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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. Since its last TPR, the EC has continued to re form its Common Agricultural Policy (CAP), so 
as to lower distortions and achieve greater market or ientation. The reforms are also contributing to the 
reduction of the burden of agricultural support on th e EC's economy, mainly through the decoupling 
of payments from production. However, tariff prot ection and domestic support to agriculture, together 
with the limited liberalization of agricultural pr oducts, even under the EC's preferential agreements, 
continue to limit foreign competition and the infl uence of world market signals, and to generate 
surpluses of certain products. The policy has made su bsidies important for exports of some surpluses, 
as well as of some processed agricultural products. Ta riffs on agricultural imports (major division 1 of 
ISIC, Revision 2) average 10% - 16.5% on the WTO definition of agricultural products - in 2004 
(down from 10.1% in 2002), with rates ranging up to 209.9% (Chapter III(2)(ii) and Table AIII.1). In 
2002, support to agricultural producers was 36% of fa rm receipts (above the OECD average of 31%), 
and the total amount spent on CAP still repr esents over 40% of Community expenditure. 
2. Since 2003, the EC has operated a new Common Fisheries Policy (CFP), aimed at addressing 
some of the main problems faced by the industry, including the overexploitation of certain fishing 
stocks.  The main changes to the previous CFP are:  the adoption of a long-term approach to fisheries 
management; a new fleet policy; socio-economic m easures; access to waters and resources; control 
and enforcement; and involvement of stakeholders in  decision-making. Tariff protection on fishing is 
10.5%, on average, in 2004 (up from 10.4% in 2002), with rates ranging up to 23%. 
3. The EC has an energy-intensive economy, which is about 50% self-sufficient in energy.  
Support is still granted for, inter alia , more efficient environmentally friendly energy. Changes to the 
energy policy guidelines are being discussed to achie ve security of energy supply, complete the EC 
internal market, and enhance competition in the su bsector. Under recently enacted legislation, the 
electricity and natural gas markets have been furthe r liberalized and made more efficient. Imports of 
electricity are duty free. 
4. Productivity growth in EC manufacturing (maj or division 3 of ISIC, Revision 2) has 
continued to decelerate, giving rise to the notion that  this sector may become relatively less important 
for the EC economy. Moreover, the sect or is still a major beneficiary of  state aid. As a result, the EC 
is implementing wide-ranging programmes to increase its efficiency, and to become the most competitive economy in the world by 2010. Tariffs  on manufactured imports average 6.4%, (down 
from 6.5% in 2002); relatively high rates apply to some processed food products. 
5. Services continue to be, by far, the most important contributor to the EC's real GDP and 
employment, despite weak productivity growth in  the Community, particularly in the sector. 
Furthermore, the sector has lagged behind others  in creating a single market, largely because of 
differences in regulation across member states. The EC has taken measures to address some of the 
structural problems in certain services subsectors, notably through the Financ ial Services Action Plan 
(FSAP), the reform of the regulatory framework  on telecommunications, and progress on the Action 
Plan for transport.  Further liberalization of ser vices is considered as the most important mid- and 
long-term goal of EC reforms, since it woul d boost the overall competitiveness of the economy. European Communities WT/TPR/S/136 
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(2) AGRICULTURE  
(i) Main features 
6. Agriculture represented 2% of GDP of the 15 member States of the European Communities 
(the EC-15) in 2002, and 3.9% of GDP of the ten acceding countries (the C-10). Agriculture, 
including hunting, forestry and fishery activities, employed 4% of the working population of EC-15, 
down from 4.3% in 2000, whereas agriculture and rela ted activities employed 13.4% of the total work 
force of the C-10 in 2002 (Table IV.1). The cu ltivated area of the EC-15 accounted for 130.8 million 
hectares in 2002; in the C-10 it was 36.2 million hectares, with Poland accounting for almost half of this amount. The Community currently has around 11 million farmers, of which close to 4 million are 
from the C-10.  The average size of farms is about 19 hectares in the EC-15, and around 7 hectares in 
the C-10.
1  
Table IV.1 
Selected agricultural statistics, 2002 
Real income 
(1995=100)   
 
 
Utilized area 
('000 hectares)  
 
 
Final production 
(€ Million) Share of household 
consumption 
expenditure devoted 
to food, beverages 
and tobaccoa 
(%) Share of 
employment in 
civilian 
working 
populationb 
(%)  
2002  
% change from 
2001 
Austria 3,387 5,704 15.5 5.7 95.3 -2.8 
Belgium 1,393 7,056 16.3 1.8 107.8 -7.7 
Cyprus 144c .. 32.7 5.4 .. .. 
Czech Rep. 3,652 3,283 26.4 4.9 .. .. 
Denmark 2,690 8,348 17.4 3.2 81.1 -26.2 
Estonia 890c 475 32.7 6.5 .. .. 
Finland 2,216 4,288 18.7 5.5 106.6 7.2 
France 29,622 64,813 14.3 4.1 108.9 -0.9 
Germany 16,971 41,454 16.2 2.5 110.9 -18.0 
Greece 3,917c 12,189 20.6 15.8 111.8 5.7 
Hungary 5,867 6,077 27.7 6.1 .. .. 
Ireland 4,372 5,746 16.5 6.9 92.6 -11.4 
Italy 15,341 43,639 16.9 4.9 110.7 -1.7 
Latvia 2,480 587 32.9 15.3 .. .. 
Lithuania 3,487 1,067 38.9 18.6 .. .. 
Luxembourg 127 256 19.7 2.0 91.1 1.1 
Malta 10 146 26.5 2.1 .. .. 
Netherlands 1,933c 20,114 14.3 2.9 81.2 -7.5 
Poland 16,891 13,241 28.0 19.6 .. .. 
Portugal 3,813 6,258 22.7 12.5 136.8 -2.2 
Slovak Rep. 2,240 1,677 28.7 6.6 .. .. 
Slovenia 506 1,062 22.0 9.7 .. .. 
Spain 25,554 37,335 18.8 5.9 125.1 1.2 
Sweden 3,039 4,710 17.3 2.5 114.8 -1.5 
U.K.  15,722c 24,465 13.8 1.4 64.0 3.9 
EC-15 130,809 286,372 16.2 4.0 107.2 -3.4 
C-10 36,167 27,615d 28.3 13.4 .. .. 
.. Not available. 
a 2001. 
b Employment in agriculture, hunting, fishing and forestry. 
c 1999. 
d Without Cyprus. 
Source: DG Agriculture (2004), Key Agricultural Statistics , Table 2.0.1.2, and DG Agriculture (2003), Agriculture in the 
 EU – Statistical and Economic Information 2002 , p. 32, Brussels. 
                                                      
1 DG Agriculture (2003b). WT/TPR/S/136 Trade Policy Review 
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7. Forests in the EC-15 cover 130 million hectares, around 36% of its total landmass. Forest type 
and coverage varies greatly across the EC, reflectin g bio-geographic and clima tic diversity, as well as 
differing traditions of land use. In recent decades,  changes have been brought about by intensified 
management practices, the use of exotic tree sp ecies, the introduction of animals for hunting, and 
drainage.  Moreover, repeated for est fires have produced changes in the Mediterranean region.  These 
problems have affected the productive capacity of forests as a source of raw materials for timber-
based industries, and their capacity to act as a car bon sink that lessens the effects of climate change. 
As a result, a new scheme, "Forest Focus", is in  place to monitor and safeguard the Community's 
forests; it runs from 1 January 2003 to 31 December 2006, with a budget of € 61 million for the 
period.2 
 8. Agricultural income for the EC-15 fell by 3.4% on average in real terms in 2002 (in contrast 
with increases of 4.5% in 2000 and 6% in 2001) due to  a sharp fall in the prices of many crops (e.g. 
cereals, oilseeds, and potatoes) and animal products (e.g. pigmeat, poultry, and milk), which more 
than offset the increase in the total volume of production.
3  With the exception of Greece, Spain, 
Luxembourg, Finland, and the United Kingdom, the EC- 15 registered declines in real income in 2002; 
the sharpest decline (26.2%) was in Denmark. In 2002, real incomes were above their 1995 levels in 
nine countries of the Community, with the United Kingdom at the bottom of the list (36% below its 1995 level).  However, farmers ofte n complement their agricultural in come by revenue from non-farm 
sources. 
9. In 2002, average income in the EC-15 decrea sed most significantly in farms specialized in 
pork and poultry production (-38.7% compared with 2001 income levels), followed by mixed (crops 
and livestock) production (-15.9%), wine (-7.5%) , and milk (-7.3%). Farms specialized in the 
production of other permanent crops and horticulture experienced a rise, in average income, of 18.6% 
and 11.7%, respectively. In value terms, milk rema ins the single most important agricultural product 
(14.5% of the EC-15 agricultural production in 2002, up from 13.8% in 2000), followed by pigs 
(10.2%) and cattle (9.1%).  In 2002, pigs repres ented 18.1% of the C-10 agricultural production, 
followed by milk (14.9%), and wheat (8.8%). 
10. The EC-15 is the world's leading trader (e xporter and importer) of agricultural products, and 
is self-sufficient in most agricultural products subj ect to the CAP. In 2002, the highest level of self-
sufficiency (the ratio of domestic production to co nsumption) was attained in whole-milk powder, 
followed by skimmed milk powder, sugar, wheat, and butter. Some EC agricultural production is thus 
reliant on export opportunities. In 2000, the EC-15 exports of individual commodities accounted for a 
substantial portion of world trade: wine (39.8%),  pigmeat (36.1%), cheese (35.8%), milk powder 
(32.5%), butter (21.2%), eggs (19.1%), and sugar (16.8%). 
(ii) Common Agricultural Policy (CAP) 
(a) Overview 
11. The Agenda 2000 reform of the CAP provid es the basic framework for EC's agricultural 
policy over the period 2000-06.
4 In June 2003, the EC's Council of Ministers decided to reform the 
CAP, as from 2004-05. The main mechanisms of the CAP are: Guaranteed Common Prices and 
Common Market Organisations (CMOs) for 18 product categories.5  In marketing year 2000/01, the 
EC-15's total Aggregate Measurement of Suppor t (AMS) amounted to € 43,654 million (compared 
                                                      
2 European Commission Press Release IP/02/1103, 19 July 2003. 
3 DG Agriculture (2003a). 
4 DG Agriculture (2000). 
5 See WTO (2002) for a description of the CMOs. European Communities WT/TPR/S/136 
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with a commitment level of € 67,159 million), while  domestic support through green box and blue 
box measures reached € 21,845 million and € 22,223 million, respectively.6 The combined share of 
output payments and market price support fell from 91% of producer support in 1986-88 to 61% in 
2000-02, while payments based on area planted/anim al numbers increased from 2.8% to 27.3% over 
the same period. This has somewhat increased th e exposure of farmers to world market signals.7 
Nevertheless, the total value of aid that potentiall y has the most production-distorting effects (market 
price support, output payments, and input subsidies)  accounted for 68.7% of support to producers in 
2002 (down from 69.9% in 2000).8 
12. The EC's rural development regulation under the Agenda (sec ond pillar of the CAP) includes 
accompanying measures (e.g. agri-environmental measu res, early retirement schemes, afforestation, 
and payments to assist farmers in least-favoured  areas). These and other measures, such as 
investment, training, promotion, and conversion of ag riculture, are to some extent, co-financed by EC 
member States, with 60% to 85% of the financ ing coming from the EC budget.  Funding for this 
second pillar over the period 2000-06 amounts to € 38.3 billion. Around € 4.8 billion were made 
available for 2004, 2% higher than actual expenditures in 2003.9 
13. The EC also finances Leader+, an initiative to encourage and support a series of small-scale 
pilot approaches to integrated rural development, at  the local level in selected areas of the EC. The 
total EC contribution over 2000-06 is more than € 2 billion, financed under the European Agricultural 
Guarantee and Guidance Fund (EAGGF).  In 2002, the Commission also created a special aid fund of 
between € 500 million and € 1 billion for natural, t echnological or environmental disasters, available 
both to member States and applicant countries.10 
14. On 10 December 2003, the Commission adopted a regulation on " de minimis " aid for 
agriculture and fisheries. After consultation with member States and third parties, the Commission 
plans to implement it towards the end of 2004. The regulation exempts national aid of up to € 3,000 per farmer and fisherman (over three years)  from the requirement of prior notification.
11 To avoid 
large-scale support operations, any member State gr anting such aid has to respect an overall ceiling 
roughly equal to 0.3% of its agricultural or fisher ies output.  If all member States fully use this 
possibility, it would amount to an average " de minimis " aid of around € 290 million per year for the 
whole EC, i.e. 2.2% of the annual value of  agricultural state aids of € 13 billion.  
15. A total of € 43.2 billion was spent on the CAP in 2003 (compared with € 41.5 billion in 
2001), i.e. over 40% of Community expenditure. Expenditure is channelled mainly through the 
EAGGF managed by member States and monitored by  the Court of Auditors. Appropriations for the 
guarantee section of the EAGGF for 2003 were € 44. 6 billion. France received the largest share of 
                                                      
6 WTO document G/AG/N/EEC/49, 1 April 2004. 
7 The prices received by EC farmers were, on aver age, 33% above world mark et prices in 2000-02 
(compared with 76% in 1986-88) (OECD, 2003a). 
8 OECD (2003f). 
9 OECD (2003a). 
10 As a response to flooding and droughts, new meas ures were made available: derogations to allow 
grazing on set-aside land, adva nces on direct payments, cereals from inte rvention stocks sold at a discount price 
to farmers for animal feed, and derogations and faster procedures for decisions on rural development assistance . 
In 2002, for example, farmers in fl ooded regions of Germany received adva nces of 50% of arable payments, 
with € 516 million being brought forward from the 2003 budget. Farmers in southern parts of Italy affected by persistent drought received advances of 50% of payments  at a total cost of some € 300 million (OECD, 2003). 
11 One out of two farmers receives less than € 2,000 on  direct EC payments each year. This is the first 
time the Commission proposes " de minimis " aid in agriculture and fisher ies (European Commission, Press 
Release) [Online]. WT/TPR/S/136 Trade Policy Review 
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EAGGF assistance in 2002, in line with its 22.6%  share in overall EC agricultural production, 
followed by Germany, Italy, and Spain (Table IV.2). 
Table IV.2 
EAGF guarantee and guidance expenditure by member St ate, and national expendi ture on agriculture, 2002 
 Share in EC 
agriculture 
production 
(%)  
EAGF  
guarantee 
(€ million)  
EAGF  
guidance 
 (€ million)  
EAGGF  
total 
 (€ million)  
Share in total 
EAGGF 
(%) National expenditure on 
agriculturea 
(€ million) 
Austria 2.0 1,090 17.0 1,107 2.4 900 
Belgium 2.6 942 12.9 955 2.1 400 
Denmark 3.2 1,221 2.5 1,224 2.7 250 
Finland 1.4 838 37.0 875 1.9 1,500 
France 22.6 9,752 140.6 9,893 21.5 3,500 
Germany 15.5 6,784 548.2 7,332 16.0 1,900  
Greece 4.0 2,634 411. 5 3,046 6.6 270 
Ireland 2.0 1,709 36.2 1,745 3.8 510 
Italy 15.0 5,672 487.1 6,159 13.3 1,100b 
Luxembourg 0.1 37 0.3 37 0.1 35 
Netherlands 7.2 1,133 13.4 1,146 2.5 1,000 
Portugal 2.1 754 353.0 1,107 2.4 350 
Spain 12.3 5,933 833.3 6,766 14.7 720b 
Sweden 1.6 817 22.4 839 1.8 400 
UK 8.4 3,643 81.5 3,725 8.2 1,100 
Total 100.0 43,214  2,997 46,211 100.0 13,935 
a Provisional data. 
b Data do not include regional expenditures. 
Source: DG Agriculture (2004), Tables 2.0.1.2, 3.4. 2 and 3.4.10, [Online].  Available at:  
 http://europa.eu.int/comm/ agriculture [10 April 2004]. 
16. In terms of products, the largest share of E AGGF expenditure was devoted, in 2002, to arable 
crops (43%, up from 41% in 2001), followed by b eef and veal (18%, up from 15% in 2001), and milk 
products (6%, up from 4.5% in 2001).12 Rural development now constitutes 10% of EAGGF 
Guarantee spending.  In marketing year 2000/01, the distribution of the AMS among the main 
beneficiary agricultural products showed: beef (25. 6% of the total), white sugar (13.3%), butter 
(10.2%), tomatoes (6.1%), common wheat (5.2%), a pples (5.1%), barley (5%), and olive oil (4.7%).13 
According to the OECD, the producer support est imate (PSE) for the EC remains very high, 
particularly for beef and veal, wheat and other gr ains, sugar, milk, and sh eepmeat; eggs benefit the 
least (Table IV.3).14 
                                                      
12 DG Agriculture (2003a). 
13 WTO document G/AG/N/EEC/49, 1 April 2004. 
14 The PSE is an indicator of the annual monetary value of gross transfers from consumers and 
taxpayers to agricultural producers, measured at the farm -gate level, arising from policy measures that support 
agriculture, regardless of their nature, objectives or impact on farm production or income. For further details see OECD (2002b). European Communities WT/TPR/S/136 
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Table IV.3 
Main indicators of suppo rt by commodity, 1986-02 
  1986-88 2000-02 2000 2001 2002a 
Wheat PSE (€ million) 
Percentage PSE 7,879 
51 9,757 
46 9,950 
46 9,243 
46 10,078 
46 
Maize PSE (€ million) 
Percentage PSE 2,928 
53 2,616 
35 3,038 
41 2,812 
37 1,997 
28 
Other grains PSE (€ million) 
Percentage PSE 5,238 
56 6,110 
51 6,014 
50 6,199 
51 6,116 
52 
Rice PSE (€ million) 
Percentage PSE 395 
57 269 
31 136 
17 349 
40 321 
37 
Oilseeds PSE (€ million) 
Percentage PSE 2,828 
59 1,884 
35 2,157 
39 1,806 
34 1,689 
31 
Sugar PSE (€ million) 
Percentage PSE 2,883 
60 2,357 
48 2,614 
50 2,008 
44 2,449 
49 
Milk PSE (€ million) 
Percentage PSE 19,002 
57 17,523 
44 16,335 
42 17,088 
41 19,147 
48 
Beef and veal PSE (€ million) 
Percentage PSE 11,956 
55 21,047 
73 17,720 
66 20,108 
73 25,313 
79 
Sheepmeat PSE (€ million) 
Percentage PSE 3,616 
70 3,050 
46 3,507 
53 3,333 
49 2,312 
38 
Pigmeat PSE (€ million) 
Percentage PSE 2,839 
16 6,201 
24 5,933 
25 5,884 
20 6,786 
26 
Poultry PSE (€ million) 
Percentage PSE 1,770 
24 3,432 
37 3,295 
37 3,535 
35 3,466 
38 
Eggs PSE (€ million) 
Percentage PSE 644 
13 230 
4 244 
4 124 
2 323 
6 
Other commodities PSE (€ million) 
Percentage PSE 24,740 
29 25,791 
22 25,205 
22 25,474 
21 26,694 
22 
All commodities PSE (€ million) 
Percentage PSE 86,718 
40 100,266 
35 96,146 
34 97,963 
34 106,689 
36 
a Provisional 
Note: The producer support estimate (PSE) fo r "other commodities" is the residual of  the PSE for all commodities minus the PSE for 
 the commodities listed above. 
Source : OECD (2003), Agricultural Policies in OECD Co untries:  Monitoring and Evaluation 2003 , Paris. 
17. Overall, the EC's total agriculture transfers, as  a share of its GDP, decreased from 2.7% in    
1986-88 to 1.3% in 2000-02, partly as a result of  the shift from market price support measures 
towards payments based on area planted and herd size (Table IV.4). The proposals for a long-term 
reform perspective for sustainable agriculture repr esent an opportunity to fu rther increase the market 
orientation of the CAP and reduce the production and trade distortions for a number of commodities.  
18. The PSE for the EC, as a percentage of tota l production value, declined, on average, from 
40% in 1986-88 to 35% in 2000-02. However, support to producers increased from 34% of farm 
receipts in 2001 to 36% in 2002 (above the OECD aver age of 31%).  The decline in world prices and, 
to a lesser extent, an increase in payments based on input constraints were the main factors explaining 
the increase in support in 2002. Reflecting the evol ution of world prices, the implicit tax on 
consumers, as measured by the c onsumer support estimate (CSE), went from -24% in 2001 to -28% in 
2002.15   
                                                      
 15 The CSE is an indicator of the annual monetary value of gross transfers to (from) consumers of 
agricultural commodities, measured at the farm gate, ar ising from policy measures that support agriculture 
regardless of their nature, objectives or impacts on cons umption of farm products. For further details see OECD 
(2002b). WT/TPR/S/136 Trade Policy Review 
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Table IV.4 
Transfers associated with agricultural policies in the EC, 1986-02 
  1986-88 2000-02 2000 2001 2002a 
PSE € million 
US$ million 
(%)b 86,718 
95,426 
40 100,266 
92,296 
35 96,146 
88,606 
34 97,963 
87,734 
34 106,689 
100,549 
36 
CSE € million 
US$ million 
(%)c -64,137 
-70,518 
-41 -49,127 
-45,241 
-26 -48,585 
-44,775 
-27 -46,122 
-41,306 
-24 -52,672 
-49,641 
-28 
Total transfers d € million 
US$ million (% of GDP) 100,624 
110,771 
2.7 112,823 
103,849 
1.3 108,577 
100,061 
1.3 110,456 
98,921 
1.3 119,438 
112,564 
1.3 
Memo item : 
Total transfers for all 
OECD countries  
 € million 
US$ million 
(% of GDP)  
275,029 
302,251 
2.3  
342,514 
315,045 
1.2  
348,682 
321,335 
1.3  
341,122 
305,501 
1.2  
337,737 
318,300 
1.2 
a Provisional. b PSE as a percentage of total value of production (valued at dome stic producer prices), adjusted to include direct payments an d to 
 exclude levies on production. 
c CSE as a percentage of total value of cons umption (valued at domestic producer prices). 
d Total transfers are not the sum of PSE and CSE; they cover the total value of production and include not only transfers to 
 agriculture, as measured by the PSE and CSE, but also other transfers associated w ith agricultural policies. 
Source : OECD (2003), Agricultural Policies in OECD Countries,  Paris. 
19. The EC has 89 tariff quotas on agricultural products, managed by the Commission on the 
basis of first-come-first-served (20), historic imports (22), and mixed allocation methods (47).16  The 
average filling ratio for tariff quotas is 67% each year.17  In the marketing year 2002/03, full 
utilization occurred in imports of live sheep and goa ts; meat of sheep or goats; poultry cuts; butter; 
cheese; certain fruits (including apples, pears, tabl e grapes, cherries, and almonds); and vegetables 
(e.g. potatoes, carrots, and sweet peppers); wh ile there was significant under-utilization for wheat; 
meat of swine; bran; and sweet potatoes.18 A recent World Bank study estimates that tariff quotas 
affect about 38% of EC's agricultural production.19  
20. In the marketing year 2002/03, the basic pr ice for sheepmeat was abolished; intervention 
prices for cereals, rice, sugar beet, milk, butter, an d pigmeat were maintained at the 2001/02 levels.20  
In July 2002, the intervention price for b eef and veal was replaced by a basic price  for storage, set at 
€ 2,224 per tonne, i.e. 26.2% below the 2001/02 intervention price.21 
21. In the marketing year 2000/01, the EC i nvoked the price-based special safeguard (SSG) 
clause under the WTO Agreement on Agriculture fo r sugar, molasses, and a number of poultry 
products, while the volume-based SSG clause was made operational for so me fruit and vegetable 
products. 
                                                      
16 This includes methods involving licences issued on a first-come, first-served basis and systems 
where licence requests are reduced pro rata  where they exceed available qua ntities. Importers' shares are 
generally allocated and licences issued in relation to quantities demanded and often prior to the commencement 
of the period during which the phys ical importation is to take place.  
17 European Commission (2003h). 
18 WTO document G/AG/N/EEC/45, 18 June 2003. 
19 World Bank (2003). 
20 The intervention prices were: cereal s (€ 101 per tonne), rice (€ 298 per tonne), sugar beet (€ 48 per 
tonne), milk (€ 2,055 per tonne), butter (€ 3,282 per tonne), and pigmeat (€ 1,509 per tonne) (OECD, 2003a). 
21 The basic price for beef is a pri ce at which private storage may be triggered. There is a safety net 
intervention price of  €1,560 per tonne. European Communities WT/TPR/S/136 
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22. Liberalization of agricultural products under the EC's various bilateral and regional trade 
agreements remains limited (Chapter II(5)(iii)).  Processed agricultural goods imported into the EC 
from its preferential partners are subject to custom s duties comprising an industrial and an agricultural 
component. While all industrial components enjoy substantial preferential tariff treatment, tariff 
reductions on agricultural components are still limited. 
23. The simple average MFN tariff on agricultural pr oducts is 10%.  In general, tariffs are lower 
on agricultural products not produced in the EC (e.g., coffee, tea, spices), but are considerably higher 
on primary CAP and processed products (Table A III.1). Border protection and domestic support, 
together with the limited liberalization under th e preferential agreements, have insulated some 
products from competition and generated surpluses. Th e policy has thus made subsidies indispensable 
for exports of some of the surpluses, as well as for exports of certain processed agricultural products. 
The Commission notified an allocation of € 2.6 billio n to export subsidies in the marketing year 2001-
02 (down from € 5.6 billion 1999-00), pr incipally on milk and milk prod ucts (37%), sugar (19%), and 
beef meat (15%).22 
24. Since the last TPR of the EC, in the WT O Committee on Agriculture, Members have raised 
several questions in areas such as the EC's tariff quota administration23; the CAP Mid-Term Review to 
reduce trade-distorting domestic support24; budget contribution by Member States on the EC's 
restructuring and conversion programme25; the EC's sugar policy, including export subsidies26; and the 
EC's price-based special safeguard actions.27 Since mid 2002, issues have also been raised in the 
WTO SPS Committee concerning the EC (Chapter III(2)(x)). 
25. On 26 June 2003 in Luxembourg, the Council of Agriculture Ministers agreed to reform the 
CAP, beginning in 2004-05.28  In addition, on 23 September 2003, the Commission presented to the 
Council of Ministers and the European Parliament three reform options for the sugar regime, which 
has never been fundamentally reformed. At the sa me time, it adopted reform proposals for tobacco, 
olive oil and cotton (section (b) below), which would enter into force in 2006.29 The reform of the 
CAP is aimed at, inter alia : establishing a more stable policy fra mework for the sector; putting greater 
emphasis on addressing the interest of consumer s and taxpayers; increasing market orientation 
through simpler and less trade-distorting support measures; keeping budgetary costs stable and 
manageable; safeguarding the rural economy and environment; and helping in negotiating an 
agreement under the WTO that meets the need s of the EC's agriculture and society.30 
26. The key element of the CAP reform is the introduction, as from 1 January 2005, of a single 
farm payment scheme (SFPS) "decoupled" from production.31 Member States may decide to maintain 
certain "coupled" elements.  The SFPS will replace most of the existing premia under different 
CMOs.  It is subject to the requirement to keep  all farmland in good agriculture and environmental 
conditions ("cross-compliance"). Other measures of  the reformed CAP include reduction in direct 
                                                      
22 WTO documents G/AG/N/EEC/32, 18 June 2001, and G/AG/N/EEC/44, 11 June 2003. 
23 WTO document G/AG/R/31, 27 August 2002. 
24 WTO document G/AG/R/32, 6 November 2002. 
25 WTO document G/AG/R/33, 7 January 2003. 
26 WTO document G/AG/R/34, 15 May 2003. 
27 WTO document G/AG/R/35, 26 August 2003. 
28 This was followed, on 29 September 2003, by CAP reform decisions adopted by the EC's Council of 
Ministers. 
29 European Commission (2003a). On 18 November 2003, the Commission adopted the reform 
proposals on tobacco, olive oil, and cotton (European Commission Press Release IP/03/1559, 
18 November 2003). 
30 DG Agriculture, "CAP Reform Summary", Newsletter July 2003, Brussels. 
31 Member States may delay implementation of the SFPS up to 2007. WT/TPR/S/136 Trade Policy Review 
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payments ("modulation") for bigger farms to finance the new rural de velopment policy; reforms in the 
intervention mechanism for produc ts with structural imbalances such as butter, rye and rice; 
adjustments in support mechanisms for other products  (e.g. durum wheat, drying aids, starch potatoes, 
dried fodder, and nuts); and a mechanism for financia l discipline that ensures the reform budget, fixed 
until 2013, is not overshot.  Reforming the CAP i nvolves many detailed changes, some taking place 
over several years. The key policy elements of th e CAP reform are summarized in Box IV.1, while 
Table IV.5 presents a comparison between the main measures of the current CAP with those of the 
reformed CAP on key arable crops and animal products. 
27. The reformed CAP has greater market orient ation and lower market distortions than the 
current CAP, mainly because of the significant decoupling of payments from production. For the 
same reason, income transfer efficiency is impr oved and the administrative burden is reduced. These 
benefits would be maximized if all member States were to make full use of the scope for converting 
commodity-linked payments into the new SFPS.32 
28. The CAP reform makes significant changes to the EC acquis communautaire  on which the 
negotiations of the C-10 were based.  In their curre nt form, the CAP reform texts take no account of 
the results of those negotiations or of the enlarg ement itself. Therefore, the Commission has made a 
proposal to adapt both the Act of Accession and the CA P reform texts to ensure that they can function 
in an enlarged EC.  In particular, in order to ma intain the general approach taken on the progressive 
introduction of direct payments, the proposal foresees that the new direct payments introduced by the 
CAP reform would be subject to the same phasing-in  schedule as all other direct payments: 25% of 
the present system in 2004, rising to 30% in 2005,  35% in 2006, and 100% in 2013. In terms of 
expenditure, the payments would be:  € 2.1 billion in  2004, € 3.6 billion in 2005 and € 3.9 billion in 
2006.  The proposal also maintains both the option for the C-10 to apply a hectare-based single area payment scheme (SAPS) instead of the new SFPS, and the principle of topping up direct payments.
33 
On cross-compliance, farmers in the C-10 will beco me subject to the CAP reform rules from 2005, , 
while the mechanisms of financial discipline and m odulation should not be applicable to the C-10 
until the phase-in of direct payments in those countries has reached the EC-15 level.  
                                                      
32 France is to use the partial coupling options by implementing the SFPS in 2006, when 25% of arable 
aid payments will remain coupled to production, as w ill 50% of ewe premium payments (the remainder being 
paid in decoupled form). France will also retain 100% of the suckler cow premium in coupled form, as well as 
100% of the calf slaughter premium and 40% of the beef slaughter premium (Agra Europe, 18 February 2004).  
33 Topping-up would be possible under the classical scheme until the end of 2006, under the SAPS until 
the end of 2008, and under the new SFPS from 2005 (DG Agriculture, 2003c). European Communities WT/TPR/S/136 
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Box IV.1:  CAP reform:   The major elements of the reformed CAP  
(1) Single farm payment scheme 
A single farm payment scheme (SFPS) wi ll replace most of the premia (direct aid payments to farmers) currently 
offered. The new scheme will no longer be linked to what a farmer produces (it will be "decoupled").  The amount of the payment will be calculated on the basis of the direct  aids a farmer received in a reference period (2000-02).  
A major aim of the SFPS is to allow farmers to become more market oriented.  Management decisions, formerly influenced by what the CAP offered in subsidies, may now be taken on the basis of market requirements.  In order to ensure continued land management activities throughout the EC, beneficiaries of direct payments will be obliged to keep their land in good agricultural and environmental conditions.  Farmers, who fail to comply with this 
requirement, will face reductions in direct payments (see "cross-compliance", below). 
(a) Decoupling The SFPS comes into operation on 1 January 2005.  However, member States may delay implementation up to 
2007.  Full decoupling is the general principle from 2005 onwards.  However, member States may decide to maintain a proportion of direct aids to farmers in their existing form, at national or regional level, but only under 
well-defined conditions and within clear limits: 
• they may retain 25% of the basic area payments  for cereals and other arable crops of the 
SFPS or, up to 40% of the supplementary durum wh eat aid in order to continue the existing 
coupled per hectare payments; 
• 50% of the sheep and goat premia can be granted as coupled payments; 
• in the bovine subsector, member States may keep up to 100% of the suckler cow premium 
and up to 40% of the slaughter premium coupled.  Alternatively, they could keep 100% of the slaughter premium coupled or, instead, up to 75% of the special male premium; 
• in the dairy subsector, decoupling will take place once the reform is fully implemented 
(2007).  Member  states may opt to apply decoupling from 2005; 
• drying aid, and direct payments in the outermost regions and the Aegean islands need not to 
be integrated into the single payment scheme. 
(b) Additional coupled payments 
Member States may grant "additional payments" to suppo rt agricultural activities that are important for the 
protection or enhancement of the environment or for improving the quality and marketing of agricultural production.  These additional payments may use up to 10% of the funds available for a certain subsector included in 
the SFPS in the member State concerned.  The additional payment must be within the overall limits laid down for the particular subsector. 
(c) Dairy payments Dairy direct aids will be introduced in stages and fully implemented by 2007.  Generally, dairy payments will form 
part of the SFPS from 2006-07 onwards, unless member St ates decide on an earlier introduction of decoupling 
within a regionalized application of the SFPS. At the latest, two years after implementation of the SFPS by all 
member States, the Commission will submit a report to the Council, if necessary with appropriate proposals, on any 
market disturbances or structural developments that may ha ve taken place as a result of maintaining sector-specific 
direct payments. 
(2) Compulsory cross-compliance 
The reformed CAP puts greater emphasis on cross-compli ance. Cross-compliance was voluntary for member States 
and applied to environmental standards only. It is now compulsory. All farmers receiving SFPS and other direct payments are subject to cross-compliance.  A "priority list " of 18 statutory European standards has been established 
on environment, food safety, and animal health and welfare, and farmers are to be sanctioned for non-respect of these standards, in addition to the sanctions generally applied, through cuts in direct payments.  The reduction shall not exceed 5% and, in case of repeated non-compliance, 15% .  But if non-compliance is intentional, the percentage 
reduction shall not, in principle, be less than 20% and may go as far as total exclusion from one or several aid schemes and apply for one or more calendar years.  Beneficiaries of direct payments will also be obliged to maintain all agricultural land in good agricultural and environmental condition, in order to avoid land abandonment and subsequent environmental problems.  Where a farmer fails to comply with such requirements, reductions in 
payments will be applied as a sanction. 
 
Box IV.1 (cont'd)WT/TPR/S/136 Trade Policy Review 
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Control of cross-compliance requirements will be carried out on the basis of IACS (integrated administration and 
control system for certain EC aid schemes) with a high level of flexibility as regards the required control rates.  This 
will ensure that control can rely on the existing mechanisms established in the fields concerned.  To facilitate the 
application of cross-compliance the Commission will outlin e indicators for each legal obligation.  Member States 
may retain 25% of the money collected through the application of cross-compliance (i.e. non-compliance by farmers). They must ensure that there is no significant decrease in their total permanent pasture area. 
(3) Modulation and financial discipline 
In order to finance the additional rural development measures , direct payments for larger farms will be reduced (the 
mechanism known as "modulation"), by 3% in 2005, 4% in 2006 and 5% from 2007 onwards.  Direct payments of up to € 5,000 per farm will remain free of reductions. One percentage point (i.e. 20% of the modulation money generated in a particular member State) will be allocated to the member State concerned.  The remaining amounts will be re-distributed among member States according to :  agricultural area;  agricultural employment;  and GDP 
per capita in purchasing power.  However, every member State will receive at least 80% of its modulation funds.  
Reductions in direct payments will not apply in the accession countries until direct payments reach EC levels.  Outermost regions of the EC and the Aegean islands will be exempt from modulation.  Member States will be permitted to continue with domestic modulation up to the level required to fund rural development programmes established before 2006. A "financial discipline" mechanism will be applied in order to keep CAP spending in line with the strict budgetary ceilings laid down by EC leaders at the European Council meeting in Brussels in October 2002.  This means that direct aid will be adjusted when forecasts indicate that spending in the relevant areas of the CAP (market expenditure and direct payments – subheading 1 (a) of the financial perspective) will exceed established ceilings, 
reduced by a safety margin of € 300 million.  In other words,  if overspending on direct aids is forecast then direct 
aids will be reduced to ensure that the budget is not exceeded.  The Council will fix the necessary adjustment each year, based on a Commission proposal.  This mechanism aims to ensure that CAP expenditure is kept on a tight rein. 
(4) Strengthened rural development policy 
A modulation rate of 5% will result in additional rural development funds of € 1.2 billion a year being made 
available.  The reform also includes a significant extension of the scope of available instruments for rural development, starting in 2005, to further promote food quality , meet higher standards, and foster animal welfare.  
Support to agri-environmental measures will be increased to pay a maximum of 85% of the cost in areas covered by "Objective 1" (instead of 75%) and 60% (instead of 50%) in  other areas.  It will be for members States and regions 
to decide if they wish to take up these measures within their rural development programmes.  The new measures will comprise: 
• Food quality measures :  incentive payments will be available for farmers who participate in 
recognized schemes designed to improve the quality of agricultural products and production processes, and give assurances to consumers on these issues; and support will be available 
to producer groups for activities intended to inform consumers about, and promote, goods 
produced under quality schemes.  Public support will be permitted up to a maximum of 70% of eligible project costs. 
• Meeting standards :  member States may offer temporary and digressive support to help their 
farmers to adapt to the introduction of demanding standards based on EC legislation on the 
environment, public, animal and plant health, animal welfare, and occupational safety.  Aid 
will be payable on a flat-rate basis over a maximum of five years, up to a maximum of € 10,000 per holding year, and will be reduced over the implementation period. 
• Farm advisory service :  establishment will be voluntary for member States until 2006.  
From 2007, member States must offer adviso ry services to their farmers.  Farmers' 
participation will be voluntary.  In 2010, the Council will decide whether the advisory 
system should become compulsory for farmers.  They may benefit from pubic support to a 
maximum of 80% of the cost of such services, subject to a ceiling of € 1,500. 
• Animal welfare :  there is now provision to support farmers who enter into commitments for 
at least five years to improve the welfare of their farm animals;  th e commitments must go 
beyond usual good animal  husbandry.  Support will be payable annually on the basis of the additional costs and income forgone from such commitments, with annual maximum 
payment levels of € 500 per livestock unit. 
Source:  Directorate General for Agriculture (2003), "CAP reform summary", Newsletter , July 2003, Brussels. 
 European Communities WT/TPR/S/136 
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Table IV.5 
Current and reformed CAP for key arable crops and animal products 
 Current CAP Reformed CAP 
Arable crops 
Cereals • Intervention price at € 101.31/t 
• Direct payments of € 63/t multiplied 
by the reference yield. • Monthly increments (seven steps each 
adding € 0.93 /t to intervention price) • No change. 
• No change 
• Cut of monthly increments by 50%. 
Rye • Rye intervention at the general cereals 
level • Abolition of rye intervention and introduction of a transitional measure 
(MS):  more than 50% of total EU rye production will receive at least 90% 
of the modulation generated in the MS.  In such a case, at least 10% of 
modulation money may also use optiona l derogation from full decoupling 
principle 
Durum wheat • Specific supplementary payments: 
- € 344.5/t in "traditional" areas - € 138.9/t in areas where the 
  production is "well-established" 
  within the limit of the maximum   guaranteed area (MGA) 
• Supplements depending on the use of 
certified seeds. • Decoupling from 2005 onwards and reduction of supplements: 
- in "well-established" areas to € 93/ha in 2004, € 46/ha in 2005 and zero   afterwards 
- in "traditional areas" to €3 13/ha in 2004, € 297/ha in 2005, € 285/ha 
  from 2006 onwards 
• From 2004-05, introduction of special premium of € 40/t, depending on 
certain criteria. 
Oilseeds • Alignment of the area payment for 
oilseeds and cereals • Decoupling, no change in direct payments 
Protein crops • Specific supplementary payment of 
€ 9.5/t times the reference yield • Specific supplementary payment of € 9.5/t will be maintained and 
converted into crop specific area payment of € 55.57/ha. • MGA of 1.4 million ha 
Rice • Intervention price at € 298.35/t (paddy 
rice) • Direct payment of € 52.65 /t multiplied 
by the reference yield (per hectare, 
within MGA) • 50% cut in intervention price to € 150/t, triggering intervention on limited 
quantity of 75,000 t maximum • Compensation payments of € 177/t of which € 75/t granted as a crop-
specific payment (blue box) 
• Reduce national MGAs to 1999-01 average or the current MGA, whichever is lower 
• Mandate for the Commission to ne gotiate tariff quotas on rice imports 
(Article XXVIII of GATT-94) 
Starch 
potatoes • Measures for producers: 
Minimum price of 178.31 €/t 
Payment of € 110.54/t • Payment to producers 60%, coupled, 40% to be integrated in single farm 
payment 
• Production refunds and minimum pri ce for starch potatoes maintained 
Energy crops • Non-food regime on set-aside land 
(contract with processor required) • € 45/t for energy crops (contract with processor required) 
• MGA of 1.5 million ha, no allocation by MS 
• Growing on set-aside land possible but no energy crop premium in this case 
Drying aids • Supplementary payment for cereals, 
oilseeds, linseed, flax and hemp of € 19/t • Increase supplementary payment from € 19/ha to € 24/ha 
Dried fodder • Direct payments: 
€ 68.83/t for dehydrated fodder € 38,64/t for sun dried fodder • Support for dried fodder will be re distributed between growers and 
processing industry: 
Direct support to growers will be in tegrated into single farm payment 
  National ceilings will apply 
Processing aid of € 33/t for dehydr ated fodder and sun-dried fodder 
Commission report and proposals if appropriate by 30 September 2008 
Nuts • Multi-annual quality/marketing 
improvement plans, operated by 
producer groups • Specific measures repealed in 1996 but 
possible to keep plans running until they 
expire (10 years), the last plans expiring in 2006-07 
• No specific support measures 
afterwards • Flat-rate payment of € 120.75/ha with MS top-up option up by 
€ 120.75/ha 
MGA of 800,000 ha 
Animal products 
Beef  • Basic price at € 2,224/t with private 
storage possible at 103% of this price   Safety-net intervention level of 
€ 1,560/t  • Adaptations for calcul ation of Annex VII: 
Number of suckler cow premia for Austria is increased by 50,000   animals, regional ceiling for special premium to be reduced 
  accordingly. 
Number of suckler cow premia in Portugal to be increased to 416,539       animals in the context of a conversion programme 
  Table IV.5 (cont'd) 
 
 WT/TPR/S/136 Trade Policy Review 
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 Current CAP Reformed CAP 
 • Headage payments: 
€ 150 for steers (two payments); 
€ 210 for bulls/year; and € 200/year for suckler cows. 
• Slaughter premium per head of € 80 
(bulls, steers, cows) and € 50 (calves). • Eligibility criteria: up to 1.8 LU/ha 
(from 01.01.03, currently 1.9 LU), head 
limit of 90 (with derogation). • Extensification premium: € 100 per 
premium (stocking density 1.4 LU/ha) 
• Other options for MS: € 80 per premium for a stocking density below 
1.4 LU/ha and € 40 for 1.4 to 1.8 LU/ha. 
• National envelope (budget) Percentage of heifers that can receive suckler cow premium  
  increased from 20% to 40%. 
Number of slaughter premia for Italy increased to 1,892,201   animals. 
Calves are defined as bovine animals aged more than one month 
  and less than eight months;  a ma ximum carcass weight to be defined. 
Dairy • Quota-regime valid until 2008. 
• Stepwise reduction of intervention 
price by 15% from 2005-06 onwards. • Cow premium rising from € 8.62/t to 
€ 25.86/t of quota from 2005-06 
onwards including additional payment ("top-up" premium and/or area payment). 
• Global increase of quota by 2.39% 
(first increase for ES, IT, EL and IRL in 1999-01 and other MS from 2005-07). • Quotas maintained to 2014-15. 
• Agenda 2000 decision (= price cut of 15%, compensated by direct 
payments, extra quota) will be repl aced by asymmetric price cuts: 
butter: 7% in 2004, 7% in 2005, 7% in 2006 and 4% in 2007 SMP: 5% in 2004, 5% in 2005, and 5% in 2006. 
• Compensation payments, including national envelope, will become on 
average € 11.81/t in 2004, € 23.65/t in 2005, and € 35.5/t from 2006 onwards. 
• The pending quota increase for 11 MS  will be postponed from 2005 to 
2006;  additional quota is allocated to Greece (120 000 tonnes), Portugal 
(Azores) will obtain further exempti on from the levy for 73,000 tonnes in 
2003-04, reduced stepwise to 50,000 tonnes, to become permanent 
additional quota from 2005-06 onwards. • Ceiling to butter intervention: 70,000 tonnes in 2004 to be reduced in 
annual steps of 10,000 tonnes to  arrive at 30,000 tonnes from 2008 
onwards. • Intervention will only be open between 1 March and 31 August. 
Note: LU= livestock unit. 
Source: Directorate General for Agriculture (2003), CAP Re form Summary, Newsletter, July 2003, Brussels. 
(b) Policy by selected products 
29. In several key agricultural product categories, such as cereals, beef, dairy, and wine, the CAP 
has undergone certain reform processes over the past decade. Since 1992, the CAP has entailed 
gradual reduction of payments based on output a nd market price support measures (e.g. intervention 
prices, export subsidies, tariffs and tariff quotas) , with a view to basing farmer income support 
increasingly on area planted or herd size. In addition, on 22 April 2004, reforms were decided on 
tobacco, olive oil and cotton34, while sugar reform is under discussion.  
Tobacco 
30. The EC-15 is the world's fifth largest to bacco producer, though tobacco production represents 
only 0.4% of its agricultural output. Greece and Ital y account for more than 75% of the EC-15 raw 
tobacco production. In the 1990s, the area under tobacco  in the EC-15 decreased at a rate of 2.6% per 
year, while the EC-15 average yield rose from 2 to  2.7 tonnes per hectare. The tobacco subsector 
employs 2.4% of total annual working units in the EC-15 agriculture sector.35 A few large capital-
intensive farms coexist with many small, labour-inten sive farms, less integrated with markets. Over 
the last decade, there has been a reorientation to wards the production of high-quality varieties, and 
prices of EC-produced raw tobacco on internationa l and domestic markets have increased. The EC-15 
                                                      
34 European Commission, Press Release IP/04/521, 22 April 2004. 
35 One annual work unit corresponds to the work of one person occupied on an agricultural holding on 
a full-time basis (minimum of 225 eight-hours working days, per year).  European Communities WT/TPR/S/136 
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also imports raw tobacco, and is a major expo rter of cigarettes and other processed tobacco 
products.36  
31. MFN tariffs on tobacco and manufactured t obacco substitutes average 18.3%, with rates 
ranging up to 74.9%. The CMO for tobacco suppor ts producers in the EC-15 through a premium 
system based on the level of production, modulated according to quality criteria and subject to 
individual production quotas for each tobacco variety.  It also relies on measures to convert production 
through a quota buy-back programme and a Community Tobacco Fund (CTF). CAP expenditure on tobacco was € 973 million in 2001, i.e. 2.3% of the EAGGF budget. With a view to reducing the 
difference in excise duties and prices among member  States, a new Directive was adopted in 2002, 
establishing revised minimum duties on tobacco products, notably on cigarettes (Chapter 
III(2)(iii)(b)).
37 Some doubts have been voiced, within the EC, about the sustainability of the tobacco 
subsector and the social justification for producti on-related payments for tobacco growers, given the 
apparent contradiction between those ai ds and EC public health policies. 
32. The current tobacco premium is to be decoupl ed and integrated into the SFPS over a four-year 
transition period starting in 2006, to avoid, accord ing to the Commission, a disruptive effect on 
production.38 During this period, at least 40% of the tob acco premium will have to be included in the 
SFPS. Member States may decide to retain up to  60% as a coupled payment. This is to be 
accompanied by a phasing-out of the CTF.39 The global support to tobacco is to remain at its present 
level. In 2006, the reform will start with the transfer of all or part of the current tobacco premium into 
entitlements for the SFPS. 
Olive oil 
33. The EC-15 accounts for about 80% of world production of olive oil. In 1998/99, the area 
under olive groves was about 4% of the EC's useable agricultural land, of which 44.5% was in Spain, 
26.3% in Italy, 18.8% in Greece, and 9.7% in  Portugal. Olive groves involve about 2.5 million 
producers, close to one third of all the EC-15 farmers, provides seasonal employment in winter, and significant off-farm employment in the associated milling and processing industry. The size of 
specialized olive holdings range from an average of 13.5 hectares in Spain to 3.2 hectares in Greece. 
While olive oil represents about 3% of total world oil consumption, the demand has risen at a rate of 
6% per year since 1995/96, in light of its positive image in terms of healthfulness and quality. In the 
last ten years, EC-15 olive oil exports have  doubled, reaching almost 324,000 tonnes in 2001/02, 
while imports, mainly from Tunisia to Italy, have remained stable.
40 
34. MFN tariffs on olive oil average 67%, with rates ranging up to 75.8%. The current CMO for 
olive oil, created in 1966, relies on production aid as th e main measure of support. The aid is granted, 
at a rate of € 1,322.5 per tonne, to all producers on the basis of the quantity of olive oil produced, subject to the national guaranteed quantity ( NGQ) currently totalling 1.78 million tonnes. 
Mechanisms regulating the amount of aid granted to  producers have been put in place for cases where 
member States over- or undershoot their NGQs. Interv ention buying-in has been replaced by a private 
storage aid scheme. Export refunds have been set at zero since 1998 without any negative impact. A 
                                                     
 
36 European Commission (2003a). 
37 Directive 2002/10/EEC of 12 February 2002, OJ L46 of 16 February 2002. 
38 As from 2010, tobacco aid will be completely de- linked from production, 50% will be transferred to 
the SFPS and the remaining 50% will be used for restructuring programmes under the rural development policy (European Commission, Press Release IP/04/521, 22 April 2004).  
39 The CTF will continue to finance information measures as long as there is coupled aid (European 
Commission Press Release IP/03/1559, 18 November 2003). 
40 European Commission (2003a). WT/TPR/S/136 Trade Policy Review 
Page 98 
 
 
production refund is granted for olive oil used in vegetable and fish preserves. In 2001, further 
emphasis was given to control and quality aspects, most notably through the "EC Quality Strategy for Olive Oil", which established product and marketing standards.  
35. The CAP reform for olive oil consists in converting part of the existing production-linked 
payments into direct income support, starting in 2006. According to the Commission, full conversion 
could negatively affect certain traditional produci ng regions and result in low-output olive groves. 
Under the proposal, 60% of the average olive oil production-linked payments during 2000-02 (€ 2.3 
billion per year for the EC-15) will be converted into entitlements under the SFPS for holdings larger 
than 0.3 ha; payments for smaller holdings  would be completely decoupled from 2006.
41 The 
remaining 40% of the direct aid would be retained  by the member States as national envelopes for an 
additional olive grove payments to producers, cal culated on a per hectare or per tree basis.  On 
1 November 2004, the Oils and Fats  Regulation should be replaced by a new regulation comprising 
measures for the domestic market, trade with th ird countries, as well as the promotion of quality.42 
The current private storage measures for olive oil will be retained as a safety net. The refunds relating 
to exports and manufacture of foodstuffs preserved in  olive oil will be repealed. The current regime 
will continue to apply for the marketing year 2004/05.  
Cotton 
36. The EC-15 is the world's main net importer of  raw cotton, with 708,000 tonnes of imports and 
227,000 tonnes of exports in 2002. The EC-15 contributes only 2.5% to world cotton production. Cotton contributes only 0.5% to the EC-15 agricultural output, but is very important for Greece, and 
to much lesser extent, to Spai n. Greece produces almost 80% of total EC production of 1.55 million 
tonnes of raw cotton, and cotton accounts for 9% of its final agricultural output. Cotton holdings are characterized by their large number (71,600 in Greece and 7,600 in Spain) and small size (4.9 ha in Greece 4.9 ha. and 12 ha in Spain, on average). Mo st cotton producers in the two main EC producing 
countries belong to producer organizations, whereas at the processing level, there is a mixture of private enterprises and cooperatives. 
37. MFN tariffs on cotton average 6.4%, with rates ranging up to 8%; access is free under EBA 
and Cotonou preferences. The CMO for cotton dat es from the time of accession of Greece to the 
Community in 1981.  The regime, last modified in  2001, is centred on a direct aid per tonne of raw 
cotton, subject to a NGQ for each member State. The level of aid to processors, who pay a minimum 
price to producers, is fixed periodically on the basis of the difference in a "guide price" and the world 
price. Since 1995/96, the "guide price" has been fixed at € 1,063 per tonne, with a minimum price of € 
1,010 per tonne. The NGQ is fixed at 782,000 tonn es for Greece, 249,000 for Spain, and 1,500 tonnes 
for other EC-15. Adjustments can be made to the amount of aid paid out if production over- or 
undershoots the guaranteed quantities. The EC-15 does not grant export subsidies for cotton. The Commission is of the view that there is a need to  tighten budget discipline and reduce the total area 
dedicated to intensive cotton producti on, which causes environmental problems.
43 
38. The CAP reform for cotton consists in tran sferring 65% of the producer-support expenditure 
per member State to the SFPS, in the form of direct  income aid, starting in 2006. The member States 
will retain the remaining 35% of the expenditure as national envelopes for the new area payment to 
cotton producers, in zones suitable for that cr op. The new area payment will be granted for a 
                                                      
41 According to the Commission, to avoid imbalance in the market, access to  the SFPS will have to be 
limited to olive-growing areas existin g prior to 1 May 1998, and to new plantings approved by the Commission 
(European Commission Press Release IP/04/521, 22 April 2004). 
42 The Oil and Fats Regulation 136/66 EEC covers, inter alia , olive oil and tables olives. 
43 European Commission (2003a). European Communities WT/TPR/S/136 
 Page 99 
 
 
maximum area of 455,360 ha (370,000 ha in Greece, 85,000 ha in Spain, and 360 ha in Portugal). If 
the eligible area under cotton ex ceeds the maximum area, the aid per hectare will be reduced 
proportionally. The establishment of inter-branch or ganizations will be encouraged to enhance the 
quality of the cotton produced.44 
Sugar 
39. The EC-15 is a key player on world sugar markets, with a 13% share of production (third 
largest producer), 12% of consumption, 15% of expor ts and 5% of imports. Th e EC-15 is a net sugar 
exporter. Net exports represent, on average, 20% of the EC-15 sugar production and 2-3.5% of its 
exports of agri-food products. Sugar is produced  throughout the EC-15, with the exception of 
Luxembourg; Germany and France account for more  than half, followed by the United Kingdom and 
Italy (8% each). EC-15 sugar production oscilla tes between 15 and 18 million tonnes.  The C-10 
produce about 3 million tonnes, with Poland accounting for two-thirds. Sugar b eet covers 1.8 million 
hectares in the EC-15, accounting for 1.4% of the utilized agricultural area, and provides close to 
1.8% of agricultural output in value. 
40. MFN tariffs on sugar and sugar confectionary  average 23.6%, with rates ranging up to 
114.4%. Sugar has so far stayed out side the CA P reform process, including under Agenda 2000.  
Some of the main reasons for changing the EC suga r regime are: continual decline in prices due to 
chronic world over supply of sugar; sugar from the EC-15 is not competitive on world markets, with subsidies in the order of 75% of the intervention price required for sales to take place; constraints on 
subsidized exports under the WTO Agreement on Ag riculture imply growing stocks of sugar under 
unchanged internal demand conditions; high cost of the regime to  consumers; and the limited benefits 
from the regime mainly accrue to a small number of  beet farmers and sugar processors in the EC.
45 
Sugar producers benefit from a system that combin es border protection, suppl y control, and support 
prices. The intervention price for sugar is currently  set at € 631.9 per tonne for refined sugar and € 
523.7 per tonne for raw sugar. The EC-15 market price has been two to three times higher than 
international reference prices over recent years. 
41. The Commission has three reform policy options for the sugar regime (Table IV.6). It is 
expected to make a formal reform proposal by  mid-2004 after the Council and Parliament conduct a 
political debate on the subject.46 The current sugar regime expires in 2006. According to the 
Commission, the main aim is to modify the EC s ugar framework to bridge the gap between domestic 
and world prices, and shift support from product to pr oducer, while examining the likely effects on 
international markets, especially with respect to  the impact it may have on developing countries in 
general, and ACP countries benefiting from  the Sugar Protocol in particular.47  
                                                      
44 An envelope of € 22 million is to be shared betw een member States on the basis of the average area 
eligible for aid during 2000-02, and will be an integr al part of the second pillar of the CAP (European 
Commission Press Release IP/04/521, 22 April 2004). 
45 Court of Auditors, "Special Report No. 20/2000 concerning the management of the common 
organisation of the market for sugar, together with the Commission’s replies" (OJ C 50/1 of 15/2/2001). 
46 European Commission Memo/03/232, 18 November 2003. 
47 European Commission (2003). WT/TPR/S/136 Trade Policy Review 
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Table IV.6 
EC policy options for sugar: advantages and disadvantages 
Advantages Disadvantages 
Extension of current regime 
• Production and producer incomes are maintained in the majority 
of regions, though the level of both decreases gradually. 
• Budget cost of the regime decreases progressively. • Current preferences to ACP/ EBA countries are maintained. • Restructuring and improved competitiveness of the sector are 
delayed. 
• Non-restricted quantities of  imports, under preferential 
agreements, at non-competitive prices, are attracted to the EC 
market. 
• Maintenance of EC production is threatened. • Distortions in competition a nd inequalities between producers 
remain. 
• The sugar CMO remains complex. • No environmental improvement is achieved. 
• Dependence of uncompetitive developing countries on the EC 
market is maintained;  this dela ys the necessary restructuring. 
Price decrease 
• Restructuring and improved competitiveness of the sector are 
facilitated. 
• Ensures a better balance between supply and demand in the EC 
market, and reduces production surpluses and world market 
distortion. 
• Distortions in competition and inequalities between producers are 
lessened. 
• Consumer prices for sugar come down. • Diversification in the market for sweeteners takes place. • Budget cost of the regime is reduced. 
• Competitive LDCs/ACP producers maintain preferential access. • Revenue falls for the ACP count ries benefiting from the sugar 
protocol;  the least competitive might even stop exports. 
•The question of the need to introduce restructuring and/or 
reconversion measures is raised. 
Liberalization 
• Competitiveness of the sector is improved in the medium to long term. 
• World market distortions are reduced. • Export refunds are suppressed. 
• Budget cost of the regime is reduc ed to the cost of compensation. 
• The common market organiza tion for sugar is simplified. 
• Increased market opportun ities for low cost/competitive 
producers. • Price stability is no longer assured. 
• A large part of the EC sugar industry irreversibly disappears. 
• Producer incomes fall with significant effects on certain rural 
communities. 
• Revenue falls for the ACP countries benefiting from the Sugar 
Protocol, and most will probably be uncompetitive. 
• The question of the need to introduce restructuring and/or 
reconversion measures is raised, including for the affected ACP 
countries. 
• Production of sweeteners is no longer competitive and 
disappears. 
• Profitability of sugar re fineries is threatened. 
• Risk of reduced crop rotation. 
Source: European Commission (2003), Accomplishing a sustainable agricultural model for Europe through the reformed 
 CAP:  the tobacco, olive oil, cotton and sugar sectors , Brussels. 
(3) FISHERIES  
(i) Main features 
42. The EC-15 ranks third in the world, with  about 6% of total catches and aquaculture.48  Spain 
is the leading producer among the EC-15 (19%), followed by Denmark (18%), and the United Kingdom (13%). The value of output of the processing subsector is nearly twice the value of production of the catching subsector. Total employm ent by fisheries exceeds half a million people. 
                                                     
 
48 The production of fishery products by the aquacu lture industry (the farming of aquatic organisms 
including fish, molluscs, and crustaceans) has increased significantly over the past decade, and today represents 
31% of the total value of fishery production in the EC-15. The value of aquaculture production in countries such as Finland and Greece is greater than the valu e of their landings (Eur opean Commission, 2001a). European Communities WT/TPR/S/136 
 Page 101 
 
 
The EC-15 has a 200-mile fishing zone off the coastal  areas of the North Atlantic and the North Sea, 
which is fished by Community v essels, as well as vessels from countries that have concluded bilateral 
agreements with the EC.  Pelagic fish, such as he rring, sandeels, sprat, horse mackarel, sardines and 
mackerel, make up about 50% of total catches. Ho wever, cod or larger pelagic fish, are more 
important economically even though they represent less than 10% of the volume of total catches.  
MFN tariffs on fishing products average 10.5%, with rates ranging up to 23%.   
43. The EC-15 has just under 100,000 vessels. Over  the past decade, the number of vessels has 
decreased by 7%, while the capacity of the fleet has fallen by 5% in tonnage and 7% in engine power. 
This was largely due to the EC-15 policy to cut fl eet overcapacity to reach a better balance between 
fishing efforts and available fish resources. The EC-15 fleet is rather old, with an average age of 19 
years. 
44. In 2002, the EC-15 recorded a € 10 billion trade deficit in fishery products, with imports of    
€ 12.3 billion and exports of € 2.3 billion. Norway is the primary supplier of fishery products to the 
Community (15.8% of the EC-15 fishery imports), and Japan is the first consumer of the EC-15 fishery exports (16% of the EC-15 fishery exports). Spain has been increasingly the main exporter and 
importer of fishery products vis-à-vis  third countries; while in terms of intra-EC-15 trade, Denmark is 
the main exporter and France the main importer.  In 2001, the EC-15 ranked second among world 
importers of fishery products with about one quar ter of the total; it was sixth among world exporters, 
with a share of 5.5%.
49 
45. Total catches in the C-10 fell by over two thirds between 1991 and 2000, due to overfishing 
and the collapse of markets when the Soviet Union br oke up. As a result, enlargement is not expected 
to significantly increase the fisheri es resources in the Community. Only Poland and, to a lesser extent, 
the three Baltic countries have a relatively large fi shing industry. In 2000, total catches in the 
acceding countries represented 9.1% of the catches by  the EC-15; Poland was first, accounting for 
almost 40% of the C-10's catches, followed by La tvia (24.6%), Estonia (20.5%), and Lithuania 
(14.3%). Aquaculture in the C-10 was 5.9% of tota l aquaculture production in the EC-15 in the same 
year; Poland, the Czech Republic, and Hungary were the main producers.50  
(ii) Common Fisheries Policy (CFP) 
46. Since 1 January 2003, the EC has had a new CFP, aimed at achieving biologically, 
environmentally and economically sustainable fisheries by, inter alia , better conserving fish stocks, 
protecting the marine environment, ensuring th e economic viability of the European fleet, and 
providing good food quality to consumers.51  Several important fish stocks, such as cod, are on the 
verge of collapse as a result of overexploitation.52 Beyond the damage to fish stocks, such a situation 
has had a significant negative effect on fishermen's income, the balance of the marine ecosystem, and 
the supply of fish to the EC market.  
47. A long-term approach to fisheries management has been adopted, involving the setting of 
multi-annual recovery plans for stocks outside safe biological limits, and of multi-annual management 
plans for stocks.53  The approach aims to avoid sudden ch anges in total allowable catches (TACs) 
from one year to another, and allow fishermen to  operate under more stab le conditions. Given the 
high risk of collapse of certain fish st ocks, plans have been in place, since 200354, for a 65% reduction 
in cod fishing (equivalent to a quota of 22,659 tonn es), and a 50% cut for other stocks for which the 
International Council for the Exploration of the Sea (ICES) recommends a zero catch.55 As a result of 
                                                      
49 Eurostat (2003b). 
50 Eurostat (2003c). WT/TPR/S/136 Trade Policy Review 
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the enlargement, the Commission prop osed to incorporate the C-10 into  the quota system for all those 
stocks where such countries are entitled to fishing possibilities.56  
48. The former system of Multi-Annual Guidance Programmes (MAGPs), which proved 
ineffective at tackling the overcapacity of the EC fl eet, has been replaced by a system  that puts more 
responsibility in member States to achieve a bette r balance between fishing capacity and available 
resources. It includes: (i) reference levels, based on the MAPGs set for 31 December 2002, and to be 
automatically reduced whenever any capacity is with drawn with public aid; (ii) phasing-out of public 
aid (available only up to the end of  2004) to private investors to help them renew fishing vessels 
under 400 GT (gross registered tonnes) or modernize vessels that are at least five years old57; (iii) a 
€ 32 million "scrapping fund", established to achieve additional reductions in fishing efforts required 
under recovery plans58; and (iv) aid (available until the end of 2004) for permanent transfers of EC 
                                                                                                                                                                     
51 The final decision was taken at the Agriculture an d Fisheries Council, Brussels, on 16-20 December 
2002.  The new CFP arose because some elements of the CFP, which dates back to 1983, had to be reviewed by 
31 December 2002; the Commission decided to widen the review to the whole CFP. In March 2001, the 
Commission issued a Green Paper on the operation of the CFP and, in May 2002, it presented a first series of 
proposals to reform the CFP. Althou gh several changes have already been  made to the CFP since 2003, much 
remains to be done in terms of measures, including a Code of Conduct for responsible fisheries in Europe (DG 
Fisheries, 2003c). 
52 The number of stocks in a critical state has continued to grow: ICES identified 14 stocks in 2003, 
compared with 9 in 2002 (European Commission Memo/03/32, 14 October 2003). 
53 In addition, if a serious threat to the conservation of resources or to the marine ecosystem is posed by 
fishing, emergency measures taken by the Commission are applicable for six months and renewable for further 
six months. Emergency decisions taken by member States for their own waters are valid for three months. 
Member States can adopt conservation and management meas ures applicable to all fishing vessels within their 
12-mile zones, provided that these measures are non-discriminatory, and proper consultation is undertaken (DG 
Fisheries, 2002). 
54 Scientists from the ICES and the Scientific, Technical, Economic Committee on Fisheries (STECF) 
had advised a moratorium on the fisheries concerned. Because of the economic and social consequences that 
such moratorium would have on the respective fleets, the Commission proposed, as an alternative, substantially 
reduced fishing possibilities for certain fish stocks. The Co uncil finally agreed on temporary recovery measures 
for such fish stocks and set TACs at levels generally higher than those proposed by the Commission (DG 
Fisheries, 2003c). 
55 In addition, the Council is currently assessing other proposals made by the Commission, including a 
review of current maximum fishing effort ceilings taki ng into account the reduction of fishing opportunities 
since 1995 (when the regulations came into force), and the levels of fishing activity based on the period 
1998-02; and the extension of the fishing effort system to pelagic fisheries, which also require extra protection 
(DG Fisheries, 2002). 
56 TACs are proposed accord ing to the relative stability establishe d in the Treaty of Accession. In the 
Baltic, the stocks concerned include cod, herring, salmon, and sprat (European Commission Press  IP/03/1768, 
14 October 2003). 
57 Member States that grant public aid for the re newal of the fleet will have to reduce the overall 
capacity of their fleet by a minimum of 3% of the refere nce levels. For every GT introduced in the fleet with 
public aid over 2003-04, member States will have to d ecommission, without aid, an equivalent capacity (1:1, 
entry/exit ratio) for vessels up to 10 GT or 1.35 tonnes (1:1.35, entry/exit ratio) for vessels over 100 GT (DG 
Fisheries, 2003c). 
58 Vessels whose fishing efforts have to be reduced by 25% or more as a consequence of a recovery 
plan are eligible for aid from this fund; premiums are 20% higher than those available for decommissioning under the Financial Instrument for Fisheries Guidance (FIFG) (DG Fisheries, 2002). European Communities WT/TPR/S/136 
 Page 103 
 
 
vessels to third countries, including through the cr eation of joint enterprises with third-country 
partners.59 
49. Aid from member States to fishermen and v essel owners who have temporarily stopped their 
fishing activities, due to unforeseeable circumstances,  can be allocated for three consecutive months 
or for six months over 2000-06.60 Aid will be extended to support the retraining of fishermen to help 
them convert to professional activities outside fisheri es, while allowing them to continue fishing on a 
part-time basis. 
50. The regime restricting access to the 6-to-12-m ile zones to vessels that  traditionally fish in 
those waters will be maintained until 31 December  2012, when the Council reviews the situation on 
the basis of a Commission report. The access a rrangement restricting the Shetland Box will be 
maintained until the end of 2004, when the Counc il decides on possible amendments. On access to 
Western Waters (from the Bay of Biscay to the Britis h Isles), all member states' vessels, including 
those from Spain and Portugal, which are now fully in tegrated into the CFP, are submitted to the same 
regime of effort limitation on the basis of activity  during 1998-02 and fishing opportunities. As from 
2003, vessels from Spain, Portugal, and Finland have the right to fish for unregulated or unallocated 
resources in the North Sea. 
51. Responsibility to ensure effective control,  inspection and enforcement of the CFP rules 
remains with the member States.61  However, the Commission will c ontinue to be responsible for the 
evaluation and control of the application of CFP rules by the member States, including the possibility of taking immediate preventive measures if there is  evidence that fishing activities could lead to a 
serious threat for the conservation of resources.
62 The use of satellite vessel-monitoring systems 
(VMS) will be extended to vessels over 18 metres overall from 1 January 2004 and to vessels over 
15 metres one year later. 
52. Regional Advisory Councils (RACs), co mprising fishermen, scientists and other 
representatives from environmental and interested c onsumer groups, will be established. National and 
regional authorities from any other member State may participate and the Commission may be present 
at their meetings. The RACs may be consulted by  the Commission and may submit recommendations. 
Each RAC covers sea areas under the jurisdiction of at least two member States.63  
53. In the context of the CFP reform, other measures taken include: a Community Action Plan 
adopted in June 2003 to integrate environmental protection requirements into the CFP (in late 2003, 
the Commission proposed measures to minimize by-catches of cetaceans in fishing gear); a 
Community Action Plan for the eradication of illega l, unreported, and unregulated fishing (IUU); a 
strategy for the sustainable development of Europ ean aquaculture; an Action Plan to counter social, 
                                                      
59 Limited to exports to countries with which the EC has signed a fisheries agreement to set up joint 
enterprises; the amount of the premium is limited to 30% of the FIFG scrapping premium for exports and to 80% for joint enterprises (DG Fisheries, (2003c). 
60 Aid may be extended from one year to the next if temporary interruption results from the 
implementation of a recovery or multi-annual management plan, or from emergency measures decided by the 
Commission or member States (DG Fisheries, 2002). 
61 Cooperation among member States has been reinfor ced so that each member State, in addition to 
being responsible for controlling its own fleet within its  own waters and outside Community waters, may control 
vessels flying its flag throughout Community waters, except in the 12-mile zone of another member State (DG 
Fisheries, 2003c). 
62 These measures will be applicable for a period of  three weeks and prolonged up to six months. The 
Commission can also penalize member States that exceed  their fishing opportunitie s by deducting quotas (DG 
Fisheries, 2002). 
63 DG Fisheries (2003c). WT/TPR/S/136 Trade Policy Review 
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economic, and regional consequences of the rest ructuring of the EC fishing industry; and a 
Community Plan to reduce discards of fish and to prevent catches of unwanted fish.64  
54. The Financial Instrument for Fisheries Guidan ce (FIFG) remains the leading form of financial 
assistance to the subsector. Its main purposes are: to assist in fishing-reduction efforts decided by the 
Council, which sets out (for each member State) the objectives for fleet restructuring and the means to 
achieve them; to finance investment, including in fleet renewal and modernization of fishing vessels; and to counter the social, economic, and regional con sequences of the restructuring of the EC fishing 
industry derived from the new CFP.  The FIFG budget for 2000-06 amounts to € 3.7 billion (up from 
€ 2.7 billion during 1994-99); € 2.6 billion are earmarked for Objective 1 regions
65, and the rest for 
other areas. Spain is expected to receive 46% of  the FIFG over 2000-06, followed by Italy (10%), 
France (7%), and Portugal and the United Kingdom (6% each).66 
55. Since December 2002, member States no l onger have to notify the Commission of national 
aid that co-finances projects benefiting from FIFG  support. The Commission has also adopted a draft 
regulation proposing to exempt most categories of st ate aid from prior notification to the Commission. 
The categories proposed include aid for promotion a nd/or advertising of fisheries products, scrapping 
of fishing vessels, and aquaculture and inland fish ing. Once adopted, the block exemption will apply 
to aid granted to SMEs for amounts below € 1 milli on or to aid designed to finance projects with a 
maximum eligible amount of € 2 million.67 
56. The  European Regional Development Fund (ERDF) supports several fishing activities, 
including fisheries-dependent areas. During the period  2000-06, € 83.1 million (e quivalent to 0.4% of 
the total ERDF funding of € 19.2 billion) are lik ely to benefit regions dependent on fishing: 
€ 78.6 million under Objective 1, and € 4.5 million under Objective 2.68 Moreover, the European 
Social Fund (ESF) supports vari ous transnational projects, mainly in Spain, France, Italy, and 
Portugal, dealing with training and diversification in fisheries and aquaculture. Overall, during 2000-
06, ESF funding allocated to regions that include fisheries-dependent areas amounts to € 5.2 billion, of which € 4.3 in Objective 1 regions.
69  Support for rural development in fisheries-dependent areas 
outside Objective 1 regions is also provided by the EAGGF. Planned expenditure for agriculture and 
fisheries activities under EAGFF amount to € 11.4 billion during 2000-06 (€ 7.8 billion within and 
€ 3.6 outside of Objective 1 areas).70  
                                                      
64 DG Fisheries (2003c). 
65 Objective 1 refers to regions where devel opment lags behind and/or in remote places. 
66 Additional measures have been foreseen for vessels and fishermen affected by multi-annual 
management plans. For example, vessels forced to reduce their activity by more than 25% will be eligible for a 
20% increase of the FIFG scrapping premium. In additio n, € 32 million were made available in 2003 to 
complement FIFG allocations for the scrapping of vessels.  
67 In addition, the Commission adopted, on 5 November 2003, a proposal to amend some of the FIFG 
provisions to implement the EC strategy for sustainable aquaculture.67 An amendment to Article 12 of the FIFG 
regulation (socio-economic measures) ha s also been proposed to grant fi shermen with at least five years 
experience non-renewable individual compensatory payments to help them diversify their activities while 
remaining involved in fishing (European Commission, 2002a). 
68 Objective 2 refers to funds to support economic and social conversion in industrial, rural, urban or 
fisheries-dependent areas facing structural difficulties.  
69 This does not include Objective 3 interventions that do not single out any sector-specific area that 
should or could primarily benefit from ESF support. 
70 European Commission (2002a). European Communities WT/TPR/S/136 
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57. The CMO for fishery and aquaculture products comprises71: common marketing standards on 
quality, grades, packaging, and labelling of bot h Community and imported fresh fisheries products; 
producers' organizations (POs) (composed of fish ermen) established in each member State, and 
implementing the supply-side instruments of the CMO; a price support system that sets minimum 
prices below which fish products cannot be sold; an d rules for trade with non-Community countries. 
For 2003, the budgeted amount for price support in terventions was € 14.5 million. As from 
1 January 2002, the CMO requires consumers to be  informed about the production method, the catch 
area, and the exact commercial designation of the pr oduct they buy; it also introduces some elements 
of traceability of fisheries products.72 These requirements also apply to imports from third countries.  
Table IV.7 lists the key characteristics of the fi ve main intervention mechanisms of the CMO in 
fishery and aquaculture.73  
58. The EC's commercial policy on fishery products  has led to the opening of new autonomous 
tariff quotas on fishery products for the processing industry (Table IV.8). The Community tariff quotas on all fishery products are managed on a first-come-first-served basis. In certain cases, the tariff reduction cannot be invoked when the import price is below a reference price; in these cases the 
full tariff is applied.
74  Preferences are granted under regional trade agreements (notably EFTA and 
the Cotonou Agreement) and the GSP. 
59. An important aspect of the Community's fisheries policy, in the light of fragile fish stocks 
within its territorial waters and fleet over-capacity , remains the development of fishing opportunities 
elsewhere, either through bilateral agreements75, or on the high seas, through regional fisheries 
organizations (RFOs).76 The Community’s "Southern" agreements  concern mainly African and Indian 
Ocean countries, and provide for access by Communit y fishing vessels in exchange for Community 
financial assistance and fees from vessel operators.  The tuna agreements provide for no direct 
                                                      
71 The last major revision of the CMO, adopte d in December 1999, was implemented as from 
1 January 2001. See WTO (2002). 
72 Commission Regulation  2065/2001. 
73 The CMO contains additional, optional instruments that can be used at the discretion of  member 
States under the supervision of the Commission: excl usive recognition to a single PO for a given area; 
restrictions on non-members for a limited period; and es tablishment of interbranch organizations. For example, 
representatives of catching, retailing and processing bran ches from different regions can cooperate to implement 
measures of benefit to the entire industry (European Commission, 2002h). 
74 The reference prices, below which tariff reductions do not apply, may be fixed for products that are 
the subject of: (i) tariff reduction or suspension ar rangements; (ii) autonomous tariff suspensions for an 
indefinite period of time adopted within the framework  of the reform of the CM O; and (iii) other trade 
arrangements that provide for compliance with a re ference price and are in line with the Community 
international undertakings (Council Regulation 2574/2001). For 2002-03, the species concerned by reference prices were herring, cod of the species Gadus morhua , deep water prawns of the species Pandalus borealis, and 
Alaska  Pollack (WTO, 2002). 
75 The EC has 21 bilateral fisheries agreements in force, 4 with Northern European countries: Faeroe 
Islands, Greenland, Iceland and Norway ; and 17 with African and Indian O cean countries: Ango la, Cape Verde, 
Comoros, Cote d'Ivoire, Gabon, The Gambia, Guinea, E quatorial Guinea, Guinea Bissau, Kiribati, Madagascar, 
Mauritius, Mauritania, Mozambique, Sao Tomé and Prín cipe, Senegal and Seychelle s. However, the latest 
protocols with The Gambia and Equatorial Guinea were not renewed (DG Fisheries, 2003a). 
76 The 10 RFOs to which the EC is a contracting pa rty are: North-West Atlantic Fisheries Organisation 
(NAFO); North-East Atlantic Fisher ies Convention (NEAFC); Indian O cean Tuna Commission (IOTC); North 
Atlantic Salmon Conservation Organisation (NASCO); In ternational Baltic Sea Fishery Organisation (IBSFC); 
Commission for the Conservation of Antarctic Marine Li ving Resources (CCAMLR); International Commission 
for the Conservation of Atlantic Tuna (ICCAT); Gene ral Fisheries Council for the Mediterranean (GFCM); 
Westerns Central Atlantic Fishery Commission (WEC AFC); and Fishery Committee for the Eastern Central 
Atlantic (CECAF). The EC is also applying, on a provisional basis, the International Dolphin Conservation Programme (IDCP) (DG Fisheries, 2003b). WT/TPR/S/136 Trade Policy Review 
Page 106 
 
 
competition between Community and local fishing fl eets.  The "Northern" agreements exchange 
fishing opportunities/rights between Community fleets and the fleets of third countries, and financial 
compensation is provided by the Community to Greenland and the Baltic countries.  The Community 
budget for fisheries agreements was € 183 million for 2003, down from € 189 million in 2002.   
Table IV.7 
Intervention mechanisms of the CMO in fishery and aquaculture 
Mechanism Purpose and main features Products covered Aid amounts Destination of products 
Financial 
compensation Withdrawal from the market of 
products whose price has fallen to the level of the withdrawal price, 
for up to 8% of the quantities put 
up for sale each year (10% for pelagic species) 20 fresh or chilled 
products 85% of the withdrawal 
price if less than 4% of withdrawals; from 2003, 
55% of the withdrawal 
price where withdrawals amount to 4-8% (4-10% 
for pelagic species) Destruction, by-products 
(oil, meal for animal feed) or donation to 
charitable organizations 
Carry-over aid Withdrawal from the market of 
products whose price has fallen to 
the level of the withdrawal price, for up to 18% of the quantities 
put up for sale each year, minus 
the % of quantities covered by financial compensation 23 fresh or chilled 
products Amount of technical and 
financial costs of 
processing and storage (fixed each year) Processing and storage, 
then return to  the market 
Independent 
withdrawals and 
carry-overs Withdrawal from the market of 
products of regional or local 
importance whose selling price 
has fallen to the level of the independent withdrawal price, for 
up to 10% of the quantities put up 
for sale each year, provided that no more than 5% are eligible for 
flat-rate compensation 18 fresh or chilled 
products Flat-rate aid (=flat-rate 
compensation or flat-rate 
premium) 
Flat-rate compensation: 
75% of the independent 
withdrawal price 
Flat-rate premium: fixed 
each year Same as Community 
withdrawals and carry-
overs 
Private storage aid Temporary withdrawal from the 
market of the products concerned 
if they cannot be disposed of at 
the Community selling price, up 
to 15% of the quantities put up for sale 10 products frozen 
on board Amount of technical and 
financial storage costs Storage then return to the 
market 
Compensatory allowance for tuna Direct aid to producers of tuna 
delivered to the processing 
industry if the market prices fall 5 tuna species Depends on market 
prices – subject to a 
ceiling Raw material delivered 
to the Community 
processing industry 
Source: European Commission (2002), The Common Organisation of the Markets in Fishery and Aquaculture products , 
 p.21, Brussels. 
60. As part of the reform of the CFP, measures are planned, at the level of RFOs, in particular to 
develop control and inspection systems within each  RFO, regulate certain fishing activities on the 
high seas, identify and monitor IUU vessels, promote uniform action plans to curb illegal fishing, and 
identify and quantify illegal catches. 
61. The placement of fishery products on the Comm unity market, whether of domestic or foreign 
origin, is subject to sanitary regulatio ns to protect the health of consumers.77  A Commission Decision 
                                                      
77 Council Regulation 91/493/EC concerns fishery products, and Council Regulation 91/492/EC 
concerns live bivalve molluscs. See DG Fisheries and DG Sanco online information for other food hygiene 
legislation of application to fishery products.  Available at: http://europa.eu.int/comm/fisheries [12 October 2003]. European Communities WT/TPR/S/136 
 Page 107 
 
 
sets the conditions for imports into the Community from each country based on a report of a mission 
of experts.78 A Commission Decision sets out a list of 113 countries from which imports of fishery 
products into the Community are permitted; imports  of fishery products are not permitted from 
countries not on the list.79  Part I of the list identifies 85 origins ("fully harmonized" countries) with 
practices and legislation considered in line with  the Community's; imports from these origins are 
authorized, subject only to spot checks and verificati ons. Part II of the list identifies the other 28 "pre-
harmonized" countries from which guarantees have been  received concerning their inspection systems 
and their legal sanitary requirements, but which have  not been verified by an on-the-spot inspection.80 
Imports are provisionally authorized on the b asis of documentary evidence, and Community 
inspection is carried out. Part II of the list has be en extended to 31 December 2005, due to delays and 
the possibility of revised legislation as a result of the White Paper on Food Safety.81  
Table IV.8 
Tariffs and tariff quotas on fishery products 
Product Tariffs and tariff quotas 
Alaska Pollack, frozen fillets and meat  Imports of an unlimited amount at  0% (for an indefinite period) 
Cod, fresh, chilled or frozen, excluding liv er and roes Imports of an unlimited am ount at 3% (for an indefinite period) 
Cod and fish of the species Boreogadus saida , salted or in 
brine, but not dried or smoked An autonomous quota opened for 3 year s.  Quota for 2001-03: 10,000 tons 
at 0% for each year 
Surimi, frozen Imports of an unlimited am ount at 3.5% (for an indefinite period) 
Blue Grenadier, frozen fillets and me at Imports of an unlimited amount at  3.5% (for an indefinite period) 
Prawns, in shell, fresh, chilled or fr ozen Imports of an unlimited amount at 0% (for an indefinite period) 
Shrimps and prawns, cooked and peeled An autonomous quot a opened for 3 years.  Quota for 2001-03: 5,000 tons at 
6% for each year 
Tuna loins An autonomous quota opened for 3 years.  Quota for 2001-03: 4,000 tons at 
6% for each year 
Herring, fresh, chilled or frozen An  autonomous quota opened for 3 year s.  Quota for 2001-03: 20,000 tons 
at 0% between 1 November and 31 December of each year  
Herring, spiced/vinegar cured,  in brine, preserved in 
barrels of at least 70 kg. net drained weight An autonomous quota opened for 3 years.   Quota for 2001-03: 5,000 tons at 
6% for each year 
Source:  DG Fisheries (1999), Information Notes:  "Reform of the Common Organisation of the Markets in fishery and 
 aquaculture products, Annexes III and IV [Online].  
(4) ENERGY  
62. The EC is an energy-intensive economy; energy consumption has increased by 1% to 2% per 
year since 1986. While industrial demand for ener gy has been relatively stable, the demand from 
households and the tertiary sector has increased as a result of the transition to a more service-oriented 
economy. The EC's own energy supply covers barely half of its needs; foss il fuels (oil, coal, and 
natural gas) make up four fifths of the EC's tota l energy consumption and almost two thirds of its 
imports.82 Natural gas from the Russian Federation alone represents nearly 20% of EC's total energy 
consumption. Renewable energy sources represent onl y 6% of the EC's current energy balance. The 
                                                      
78 The test applied to imports is whether the hygiene conditions under which production is carried out 
in the country of origin can be considered to be equivalent to that required from Community producers;  a competent authority responsible for the public health  aspects of fishery products must also exist. 
79 Commission Decision 97/296/EC. 
80 Council Decision 95/408/EC, as amended. 
81 Council Decision 2003/912/EC. 
82 The cost of oil production is 2-7 times the world price; the EC has 8 years of reserves. The EC has 
2% of the world's natural gas reserves, and has 20 years re serve. It has 2% of the world's uranium reserves, and 
40 years reserve (European Commission, 2002b). WT/TPR/S/136 Trade Policy Review 
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energy demand in the C-10 countries is likely to surge, especially in the period leading up to 2010, 
when their economies are expected to grow mu ch faster than the EC-15's (Chapter I(4)).  
63. In November 2002, the Commission published the Green Paper "Towards a European 
strategy for the security of energy supply", wh ich sets out new energy policy guidelines. The two 
main policy aims of the EC in energy are security  of energy supply and completion of the internal 
market. Security of supply means, inter alia , better energy efficiency, diversification of sources and 
technologies, reduction of import de pendency, promotion of domestic production, guidance of energy 
consumption, and development of the trans-European energy network.  
64. In 2002, € 21 million were budgeted to su pport the trans-European energy network 
programme. In addition, € 32 m illion were budgeted to finance several other energy-related 
programmes: Carnot (clean and efficient use of solid fuels); Sure (safe transport of radioactive materials); Altener (promotion of renewable energy sources); Save (promotion of energy efficiency); 
Synergy (promotion of internationa l cooperation in energy); and Etap (studies, analyses and forecasts 
on energy).  Moreover, € 19 million were allocated to support activities related to nuclear energy.
83 
65. On 25 November 2002, a political agreement was reached by the Council of Energy Ministers 
on the adoption of new legislation on gas and electri city markets through: the Acceleration Directive, 
aimed at completing the internal gas and electricity markets84; a regulation on cross-border electricity 
trade, aimed at enhancing competition within the internal electricity market; and a Directive on 
security of supply in the gas subsector, aimed at clarifying and defining the responsibilities of market operators as regards security of supply.  A 2003 Directive changed the place of taxation of natural gas 
in pipelines and of electricity, from the place of supply to the place of consumption. In addition, on 20 
March 2003, the Council agreed to a proposed directive for the taxation of energy products to, inter 
alia, improve the functioning of the internal market  by reducing divergence in excise duty rates 
among member States, and help to meet the environmental objectives of the Community and the Tokyo Protocol (Chapter III(2)(ix)).   
66. The essential elements of the Acceleration Di rective are: market liberalization for all non-
domestic gas and electricity customers as of 1 July  2004, and for all other customers, including 
private households, as of 1 July 2007; reinforced universal service obligati ons in the electricity 
subsector (guarantee of supply at reasonable prices) ; legal and functional unb undling for transmission 
system operators as of 1 July 2004
85; introduction of a regulated third party access regime for 
transmission and distribution networks and lique fied natural gas facilities; the need for the 
establishment of regulatory authorities to, inter alia , fix methodologies underlying the calculation of 
the network access tariffs;  and derogations (by th e Commission) from regulated tariffs for major new 
gas infrastructure.  
67. The main elements of the regulation on cross-border trade are: establishment of a 
compensation mechanism in favour of transmission sy stem operators for costs incurred as a result of 
hosting cross-border flows of electricity86; setting harmonized principles on cross-border transmission 
charges, in particular the application of non-di scriminatory, transparent, and non-distance-related 
charges for network use; setting rules to maximize availability of transmission capacity; establishment 
                                                      
83 European Communities (2003a). 
84 Council document 14867/02 on gas, and Council document 14869/02 on electricity, both of 
27 November 2002. Revision of Directives 96/92/EC on electricity and 98/930/EC on gas. 
85 For distribution system operators, functional unbundling as of 1 July 2004, and legal unbundling as 
of 1 July 2007 (DG Competition, 2003a). 
86 Compensation to be paid by the operators of the transmission systems from which cross-border flows 
originate and the transmission sy stems where those flows end. European Communities WT/TPR/S/136 
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of principles to deal with congestion; involveme nt of regulators in tariff and capacity allocation 
issues; and setting of penalties by member States for regulation infringements. 
68. The Commission considers that when this le gislation is finally a dopted, it is to be 
accompanied by strict application of EC competition law, since various energy markets are often still 
dominated by "national champions"; the liberalization process will likely lead to further mergers, and 
certain energy companies may try to benefit from state aid to improve their competitive situation.87 
(5) MANUFACTURING  
(i) Overview 
69. The importance of the manufacturing sector in terms of its contribution to GDP and 
employment in the EC-15 has been decreasing over time. Some 20 million SMEs constitute the 
backbone of the sector. Developments in the EC-15 manufacturing show considerable diversity during 
1979-02:  employment and output declined in textil es and clothing, and leather and footwear; whereas 
some other industries (e.g. chemicals, rubber and plastics, telecommunications equipment, office 
machinery and electrical equipment) have shown ma rked increases.  Overa ll, the trade surplus on 
manufactured goods has improved, rising from € 31.5 billion (0.6% of GDP) in 1989 to € 95.2 billion 
(1.1% of GDP) in 2001.88  
70. After a decade of downsizing and restructuring, the structure of the manufacturing sector in 
the majority of the C-10 is between that of the "E C-South" (Greece, Portugal, and Spain) and the "EC-
North" (Germany, France, Italy, and the United Kingdom).89 The C-10 have particularly high 
employment shares in textiles and clothing, leather, and wood. Table IV.9 shows a comparison 
between the structure and size of the manufacturing sector in the EC-15 and the Central and East 
European (CEE) countries (i.e. the C-10, excludi ng Cyprus and Malta, and including Bulgaria and 
Romania). In general, the most important manufact uring subsectors in the CEE are food, beverages 
and tobacco; transport equipment; and basic metals  and fabricated metal products. In the Baltic 
countries, textiles and wood products  have large weight. The C-10 manufacturing sector is negligible 
compared to the EC-15's.90 According to a report by the Commission, FDI has contributed to the 
modernization of manufacturing in the C-10; however, the ability of many domestically owned 
enterprises to cope with increased compe tition in the single market remains weak.91 
71. The Lisbon European Council of 23 and 24 March 2000 set a new strategic policy objective 
for the EC: "to become the most competitive a nd dynamic knowledge-based economy in the world, 
capable of sustained economic growth with more  and better jobs and greater social cohesion". 
Achieving this depends, to a great extent, on  the ability of the Community to develop the 
competitiveness of its manufacturing industry. To this  end, in December 2000, the Council adopted 
the "Multiannual Programme for Enterprise and Entr epreneurship, and in particular for SMEs 
                                                      
87 DG Competition (2003a). 
88 European Commission (2003g). 
89 In particular, manufacturing prod uction structures in the Czech Re public, Hungary, Slovenia, and 
Slovak Republic are very close to the EC-15 average (European Commission, 2003g). 
90 Measured at 2000 exchange rate s, the share of the eight CEE co untries (acceding in May 2004) in 
total manufacturing production in an enlarged EC (comprising themselves and the EC-15) was 4.4%. 
Nevertheless, if expressed in terms of purchasing po wer parities, which correct the undervaluation of the 
currencies of some of the THE C-10, their share would double to 9% (it would be 10.7% if Bulgaria and 
Romania were included). In 2000, the eight CEE countries' manufacturing employment represented 15% of that 
of an enlarged EC (Eur opean Commission, 2003g). 
91 European Commission (2003g). WT/TPR/S/136 Trade Policy Review 
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2001-05". On 11 December 2002, the Commission adopted a document, "Industrial Policy in an 
Enlarged Europe", which revisits the broad objec tives and principles of the EC's industrial policy set 
out in a communication of 1990.92  The programme and the new document highlight the slowdown in 
productivity in the EC as a serious cause of concern, as well as the need to increase the 
competitiveness of its economy, including manufacturing.  
Table IV.9 
Structure and size of the manufacturing sector in the CEEC and the EC-15, 2000 
 Industry share in total 
manufacturing a 
(Per cent) Production shareb of CEEC in an 
enlarged ECc 
(Per cent) Employment share of 
CEEC in an enlarged 
ECc 
(Per cent) 
 CEEC EC-15 Using exchange 
rate Using PPPs  
Total manufacturing 100.0 100.0 5.0 10.7 20.9 
Food products; beverages and t obacco 19.1 13.7 6.8 14.3 24.2 
Textiles and textile produc ts 4.9 3.9 6.3 13.5 36.9 
Leather and leather products 0.9 0.9 5.0 10.9 32.6 
Wood and wood products 3.2 1.9 7.9 16.0 28.4 
Pulp, paper and paper products; 
publishing and printing 5.5 7.6 3.6 7.7 11.8 
Coke, refined petroleum products and 
nuclear fuel 7.1 6.0 5.8 13.2 36.6 
Chemicals, chemical products and 
man-made fibres 7.2 10.1 3.6 8.0 16.7 
Rubber and plastic products 3.9 3.8 5.1 10.6 16.0 
Other non-metallic mineral products 4.8 3.4 6.8 14.3 24.8 
Basic metals and fabricated metal 
products 12.5 11.1 5.5 12.2 17.5 
Machinery and equipment 5.7 8.9 3.2 7.1 19.1 
Electrical and optical equipment 10.2 12.0 4.2 9.1 16.2 
Transport equipment 11.3 13.6 4.2 9.0 16.0 
Other manufacturing 3.7 2.9 6.2 12.9 23.3 
a Shares in total manufacturing production (in no minal terms, converted using exchange rates). 
b Production values in the year 2000 converted using current exch ange rates, and using purchas ing power parities (PPP) for 1999 . 
c In this table, "enlarged EC" is the sum of the EC-15 and CEEC . CEEC refers to the eight Central and East European countries 
that acceded in May 2004, plus Bulgaria and Romania. 
Source: European Commission (2003), European Competitiveness Report 2003 , p. 191, Brussels. 
72. Some of the main priorities are to meet the challenges of globalization, and to achieve an 
"Enterprise Europe" (a horizontal enterprise policy) by 2005. According to this document, the EC "needs to address the entire business environment to enable enterprises, whatever their size, legal 
form, sector or location, to grow and develop in a way that is compatible with the overall EC goal of 
                                                     
 
92 COM (1990) 556 of 16 November 1990. European Communities WT/TPR/S/136 
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sustainable development". The Community has to develop new technologies, including information 
and communication technologies (ICT) and biotechnolog y; and its industry needs to become more 
innovative. The Community must develop its entrep reneurial capacity, take risks and grow new and 
bigger businesses; it must improve market access for goods and services.93 
73. On 8 May 2003, the Commission adopted a new definition of SMEs, aimed at promoting 
entrepreneurship, investment and growth; facilita ting access to venture capital; cutting administrative 
burdens; and increasing legal certainty. The definiti on maintains the different SMEs thresholds, but 
provides for a substantial increase of the financia l ceilings, as a result of inflation increases since 
1996, when the first Community SME definition was made.94 The new definition will be used from 
1 January 2005. 
74. The manufacturing sector is a major beneficiar y of state aid. During 1990-02, of the 120 
individual awards of rescue and restructuring aid, around 90 were for manufacturing firms in difficulty; in total, an estimated € 45 billion of state aid was awarded. During the 1990s, the bulk of 
ad hoc  aid granted in the EC was for the restructuring programme in the German Bundeslander and 
for rescuing or restructuring companies and large conglomerates in other member States.
95 In 2002, € 
93 million were budgeted for the research programme , "Promotion of innovation and encouragement 
of SME participation"; and about € 90 million annually  are allocated to SME-oriented projects as part 
of the 2001-05 enterprise and entrepreneurship programme.96 
75. MFN customs tariffs on manufactured goods average 6.4%, with rates ranging up to 209.9% 
on food manufactures (Chart IV.1). Specific tariffs  are levied on products, such as alcoholic 
beverages, meat and edible offal of poultry,  and cheese and curd; compound duties apply to, inter 
alia, preparations of vegetables, and meat  and edible offal; and mixed duties to, inter alia , sugar 
confectionary, and ice cream. 
 
                                                      
93 European Commission (2002f).  
94 According to the new definition, micro companies have less than ten employees, and a turnover/or 
balance sheet of up to € 2 million (previously undefined); small enterprises have less than 50 workers, and a 
turnover/balance sheet of up to € 10 million (previously € 7 million and € 5 million, respectively); and medium-sized companies employ less than 250 workers, have a turnover of up to € 50 million (€ 40 million before), or 
balance sheet of up to € 43 million (€ 27 million previously) (European Commission, Press Release IP/03/652, 
8 May 2003). 
95 Aid amounts vary from less than € 1 million to more than € 20 million. Of the 120 firms, around 35 
were in Germany, 20 in France, 15 in Spain and Italy, and 5-10 in Austria, Belgium, and Portugal; in other 
member States, there were at most to w aid cases (European Commission, 2003g). 
96 European Communities (2003a). WT/TPR/S/136 Trade Policy Review 
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111
121
122
130
210
220
230290
311
312313314
321
322
323
324
331
332
341
342351
352
353354
355
356
361
362
369371
372
381382
383
384
385
390
410Chart IV.1
EC tariffs by ISIC classificationa, 2004
Per cent
International Standard Industri al Classification, Revision 2
WTO Secretariat calculations, based on data provided by the EC authorities.AverageMaximum
Minimum
a
Source :111 
121 122130210220230390311312313314321322323
324
331332
341
342Description
Agricultural and livestock production
ForestryLoggingFishingCoal miningCrude petroleum and natural gas productionMetal ore miningOther miningFood productionOther food products and animal feedsBeveragesTobacco manufacturingTextilesManufacture of wearing apparel, except footwearLeather products, except footwear and wearing apparelFootwear, except vulcanized rubber or plastic footwearWood and wood products, except furnitureManufacture of furniture and fixtures, except primarily of metalPaper and paper productsPrinting, publishing and allied industriesDescription
Industrial chemicals
Other chemicals, including pharmaceuticalPetroleum refineriesManufacture of miscellaneous petroleum and coalproductsManufacture of rubber products n.e.s.Manufacture of plastic products n.e.s.Pottery, china and earthenwareManufacture of glass and glass productsOther non-metallic mineral productsIron and steel basic industriesNon-ferrous metal basic industriesFabricated metal products, except machinery and equipmentNon-electrical machinery including computersElectrical machinery apparatus, appliances and suppliesTransport equipmentProfessional and scientific equipmentOther manufacturing industriesElectrical energy351
352353354
355
356361362369371372381
382
383
384
385390410
150.1209.9
0.010.020.030.040.050.060.070.080.0100.0250.0
 
 European Communities WT/TPR/S/136 
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(ii) Selected industries 
(a) Textiles and clothing 
76. The EC is the world's largest importer of tex tiles and clothing products , and exporter of textile 
goods; it ranks second in the world in terms of expor ts of clothing products. In 2002, the subsector 
accounted for 5.8% of total EC tr ade: imports amounted to € 71.6 b illion and exports to € 43.8 billion. 
The subsector accounts for about 4% of total EC  manufacturing production and 7% of manufacturing 
employment (2.1 million jobs). There are 177,000 enterprises, mostly SMEs, with a combined turnover of € 200 billion.
97 MFN tariffs on textiles, wearing a pparel, and leather products average 
7.6%, with rates ranging up to 17%. 
77. On average, the subsector plays a more importa nt role in the economy of the C-10 than in the 
EC-15 in terms of output and employment. The C-10 's exports are mostly (between 66% and 100% 
depending on the country and the product) to the EC- 15. The C-10 are the destination for 16% of the 
EC-15's total exports of yarns and 8% of all textiles exports.98 
78. The textile and clothing subsector does not enjoy any specific incentiv es. However, like any 
other manufacturing industry, it can benefit from th e incentives listed in the guide of "Grants and 
Loans from the EC". In addition, it can profit from actions that specifically target sub-contracting 
activities (10-60% of total activities in the subsector of member States).99 
79. The EC applies quotas on imports of cer tain textile and clothing products from WTO 
Members, and under bilateral agreements with non- WTO members (Chapter III(2)(vii)).  Ecs' imports 
of textiles and clothing under quota represent less than a third of its total imports of these products.100 
80. Under the WTO Agreement on Textiles and Clot hing (ATC), the EC submitted the list of  
products covered in the first, second, and thir d phases of integration into the GATT 1994; as from 
1 January 2005, the remainder will be integrated, resulting in the removal of all EC quotas on these 
products (Chapter III(2)(vii)). In anticipation of  this, on 28 October 2003, the Commission proposed 
measures to promote competitiveness in the subsect or. These include R&D and innovation in areas of 
specific relevance (e.g. technical textiles); educati on and training policy (e.g. improvement of SME's 
access to existing funding opportunities by simpli fying the procedures); regional policy (e.g. 
completion of the Euro-Mediterranean area by 2005); exploration of the use of labelling to facilitate 
access to EC products that respect international labour or environm ental standards; and examination 
of the use of a "Made in Europe" label of origin to promote European quality products.101 Currently, 
only textile products that comply with certain la belling requirements may be marketed within the 
Community.102 
81. In general, certain studies estimate the global welfare gains from the ATC to range between 
US$6.5 billion and US$324 billion. Some studies predict that the ATC, when fully implemented, will 
                                                      
97 European Commission Press Release IP/03/1463, 28 October 2003. 
98 European Commission (2003e). 
99 Subcontracting is present in all areas of the tex tiles and clothing subsector, but it is of particular 
importance in the finishing, knitting and clothing industries (European Commission, 2003b). 
100 European Commission (2003e). 
101 A High-Level Group (comprising the Commission, member States, and stakeholders) will be set up 
to explore initiatives and make recommendations. The Co mmission intends to report on the results achieved by 
spring 2005 and again by the end of 2006 (European Commission Press Release IP/03/1463, 28 October 2003). 
102 Council Directive 96/74/EC, 16 D ecember 1996, on textile names. WT/TPR/S/136 Trade Policy Review 
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account for up to two-thirds of all gains from the Uruguay Round, whilst others put it at merely 5%.103 
The distribution of the welfare gains is unequal and differs from a study to another.104 With regard to 
the EC, one study finds that it would reap total welf are gains of some € 25.3 billion per year, of which 
97% would derive from elimination of quantita tive restrictions and 3% from tariff reform.105 The 
welfare gains are expected to result from lower consumer prices and re-allocation of resources to 
more efficient sectors. However, in the medium -term, there could be some adjustment costs 
(including the loss of employment in the textile a nd clothing subsectors) as resources move to other 
sectors. 
(b) Chemicals 
82. Chemicals is the main manufacturing subsector in the EC-15 in terms of value added (7.5% of 
the manufacturing value added in 2001).106  Excluding pharmaceuticals, it contributes 1.3% to total 
GDP. The chemical industry is rather capital intensiv e, but still provides 1.7 million jobs in the EC-15 
(4.2% of the workforce in manufacturing). In 2000, the turnover of the industry was € 417 billion. It is 
a key supplier to virtually all sectors of the econo my.  About 30% of chemicals is further processed 
within the industry. In the EC-15 it is mainly concentrated in Germany (26.2% of the EC-15 
production in 2000), followed by France (17%), the United Kingdom (13.5%), and Italy (11.6%). In 
2000, the subsector was made up of 22,890 enterprises,  of which SMEs represent more than 95%. In 
2002, chemicals had trade surplus of over € 60 bill ion. Environmental expenditure in the EC-15 
chemicals, rubber and plastics industries amounts to € 7.7 billion per year, i.e. 3.5% of their value added, and accounts for 23% of total the EC-15 environmental protecti on expenditure in all 
industries.
107 MFN tariffs on industrial chemicals and basic industrial chemicals average 4.7%. 
83. The chemicals subsector is also important in the C-10, and its contribution to total 
manufacturing ranges from about 4% in Latvia to 8% in Hungary. The turnover of the industry in the 
C-10 was € 16 billion (roughly 4% of the EC-15 chem ical production). In general terms, the subsector 
has suffered a declined in output in the C-10, with  most of the loss occurring in the first years of 
transition to a market economy, and then after the Russian crisis in 1998.108 
84. According to the Commission, the current le gislative system for chemicals is cumbersome, 
has been largely unable to identify the risks posed by many chemicals, and is slow to address already 
established risks. It distinguishes between "existing"  and "new" chemicals, using 1981 as a basis; they 
are regulated under different procedures. As a result, the Commission adopted a White Paper on 13 February 2001
109, and, on 29 October 2003, presented a pr oposal for a new regulatory framework 
for chemicals that would replace over 40 Directives and Regulations, by introducing a single, 
integrated system, treating new and existing substances equally; the system is called REACH (Registration, Evaluation, and Authorization of Chemicals).
110  
                                                      
103 Most studies use computable general equilibrium models (CGE). See OECD (2003c). 
104 In general, most studies predict that China  will experience the highest growth. Some studies also 
point to the loss by some LDCs as their preferential ma rgins are eroded. Industrialized countries, on the other 
hand, are expected to witness substan tial welfare gains from lower consumer prices and more efficient resource 
allocation in the long run. See Harrison, Rutherford and Tarr (1997), pp. 216-252; and Diao and Somwaru 
(2001). 
105 Francois, Glismann an d Spinanger (2000). 
106 European Commission (2003p). 
107 European Commission (2003o). 
108 European Commission (2000). 
109 COM(2001)88. 
110 The proposal has been forwarded to the European Parliament and the Council of Ministers for 
adoption under the co-decision procedure (European Commission Press Release IP/03/1477, 29 October 2003). European Communities WT/TPR/S/136 
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85. The aim of REACH is to secure a high level of protection for human health and the 
environment, while ensuring the efficient functio ning of the internal market, and stimulating 
innovation and competitiveness in the subsector. The key elements of the new system are placing responsibility on the industry to manage the risks of its chemicals. Other elements are: increasing the 
threshold for registering new substances from 10 kg . to 1 tonne, and the ma ximum time-limit for 
exemption from registrations for R&D from 6 to 15 y ears; establishing a Chemi cal Agency to ensure 
the consistent application of the system, and to manage the database of all registered chemicals; 
evaluation by the national authorities of substances a nd animal testing; and substances of very high 
concern (e.g. carcinogenic, mutagenic, toxic, bi o-accumulative) would require authorization for 
particular uses from the Commission. The direct costs of REACH to the chemicals industry are 
estimated at € 2.3 billion over an 11 year period.
111 
(c) Coal and steel 86. The EC-15 produces about 74 million tonnes of hard  coal (less than 2% of world production), 
down from 470 million tonnes in 1953, and imports ar ound 180 million tonnes. Hard coal is currently 
produced by France, Germany, Spain, and the Un ited Kingdom. After enlargement, the Community's 
coal production is expected to more than double. Production costs of European coal are relatively 
high, mainly because of difficult geological conditions: the average cost of producing coal in Europe 
is 3-4 times the international market price. Empl oyment in the coal industry has also decreased 
consistently over the years, to less than 72,000 people (down from 1.7 million fifty years ago).
112 
Imports of coal are duty free. 
87. The EC-15 produces 159 million tonnes of steel (about 15% of world production), up from 39 
million tonnes in 1953; the industry employs 276,000 workers (employment peaked at 774,000 in 1972). New technologies, privatization, and cross-border mergers improved the industry's performance during the 1990s. Since 1998, the domes tic market has been fully absorbing the 
Community's steel production, and steel has to be imported from third countries. Most of the C-10 have an important steel industry, and together they produce over 40 million tonnes. During the last 
decade, a restructuring process in the C-10 resulted in the closure of many inefficient facilities and a 
workforce reduction by some 65%. Privatization of  the remaining state-owned steel companies in 
these countries is almost complete.
113 Tariff protection on iron and steel is very low, with tariffs 
averaging 0.2%, but ranging from zero (e.g. on steel) up to 7%. 
88. The European Coal and Steel Community (ECSC) treaty expired on 23 July 2002, fifty years 
after coming into force.114 The Amsterdam Council of 16-17 June 1997, called on the Commission to 
take measures to transfer the ECSC's net assets a nd liabilities (€ 1.6 billion) resulting from the levy on 
ECSC products to the overall EC budget, and to fund  research activities in the two subsectors: 72.8% 
of annual interest on ECSC net assets are devot ed to research on steel and 27.2% on coal. 
                                                      
111 European Commission Press Release IP/03/1477, 29 October 2003. 
112 European Commission Press Release IP/02/898, 19 June 2002. 
113 As part of their EC accession pr ocess, the THE C-10 were given a grace period during which state 
aid could be given only if certain conditions were met.  One of these conditions was the adoption of a national 
restructuring programme, such as those adopted by the Czech Republic in 2002, and Poland in 2003 (European 
Commission, 2003r). 
114 Belgium, France, Germany, Italy, and Luxembourg  decided to create the EC SC, the first European 
supranational institution, to manage the peaceful use of coal and steel, which had traditionally been the key 
engines of national military efforts. The ECSC was the starting-point of the European Community as created in 1957.  WT/TPR/S/136 Trade Policy Review 
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89. After the expiry of the ECSC, the EC decide d on a new framework for coal aid, which is to 
apply until 2010. Under this framework, the Co mmission may approve aid for the reduction of 
activity, subject to certain conditions.115 Total state aid for coal production fell from     € 5.6 billion in 
1995 to € 3.3 billion in 2002.  As a general rule, rescue and restructur ing aid for the steel industry is 
prohibited116; however, in 2003, the Commission authorized aid for environmental and R&D 
purposes. 
(6) SERVICES  
(i) Overview 
90. In 2002, services accounted for 71% of the EC-15' s real GDP and employed 68% of its labour 
force; the size of the sector vari es considerably across member States.117 In the C-10, services 
represent 66.7% of real GDP, and 54% of total employment. The EC-15 is the world's leading 
exporter and importer of commercial services (Chapter I(3)(ii)). Nearly 90% of all SMEs in the EC-15 
are in services industries. The problem of weak pr oductivity growth in the Community is particularly 
acute in services118, with rates in the private sector declining from 1.9% during 1991-95 to 1.4% over 
1996-00. This may be associated with an insu fficient use of information and communication 
technologies (ICTs), particularly in subsectors such as retail and wholesale trade and financial 
services. For the same periods, productivity growth  rates increased from 4.8% to 6.8% in ICT-
producing service industries (i.e. telecommunications).  
91. Services has also lagged behind other sectors in creating a single market, and accounts for 
only 20% of the EC-15 cross-border trade, mainly because of differences in regulation across member 
States, and red tape for EC companies operating outside their home countries.119 As a result, on 
13 January 2004, the Commission presented a proposal for a Directive that sets out a framework for 
creating a genuine internal market for services by 2010.120 The Commission regards this as perhaps 
                                                      
115 For example, aid should be part of a closur e plan, and aid for current production and aid for 
investments of up to 30% of the total cost for coal mines have to demonstrate that they are competitive vis-à-vis  
imported hard coal of a similar quality. 
116 European Commission (2003q). 
117 The share of services in total employment ranges from 56% in Portugal to 76% in the Netherlands; 
in terms of value added, services represent betw een 60% (Ireland) and 80% (Luxembourg) of the total 
(European Commission, 2002d). 
118 With the exception of two of the seven member states for which comparable data are available 
(France and the United Kingdom), services sector productivity growth declined during the second half of the 
1990s (European Commission, 2003g).  
119 In 2002, a Commission report listed 92 remaining barriers encountered by companies wishing to 
offer services in more than one EC country, Financial Times , 18 November 2003. 
120  This deadline was set by the Lisbon Strategy. The services covered by the proposal account for 
around 50% of all economic activity in  the EC. The Commission proposes, inter alia , mutual recognition 
between member states for documents that allow companie s to provide services; the introduction of "one stop 
shops" for permits to do business in each member Stat e by 31 December 2008; a ban on requiring permits unless 
they are justified in the general interest. The Commission also suggests banning: all general prohibitions on 
commercial communications for regulated professions; the requirement for companies providing services occasionally or temporarily to have a permanent establ ishment on their territory or to oblige companies to 
follow the rules of their host country in addition to thos e of their home country; and the requirement for workers 
from elsewhere in the EC to register with local authorities (European Commission, Press Release IP/04/37, 
13 January 2004). European Communities WT/TPR/S/136 
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the most important mid- and long-term goal for reform s; the financial services subsector, in particular, 
is crucial because it will boost the overall competitiveness of the economy.121 
92. Since the last Review of the EU, some of  the major developments in the sector concern 
progress on the Financial Services Action Plan (FSAP) ; the reform of the regulatory framework for 
telecommunications; and the evolution of the Action Plan  for transport, e.g. the tabling of legislation 
on integrating rail markets, and the establishment of the European Maritime Safety Agency in 
June 2002 and of the European Aviation Safety Agen cy in July 2003. However, many other services 
activities are not subject to a comprehensive in ternal market policy; these include tourism, 
distribution, construction, engineering and cons ultancy, certification and testing services and 
employment agencies.122  
93. Under the General Agreement on Trade in Se rvices (GATS), the EC scheduled commitments 
across virtually all major service categories, and ra tified the GATS Fourth and Fifth Protocols on 
basic telecommunications and financial services. As a result of the EC's commitments under the 
Fourth Protocol, the framework regulating the EC-15 nationals was extended to all foreign operators, 
with minor limitations on market access and national treatment.123 The commitments made by the EC 
under the Fifth Protocol extend the principle of the single passport to third-country providers, subject 
to various limitations, mostly member-state specific, on market access and, in a few cases, on national treatment.
124 The EC maintains MFN exemptions under Article II of the GATS.  In April 2003, the 
EC-15 notified the WTO of its intention to re place the existing GATS schedules and lists of MFN 
exemptions of EC-12, the EC-15 a nd, where relevant, Austria, Finla nd, and Sweden with consolidated 
schedules. The consolidated schedule of commitment s and list of MFN exemptions are to come into 
force on completion of the ongoing negotiations pursu ant to Article XXI (Modification of Schedules) 
of the GATS. The EC-15 has tabled its initial c onditional offer in the ongoing services negotiations.125  
(ii) Financial services  
(a) Overview 
94. The EC-15's financial services are dominated by banks (bank loans amounted to 109.6% of 
GDP in 2001), followed by in surance and securities. Financial institutions are less and less 
specialized, with banks providing certain insuran ce services and vice-versa. Nonetheless, the price of 
certain services depends on the way they are supplie d: estimates show that a 10% drop in bank-based 
financing in favour of capital market  financing would reduce financing co st by the equivalent of 0.3% 
of the EC's GDP.126 
95. The FSAP, launched in 1999 and to be fully implemented by 2005, has the aim of ensuring a 
single market for wholesale financial services and st ate-of-the-art prudential rules and supervision, 
and opening and securing reta il markets. It represents a major dr ive to integrate the different EC 
                                                      
121 Many regulatory bottlenecks remain, e.g. in th e areas of clearing and settlement, which constitute 
the arteries of the financial system (European Commission, 2002c). 
122 European Commission (2003j). 
123 Most of these limitations reflected delays in the implementation process in some member States and 
have expired since (WTO document GATS/SC/31/Suppl.3 adopted by Council Decision 97/838/EC). The content of the EC's commitments under the GATS' Fourth Protocol is covered in WTO (1997), p. 112. 
124 Third-country financial servi ces providers enjoy the new access opportunities created by progress 
on the FSAP, but will also assume the new obligations on financial service providers established in the EC 
(WTO document GATS/SC/31/Suppl.4/Rev.1, as implemented by Council Decision 1999/61/EC). Details of the 
EC's commitments under the GATS' Fifth Protocol are covered in WTO (2000b), Annex IV.2. 
125 WTO document TN/S/O/EEC, 10 June 2003. 
126 European Commission (2003d). WT/TPR/S/136 Trade Policy Review 
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financial markets and regulations, by allowing all financial institutions to operate on an EC-wide 
basis.127 The FSAP is a central plank of the Community ’s strategy for promoting economic growth, 
since more integrated financial markets could reduce trading costs and thereby boost GDP growth and employment.
128 It consists of legislative and non-legisla tive measures to achieve these objectives, with 
a schedule for adoption and implementation; progress is  monitored periodically by the Internal Market 
Directorate-General. Enlargement of the single ma rket is also expected to amplify the economic 
benefits to the Community and third countries, pa rticularly during the high-growth catch-up phase, 
when the C-10 have high financing needs to fund investments.  
96. Up to April 2004, 36 of the 42 original le gislative measures for the completion of the FSAP 
had been adopted. Since the last TPR of the EC, some of the key measures taken are through: the 
Directive on distance contracts for financial services, aimed at establishing a harmonized and appropriate legal framework for contracts negotia ted at a distance (e.g. telephone, fax or over the 
internet), while protecting the consumer
129; the Directive on Securities Market Abuse, aimed at 
tackling cross-border fraud, and market manipulation130; the Directive on Pension Funds, which gives 
managers greater freedom to invest on a pan-European basis by, inter alia , allowing for mutual 
recognition of member States' supervisory regimes131; the Prospectuses Directive, which introduces a 
new "single passport for issuers", making securities available to all EC investors (once approved by 
the relevant authority in one member state, a pr ospectus has to be accepted everywhere else in the 
EC)132; and a Regulation endorsing most of the exis ting International Accounting Standards (IAS), 
including the related interpretations (SICs), to contri bute to the consistent application of IAS for listed 
companies across the EC as from 2005. 
97. On 16 March 2004, the Commission presented a proposal on Statutory Audit in the EC to 
accompany the original FSAP measures. This proposal  is important to avoid future scandals such as 
that of Parmalat in Italy. Group auditors will be requ ired to take full responsibility for the audit of the 
consolidated accounts of the whole group of companies; the proposal will reinforce oversight of auditors and foresee the use of in ternational auditing standards. 
98. In addition, on 6 November 2003, the Comm ission launched a package of seven measures 
with the objective of improving the regulation and s upervision of banking, insurance, and investment 
funds, by extending the framework already used in the securities subsector since 2002 through the 
                                                     
 
127 For a description of the regulatory framework for financial services, see WTO (2002). 
128 According to some studies, pooling the present regional bond and equity markets would move the 
EC to a new equilibrium characterized by higher growth rates of GDP (1.1%), employment (0.5%), and investment (6%) (European Commission, 2003v). 
129 Directive 2002/65/EC, 9 October 2002. 
130 Directive 2003/6/EC, 28 January 2003. This Directive also requires a single regulatory and 
supervisory authority to be designated in each member Stat e to deal with market abus e, and to ensure a uniform 
approach.  The proposal does not mandate the harmonization of penalties against market abuse, because this was 
considered to fall under the competence of member States, but it does encourage members to set penalties to 
promote compliance with the requ irements of the proposed ISD. 
131 Directive 2003/86/EC of 13 May 2003. The institutions involved, such as pension funds and 
superannuation schemes, cover about 25% of the EC-15 labour force and manage assets worth € 2,500 billion 
(29% of EC-15 GDP). 
132 A prospectus is a disclosure document, containing key financial and non-financial information, that 
a company makes available to potential investors when it is issuing securities (e.g. shares, bonds, derivative 
securities) to raise capital and/or wh en it wants its securities admitted for trading on exchanges. The Directive 
concerns only disclosure requirements. Conditions for admission to listing remain subject to existing European and national requirements (European Commission Press Release IP/03/1018, 15 July 2003). European Communities WT/TPR/S/136 
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European Securities Committee (ESC).133 The package will restructure the organization of financial 
services by establishing four new committees. Tw o of them, the European Banking Committee (EBC) 
and the European Insurance and Occupational Pens ions Committee (EIOPC), will replace the existing 
Banking Advisory Committee (BAC) and the Insura nce Committee (IC), respectively, and will assist 
the Commission in adopting implementing measures for EC Directives. The other two, the Committee 
of European Banking Supervisors (CEBS) a nd the Committee of European Insurance and 
Occupational Pension Supervisors (CEIOPS) , with effect from 1 January 2004 and 
24 November 2003, respectively, will bring togeth er national supervisors. Moreover, responsibility 
for overseeing the implementation of EC law on collective investment funds (UCITS) will be 
transferred from the UCITS Contact Committee to the existing ESC, and the necessary coordination 
of supervisory practices in the UC ITS field will be added to the ta bles of the Committee of European 
Securities Regulators (CESR).134 
99. In the Brussels European Council mee ting of 21-22 March 2003, Heads of States and 
Governments called on the European Parliament to en sure the adoption of two particularly important 
proposals before the European Parliament's electoral  recess: the Transparency Directive, aimed at 
increasing the frequency and content of interim repor ts by listed companies to encourage a more 
rational and efficient allocation of resources; and the new investment services Directive, which constitutes the core of a securities rule-book for th e EC, governing the main types of investment 
services and the activities of exchanges. Other outst anding proposals of the FSAP concern:  a revised 
capital framework for banks and investment firms by 2006-07 to enable them to base their supervisory 
capital requirements more on their internal risk models; the Company Law Directive on Cross-border 
Mergers (presented in November 2003); and the Comp any Law Directive on Cross-border Transfer of 
Seat (proposal foreseen by September 2004). Accompanying the original FSAP measures, and the outstanding proposals are the so-called Insurance So lvency II work to create a consistent risk-based 
insurance solvency system, compatible with intern ational developments in supervision and financial 
reporting; a Directive on reinsurance supervision to  harmonize methods for reinsurance supervision in 
the EC and to abolish some remaining trade barri ers for cross-border reinsurance activities;  and a 
third Money Laundering Directive to further comb at money laundering and terrorist financing.  
100. The Commission also adopted, a separate Action Plan on Company Law and Corporate 
Governance, in May 2003, aimed at restoring public  confidence in international financial markets 
after the corporate scandals in world financial ma rkets caused by improper corporate behaviour, lack 
of transparency, accounting manipulation and fraud. So me of these initiatives are an extension of the 
original FSAP.
135 
(b) Banking 101. According to the latest available data , between 1999 and 2000, the number of credit 
institutions in the EC-15 declined from 8,330 to 7,6 20, mainly as a result of concentration; the number 
of persons employed in banking re mained relatively stable at about 2.7 million. Germany and France 
have about half of the total number of the EC-15 banks, but this proportion is decreasing due to the 
drop in the number of cooperative enterprises. In te rms of density, Spain has the highest number of 
local units per one million inhabitants (997), and Sw eden the lowest (232). The balance sheet of the 
EC-15 credit institutions increased by 13.1% from 1999 to 2000, to reach € 23 ,293 billion, i.e. 277% 
of the GDP of the EC-15; the balance sheet ra nges from 124% of GDP in Greece to more than 
                                                     
 
133 The package is made up of a proposed Directive and six Commission Decisions (European 
Commission Press Release Memo/03/220, 6 November 2003).  
134 European Commission Press Release IP/03/1507, 6 November 2003. 
135 European Commission (2003i). WT/TPR/S/136 Trade Policy Review 
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3,000% in Luxembourg.  The return on equity (an i ndicator of the profitability of the capital invested) 
of the EC-15 banks reached 10.9% in 2000, up from 9.5% in 1999.136  
102. The regulation of the banking system in th e EC is based on the single European passport 
principle and prudential supervis ion of banks according to the home country control principle.137 
Foreign banks can operate in the EC if they est ablish branches or through cross-border bank mergers 
(shareholding in subsidiaries). Member States must  not apply more favourable Community provisions 
to foreign bank branches than those applied to bran ches of credit institutions having their head office 
within the EC. The Community, however, may agree to apply identical provisions to branches having 
their head office within or outside the EC when the principle of reciprocity is observed by the country 
in which the head office of the foreign bank branch is based.138 In addition, banks are subject to 
Community rules on competition and state aid (Chapter III(4)(ii)). 
103. In December 2001, the EC-15 adopted the regulation on cross-border payments in euros with 
a view to achieving a single payments area. The regulation provides for the principle of non-discrimination on bank charges for national and cro ss-border payments in euros, implemented since  
1 July 2002 for card payments and withdrawals at cash dispensers, and since 1 July 2003 for cheques 
and credit transfers. According to the regulation, equal charges should apply to national and cross-
border payments in euros up to € 12,500 throughout the Community, irrespective of distance.   
(c) Insurance 104. According to the latest available data, the in surance subsector has con tinued to consolidate.  
In 2001, there were 4,608 insurance companies in the EC-15 (down by 2.1% from 2000) handling: 
non-life insurance (56.3%), life insurance (25%),  specialist reinsurance (13%), and composite 
insurance (5.7%). The United Kingdom has the hi ghest number of insurance enterprises (808), 
followed by Germany (694), and France (504). Tota l investments of insurance companies increased 
from € 4,595 billion in 2000 to € 4,670 billion in 2001. These enterprises wrote € 764 billion of gross 
premiums in 2001 (excluding reinsurance), up from € 759 billion in 2000, making the EC-15 insurance market the third largest  in the world, behind the United States and Japan. Life insurance 
represented 63% of total direct gross premiums in 2001;  its growth decreased slightly in 2001, for the 
first time since 1994. On a per capita basis, averag e spending on life insurance is highest in the United 
Kingdom and in Finland, and lowest in Greece and Austria; average spending is more homogeneous 
in the non-life area.
139 
105. Insurance undertakings have also bene fited from the single passport since 1994. The 
Community has two objectives in the subsector:  to provide all EC citizens with access to the widest 
possible range of insurance products on offer in the Community, while guaranteeing them the legal 
and financial protection required;  and to guarantee that an insurance company authorized to operate 
in any of the member States, can pursue its activiti es throughout the Community in terms of the rights 
to establish and to supply services.  In order to ach ieve such objectives, the Community has dealt with 
life insurance and non-life insurance separately to ta ke account of their specific characteristics.  In 
addition, the Community has separate legislation on sp ecific areas:  motor vehicle liability insurance, 
                                                      
136 Eurostat (2002). 
137 Due to a certain degree of harmonization on capital adequacy requirements, deposit-guarantee 
schemes, and regulatory supervision, since 1993, EC banks benefit from the "single European passport".  The 
single passport is a single licence allowing banks and other credit institutions to set up branches and offer services throughout the Community; it contains a list of banking services that can be provided in all the member 
States on the basis of such a licence.    
138 Directive 2000/12/EC. 
139 Spending in Luxembourg is inflated by the premiums written for non-residents. European Communities WT/TPR/S/136 
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annual accounts and consolidated accounts of insura nce undertakings, and legal protection insurance, 
and credit and suretyship insurance.  
106. Since the last TPR of the EC, three main le gislative developments have taken place in the 
subsector. On 5 November 2002, a Directive on life in surance replaced all th e life Directives adopted 
since 1979, by recasting them into a single text.140  It includes rules concerning supervision, solvency 
margin requirements; and the freedom to provi de life insurance services throughout the EC.141 A 
Directive on non-life solvency requirements adopt ed on 5 March 2002, increased the solvency 
requirements in certain business lines such as ma ritime, aviation, and general liability business.142 On 
27 November 2003, a fifth Motor Insurance Directive was agreed by the Council of Ministers 
responsible for competitiveness.143 It is aimed at making it easier for drivers to obtain and claim upon 
insurance, especially when buying or using vehicles within the Community but outside their 
permanent residence (an EC country), and at upgrading the protection of victims.144  
(d) Securities 107. In 2003, the stock exchanges of five memb er states – London, Euronext Paris, Deutsche 
Borse, Italy, and Euronext Amsterdam – were am ong the world's ten largest in terms of market 
capitalization of domestic companies, but in each  case, well below that of the New York Stock 
Exchange, the world leader.
145  European equity markets experien ced a sharp decrease in the value of 
market capitalization during 2000-02 as a result of, inter alia , the downward revisions of the value of 
technology, media, and telecommunication compani es, and sluggish world economic growth. In 2003, 
however, market sentiment improved, although a high  degree of uncertainty over the course of future 
economic developments  remains apparent. 
108. The EC's single securities market w as to be completed by the end of 2003.146  To fulfil this 
objective, several aspects of securities transactions have  been modified since the last TPR of the EC, 
particularly through the adoption of a Directive on market abuse, and a Directive on prospectus. Other 
legislative measures are under consideration, e.g. the review of the 1993 Investment Services 
Directive (ISD) (see section (a) above).  Investme nt firms have benefited from the single passport 
under the ISD since 1996. Stock exchanges that provide listing and trading services are "regulated 
markets" under the ISD; the ISD also contains pr ovisions on remote access to clearing and settlement. 
However, the Commission identified several gaps in this regime, and has submitted a proposal to 
upgrade the ISD and to make the single passport work  more effectively. With the aim of imposing 
                                                      
140 Directive 2002/83/EC, 25 September 2002. 
141 The Directive deals, for example, with the taki ng-up of life insurance business and conditions for 
offering life insurance services, and outlines applicable  solvency requirements for life insurance. The recast 
directive includes the changes made to  the solvency requiremen ts introduced by Directive 2002/12/EC (the so-
called Life "Solvency I" Directive). 
142 Directive 2002/13/EC, 5 March  2002 (Non-Life "Solvency I" Directive). 
143 The proposed Directive is due to be implemente d two years after its definitive adoption (European 
Commission Press Release IP/03/1615, 28 November 2003). 
144 It sets a new minimum insurance amount for personal injuries of € 1 million per victim, plus an 
option for member States to apply a minimum of € 5 million per accident (as requested by the European 
Parliament). For damage to property , it sets a minimum of € 1 million per accident (European Commission Press 
Release IP/03/1615, 28 November 2003). 
145 Comparisons cannot be made directly because di fferent systems, are used  to complie turnover 
statistics. 
146 This deadline was agreed during the Stockholm European Council meeting of March 2001, 
following the presentation, on 15 February 2001, of the final report of the Committee of Wise Men chaired by 
Alexandre Lamfalussy. The report criticized current  legislation for being complex and ill-adapted to 
requirements, owing to the lack of harmonization (WTO, 2002).  WT/TPR/S/136 Trade Policy Review 
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conduct-of-business rules on investment firms (under Ar ticle 11 of the ISD), the proposal clarifies the 
distinction between "professional investors" (aware of risks) and other investors (more in need of 
protection). 
109. Mutual funds (known as undertakings for colle ctive investment in tr ansferable securities 
(UCITS)) are also subject to the single passport re gime. Since 1986, mutual funds licensed by their 
home countries have been able to offer units for sale throughout the EC. The Commission has 
proposed to extend the licensing regime to collectiv e investment vehicles other than those investing 
just in transferable stocks and bonds (e.g., depos its, money market instruments, derivatives), and to 
apply the single passport regime to enterprises providing fund management services. 
(iii) Telecommunications and postal services 
110. The EC-15 telecommunications services market  was valued at € 251 billion in 2003 (up from 
€ 242 billion in 2002), roughly on a par with the Un ited States market. In 2003, revenue from the 
subsector increased by around 4%, due largely to mobile telephony and broadband access: the average 
mobile penetration rate in the EC-15 was 81% (u p from 75% in 2002). Since liberalization in the 
subsector began, in 1998147, tariffs for national calls have been reduced by around 53% on average, 
and those for international calls by around 42%; howe ver, prices remain higher than in the United 
States. Furthermore, the market is somewhat fra gile following the bursting of the "dotcom" bubble, 
the global economic slowdown and over-investment in  backbone capacity, combined with high levels 
of debt resulting from expensive acquisition strategies and the cost of the transition to third generation 
mobile systems (i.e. wireless mobile technology co mbined with high data transmission capacities).148 
However, according to the Commission, the EC ma rket for electronic communications networks and 
services started to recover in 2003, owing to the in crease in mobile subscribers and the higher revenue 
per user, and the mounting number of broadband co nnections. Many operato rs managed to reduce 
their debt levels while returning to profits in  the fixed telephony segment due to the revenues 
generated by broa dband connections. 
111. The telecommunication services market in the C-10  was valued at € 19.3 billion (about 8.2% 
of the EC-15 market) in 2002, with Poland and H ungary accounting for almost 65% of the total. The 
fixed telecommunication market was liberalized by 1 January 2002 in all the C-10. However, in the 
majority of the C-10 the State still holds a cont rolling stake in the supplies of fixed services; 
competition is gradually increasing. The prices of  national fixed calls are relatively low and 
comparable to the EC-15 tariffs, while prices of inte rnational calls vary greatly but are, on average, 
higher than the EC-15 prices. Mobile and internet penetration in the C-10 is below the EC average, 
with the exception of the Czech Republic and Slov enia where levels are similar to those in the 
EC-15.149  Selected telecommunication indicators for the EC-15 and the C-10 are shown in 
Table IV.10.  
                                                      
147 Sweden and the United Kingdom had liberalized ba sic public telecommunication services earlier. 
148 European Commission (2002e). 
149 IBM (2003). European Communities WT/TPR/S/136 
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Table IV.10 
Selected telecommunica tions indicators, 2002 
 Main 
telephone 
lines ('000) Main lines 
per 100 
inhabitants Cellular 
mobile 
subscribers 
('000) Cellular 
subscribers 
per 100 
inhabitants Internet 
users ('000) Internet hosts 
per 10,000 
inhabitants PC's 
('000) PC's per 100 
inhabitants 
Austria 3,988 48.9 6,600 80.9 3,340 451.0 3,013 36.9 
Belgium 5,132 49.6 8,135 78.6 3,400 325.4 2,500 24.1 
Denmark 3,739 69.6 4,478 83.3 2,500 1,556.8 3,100 57.7 
Finland 2,850 54.7 4,400 84.5 2,650 2,343.0 2,300 44.1 
France 33,994 57.0 38,585 64.7 18,716 232.9 20,700 34.7 
Germany 53,720 65.0 60,043 72.8 35,000 314.3 35,600 43.1 
Greece 5,608 52.9 9,239 83. 9 1,705 146.0 900 8.2 
Ireland 1,975 50.2 2,969 75.6 1,065 347.2 1,654 42.1 
Italy 27,452 48.6 52,316 92.7 17,000 119.1 13,025 23.0 
Luxembourg 347 77.9 473 105.4 165 384.4 265 59.0 
Netherlands 10,000 61.7 12,100 74.7 8,590 1,937 7,557 46.7 
Portugal 4,361 41.9 8,529 81.9 3,700 158.2 1,394 13.4 
Spain 18,706 45.9 33,475 83.5 7,856 145.0 7,972 19.6 
Sweden 6,579 73.5 7,949 88.9 5,125 949.6 5,556 62.1 
UK 35,145 59.5 49,921 84.5 24,000 485.0 23,972 40.6 
EC-15 20,240 57.1 19,947 82.4 8,988 659.7 8,634 37.0 
Cyprus 427 61.1 418 59.7 210 38.5 193 27.6 
Czech Rep. 3,675 36.2 8, 610 84.9 2,500 223. 2 1,800 17.7 
Estonia 475 35.0 881 65.0 560 467.6 285 21.0 
Hungary 3,666 36.1 6,562 64.7 1,600 191.6 1,100 10.8 
Latvia 701 30.1 917 39.4 310 152.4 400 17.2 
Lithuania 936 27.0 1,632 47.1 500 157.8 380 11.0 
Malta 207 52.3 277 69.9 99 185.7 101 25.5 
Poland 11,400 29.5 14,000 36.3 3,800 170.3 4,079 10.6 
Slovak Rep. 1,403 26.0 2,923 54.4 862.8 159.9 970 18.0 
Slovenia 811.0 40.7 1,667 83.6 800 179.3 600 30.0 
The C-10 2,370 37.4 3,789 60.5 1,124 192.6 991 18.9 
Source: ITU (2003), Telecommunications Indicators , Geneva. 
112. The deadline for implementing the main elemen ts of the new EC-15 regulatory framework for 
telecommunications was 25 July 2003.150  However, by February 2004, only nine member States had 
taken action to incorporate the new re gulatory framewordk into national law.151  The new framework 
is aimed at, inter alia , establishing a harmonized regime across member States, promoting more 
competitive markets and technology-neutral regulation,  and guaranteeing basic consumer interests. It 
consists of five Directives152: (i) a Framework Directive setting out the main principles, objectives, 
and procedures; (ii) an Authorization Directive intr oducing a system of general authorization for all 
                                                      
150 In 1999, the Commission launched a major review of the subsector.  The review resulted in the 
adoption of a new regulatory framework in March 2002;  the new framework entered into force on 25 uly 2003.  
Previously, on 1 January 1998, all EC-15 telecoms infrastrucutre and service segments were opened to 
competition, with transitional periods for some member States, these have all been completed.  As a result of the EC's commitments under the 1997 Fourth Protocol to the GATS, the framework regulating EC nationals was 
extended to all foreign operators, w ith minor limitations on market acce ss and national treatment (WTO, 1997). 
151 These are Denmark, Finland, Ireland, Sweden, the United Kingdom, Spain, Italy, Austria and 
Portugal.  The Commission was to star t proceedings against latecomers. 
152 These are: 2002/21/EC (Framework Directive); 2002/20/EC (Authorization Directive); 2002/19/EC 
(Access and Interconnection Directive); 2002/22/EC (Unive rsal Service Directive); and 2002/58/EC (Privacy 
and Electronic Communications Directive). WT/TPR/S/136 Trade Policy Review 
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types of electronic communication services and networ ks (e.g. fixed and mob ile networks, data and 
voice services, broadcasting), instead of individual or  class licences, to facilitate entry in the market 
and reduce administrative burdens on operators; (iii) an Access and Interconnection Directive 
stipulating procedures and principles for imposing pro-competitive obligations (regarding access to, 
and interconnection of, networ ks) on operators with significant market power (SMP)153; (iv) a 
Universal Service Directive requiring a minimum le vel of availability and affordability of basic 
electronic communication services and guaranteeing a set of basic rights for users and consumers of electronic communication services; and (v) a Privacy and Electronic Communications Directive setting out rules for the protection of privacy a nd of personal data processed in relation to 
communications over public communication networks.
154 
113. Other legislative instruments of the ne w regime include: the Radio Spectrum Decision155, 
which establishes principles and procedures for the development and implementation of an internal 
and external EC radio spectrum policy (it does not require transposition by member States); the 
Commission Competition Directive, which consolidat es the legal measures that have liberalized the 
telecommunications subsector over the years;  the Commission guidelines on market analysis and the 
assessment of SMP, which set out a common metho dology and principles for the national regulatory 
authorities (NRAs) charged with these tasks; and the Commission recommendation on relevant markets, which defines a list of 18 relevant electronic communications markets to be examined. 
Under the new framework, NRAs are to conduct a proper market analysis (in accordance with 
competition law principles) before imposing regulator y obligations on undertak ings with SMP. NRAs 
are expected to focus their mark et analysis on those 18 markets.
156 
114. Four institutions are in charge of the mana gement, implementation, and further development 
of the new regulatory framework: (i) the Communi cations Committee, with the Commission as Chair 
and secretariat, and members from national ministri es and regulatory authorities, has regulatory and 
advisory functions on implementation issues arising from the five Directives; (ii) the Radio Spectrum 
Committee, with the Commission as Chair and secretariat, and members from national ministries and 
regulatory authorities, it deals with technical implementing measures aime d at harmonization of 
frequency allocation and development of common external radio spectrum policy objectives; (iii) 
European Regulators Group, with a Chair elected from and by members (heads of the independent NRAs), and the Commission as secretariat, contri butes to a consistent application of the new 
framework in all member states; and (iv) the Ra dio Spectrum Policy Group, with  a Chair elected 
from and by members (high-level governmental  experts from member States and high-level 
Commission representatives), provides a platform for all stakeholders to coordinate the use of radio spectrum.
157 
                                                      
153 According to the Framework Directive, an und ertaking is deemed to have SMP if, either 
individually or jointly, it enjoys a position equivalent to dominance. As a proxy of market power, the Guidelines 
on market analysis suggest computed market shares, typically based on sales volume or sales value. SMP is normally viewed as being a factor where the market share exceeds 40%; where the market share exceeds 50%, 
SMP is assumed to be present. Under the previous regulatory framework, an undertaking was subject to ex ante  
regulation if it had a 25% market share (Scott-Marcus, 2002). 
154 The privacy and electronic communications Directive had to be transposed into national law by 
31 October 2003, while the other four Directives by 25 July 2003 (European Commission, 2003n). 
155 Decision  676/2002/EC. 
156 If an NRA decides to regulate a market not listed in the recommendation, it will have to seek the 
Commission's prior approval and follow the procedure set out in Article 7 of the Framework Directive. NRAs are also expected to collaborate with national co mpetition authorities (NCAs) (DG Competition, 2003a). 
157 Meetings of these bodies may also be attended by experts from the European Economic Area (EEA) 
and by accession candidates. Other expe rts and representatives from stakehol der associations may be invited to 
attend non-restricted parts of meetings (European Commission, 2003n).  European Communities WT/TPR/S/136 
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115. The general authorization introduced by the new regime must guarantee at least the following 
basic rights: the right to provide electronic communication networks and services, whether public or private; the right to apply for rights to install fac ilities and to have such applications treated by the 
relevant NRA in an objective and non-discrim inatory way; the right to negotiate access and 
interconnection with other providers  and to obtain support from the NRA when such negotiations with 
operators with SMP fail (this right is only guarante ed for providers of public services and networks); 
and the right to be considered for designation as uni versal service provider or to provide elements of 
the universal service (this right is only guaranteed for providers of public ser vices and networks). In 
return for those rights, member States may impose up to 18 categories of conditions that apply to all 
or certain types of network or service providers.
158 Some other conditions may be imposed in 
connection with the grant of rights of use of freque ncies and numbers. Operations with SMP can be 
required to offer cost-oriented interconnection,  publish a reference offer, unbundle interconnection 
charges, and to maintain accounting separation between their interconnection and other activities.159 
The NRA has powers of intervention, if n ecessary, including in dispute resolution. 
116. The scope of universal service obligations and provisions on their financing are maintained in 
the new regulatory framework, subject to periodic revi ew.  The basic requirement is still connection to 
a public telephone network at a fixed location and at an affordable price, as well as directory services 
and public payphones. Financing universal service c ontinues to be assumed primarily by the network 
operators, although there is provision for supporting th e service from taxpayer funds or by a levy on 
other market participants.  The new framework al so introduced number portability for mobile phone 
subscribers to ensure that switching service provide rs is less costly, just as was mandated for wire-
based operators with SMP, who are also still requi red to offer carrier selection and carrier pre-
selection.160 
117. In establishing a common regulatory framework, it was necessary to ba lance the prerogatives 
of NRAs against the needs of the single market and the prerogatives of the European Commission in 
maintaining that single market. The new regime preser ves the ability, in general, of NRAs to operate 
unilaterally, but are obliged to notice to the Co mmission and to other NRAs. The Commission retains 
the power to require market definition or a designa tion of SMP to be withdrawn where it would create 
a barrier to the single EC marketplace, or woul d be incompatible with EC policy objectives.161 Full 
independence of NRAs, both from suppliers and from governments, has been strengthened in the new 
Framework Directive.  In particular, "member states that retain ownership or control of undertakings 
                                                      
158 Part A of the Authorization Directive lists 18 categories of conditions, including: contributions to 
the funding of universal service, administrative charges,  interoperability of services and interconnection of 
networks, accessibility of numbers, cons umer protection, technical standard s, network integrity and security, 
and restrictions on the transmission of illegal content. Except where it is necessary to guarantee national 
security, member States cannot impose conditions (under a general authorization) that are not in Part A of the 
Annex. While undertakings must comply with the conditions of the general authorization, non-compliance with 
one or more conditions can, generally, not be used by the NRA to stop an undertaking from providing a service or network (European Commission, 2003n). 
159 As of 2002, the Commission discontinued the "best-practice" guidelines for interconnection pricing, 
put in place in 1998, because operators  were providing NRAs with appropri ate cost-accounting information to 
ensure that interconnection charges were cost-oriented. The Interconnection Directive applies both to wire-based 
and wireless communications, but mobile operators with SMP on the national market for interconnection are required only to offer cost-oriented interconnection.  In  practice, because the nationa l market for interconnection 
covers fixed-fixed, fixed-mobile, and mobile-mobile interconnection, most mobile operators’ charges for 
terminating traffic from the fixed network are not subject to cost orientation (European Commission, 2003n). 
160 Number portability allows users to retain their numbers independently of the enterprise providing 
the service.  Carrier selection and pr e-selection allow users to use the services of competing operators to make 
calls by using a short prefix or as a default option. 
161 Scott-Marcus (2002). WT/TPR/S/136 Trade Policy Review 
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providing electronic communications networks and or services shall ensure effective structural 
separation of the regulatory function from activities asso ciated with ownership or control."  This is 
significant because, despite privatiza tion in the past decade, state involvement is over 50% in Austria, 
Belgium, Finland, France, Greece, and Germany,  and continues to be minor but symbolically 
important in Ireland, Italy, Portugal, and Spain; it is absent only in Denmark and the United Kingdom.   
118. On 10 June 2002, the EC adopted  a new Directive on postal services.162 The Community 
policy for postal services is aimed at improving the qu ality of service, maintaining the universal postal 
service for EC citizens and completing the internal ma rket for postal services. Accordingly, the main 
changes introduced by the new Directive are: the possibility of completing the internal market in 
2009163; further opening of the market, including progressive reduction of the reserved area by 
1 January 2003 and 1 January 2006164, and the liberalization of outgoing cross-border mail, except for 
member States with exceptional circumstances; the prohibition of cross-subsidization of universal 
services (outside the reserved area) with revenues from services in the reserved area, unless this is strictly necessary to fulfil specific universal service  obligations; and the application of the principles 
of transparency and non-discrimination whenever universal service providers apply special tariffs. 
(iv) Transport 
(a) Overview 
119. Transport accounts for 7% of both GDP and total employment, around 40% of member States' 
investment, and about 30% of the EC-15's energy consumption. Transport demand, particularly for 
intra-EC traffic, has grown more or less constan tly over the last two decades, by 2.3% a year for 
goods and 3.1% for passengers. Howeve r, there is unequal growth in the different modes of the EC-15 
transport. Road transport accounts for 44% of the goods transport market followed by 41% for short 
sea shipping routes, 8% for rail, and 4% for inland waterways; on the passenger transport market, road 
accounts for 79%, rail for 6%, and air for 5%. Probl ems faced by the subsector include congestion on 
the main road and rail routes, in cities and at certain airports
165; environmental and public health 
concerns166; poor road safety; and, in general, difficulties in implementing the common transport 
policy provided for by the Treaty of Rome, including developing the Trans-European Transport 
Network (TEN-T).167 Continued economic development, combined with enlargement, could 
exacerbate these problems.  
                                                      
162 Directive 2002/39/EC. 
163 In 2006, the Commission will complete a study evaluating, for each member State, the impact on 
universal services of the completion of the internal market in 2009. On the basis of the study, the Commission will make a proposal to be approved by the European Parliament and the Council (DG Competition, 2003a). 
164 According to the Commission, as of 2003, the reserved area is limited to the distribution of items of 
correspondence weighing less than 100 g and whose price is  less than 3 times the basic tariff. As of 2006, these 
thresholds will be respectively lowered to 50 g and 2.5 times the basic tariff. 
165 According to the Commission, daily traffic jams affect 10% (7,500 km), of the EC-15 motorways, 
while 20% of the rail network are classified as bottlenecks.  At 16 of the EC-15 main airports, 30% of flights are 
delayed for more than 15 minutes. Congestion on roads and airports increases pollution, adding an estimated 6% 
to the EC-15 fuel consumption (European Commission, 2003w), Introduction .  
166 Transport is responsible for about 28% of all EC-15 emissions of CO, the main greenhouse gas 
(Eurostat, 2003c). 
167 In December 1992, the Commission presented a White  Paper on the subsector, in which it undertook 
to turn the 15 national networks into a single European network by developing all modes of transport. It is a key 
element for the creation of the EC internal market, and is  to be completed by 2010. However, there have been 
delays, and there is a serious likelihood that the network, in particular the railway (despite taking at least 55% of 
the TEN-T funds) and inland waterways components, will not be fully completed by then. Current investments European Communities WT/TPR/S/136 
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120. Transport in the C-10 had been characterized, in the past, by extensive intervention of the 
state through subsidization and provision of public tr ansportation, obsolete infrastructure, inefficient 
use of freight capacity, and limited private mobility . The economic reforms of the 1990s led to a big 
increase in private car ownership, accompanied by a decline in public transpor t. At the same time, 
freight transport underwent a significant restruct uring process, with trucks overtaking rail in 
importance. Apart from the need to develop and upgrade transport networks in the C-10 (upon 
accession, the C-10 form part of the enlarged TEN-T),  issues that still require some attention in terms 
of harmonization towards the transport acquis  include:  infrastructure organization, technology, safety 
and environment legislation, market access, fiscal matters, social legislation, and fleet capacity.168 
121. The White Paper, published in September 2001169, proposes an Action Plan aimed at bringing 
about substantial improvements in the subsector by developing a modern, sustainable transport system 
for 2010. It suggests about 60 measures to make overa ll transport efficient, of high-quality, and safe; 
and, at the same time, to shift the balance betwee n modes of transport by revitalizing the railways, 
promoting sea and inland waterway transport, contro lling the growth in air transport, and developing 
intermodality by combining road-rail, sea-rail or rail-air transport.170  
122. The Marco Polo and Galileo programmes are tw o of the key measures that resulted from the 
White Paper. Some of the main objectives of Marco Polo, adopted on 22 July 2003, are to reduce road 
congestion, to improve the environmental performance of the freight transport system, and to enhance 
intermodality. To achieve this, Marc o Polo supports actions in all segments of freight transport, 
logistics, and other relevant markets. It runs fro m 2003 to 2010, with a budget of € 75 million for the 
EC-15 during 2003-06; each acceding country will add to the budget.171 Galileo is a joint initiative by 
the EC (represented by the Commission), and the European Space Agency (ESA).172 It is to be fully 
operational from 2008, and is the first globa l satellite navigation system designed, inter alia , to 
resolve mobility and transport proble ms by providing positioning services.  
123. All modes of transport in the Community have been liberalized since 1993.173 However, a few 
restrictions remain;  for example, there is not yet ca botage in rail freight transport, nor is there market 
opening in rail passenger transport. Liberalization of cabotage in the other modes of transport in the 
                                                                                                                                                                     
amount to € 15-20 billion a year, and it is estimated that  the total cost of the TEN -T through to 2010 will be 
€ 400 billion plus additional sums for enlargement. For this reason, on 23 April 2003, the Commission proposed 
to the Parliament and the Council greater involvement of public-private partnerships (PPP), and new 
management and financing mechanisms (European Commission, Press Release IP/03/560, 23 April 2003). 
168 European Commission (2003f). 
169 "European transport policy for 2010: time to decide". 
170 Congestion charging, where users pay for the scarce infrastructure they occupy  on roads, airports or 
elsewhere, is also being introduced . One example is the system put in place in London in 20 03, which charges 
motorists for driving into the city's central district, and which may be copied in other European capitals 
(European Union, 2003w). 
171 Marco Polo should contribute to regain the 1998 freight levels between the various transport modes, 
by shifting the expected aggregate increase in interna tional road freight traffic of 12 billion tonnes per km 
annually to short sea shipping, rail, and inland waterway s, or to a combination of modes of transport in which 
road journeys are as short as possible (European Commission, 2003k). 
172 The European Commission is responsible for the political dimension of Galileo and for setting 
objectives; ESA is responsible for the technical definition, development, and validation of Galileo. The Galileo 
Joint Undertaking will be responsible for the development of the Galileo programme and the selection of a 
commercial operator, who will make a significant contribution to the funding of the establishment of Galileo from 2006, and will provide the Galileo services from 2008. Galileo will comprise 30 satellites orbiting at an 
altitude of nearly 24,000 km. Ground stations will be responsible for management and control (European 
Communities, 2003b). 
173 See WTO (2002). WT/TPR/S/136 Trade Policy Review 
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EC-15 occurred in stages: 1 January 1993 for inla nd waterway transport; 1 April 1997 for air 
cabotage, 1 July 1998 for road transport; and 1 January 1999 for maritime cabotage.174   
124. The European Regional Development Fund (E RDF) and the Cohesion Fund contribute to the 
financing of transport infrastructure in the Commun ity, notably in Objective 1 regions. Moreover, half 
of the Cohesion Fund's resources are allocated to tr ansport infrastructure, particularly the TEN-T. The 
European Investment Bank (EIB), whose activity is geared towards regional development, also funds 
transport infrastructure. 
(b) Road transport 
125. Road transport dominates the carriage of goods  and passengers in the Community, and freight 
transport is estimated to increase by 50% by 2010.175 In 2001, the EC-15 had 52,748 km of 
motorways (up from 51,559 km in 2000), with Germany, France and Spain accounting for almost 60% of the total; the C-10 had almost 3,000 km of motorways.  In 2000, the number of passenger cars in the EC-15 reached 177.4 million, i.e. 469 cars per 1,000 inhabitants on average; while in the C-10 
there were 20.6 million cars, representing 323 cars per 1,000 inhabitants (Malta ranked first with 483). 
126. In order to further improve the functioning of road transport, the Commission made proposals 
in 2003, on, inter alia , the initial and periodic training of professional drivers; harmonized rules for 
national driving bans on lorries; and charging of heavy goods vehicles for the use of certain infrastructures. In addition, new rules on working times for professional drivers were introduced, as 
well as a "driver's certificate" to make it possible to check that the driver is lawfully employed. 
(c) Rail transport 
127. The share of goods carried by rail in the Co mmunity has decreased st eadily over the years, 
from 21% in 1970 to about 8% currently, compared with 40% in the United States.
176 Passenger 
traffic by rail is around 300 billion passengers/k m (up from 217 billion passengers/km in 1970).177 
New high-speed rail services have resulted in a significant increase in long-distance passenger 
transport.  The total length of railway lines in  the EC-15 decreased from 159,784 km in 1998 to 
156,353 in 2000; while in the C-10 it remained rela tively stable at around 50,000 km., with Poland 
accounting for almost half of the total.178 Rail transport is key for achieving a balanced intermodal 
transport system in the Community. 
128. The Commission has identified a number of struct ural defects in rail tran sport, such as: lack 
of EC  market integration for rail services due to  national regulatory, ope rational, and technical 
barriers; lack of proper separation between managers  of railway infrastructure and operators of train 
services; and insufficient quality of rail services due to a lack of competition.179 To revitalize the 
railway system and to encourage a shift of goods transport from road to rail, the Council and the 
                                                      
174 European Commission (2003w), Introduction . 
175 Road transport accounts for 84% of CO2 emissions a ttributable to the transp ort subsector (Eurostat, 
2003c). 
176 A freight train in the EC travel s at an average speed of 18 km per hour. Rail must improve speed 
and service levels if it is to attract freight traffic from roads (European Commission Press Release IP/03/378, 
14 March 2003). 
177 European Commission (2001d). 
178 Eurostat (2003c). 
179 Communication from the Commission to the Council and the European Parliament, "Towards an 
integrated European railway area", 2002;  and DG Competition (2003a). European Communities WT/TPR/S/136 
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European Parliament adopted a rail infrastructure package, in early 2001180, which should have been 
transposed into national law throughout the EC as from 15 March 2003. However, by March 2004, 
only France, Belgium, Finland, Portugal, Spain, a nd Denmark had fully transposed the package into 
national law.181 The package requires member States to, inter alia , guarantee access rights to the 
Trans-European rail freight network for international freight services182; set charges for the use of 
infrastructure according to common principles; define transparent and fair rules and procedures for the 
allocation of train paths;  and set up an independent  regulatory body in each country to ensure fair and 
non-discriminatory access conditions for all railways undertakings. 
129. In January 2002, the Commission presented a second railway package on which the European 
Parliament and the Council reached an agreement in principle on 16 March 2004. The reforms aim at 
establishing an integrated European railway area by, inter alia , completing the regulatory framework 
with European rules on safety and interoperability ; establishing an European Railway Agency to 
coordinate groups of technical experts seeking common solutions on safet y and interoperability; 
further market opening for domestic rail frei ght and cabotage services; and joining the 
Intergovernmental Organization for In ternational Carriage by Rail (OTIF).183 A third railway package 
proposed by the Commission on 3 March 2004 will comp lete the regulatory framework for rail in the 
EC. This latter set of measures includes liberaliz ing cross-border passenger rail services by 2010; 
introducing a EC licence for train drivers; clear  rules on passenger rights for international rail 
services, as well as a legal framework for compensations for rail freight services. In addition, the Commission is considering tabling other proposals included in the 2001 transport White Paper, such 
as deploying the European Rail Traffic Management System (ERTMS) for signalling and 
telecommunications, giving the regulators stronger powers, simplifying customs procedures, and gradually setting up a priority rail freight network.
184 
(d) Maritime transport 130. The Community is very dependent on mar itime transport (including inland waterway 
transport
185), which accounts for over 90% and 40% of its exte rnal and internal trad e, respectively. In 
2001, the transport of goods thro ugh EC ports reached 3 billion tonnes. The subsector, including 
shipbuilding, ports, fishing and related industries and services, employs 2.5 million people in the EC. 
Maritime companies of EC nationals control one third of the world fleet.186  However, since the mid-
1980s there has been a steady drift of the EC fleet  towards "flags of convenience" (i.e. countries 
which are more attractive to ship owners in term s of taxation, social legislation and safety or 
environmental standards): over 1985-95, the number of EC seafarers employed on EC-flagged ships 
fell by 37%, while the number of seafarers from non-EC countries on EC-flagged ships rose by 14%. 
                                                      
180 Directives 2001/12/EC, 2001/13/EC and 2001/14/EC.  Member States had two years to transpose 
the infrastructure package into their national legislation. 
181 Italy transposed the package into national law weeks later. On 16 October 2003, the Commission 
referred the other nine member States to the Court of Justice (European Commission Press Release IP/03/1400, 16 October 2003). 
182 At the latest from March 2008 onward, the access ri ghts must be extended to the whole European 
rail network (European Commission Press Release IP/03/378, 14 March 2003). 
183 The OTIF drafts regulations on, for example, the carriage of dangerous goods by rail. 
184 European Commission Press Release IP/04/291, 3 March 2004. 
185 Although there are only six Community countrie s with interconnected river systems (Austria, 
Belgium, France, Germany, Luxembourg, and the Nether lands), inland waterway transport accounts for more 
than one third of intra-EC transport operations. In 1998, inland waterways carried 121,000 tonnes/km of merchandise, a rise by 14% since 1970. This mode of transport also plays a key role in imports and exports 
passing through north-west Europe and constitutes a major pa rt of the hinterland for the EC's largest seaports 
(European Commission, 2003u). 
186 Eurostat (2003c). WT/TPR/S/136 Trade Policy Review 
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About half of job losses are thought to be due to fl agging out; just 13% of the world's shipping now 
sails under an EC member state flag, compared with  32% in 1970. According to the Commission, the 
trend to reflag to EC member States flags has begun thanks to state aid measures (tonnage tax 
systems) taken recently in several member States. Ne vertheless, maritime transport capacity in the EC 
remains largely underused.187  
131. On 29 October 2003, the Commission adopted new Guidelines on State Aid to maritime 
transport, aimed at further ensuring a favourable  tax environment for ship owners to counter 
international competition by open registers and flag s of convenience. The Guidelines follow the same 
approach as the previous 1997 version, but include, inter alia , clearer provisions on seafarers tax 
exemptions188; a modified flag-link principle for tax arrangements189; and new specific rules for short 
sea shipping.190 
132. On the basis of the White Paper, the Commi ssion proposed a legislative framework for ports. 
The proposal suggested laying down new, clearer rules on, inter alia , pilotage, cargo-handling, and 
stevedoring; simplify the rules governing the operation of  ports to bring together all stakeholders (e.g. 
consignors, ship owners, and carriers) in a one-stop s hop; and to integrate social legislation in order to 
build "motorways of the sea". However, the pr oposal could not be adopted and is now being 
reassessed. On inland waterways, the Commission aims to eliminate bottlenecks; standardize 
technical specifications; harmonize pilots' certificates and the rules on rest times; and develop navigational systems.
191 
133. The Commission is also reviewing the liner conference block exemption192, which has not 
been reviewed since it entered in to force in 1986. It is based on th e assumption that collective rate 
setting by members of a liner conference is an indispensable prerequisite for reliable liner shipping services. According to an OECD report, such an anti- trust immunity is unjustified because it results in 
a price-fixing cartel that affects all EC imports and exports carried by sea.
193 The European Liner 
Affairs Association argues that the agreements have provided a stable structure, and that the prices 
agreed are benchmarks only.194  
134. The sinking of the oil tankers "Erika" in December 1999 and "Prestige" in November 2002, 
prompted new measures to improve maritime safety, aimed, in particular, at avoiding environmental 
disasters caused by oil tankers. These measures incl ude: more rigorous inspections in ports; ban on 
                                                      
187 Maritime transport also plays a key part in intermodality, since it allows a way round bottlenecks 
such as in the Pyrenees between Fran ce and Spain or in the Alps between Italy and the rest of Europe (European 
Commission, 2003m). 
188 Tax exemptions are granted to all seafarers, irresp ective of their nationality or residence. However, 
for seafarers serving on board ships that provide regular passenger services between ports of the EC, such 
schemes only apply to EC/EEA citizens (European Commission Press Release IP/03/1484, 30 October 2003). 
189 The flag-link principle is the re quirement that ships fly the flag of a member State to qualify for 
state aid. For this purpose, shipping companies operating less than 60% of their tonnage under an EC flag will 
have to maintain at least the same tonnage under the flag when the new Guidelines enter into force (European 
Commission Press Release IP/03/1484, 30 October 2003). 
190 Aid may be granted for the launching phase of new services, and must permit transport (of cargo 
essentially) by road to be carried out wholly or partly  by sea. Aid is for a maxi mum of three years (European 
Commission Press Release IP/03/1484, 30 October 2003). 
191 European Commission (2003m). 
192 Agreements between shipping lines  are known as liner conferences. They are contained in Article 3 
of Regulation 4056/86. 
193 OECD (2002a). 
194 Financial Times , 4 December 2003. European Communities WT/TPR/S/136 
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single hull tankers from EC ports carrying heavy grades of oil (as from 21 October 2003)195; 
establishment of a Community monitoring, inspection,  and information system for maritime traffic; 
creation of compensation fund for oil pollution damage ;  and the setting up, on 27 June 2002, of the 
European Maritime Safety Agency (EMSA).196 
135. The EC favours the international consen sus reached in the International Maritime 
Organization (IMO) on the need to enhance maritim e and transport security, and has adopted or is 
proposing legal measures accordingly.  According to the Commission, there is consensus that these 
measures should be: internationally uniform and developed with inte rnational cooperation;  based on 
risk-assessment; and proportionate and balan ced. Moreover, security measures should disrupt 
legitimate trade as little as possible, and should not  serve as a pretext for protectionism or create 
unnecessary barriers to trade.  
(e) Air transport 136. Air travel has shown impressive growth in th e Community over the last two decades. In terms 
of passenger km, air traffic increased by an averag e of 7.4% a year between 1980 and 2001, while 
traffic at the EC-15 airports has increased five-fold  since 1970.  In 2001, air transport of passengers 
reached 769 million in the EC-15 (Germany and th e United Kingdom accounting for 20% each of the 
total, followed by France with 16%), and 30 million in the C-10 (Cyprus was first with almost 10%, 
followed by the Czech Republic and Poland with 9% each). Despite an important decline after 
11 September 2001, air traffic over Europe is expected  to grow by 4% a year over the next 15 years. 
The restructuring process of airlines has con tinued, including through mergers and alliances.
197 
137. The creation of a "single European sky" by 31 December 2004 is the main Community policy 
aim in the subsector. The followi ng measures are envisaged: reduc tion of fragmentation in the sky 
through the creation of airspace blocks that extend beyond national frontiers; establishment of a 
strong Community regulator; gradual integration of civil/military management; introduction of 
interoperability standards; and better coordination of human res ources policy on air traffic control 
activities.198  The Commission has also proposed harmonizing the qualifications for air traffic 
controllers by introducing a Community licence.199  
138. Alongside the creation of a single sky, a new regulatory framework is  envisaged to make 
more efficient use of airport capacity. Proposals for ne w rules on slot allocation (i.e. the right to take 
off or land at a specific time at an airport) are due for further consideration during 2004-05. It is 
envisaged that airport charges be adjusted to en courage the redistribution of flights throughout the 
day, and intermodality with rail is  being promoted to make the two modes complementary. In the 
aftermath of the 11 September 2001 terrorist attack s, the Commission has been given the task of 
                                                      
195 European Commission Press Release IP/03/1421, 21 October 2003. 
196 The EMSA began activities at the end of 2002, and, in general, provides technical and scientific 
advice to the Commission on maritime safety  and prevention of pollution by ships. 
197 On 11 February 2004, the Commission cleared the alliance between Air France and KLM. On 
10 December 2003, the Commission ap proved an alliance between British Airways (BA), Iberia, and GB 
Airways, a franchisee of BA. The Commission is also looking into other cases, such as Lufthansa/Austrian 
Airlines, BA/SN Brussels Air line, and Air France/Alitalia (European Commission IP/03/1703, 
10 December 2003).  
198 On 9 December 2003, an agreement covering the legislative package for the single European sky 
was reached between the Parliament and the Council. According to the Commission, the single European sky 
could save airlines between € 1.3 and 1.9 billion through a more efficient use of aircraft  and national airspace. 
Fuel consumption and gas emissions could be cut by 5%, and the number of air traffic control centres to 
between 12 and 20 from 65  at present (European Comm ission Press Release IP/03/ 1702, 10 December 2003). 
199 COM(2001)564. WT/TPR/S/136 Trade Policy Review 
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inspecting and monitoring implementation of new airport security regulations in all EC member 
States. Rules are under discussion to limit the adverse impact of air traffic on the environment, including a ban on the noisiest aircraft from airports, and reduction of greenhouse gas emissions in accordance with the Internationa l Civil Aviation Organization (ICAO). On 15 July 2002, the 
European Aviation Safety Authority (EASA) was est ablished, with the aim of maintaining high safety 
standards. New legislation on minimum insurance requ irements applicable to air carriers and aircraft 
operators is due for adoption by mid-2004. Passenge r rights, such as the possibility of compensation 
when travellers are delayed or denied boarding, have been reinforced. A draft legislation amending 
the current rules for computerized reservation systems (CRS) is likely to be proposed during 2004. 
139. On 25 June 2002, the Commiss ion renewed, until 30 June 20 05, the block exemption for 
passenger tariff conferences for the purpose of inter lining, as well as for slot allocation and airport 
scheduling. The renewal is conditional on air carriers that participate in conferences collecting certain 
data on the extent to which tickets issued in the EEA are at International Air Transport Association 
(IATA) tariffs, and the relative importa nce of such tickets for interlining.
200 
(v) Tourism 
140. The EC maintains its leading position in worl d tourism, both as a main source and destination 
of international tourist flows, accounting for 43% of arrivals and 40% of receipts in non-domestic 
world tourism in 2000. In 2003, six EC countries (France, Spain, Italy, the United Kingdom, Austria, and Germany)  were among the ten leading tourist destinati ons in the world. The subsector contributes 
about 5% to the EC-15's real GDP, employs about 8 million people directly (5% of total 
employment), and accounts for 30% of the total value of external trade in services.
201 As regards 
tourism by EC citizens, on average, three out of  four remain within the EC every year. The 
expenditure of EC tourists travelling in the EC (t hree fourths of EC tourists) amounted to € 115 billion 
in 2000. Over 99% of firms in the subsector are SMEs. The accommodation structure has remained 
relatively stable in the EC-15 in recent years; bed capacity, for example, went from 9.7 million in 
2000 to 9.9 million in 2002. The number of bed places has been rapidly increasing in the C-10, 
particularly in Slovakia and the Czech Republic. After enlargement, the C-10 will add about 800,000 
beds, i.e. around 8% of the EC-15 capacity.202 
141. Some of the main goals of tourism policy in the EC are:  improving quality, competitiveness 
and sustainability in the subsector, looking after touris ts' interests, and ensuring the continuity of its 
natural and cultural assets. The Treaty of Maastrich t included, for the first time, "measures in the 
sphere of tourism", in the list of Community ac tivities. However, the Treaty gives no particular 
guidance for a Community tourism policy, and there is no specific legal base for Community 
measures on tourism.203 
142.  On 21 November 2003, the Commission pro posed an EC-drive to enhance the economic, 
social, and environmental sustainability of European  tourism. It emphasizes the need to ensure the 
                                                      
200 Interlining occurs when a passenger travels with mo re than one airline or alliance on the same ticket. 
Most EEA airlines, including all flag carriers, are member s of IATA and take part in twice-yearly conferences 
where they agree fares for interline journeys (DG Competition, 2003a). 
201 Tourism also has an important indirect effect on employment in transport and other related services. 
If these related activities are taken into account, tourism contributes close to 12% to real GDP and provides 
20 million jobs. According to the Commission, travel and tourism jobs will increase by 2 million during the next decade (European Commission2004b). 
202 Eurostat (2004). 
203 This means that any act of the Council of Ministers on tourism requires unanimity among all 
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consistency of various Community policies and measures affecting the sustainability of the subsector 
and its competitiveness. The Commission calls for proactive cooperation among tourism enterprises, tourist destinations, and national, regional, and lo cal authorities to address the main challenges faced 
by the subsector, such as growing demand and ch anging preferences, while increasing revenues and 
preserving Europe's cultural integrity. To stimulate efforts in this regard, the Commission intends to 
establish a Tourism Sustainability Group, in which representatives from all stakeholders will set out 
guidelines for the subsector.
204 
143. Numerous tourism initiatives receive funding from EC programmes, the most important being 
the Structural Funds (i.e. ERDF, ESF and EAGGF).  During 1994-99, ECU 7.3 billion were granted 
to the subsector through the Structural Funds205.  In addition, many local tourism activities also benefit 
from financial support through other Community prog rammes, such as those aimed at improving the 
competitiveness of SMEs, restoration of cultural he ritage, and environmental protection. With the 
exception of most actions under the Structural Funds, the Commission decides on projects or actions to be supported on the basis of co-financing, with resources from national, regional, and local sources, 
both public and private. 
                                                     
 
204 European Commission IP/03/1585, 21 November 2003. 
205 European Commission (2004c). WT/TPR/S/136 Trade Policy Review 
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