Financial Daily from THE HINDU group of publications
Thursday, Jun 02, 2005
Agri-Biz & Commodities - Insight
An end to a bitter legacy
Though the EU expressed disappointment, it agreed to ``respect the ruling". Significantly, the EU Trade Commissioner, Mr Peter Mandelson, , added: "We will abide by our international obligations and will work closely with member states on necessary reforms."
This diplomatic response sought to blunt the optimism exuded by Brazil and others. Unfortunately, the sugar legacy of the EU is so complex and pits so many countries and groups against each other that any radical reform may not be practicable.
Historians trace the legacy to Napoleon and how he encouraged sugar production from beet with state subsidy when Nelson blocked sugar exports from the West Indies. Since then, Europe has got addicted to high-cost beet sugar. Currently, Europe's domestic price of sugar is three times the global price and it spends euro 3.30 in subsidies to export sugar worth one euro.
The common market organisation (CMO) in the sugar sector was set up in 1968. The idea was to ensure fair income to producers and self-sufficiency within the EU. CMO's essential features are price arrangements, production quotas, arrangements for trade with third countries and self-financing.
The EU support for sugar is through administrative arrangements such as "intervention", "minimum price for sugar beet", "sugar production quotas", etc. `Intervention' is a support price at which agencies have to buy eligible sugar offered to them. The price fixed at euro 631.90 per tonne for white sugar and euro 523.70 per tonne for raw sugar in 1993-94 has remained frozen. Similarly, support prizes for beet have also been frozen. Intervention ends by 2005-06.
The most crucial elements of the CMO are the fixation and operation of `quotas'. There are two types: A and B. These quotas seek to distribute sugar production among member states (MS) and keep the total EU production within limits. Allocations are on the basis of the past performance of member states. They may produce more, but the surplus (total production minus A and B quotas) is C - sugar which has to be exported.
It is the manner of operation of the C-quota in the world market that led to the EU's troubles with major exporters and with the WTO. How does C-quota arise? Before its entry into the EU, the UK imported large quantities of raw or white sugar from its former colonies for refining. To safeguard the interests of both the UK refiners and the ACP countries, these imports were included in the ACP-EU convention signed in 1975 and became a part of the CMO.
The Sugar Protocol of the Lome conventions (subsumed under Cotonou in 2000) was added on. Under the Sugar Protocol, the EU committed itself for `an indefinite time' to purchase and import at guaranteed prices specific quantities of sugar originating from the ACP countries. These imports are duty free and re-exported after refining.
The EU has been claiming that its sugar regime is self-financing and that it is `a non-subsidising sugar exporter'. These claims were found to be untenable. In the earlier decades, the EU was a net importer of sugar from its former colonies. Surprisingly, by the turn of the 21st century, it turned into the second largest exporter of sugar next to Brazil though it did not have any cost advantage to export sugar. How then did the EU become a stellar performer? The secret lay in the CMO.
OXFAM, which was campaigning against the EU policies, explained it in detail in its publications. It narrated how Europe a high cost producer generated an export surplus of approximately five million tonnes and dumped them abroad through a system of direct and indirect subsidies, thereby destroying the market for more efficient developing countries. There were, indeed, misgivings within the EU over the CMO. However, lobbying by beet grower and sugar refinery groups thwarted successfully any reforms.
The lobbies were strengthened by the high level of concentration in the sector. Even when the much-publicised strategy of "Everything But Arms" (EBA) was announced, they could get sugar excluded from it. Where quotas had to be assigned to new countries, they were by reducing ACP quotas.
Thus, pressure for reform had to come from abroad, especially through the WTO. In the end, major exporters such as Brazil had no recourse but to seek arbitration through the WTO. Brazil sought arbitration in 2003. The preliminary ruling was given in October 2004 and it was confirmed by the Appellate Board on April 28 this year.
The panel found that the EU is dumping more than three times the level of subsidised exports allowed under the WTO rules. C-sugar exports are effectively cross-subsidised by EU support provided for the production of quota sugar. The panel ruled that the EU contravened its WTO commitments by subsidising re-export of ACP/India quota sugar both by not showing it in its reduction commitments and by exceeding the permitted level of subsidised exports. Significantly, the ruling does not affect the right of the EU to import sugar from ACP/India on preferential terms. The panel enjoins on the EU to abide by its ACP preferences.
The panel rulings are procedural and in line with the WTO legalese. They do strengthen the hands of those who have been criticising the EU and demanding reform of the sugar regime. However, more intractable are the issues relating to reforms and the manner of reforms. The EU has itself floated a scheme in July 2004 seeking to overhaul the CMO. It proposed reduction of support price by 33 per cent annually; reduction of production quota and readjustment among members; to maintain import arrangements under ACP/EBA; and finally to reduce subsidised exports. The proposal has not made headway. Given the decades of the legacy, it is difficult to visualise sudden or drastic reforms.
As a Report of the House of Commons (Reform of the Sugar Regime, Twelfth Report, Session 2003-04) explained, "it would not realistically be possible to move from such a highly managed market to a fully liberalised position in a single step."
More than the European farmers and sugar refiners, the poor farmers in many developing countries have more at stake in the ACP preferences. One study revealed that the loss of trade preference for sugar may increase poverty rate in Fiji from 21 per cent to 80 per cent.
Another showed that preferential sugar contributes 20 per cent of Guyana's total GDP and over 50 per cent of its farm production. Nearly 150,000 people in Fiji or one-fifth of its population depends directly or indirectly on sugarcane. Other countries have similar records. Though the EU is obliged to stand by its commitments, there is no assurance that it would if, globally, the market conditions change or when its own export strategy loses its rationale. It could well renege on its ACP commitments as was evident from the EBA.
The fear gripped the heads of the Caribbean Community when they met at the 25th meeting of the Conference of Caribbean Community in July 2004. They blamed the EU over its `betrayal'. They demanded a legally binding Sugar Protocol to safeguard their interests. The group was active and strongly defended the retention of preferential arrangements before the WTO panels.
The fear still lurks that the enlargement of the EU would weaken its commitment to Lome/Cotonou arrangements. Sadly, Lome tends to create a division among developing countries. The EU tried to play on this before the WTO panels.
The enlargement of the EU adds another element. Ten new members have been added and more are on the wings. Central and Eastern European (CEE) countries have been importing sugar from Brazil, Guatemala, Nicaragua, Mexico, Cuba and Australia.
If the `current access' of third countries in markets of the accession countries is jeopardised due to common Customs union, they will have to be compensated. It is rather difficult to anticipate the readjustments among members or quantify the compensation. These could turn into disputes before WTO panels.
Sugar legacy is a small part of the larger CAP legacy. Reforms to farm subsidies have been dragging on for years and the EU and the US have been blaming each other for failure to achieve progress. The US, in its turn, has its own obnoxious sugar legacy. Will the EU reform its sugar regime unilaterally regardless of any move by the US?
The sugar legacy is a complex and bitter legacy. Its reform will not be easy. It is rather facile to assume that the ruling by the WTO panel alone would end the legacy. Current problems of the sugar trade cannot be solved by an application of free trade or subsidy rules a la WTO. A globally-negotiated sugar agreement has to be established.
It has to ensure trade and development across a number of sugar producing developing countries. They have to be assured of cross-subsidisation, markets, income and employment. There is a strong case for a commodity agreement for sugar. Free traders and neo-liberals may frown at the suggestion. In the absence of such an arrangement, there is no end to the bitter legacy.
(The author, a former Finance Ministry official, has experience in international, financial and trade issues.)
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