Over the past several weeks I have made passing references to the Everything but Arms Initiative (EBA) of the European Union (EU) and its adverse impact on the Sugar Protocol for the African-Caribbean-Pacific (ACP) group of sugar exporters. Under this initiative, which started in March 2001, the EU abolished entry quotas and tariffs for all products, except arms, which are exported to its market by the group of Least Developed Countries (LDCs). This group comprises the 49 poorest countries as determined by the United Nations Economic and Social Committee. In order to avoid major disruptions, which the EU feared might occur, three products were identified for special treatment under the initiative, namely rice, bananas and sugar. As we know, in the case of sugar the EU is a major producer and exporter so that potential disruptions had to be handled sensitively.
To avoid the disruptions the Initiative would cause, the removal of customs duties on sugar was staggered. They were to be first reduced by 20 per cent on July 1, 2006, then 50 per cent on July 1, 2007, 80 per cent on July 1, 2008, and then completely removed no later that July 1, 2009. To compensate for this staggered reduction in duties, the EU offered the LDCs immediate access for their sugar through a tariff-free quota. The size of the quota was based on their best export figures in the recent past, plus an added 15 per cent. It was also indicated at the time that these quotas would increase by 15 per cent each year for the transition period.
The announcement of the EBA Initiative came as a surprise, particularly as the ink was not yet dry on the Cotonou Agreement, which the EU had signed with the African-Caribbean-Pacific countries (ACP) in 2000. Under that agreement consultation was required before any action by the EU that could affect substantially ACP market access to its market, but none was forthcoming. At that time the LDCs were producing 2 million metric tonnes of sugar mainly for their domestic use, but the intent behind the initiative was that, where conditions permitted, it would stimulate their export of sugar. Indeed the EU had calculated that the LDCs would fill the Special Preferential Sugar (SPS) segment of its market, which as I had indicated earlier originally came into force in 1995 as a temporary (six-year) arrangement with the ACP producers.
EU parameters for dialogue
In similar fashion to its present sugar proposals, there was more than a touch of cynicism in the EU approach on the 2001 initiative. At the time it announced the initiative, the EU was seeking to position itself in good favour with the LDCs, as it pushed to garner support for its broader interests in the WTO negotiations. Indeed the EU revelled in the praise for the bold initiative and the 'generosity' it was displaying towards the LDCs, which it received from such organizations like Oxfam that had been critical of its operations over the years. This generosity, however, was at the expense of the ACP sugar exporters under the Sugar Protocol, as the EU beet farmers were not affected by the initiative. This was a clear case of robbing Peter to pay Paul, or transferring benefits from the poor to the poorer while the rich contributed nothing yet received the praise.
The communication from the commission to the EU Council and European Parliament states clearly that the challenges posed by its international commitments and reform proposals were bound to generate both "winners and losers" within the developing world. It goes on to advise that there should not be simplistic or hasty responses to the proposals and instead called for "an open and structured dialogue." In making this call, however, the EU did not hesitate to lay down certain parameters for this dialogue.
As we might expect these parameters include no compromise on the new reference price for domestic sugar, which will reduce the present intervention price by 37 per cent and its acceptance of the outcome of the Australia-Brazil-Thailand (ABT) challenge to its sugar regime in the WTO. The EU Commission, however, went on to state that the EBA is a "fixed parameter" in the EU-ACP debates over its sugar proposals. Thus the document states: "The Commission considers that, in addressing the challenges related to the EU's international commitments on sugar, the implementation of the EBA initiative, and its expected impact, should be a fixed parameter in the debate with its ACP partners." This means, therefore, that sugar imported under the EBA sugar will be guaranteed and the price at which this sugar is acquired will not be lower than the guaranteed price for ACP sugar. In other words, LDC sugar unmistakably competes with ACP sugar on the EU's preferential market. The continued erosion of existing preferences beyond the present levels is therefore likely to continue, as LDC sugar producers improve their productivity and sugar quality.
Adjustment/compensation
For the LDC producers under the EBA Initiative, the EU anticipates there will be positive gains from its sugar proposals. It clearly though expects negative effects for its own domestic beet producers and the ACP countries. As the document states, "The proposed price cuts will lead to a significant income loss to sugar beet producers." To offset this loss, the proposals envisage a direct payment as compensation. The payment will not be linked to production. Instead it will be de-coupled so that it does not provide an incentive for increased sugar production. In contrast, the EU proposal states that for the ACP countries: "The EU will consider, through the European Development Fund, the introduction of specific programmes, in a similar way to that introduced for the banana sector, to help ACP countries adapt to the new market conditions."
It claims that this proposal is intended to support modernisation of the industry and its improved competitiveness as well as diversification out of sugar. As readers would know the banana-adjustment lending had the same objectives, but has been far from successful to date.
Since the new reference price is expected to fall to 329 euros per metric tonne, the price offered to Caricom exporters under the recent US Farm Bill becomes attractive once more. Next week I shall examine the US Sugar Programme and its impact on Caricom sugar exporters.
Reader's comment
It has been my usual practice in this series when writing a number of articles on the same topic to start each with a brief link to the material that preceded it and to end with an indication of what is to follow. Last week I had indicated that I would be addressing the US Farm Bill 2002 this week. My intention is to conclude the discussion on sugar next week. The articles dealing with sugar began on July 4 and have already run for 15 consecutive weeks.
I mention all this to make the point that I share the view of Dr Chang that "The issue is larger than the ACP sugar protocol" as captioned in his letter (Stabroek News, October 6).
That is why I began the series with an analysis of the global sugar market followed by a review of the Caricom and along the way an examination of the Australia-Brazil- Thailand (ABT) challenge to the EU sugar regime, the WTO Doha Development Round and the Cancun collapse, the Everything-but- Arms Agreement (EBA) and the Least Developed countries (LDCs), and several other related matters. There is, however, a point of different emphasis, which I would like to publicly acknowledge.
The WTO is a rules-based organization, with a clear legal structure and dispute settlement and enforcement mechanism. The WTO claims that legality and rules-based transparency, accountability, and morality are what make it superior to all previous global arrangements, which superintended trade. For this reason alone, if no other, it would be foolish for a country or region that has legality and morality on its side in an area of dispute to set it aside in global trade negotiations. The West African cotton farmers have shown that even in our imperfect world, these principles can be helpful. Of course, I would not be so naive as to claim that a case can be founded on these principles alone.
US sugar policy
Caricom exports only about 8 per cent of its sugar to the US market, which is regulated by the US 2002 Farm Act. If access to the EU market is impeded, there will be fuller use made by exporters of this market. US sugar policy is therefore of great importance to our discussion. At present this policy comprises two main programmes, namely, the tariff-rate quota (TRQ) system and the price support sugar loan programme. Despite their apparent complexity, the principles behind these programmes are not hard to follow.
The tariff-rate quota (TRQ) is a two-level import tariff in which the tariff-rate changes with the volume of imports. Within the stated quota volume a lower tariff is charged on imports of sugar, and 'over' the quota volume a higher tariff is charged. The size of the quota for the lower tariff is set annually by the US Department of Agriculture (USDA) and this amount allocated to 40 countries. The total quota is about 1.3 million metric tonnes and country allocations are based on countries' trade during the period 1975-81, when it is assumed that sugar trade was 'relatively' free from restrictions. The quota allotted to Caricom countries averages about 53,000 tonnes.
There are two additional points worth nothing about the TRQ. Under the terms of the WTO Agreement on Agriculture (AOA), the US had agreed to import a minimum quantity of 1.256 million short tons of raw sugar equivalent each marketing year; the TRQ is accepted as fulfilling this obligation. Second, as a member of the North American Free Trade Association (NAFTA) established in 1994 with Mexico and Canada, an additional allocation of sugar imports is made to Mexico. This arrangement has not worked smoothly and is a source of enormous contention as Mexican sugar producers and US high fructose corn syrup (HFCS) producers wage battle to secure their position in each other's market. To prevent further deterioration in relations, a separate arrangement called a 'side letter' between Mexico and the USA has been substituted for the original NAFTA provision. This establishes a transition period before Mexico's sugar is allowed full free-trade entry into the US. The transition period ends at the end of financial year 2007, but given disputes so far this outcome is not yet certain. If, and when this occurs, the entire TRQ system will be threatened.
The price support sugar loan programme
The second main programme is the provision of subsidies directly to sugar processors and indirectly to sugar producers. Under the 2002 Farm Act loans are provided through the US Department of Agriculture (USDA) to the processors of domestically grown cane and beet.
The loan rate for refined cane sugar is 18 cents per lb and for refined beet sugar it is 22.9 cents per lb; the difference in the two rates reflects the difference in the costs of producing these two types of sugar in the US. Processors can obtain loans for sugar 'in-process,' that is sugar not yet fully refined, at 80 per cent of the full loan rate.
The loans provided by the USDA are for a period of 9 months, with the stipulation that these be repaid along with all interest charges by the end of the fiscal year in which the loan was made. As the loans are made to the processors, these in turn pay the cane and beet producers an amount proportional to their contribution to the value of the loan received. Outside of agreed arrangements between processor and producer, however, the USDA can set minimum producer payments, if required.
The loans provided are termed 'no recourse loans.' Put simply, this means that when the loan matures, the USDA must accept the sugar, which is pledged as security or collateral for the loan, in lieu of full repayment in cash, if the processor so desires. Further, the processor has no obligation to inform the USDA before hand of an intention to forfeit the sugar in lieu of payment. In other words, the processor (borrower) is free to repay the loan or give the USDA sugar for the value of the loan.
In effect, therefore, this arrangement sets the floor for sugar prices in the US domestic market, as no rational processor would repay the loan if the price of sugar in the US is below the loan rate. In this situation, forfeiture of the sugar would guarantee a better price. It should be pointed out that after the sugar is forfeited its supply on the US market is reduced, thereby helping to support the market price.
Under the 2002 Farm Act, the USDA is required, "to the maximum extent possible," to operate the sugar loan programme at no cost to the Federal Government. This can only be done if there is no forfeiture of sugar. However, if this is considered carefully, it will be seen that this is only possible if the price for sugar is above the loan rate value.
If that occurs, then the sugar can be sold to the market and the loan repaid (including all interest charges) and the processor is no worse off and indeed would normally be better-off.
Next week we will wrap up this discussion on sugar.
Future WTO impact on world sugar price
This article concludes the series on sugar, which I started on July 4, 16 weeks ago. As events unfold in the future I will return to this topic from time to time. To wrap up the discussion I pose two questions for further comment. First, what is the likely effect of an expanding WTO regime on the world sugar price? Estimates of the future world sugar price that I have seen show at best modest price gains arising from WTO liberalisation. Indeed, these price gains are often further qualified by their authors, who go on to stress the uncertainty of the effect of this projected price rise on supply responses.
The World Bank in a 1999 study had projected the price of raw sugar for three years 2000, 2005, and 2010. The nominal price estimates were 7, 10.4, and 11.3 cents per lb raw sugar for the three years respectively. The actual figure for 2000 was 8.18 cents per lb. And, as readers are aware over the past five years the daily world price of raw sugar has averaged just fewer than 8 cents per lb. When the World Bank adjusted their price estimates for inflation, the constant price equivalents (1990 base) for the same years were 6.6, and 8.6, and 8.3 cents per lb respectively. Significantly, in this study the World Bank concluded that: "commodity prices may have taken another step down in the long history of declining prices relative to those of manufactured goods."
The United Nations Conference on Trade and Development (UNCTAD) has also recently reported on results of different simulation exercises using computable general equilibrium models designed to assess the impact of full liberalization under the WTO. These show that for both sugar and agricultural prices generally, an average rise in prices of about 5 per cent. Estimates by the United States Department of Agriculture (USDA) were of a similar magnitude.
Armed with this information my own judgment is that, while we may say with a high degree of certainty that the WTO will in the long run bring greater transparency and predictability to the world sugar trade by reducing the distorting effects of tariffs, subsidies, and non-tariff barriers, the outcome of this process as far as the global balance of demand and supply of sugar and hence the price of sugar are concerned, is still far too uncertain for confident predictions to be made. With this degree of uncertainty Caricom sugar producers would be well advised to exercise extreme caution when planning to expand sugar output for sale on the world market. Indeed, because of the magnitude of the risk involved it would seem that at all costs the use of loan capital should be avoided for such ventures, as its repayment will add significantly to the full cost of producing sugar.
Options for the future
The second question, which I pose, is: what are the broad options facing regional producers? One of these clearly is to decide whether to abandon sugar production altogether or not. For those countries whose costs of production exceed the projected reduced EU price, there is to my mind no choice but to leave sugar production, unless for social, political, cultural, or some other such non-commercial reasons government decides to continue and subsidise sugar production. If the sugar is to be exported it would sooner or later fall under WTO rules prohibiting subsidies.
Another option would be for regional sugar producers to continue to aim sugar production at markets that offer the continuation of preferential prices, even if lowered, so long as the price obtained covers the cost of production and at the same time provides a reasonable return on the assets employed in sugar. The reasoning behind this is that where a potential economic rent can be earned from sugar sales, this should not be forfeited. However, in order to maximize the size of any potential economic rent, efficient sugar operations are essential.
I should point out that this option does not support plans to expand the scale of sugar output with a view to selling the excess sugar on the world market, on the presumption that increased output and sales would reduce unit costs. Such an approach does not appear to make sense given 1) the very high cost of sugar production in the region and 2) the limited scope for scale economies in sugar, given the relatively small size, on a global scale, of the Caricom sugar-producing countries. Even doubling output in a country is insignificant in global terms and would not reduce unit costs to globally competitive levels.
Yet another option would be for those countries, which plan to continue in sugar production to seek to achieve from this process 1) an increased value-added to raw sugar exports, whether through further processing or the production of specialty sugar; 2) increased commercial use of their sugar by-products; 3) increased commercial use of sugar assets in areas other than sugar, for example agro-tourism or heritage-tourism and, 4) better use of sugar lands in a mixed cropping system, where technically and commercially feasible.
The last option would be for sugar-producing countries to continue to produce sugar, but not for its sweetener properties, and to aim at its use as a chemical feedstock. I had written about this option in a book: Sugar Threat or Challenge. An Assessment of the Impact of Technological Developments in the High Fructose Corn Syrup and Sucrochemicals Industries. At the time the book was written, the incentive for sugar producers to move in this direction was the high price of oil. This commodity has been in modern times the world's leading chemical feedstock. Coincidentally, however, as I write these words, the price of oil at US$55 per barrel is once more breaking all records.
New forms and levels
of co-operation
None of these ideas sketched here would make sense in the absence of a regional approach that goes well beyond the forms and levels of cooperation already in place. In particular I would stress that cooperation should concentrate in such newer areas as:
* Financing the re-capitalisation/re-structuring of the industry;
* Establishing a truly common external protective regime, within the context of existing external obligations;
* Harmonisation of domestic sugar import/sales policy regimes;
* Establishing a rational/coherent regional market regime based on an efficient regional impact parity price for sugar;
* Harmonizing national incentives and regulatory frameworks;
* Rationalising the production of refined sugar;
* Furthering the development of R&D in all critical areas of the industry;
* Redefining the sugar enterprise (the ensemble of non-sugar assets and the scope for separate non-sugar activities: housing, eco- tourism, entertainment and recreation).