Two key features of the Sugar Protocol are the guaranteed quotas allocated by the European Union (EU) to the African-Caribbean-Pacific (ACP) Group of sugar exporters and the guaranteed price offered for sugar delivered under the quota arrangements. Administratively linked to the very first Lome Convention the original quotas offered to individual Caricom sugar exporters totaled 448,500 metric tonnes of raw sugar. By the time of the last (fourth) Lome Convention, which has been replaced by the Cotonou Agreement, it was 428,209 metric tonnes. All the Caricom exporters, with the exception of Trinidad and Tobago, have had their original quotas slightly increased. Trinidad and Tobago's quota, however, was reduced because of that country's persistent shortfalls in supplying sugar to the EU during the oil boom years of 1978 to 1984. Its quota was cut by one-quarter, from the original 72,632 metric tonnes to 43,751 metric tones.
As I had indicated in a previous article, under the Sugar Protocol, fulfilling one's quota is a legal obligation. Consequently, unless circumstances beyond the control of a country are accepted (force majeure) as the cause for its shortfall that country's quota is subject to a permanent reduction.
Today, Guyana's quota is the largest for the region, 159,410 metric tonnes. This is followed by that offered to Jamaica (118,696), Barbados (50,312), Trinidad and Tobago (given above), Belize (40,319) and St Kitts and Nevis (15,591) metric tonnes.
Pricing
The price of raw sugar sold under the Sugar Protocol is based on the domestic beet sugar price paid by the EU to its own sugar producers. In turn this is calculated on the basis of the intervention price for EU produced raw sugar and the guaranteed price the EU pays for its white or processed sugar.
Although the detailed arrangements are somewhat complicated, the net effect is that the import price of ACP raw sugar is fixed on similar terms as those applied to the EU's domestic sugar regime. As an aside readers should note for the secondary segment of the EU protected sugar market, which I had previously described, the Special Preferential Sugar (SPS) accounts for about 10 per cent of sugar sales to the EU, and, the price paid is a proportion of the Sugar Protocol price. In practice this has been approximately 95 per cent recently.
The EU benefits
The principal question that needs to be pursued at this juncture is: what have been the most obvious effects of the EU-ACP sugar arrangements for both the EU and Caricom? In my view the most stunning and at the same time un-anticipated result has been their impact on the EU as a sugar producer. At the time the Sugar Protocol was signed the EU was a net importer of sugar. To be precise it was the world's largest importer of sugar.
After two decades the EU was still the world's largest importer of sugar, but it had also in this short period become one of the world's largest producers and exporters of sugar. During last year (2003) the EU produced 18 million metric tonnes of sugar. It was ranked third after Brazil (24 million metric tonnes) and India (20 million metric tonnes). It was in that year also the world's largest exporter of white sugar, with an export total of 6 million metric tonnes. Overall Brazil was the world's largest exporter of sugar with 14 million metric tonnes, but this country concentrates on raw sugar exports.
As I remarked two years ago in this series (June 2, 2002), this is an "astonishing transformation," all the more remarkable because it has occurred within the space of two decades. There is no doubt therefore, the EU has benefited enormously from the Sugar Protocol, although this was never its stated intent.
What has resulted is that the EU, by paying a protected special price to its own beet farmers, has encouraged production to the point where there is a huge surplus of EU sugar that it has had to routinely dump on the world market. This has in turn, undermined the world market price for sugar! And, to complete this vicious circle it has had to import ACP sugar at higher than world market prices because of its protocol obligations.
The rise of other major players in the industry, particularly Brazil, Australia, India and Thailand, has seen an increase in conflict over market share, and challenges to the pricing arrangements for world trade in sugar.
The Agreement on Agriculture that came into force under the WTO in 1995 is intended to regularise all agricultural trade and has therefore created a legal and institutional mechanism for them to challenge the EU-ACP sugar arrangements, which they have done.
Caricom has not fared as well
As for the Caricom sugar producers the paradox is that as the intended beneficiaries of the Sugar Protocol they have not fared nearly as well as the EU. This is true even though they have managed to fulfil their quota obligations (except, as we have seen in the case of Trinidad and Tobago).
From an economic standpoint the Sugar Protocol offers two direct benefits to Caricom sugar exporters. In one instance, it offers the opportunity for sugar exporters to sell at more stable prices than would be the case if sugar prices were set in an open competitive commercial global sugar market.
There are a number of reasons why this is the case, but I cannot pursue these in this column. It would suffice for me to observe that historically the prices of primary unprocessed agricultural commodities on the world market have been highly volatile. And, although the Sugar Protocol price is negotiated annually and is not fixed on a long-term basis, it has not shown nearly the same high degree of volatility - although there has been significant volatility. In estimates cited in one study the reduction in price instability has ranged from as high as 70 per cent for Jamaica's exports to a low of 20 per cent for Guyana. In Belize the reduction was 45 per cent and in Barbados 59 per cent. For the three remaining Caricom sugar-producing countries the reduction has exceeded 64 per cent.
The second direct benefit is of course the income transfers, which occur because the Sugar Protocol pays a better price than that offered by the alternative option of selling sugar on the world market. With Sugar Protocol prices two to four times higher than the world market prices, the transfer benefits are by far the more important of the two direct benefits.
A proxy indicator of the size of this benefit is that with an expected eventual Sugar Protocol price decline to 329 euros per metric tonne compared to the present price of 520 euros per metric tonne, the region would lose about US$90 million in sales, if it supplies its present quota of 428,000 metric tonnes of sugar. At 329 euros per metric tonne the region would still be getting a better price than the world market price, but this would be of little comfort to those producers whose backs are to the wall because their present high unit cost of producing sugar exceeds this price.
With the extensive background we have covered over the past several weeks, next week I shall turn to examine the EU proposal that is now on the table.