A few readers have asked me the question: of all the motives mentioned for the European Union's (EU) participation in the Sugar Pro-tocol with the African-Caribbean- Pacific (ACP) Group of countries, which in my opinion was the most dominant. I am unable to discern a hierarchy of motives, and prefer instead to view the mix of motives I have portrayed as embodying self-reinforcing features. Thus when after World War II Britain entered into the Common-wealth Sugar Agreement (CSA) it was out of 1) fear the then post-war shortage of raw sugar would be persistent and its refineries would be starved of assured supplies 2) concern about the possible emergence of a sellers' market for sugar and other raw materials and, 3) a deliberate strategy to continue the colonial mercantilism it had successfully practised during World War II. After Britain sought to join the then European Economic Community (EEC), the Europeans bought in to its concerns. They recognised also that Britain's entry into the EEC would advance the European integration movement immeasurably. Readers should also bear in mind that the development paradigm of the time recognised that state involvement in the regulation of global trade was essential, since the playing field in which economies traded was markedly uneven.
Another reader (Dr Claude Chang) has by letter to Stabroek News expressed surprise that the Sugar Protocol is advanced by some as a 'hand-out' by the EU to the ACP sugar exporters, since this protocol is essentially a quantitative restriction. The truth of the matter is that any administered quantitative restriction on market access for a commodity, with or without a guaranteed price, creates an economic rent and raises its price in the relevant market. Consequently, whichever supplier is administratively 'handed' the right to supply any part of this market gets special preferential access and therefore a benefit or 'hand-out' from those administering the quantitative restrictions. My argument has been that, in the case of the Sugar Protocol, this hand-out or preference to the ACP has been exchanged for assured supply of sugar from them. This assurance was intended to be a shield or hedge against a rise in price in the open market due, for example, to a global shortage of supply relative to demand. In other words, it caters for what was then expected, the world market price rising above the negotiated price in the restricted market.
The other issues raised in his letter will be covered in due course. The US sugar market is now governed by the infamous Farm Bill of 2002. Many feel this has undermined the WTO's Agreement on Agricul-ture (AOA) and has helped to create the impasse leading to the 'Cancun collapse.'
This week I plan to introduce the EU reform proposals, which were placed on the agenda last July. In subsequent articles I shall assess this and in so doing consider 1) the so far successful Brazil, Australia, Thailand (BAT) challenge to the EU sugar regime 2) the impact of the Everything but Arms Agreement on the erosion of the Special Preferential System (SPS) segment of the Caricom-EU sugar market 3) the US Farm Bill and, 4) where sugar is likely to stand under the WTO-AOA.
The reform proposals: The new preference price
The July proposals to reform the EU sugar regime would be the first major overhaul of that regime since its inception. In light of the EU's internal timetable, for many its timing was surprising, as the current sugar regime has been regulated in place until June 2006. Moreover, last July a ruling had not yet been made on the BAT challenge in the WTO. It should be borne in mind, however, that the proposals followed on earlier reforms to the EU's US$52 billion farm support programme. They also came in the wake of the 'Cancun collapse' of the WTO negotiations, and the growing realisation that to get these talks re-started required bold initiatives to tackle the farm support programme of the rich countries, as a starting point. With the USA locked in presidential elections, no such initiative would have come from that source.
The present EU sugar regime reportedly gives subsidies to its sugar producers of about US$2.4 billion each year. Several economists, however, have expressed the view that the true cost is considerably higher. The EU July proposals offer to cut the internal price paid for sugar through the abolition of the present safety-net intervention price system, and to replace it with a reference price modality. The expectation is that sugar prices would decline by one third, that is, from 632 euros per metric tonne of white sugar to 421 euros per metric tonne. This reduction is to be phased in two stages over a three-year period. In July 2005 the price will be cut by 20 per cent, and two years after that by a further one sixth. The new system is expected to be fully in place by 2007/08.
The new reference price will be used to 1) set the minimum price for beet 2) establish the trigger-period at which private storage of surplus sugar is encouraged and, 3) importantly for Caricom, set the basis for calculating import tariffs and preferential imports. The reference to 'private storage' in the proposal is in regard to the intent to have supplies stored by the private sector on a temporary basis when surpluses arise. The EU will finance these costs.
At the new reference price of 421 euros per metric tonne, it is expected that the price of sugar in the EU market will decline by 40 per cent, based on the fact that presently sugar trades at 10-15 per cent above the present intervention price. Mini-mum beet prices are also expected to fall by 37 per cent to reach 27.4 euros per metric tonne by 2007/08.
The quota/subsidies proposal
Under the July proposals the EU quota system will also be reformed. What are termed the A and B quotas, both of which are eligible for subsidies, will be merged into one quota. The volume of this quota sugar will be reduced by 2.8 million metric tonnes over a four-year period, commencing in 2005. Initially, the cut will be 1.3 million metric tonnes and thereafter for the next three years the cut will be 0.5 million metric tonnes per year. The effect of this will be a substantial decline in subsidised exports, at a rate of about 2 million tonnes per year during the phase-in period.
In this arrangement the C quota sugar, which is not subsidy-eligible, will remain in place. Also, high fructose corn syrup (HFCS), whose rapid global growth as a sugar substitute we had recognised earlier, will have its quota expanded by 100,000 metric tonnes annually for three years, starting in 2005/06. HFCS is known as isoglucose in Europe, and its production there is severely restricted.
Finally, the ACB and EBA sugar quotas will remain in place. However, reductions in import tariffs linked to the proposed new reference price would reduce the price of sugar and drastically cut the margin of preference. On some calculations the cut could well lead to the EU offering a lower price for raw sugar from the ACP countries than that offered to those eligible under the US sugar quota arrangements.
The scam in the new proposal is that it does not directly challenge the legality of the Sugar Protocol. However, by introducing a reference price considerably below the present intervention price it scuttles the intent behind the Sugar Protocol, if not the letter of the law it enshrines.