of pork . A key element of this study is an argument that, whatever the intention of the authors of the COOL legislation, implementation will in practice require complete “trace back” capability from the farm to the retail level. With the 2003 discovery of BSE in the U.S., a comprehensive trace back system for livestock may receive greater political support. Agricultural ranchers and growers have largely welcomed the COOL legislation. The California Farm Bureau , the Rocky Mountain Farmers Union , and the Western Growers Association , among other such organizations, have endorsed this regulation. These organizations generally argue that consumers “want” labeling, , consumers have a “right” to country-of-origin information , and that the legislation is a valuable “marketing tool” . The first of these arguments is weakened by the logic of revealed preference. In the case of meat products, the comments of the president of the American Meat Institute above explain the logic of the third justification; packers may demand more domestic inputs if this lowers the cost of COOL compliance. There is also some suggestion that the alleged market power exercised by the relatively concentrated meat-packing industry has created rents that COOL will dissipate . That is, the bargaining position of producers relative to packers will be improved as a result of these rules. This is at least in part because legal liability for failure to comply with COOL will rest with retailers, not with suppliers closer to the farm gate.COOL has been justified as an attempt to favor domestic products in the U.S. market, and early indications suggest that foreign suppliers believe it will do so. Canadian cattle groups have suggested that beef be given a “North American” label if it comes from any country in NAFTA .