This paper analyses the impact of adopting or rejecting genetically modified (GM) crops in the European Union, taking into account the EU Common Agricultural Policy (CAP). In this paper the productivity impact of genetically modified organisms (GMOs) differs across crops, taking factor biased technology change into account. The transfer of knowledge across countries is modelled as a process of endogenous knowledge spill-overs. Analysis with a multi-region applied general equilibrium model shows that the CAP protects farm income and production despite non-adoption of the more productive GM crops in the EU. The EU will forgo substantial benefits in terms of economic welfare if it bans GM imports. (C) 2004 Elsevier B.V. All rights reserved.