Pressures for reforms in the EU sugar regime due to the next WTO round on agriculture and the enlargement of the EU

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1 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Ellen Huan-Niemi Minna Teivonen Economic Research (MTTL) MTT Agrifood Research Finland Abstract The export subsidy commitments imposed by the Uruguay Round Agreement on Agriculture (URAA) had become very binding for sugar regime by the end of the implementation period even though did not have any difficulties at the beginning. In the Next WTO Round, reduction in commitments are projected to be along the same lines as in the URAA. Under -15 scenario, may stay within the future export subsidy commitments if the temporary cut in production quotas for 2000/2001 will be a permanent feature yearly until marketing year 2009/2010 and the maximum level of average subsidy per ton for sugar will be 300 by 2009/2010. After EU eastwards enlargement, however, will breach the future export subsidy commitments for sugar with the accession of the Luxembourg Group in 2005/2006.

2 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of 1. Introduction The European Union (EU) is the largest exporter of white sugar in the world, accounting for 30% of 1997/1998 world exports. In addition, has been providing high level of support to its sugar sector among all the member countries of the World Trade Organisation (WTO). The EU uses export subsidies (export refunds) to bridge the gap between the high internal EU market price and the significantly lower world market price. The EU internal market is insulated from the world sugar market through a system of import duties and export refunds. The Common Market Organisation (CMO) of sugar supports producer prices at levels above world market prices, stimulating production in and resulting in exportable surpluses of sugar. The EU has been distorting trade flows by subsidising the disposal of sugar surpluses to the world market. The Uruguay Round Agreement on Agriculture (URAA) has established a set of completely new and operational rules for agriculture in order to reduce agricultural export subsidies, create new rules for agricultural import policy, shift domestic support of agriculture away from those practices that affect production and trade flows, and agree on disciplines for sanitary and phytosanitary trade measures. The URAA is implemented over a six-year period and ends in marketing year 2000/2001. As a follow-up to the Uruguay Round, a new round of trade liberalisation negotiations was launched in March 2000 for agricultural trade at the WTO. The Next WTO Round will anticipate an increase in market access and further reductions in the URAA commitments for export subsidies and domestic support. The main objective of this study is to analyse the impacts of the URAA and the Next WTO Round on sugar regime. This study will focus on the impacts of the projected future WTO commitments on sugar regime in the Next WTO Round. Furthermore, the impacts of the prospective EU enlargement by including the ten Central and Eastern European (CEE) countries are assessed regarding to the future WTO commitments for export subsidies. The future WTO commitments are projected to be along the same lines as in the Uruguay Round with further 36% reduction in export subsidy expenditure, 21% reduction in the volume of subsidised export, and 20% reduction in tariffs, over a six-year implementation period. It is assumed that there will be a three-year lapse before the start of the Next WTO Round. The reason is that the on-going WTO negotiations process is assumed to continue for 3 years after the end of the URAA in marketing year 2000/2001. The Next WTO Round is assumed to begin in marketing year 2004/2005 and end in marketing year 2009/2010 with a six-year implementation period. 2. The Uruguay Round Agreement on Agriculture: Impact on sugar regime The EU made the following commitments under the Uruguay Round Agreement on Agriculture (URAA) for sugar from marketing year 1995/1996 to 2000/2001: to convert variable import levies into binding standard tariffs, and these standard tariffs will be reduced by 20 percent over a period of 6 years, and additional duties can be imposed by invoking the Special Safeguard Provisions; 2

3 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of to maintain current access for sugar imports at million tons (white sugar equivalent) from the ACP countries and India and 82,000 tons (white sugar equivalent) of MFN sugar; to reduce the volume of subsidised sugar exports by 21 percent over a period of 6 years, but the re-export of ACP preferential sugar 1 with export subsidies is excluded; and reduce the value of export subsidies by 36 percent over a period of 6 years, but the export subsidies given to the ACP preferential sugar is excluded (ISO, 1999) Export subsidies The EU s export subsidy commitments for sugar were calculated from a base period. Sugar included HS codes of 1701 (sugar), 1702 (other sugars including isoglucose), (flavoured or coloured sugar syrups), and chapter 20 (sugar added to products falling within this chapter). The commitments are only for the export of EU s A and B quota sugar 2. The commitments neither include the re-export of ACP preferential sugar (about 1.6 million tons per year) nor sugar exported as food aid. The commitments do not cover C sugar (produced in excess of the A and B quotas) because it is exported to the world market without any export subsidies (ISO, 1999). The EU uses export refunds (export subsidies) to bridge the gap between the high internal EU market price and the significantly lower world market price for EU manufacturers and traders to export surpluses of quota sugar (A and B). The export refunds apply not only to the main products covered by the sugar regime, but also to the export of processed products containing sugar. In practice, s use of export refunds is the main way in which it supports its domestic market prices for sugar, as it grants restitution on whatever quantity of sugar it judges to be surplus to internal needs. As a result, there is hardly any intervention buying in the sugar regime (NEI, 2000). The required reduction in the volume of exports and budgetary outlays for export subsidies did not caused any difficulties for at the beginning of the URAA implementation period. The required reduction of 338,520 tons in the volume of exports was not difficult at the beginning of the implementation period because the actual level of exports by 1995 had already fallen considerably below the levels of the mid to late 1980s, which were the years used as the base period for reduction. However, the export subsidy commitments have become very binding by the end of the URAA implementation period (Graph 1 and 2). In 1 There is guaranteed access to market for sugar from African, Caribbean and Pacific (ACP) countries and India. Preferential sugar is the term used to describe cane sugar imported under the provisions of Protocol No. 8 of the Lomé Convention from the ACP countries and the Agreement with India. 2 The Common Market Organisation of sugar established minimum support prices for sugar guaranteed by an intervention purchase system. A production quota system was established to limit the total quantity eligible for price support. The EU sugar producers (growers and processors jointly) are responsible for paying the full costs to Budget of surplus quota sugar disposal through the producer levies. There are two types of quota: A and B. The major difference between A and B quota sugar is the level of imposed producer levies. Only quota sugar can be sold in and is eligible for price support through the intervention mechanism and export refunds (with the exception of preferential sugar ). Sugar produced in excess of the A and B quotas is called C sugar and cannot be marketed in. C sugar has to be sold on the world market without the support of export refunds. Thus, the quota system limits the supply of sugar in internal market (CAP MONITOR). 3

4 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of order to stay within the final marketing year 2000/2001 commitments, there is a cut in the total A and B sugar quotas. The total sugar production quotas for marketing year 2000/2001 are reduced by 498,800 tons from a total of 15,218,586 tons to 14,719,786 tons (DG AGRI, 2000) Market access The EU internal market is insulated from the world sugar market through a system of import duties and export refunds. Before the URAA, fixed a minimum import price or threshold price for sugar. Sugar imports were charged a variable import duty equal to the difference between the CIF import price and the threshold price. Preferential sugar imports were exempted from this import duty. In practice, this system of variable import duties made the importation of non-preferential sugar financially unattractive. Consequently, there was hardly any importation of non-preferential sugar (NEI, 2000). Under the URAA, was obliged to replace the ad valorem import duties into fixed standard tariffs with a gradual reduction of standard tariffs by a total of 20 percent in six years. These standard tariffs were fixed at a high base level due to the methods of converting the equivalent of non-tariff barriers into fixed standard tariffs. In reality, the special safeguard provisions for sugar have been constantly in operation since 1995 because of the low world market prices for sugar. The fixed tariffs and the additional import duties have made the import of non-preferential sugar uneconomic in comparison with the price of EU quota sugar in the internal market. Subsequently, only a very small amount of non-preferential sugar is imported. The URAA has not improved the market access for non-preferential sugar into the EU internal market. Thus, has been able to prevent competition from imported sugar that is outside its preferential trade agreement. The minimum access provisions under the URAA had little implication for as it was importing more than 10 percent (well above the 5 percent requirement of the URAA by year 2000/2001) of consumption under its preferential trade agreement with the ACP countries and India. Therefore, the URAA commitments under minimum access have not increased sugar imports to Domestic Support The EU was not required to reduce its internal price support specifically for sugar under the URAA because domestic support is measured as the Aggregate Measurement of Support (AMS), aggregated across all commodities and policy instruments. In other words, the total reduction of 20 percent over a period of six years for domestic support commitments refer to the total levels of support, but not to individual commodities. Overall, the sector wide domestic support for sugar has been high compared to the other agricultural commodities in. 4

5 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of 3. The Next WTO Round on Agriculture: Pressures on sugar regime The Uruguay Round Agreement on Agriculture (URAA) begun on the 1 st of July 1995 and concluded on the 30 th of June 2001 (over a period of 6 years). The URAA commitments for marketing year 2000/2001 will most probably continue and no further reduction in the commitments will be imposed without a new agreement for the Next WTO Round on Agriculture. The level of commitments will most likely remain at the level in June 2001 until a new agreement is signed by all the members of WTO. It is assumed in this study that the negotiation process for the Next WTO Round will last for 3 years before a new round on agriculture can be launched successfully. In other words, the commitments on agriculture will remain constant at year 2001 level. It is further assumed that the Next WTO Round is going to be along the same lines as in the Uruguay Round (Appendix 1). The Next WTO Round is assumed to begin in marketing year 2004/2005 with a 3-year lapse after the end of the Uruguay Round. The base year for reduction in commitments is 2003/2004, which is the continuance of Uruguay Round s 2000/2001 level. The Next WTO Round is assumed to end in marketing year 2009/2010 after a 6-year implementation period. The world market prices and EU total exports for sugar are based on Organisation for Economic Co-operation and Development (OECD) projections and Food and Agricultural Policy Research Institute (FAPRI) projections. The EU notifications to the WTO are used as a base for the export subsidy projections in this study. Average subsidy per ton (Appendix 2) for marketing year 1999/2000 is used for the projection of the actual export subsidy expenditure (1999/2000 average subsidy per ton multiply by the total subsidised exports). The market access or the level of protection for EU sugar regime has two different scenarios in order to show the effects of a strong and weak Euro. The projected world market prices are directly influenced by the strength of the Euro denominated in US dollar: Scenario 1 -- weak Euro equals to 0.80 USD/Euro, and Scenario 2 -- strong Euro equals to 1.20 USD/Euro. In addition, the world market prices are on the basis of CIF instead of FOB. The average freight and insurance calculations for the CIF prices of sugar are based on Food and Agriculture Organisation of the United Nations Statistical Databases (FAOSTAT) Further reductions in the export subsidy commitments and pressures on the sugar regime The assumptions for the future WTO export subsidy commitments are budgetary commitments will be further reduced by 36% over a period of six years (2004/2005 to 2009/2010) from base marketing year 2003/2004; quantity (volume) commitments will be further reduced by 21% over a period of six years (2004/2005 to 2009/2010) from base marketing year 2003/2004. Firstly, the projections for export subsidy quantity commitments indicate that will be able to stay within the future WTO quantity commitments if the total quota sugar exports will remain around more or less 1,060,000 tons (Graph 1). However, the quota sugar exports will definitely have to be below the 1,060,000 tons level by marketing year 2009/2010 in order to stay the within the future WTO commitments. 5

6 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of The EU quota sugar exports will not fluctuate a lot due to the fixed sugar production quotas. The quota sugar exports will not change drastically if there is no changes in sugar regime (sugar intervention prices, production quotas, and preferential trade agreements) and in the pattern of EU sugar consumption. Graph EU-15 Sugar: Export Subsidy Quantity Commitments Versus Subsidised Exports Quantity Projections (subsidised exports quantity = 7.36% of 2000/2001 quota sugar production*) 000 tons Base 1995/ / / / / /2001p 2001/ / /2004 Marketing Year 2004/ / / / / /2010 Sugar Quantity Commitments (1) Subsidised Exports Quantity Projections (1) Sugar Quantity Commitments are further reduced by 21% * Sugar production quotas for 2000/2001 have been cut by 498,800 tons (3.278%), and it is assumed that this "non-permanent cut" in sugar quotas will be continued until 2009/2010 in order to stay within the WTO export subsidy commitments. p: subsidised exports quantity (quota production minus consumption) = 7.36% of 2000/2001 quota sugar production Source: WTO Notifications, DG AGRI 2000, 2001a, 2001b, author s calculations According to the working paper of Commission (DG AGRI, 2001b), the total production of quota sugar will be 14,402,202 tons for marketing year 2000/2001 after a cut in the A and B sugar quotas in order to stay within the final marketing year 2000/2001 commitment for export subsidies. The production quotas of sugar are reduced by 498,800 tons from a total of 15,218,586 tons to 14,719,786 tons. The actual quota sugar production is 317,584 tons less than the total production quotas because the French Overseas Territories (DOM) and Portugal do not fully utilise their production quotas, and production quotas cannot be transferred between Member States in. As a result, the actual quota sugar production will always be less than the total production quotas available due the DOM and Portugal inability to fulfil their production quotas. The total EU sugar consumption will be 13,342,542 tons including isoglucose and inulin syrup (DG AGRI, 2001b). Therefore, the total quota sugar exports will be 1,059,659 tons 6

7 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of (1,060,000 tons when rounded). The EU will be able to stay within the future WTO quantity commitments under the assumptions that the quota sugar exports will remain at 1,060,000 tons if there is no further sugar reforms in the sugar regime, and the temporary production quotas cut for 2000/2001 will be a permanent feature yearly until marketing year 2009/2010. Notice should be taken that sugar added to products falling within Chapter 20 (more than 50,000 tons) is not taken into account for the calculation of the total EU quota sugar exports (DG AGRI, 2000, 2001a). Exports of C sugar is completely excluded from the projections because it is exported to the world market without any export subsidy. The re-export of preferential sugar from the ACP countries and India is also excluded from the projections because of the special agreement with the WTO even though the preferential sugar is exported with export subsidies. Graph EU-15 Sugar: Export Subsidy Budgetary Commitments Versus Actual Expenditure Projections with Sugar Reforms (subsidised exports quantity = 7.36% of 2000/2001 quota sugar production*) Million Euro Base 1995/ / / / / /2001p Sugar Budgetary Commitments (1) 2001/ / /2004 Marketing Year 2004/ / / / / /2010 Actual Export Subsidy Expenditure Projections -- average subsidy = 484 euro/ton (2) Actual Export Subsidy Expenditure Projections -- average subsidy = 300 euro/ton (3) (1) Sugar Budgetary Commitments are further reduced by 36% (2) Marketing year 1999/2000 average subsidy per ton for sugar, 484, is used for the actual export subsidy expenditure projections (3) Average subsidy per ton for sugar, 300, is used for the actual export subsidy expenditure projections * Sugar production quotas for 2000/2001 have been cut by 498,800 tons (3.278%), and it is assumed that this "non-permanent cut" in sugar quotas will be continued until 2009/2010 in order to stay within the WTO export subsidy commitments. p: subsidised exports quantity (quota production - consumption) = 7.36% of 2000/2001 quota sugar production Source: WTO Notifications, DG AGRI 2000, 2001a, 2001b, author s calculations Secondly, the projections for export subsidy budgetary commitments indicate that will breach the future WTO budgetary commitments by marketing year 2004/2005 (beginning of the Next WTO Round) if the average subsidy per ton for sugar is 484 (marketing year 1999/2000 average subsidy per ton) and the quantity of subsidised exports is around 7

8 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of 1,060,000 tons (Graph 2). In order to stay within the future budgetary commitments by marketing year 2009/2010, the maximum level of average subsidy per ton will have to be reduced to 300. This is an indication that reforms are needed in sugar regime. In other words, further reduction in the export subsidy commitments will put pressure on sugar regime for further reforms that will require further cuts in the sugar production quotas or the minimum support prices for sugar producers or both measures at the same time. At the moment, Commission has been favouring further cuts in the sugar production quotas instead of lowering the minimum support prices for sugar producers. Finally, is able to stay within the future WTO commitments for export subsidy under two major conditions: the temporary production quotas cut for 2000/2001 will be a permanent feature yearly until marketing year 2009/2010 and the maximum level of average subsidy per ton for sugar will be 300 by 2009/2010 (with reforms in sugar regime) EU Enlargement and pressures on the sugar regime in regard to the export subsidy commitments in the Next WTO Round In the projections, it is assumed that the first group (Luxembourg Group) of Central and Eastern European (CEE) countries to join are Poland, Hungary, Czech Republic, Slovenia, and Estonia and the second group (Helsinki Group) are Latvia, Lithuania, Slovakia, Bulgaria, and Romania. The Luxembourg Group is assumed to join in year 2005 and the Helsinki Group in year It is further assumed that the sugar production quotas allocated to the CEE countries are at their production level in year In the projections, the CEE countries net exports (or imports) are added to -15 total quota sugar exports. Intra-trade within the CEE countries and intra-trade between the CEE countries and EU are excluded from the CEE countries net exports calculations. 8

9 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Graph EU-25 Sugar: Export Subsidy Quantity Commitments Versus Subsidised Exports Quantity Projections (sugar production quotas cut in 2000/2001*) tons Base 1995/ / / / /2000p 2000/ / / /2004 Marketing Year 2004/ / / / / /2010 Sugar Quantity Commitments (1) Subsidised Exports Quantity Projections (1) Sugar Quantity Commitments are further reduced by 21% * Sugar production quotas for 2000/2001 have been cut by 498,800 tons (3.278%), and it is assumed that this "non-permanent cut" in sugar quotas will be continued until 2009/2010 in order to stay within the WTO export subsidy commitments. p: subsidised exports quantity = total quota sugar production minus total sugar consumption Source: WTO Notifications, DG AGRI 2000, 2001a, 2001b, FAOSTAT, EUROSTAT COMEXT, UNCTAD TRAINS, author s calculations The projections for export subsidy commitments indicate that will breach the future WTO quantity commitments when the Luxembourg Group joins in 2005/2006 (Graph 3). The Luxembourg Group is a net exporter of sugar. The net exports from the Luxembourg Group will be much greater than the additional export subsidy commitments brought in by this group. As a result, the combination of EU-15 and the Luxembourg Group (EU with 20 Member States) quantity commitments for export subsidy will not be enough to cover the amount of surplus quota sugar for export. Nonetheless, will be able to stay within the future quantity commitments when the Helsinki Group joins in 2008/2009. The reason is that the Helsinki Group is a net importer of sugar. The net exports of the Luxembourg Group is being counter balanced by the net imports of the Helsinki Group. As a consequence, the combination of EU-15 and the 10 CEE countries (EU with 25 Member States) quantity commitments for export subsidy will be enough to cover the amount of surplus quota sugar for export by marketing year 2009/

10 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Graph EU-25 Sugar: Export Subsidy Budgetary Commitments Versus Actual Expenditure Projections with Sugar Reforms (sugar production quotas cut in 2000/2001*) 800 Million Euro Base 1995/ / / / / /2001p Sugar Budgetary Commitments (1) 2001/ / /2004 Marketing Year 2004/ / / / / /2010 Actual Export Subsidy Expenditure Projections -- average subsidy = 484 euro/ton (2) Actual Export Subsidy Expenditure Projections -- average subsidy = 300 euro/ton (3) (1) Sugar Budgetary Commitments are further reduced by 36% (2) Marketing year 1999/2000 average subsidy per ton for sugar, 484, is used for the actual export subsidy expenditure projections (3) Average subsidy per ton for sugar, 300, is used for the actual export subsidy expenditure projections * Sugar production quotas for 2000/2001 have been cut by 498,800 tons (3.278%), and it is assumed that this "non-permanent cut" in sugar quotas will be continued until 2009/2010 in order to stay within the WTO export subsidy commitments. p: subsidised exports quantity = total quota sugar production minus total sugar consumption Source: WTO Notifications, DG AGRI 2000, 2001a, 2001b, FAOSTAT, EUROSTAT COMEXT, UNCTAD TRAINS, author s calculations The projections for export subsidy commitments indicate that will breach the future WTO budgetary commitments by a substantial amount in marketing year 2005/2006 if the average subsidy per ton for sugar is 484 (marketing year 1999/2000 average subsidy per ton), after the merging of the CEE countries into (Graph 4). The combination of EU- 15 and the 10 CEE countries (EU with 25 Member States) budgetary commitments for export subsidy will not be enough to cover the projected export subsidy expenditure for sugar when the average subsidy for sugar is 484 per ton. However, is able to stay within the budgetary commitments when the average subsidy is lowered to 300 per ton. This is an indication that reforms are needed in order to lower the average subsidy per ton for sugar, especially after the integration of the CEE countries. The enlargement of will necessitate further cuts in the sugar production quotas in order to stay within the future WTO export subsidy commitments. The Luxembourg Group 10

11 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of being a net exporter of sugar will pressure to cut the sugar production quotas by at least 225,000 tons after the integration of the Luxembourg Group into. The 225,000 tons cut in production quotas can be categorised as further permanent cuts to the enlarged EU sugar production quotas, in addition to the roll-over of the temporary cuts of 498,800 tons in production quotas since marketing year 2000/2001. The EU under the enlargement scenario will only be able to stay within the future export subsidy commitments after these cuts in sugar productions quotas. The enlargement of will pressure for further reforms in sugar regime. Under -15 scenario, will be able to stay within the future WTO commitments for export subsidy if the temporary cuts of 498,800 tons in production quotas are continued until marketing year 2009/2010 and the average subsidy per ton for sugar does not exceed 300 by 2009/2010. Under -25 scenario (after the enlargement of ), there is absolutely a need to further cut the sugar production quotas. The projections strongly indicate that the inclusion of the CEE countries into will push sugar regime to further reforms, and the reforms will have to include the CEE countries as well. Sugar production quotas allocated to the CEE countries should not exceed their current production level. In fact, the production quotas allocated should be less than their current production level because there is a need to cut the sugar production quotas by at least 225,000 tons after the accession of the Luxembourg Group into. It will not be fair to the current 15 Member States of if further cuts in the sugar production quotas have to be absorbed by them Pressures on s border protection for sugar in regard to further tariffs reduction in the Next WTO Round In the border protection analysis, it is assumed that under the Next WTO Round the tariffs for raw sugar and white sugar are to be further reduced by 20 percent over a period of six years (2004/2005 to 2009/2010) from base marketing year 2003/2004. The world market prices for raw and white sugar are based on OECD Agricultural Outlook projections. Two different scenarios are projected to show the impact of a weak and strong Euro. The projected OECD world market prices are directly influenced by the strength of the Euro denominated in US dollar: Scenario 1 -- weak Euro equals to 0.80 USD/Euro, and Scenario 2 -- strong Euro equals to 1.20 USD/Euro. 11

12 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Graph The Level of Protection for EU-15 Raw Sugar Projections (20% reduction in standard tariff) Euro/ton / / / / / / / / / / / / / / /2010 Marketing Year EU Support Price World Price with Strong Euro (2) (b) World Price plus Tariff with Strong Euro (1) (b) World Price with Weak Euro (2) (a) World Price plus Tariff with Weak Euro (1) (a) (1) Standard tariff is further reduced by 20% for raw sugar (2) World Price is based on New York Spot Price, No. 11 (a) World Price projections are based on a weak Euro -- 1 Euro = 0.80 USD (b) World Price projections are based on a strong Euro -- 1 Euro = 1.20 USD Source: OECD 2000, author s calculations Under the scenario of a strong Euro (Graph 5 and 6), if the tariffs for sugar are further reduced by 20 percent in the Next WTO Round, both -15 raw and white sugar will lose its border protection by marketing year 2009/2010 because the world market price plus tariff will be below support price for raw sugar and white sugar. The situation is more acute for white sugar compared to the situation for raw sugar. Nevertheless, can invoked the Special Safeguard Provisions (trigger price) under the URAA that allow additional duties to be imposed in the case of low world market prices. The trigger price for raw sugar is 418 per ton and white sugar is 531 per ton (CEC, 1995). The additional duties imposed by invoking the trigger price mechanism are just enough to safeguard the border protection for raw and white sugar by 2009/2010 (Graph 7 and 8). 12

13 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Graph The Level of Protection for EU-15 White Sugar Projections (20% reduction in standard tariff) Euro/ton / / / / / / / / / / / / / / /2010 Marketing Year EU Support Price World Price with Strong Euro (2) (b) World Price plus Tariff with Strong Euro (1) (b) World Price with Weak Euro (2) (a) World Price plus Tariff with Weak Euro (1) (a) (1) Standard tariff is further reduced by 20% for white sugar (2) World Price is based on London No. 5 white sugar contract (a) World Price projections are based on a weak Euro -- 1 Euro = 0.80 USD (b) World Price projections are based on a strong Euro -- 1 Euro = 1.20 USD Source: OECD 2000, author s calculations Under the scenario of a weak Euro, will definitely be able to maintain its border protection, but the margin of protection is smaller for white sugar compared to the margin for raw sugar (Graph 5 and 6). The margin of protection is smaller for white sugar may be due to the reason that the support price for white sugar ( 632/ton) is much higher than the support price for raw sugar ( 523/ton). Actually, the support prices for raw sugar and white sugar are more than double the world market prices for raw and white sugar respectively. If the Euro remains weak, will not have any problems in its border protection for sugar with a 20-percent reduction in tariffs. On the other hand, will have problems in its border protection for sugar if the Euro is strong. The EU will most probably avoid the average 36 percent reduction in tariffs applied under the URAA because will certainly face problems in its border protection for sugar when the Euro is strong. The 36 percent reduction in tariffs would give third countries significant access to internal market, leading to an increase in the imports of sugar into market. Any increase in sugar imports will correspond with an increase in the exportable surplus of sugar with export refunds (export subsidies). Due to an increase in imports without an increase in sugar consumption, is not able to export the additional surplus of quota sugar production with export refunds because the quantity and budgetary commitments for export subsidies under the WTO are 13

14 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of already binding. The increase imports of sugar will pressure to cut the sugar production quotas further with the intention to lower the surplus of quota sugar exported with export refunds in order to stay within the WTO commitments for export subsidies. Therefore, will prefer to use a lower percentage cut for sugar in tariff reductions in the Next WTO Round. In fact, may choose the option of reducing the tariffs for sugar by a minimum of 15 percent cut required under the WTO. The margin for sugar border protection will be the largest with a 15-percent reduction in tariffs compared to the 36 percent and 20 percent reduction in tariffs. Even if the Euro is strong, the margin for sugar border protection will be enough with only a 15-percent reduction in tariff instead of the 20 percent or 36 percent reduction in tariffs. Graph The Level of Protection for EU-15 Raw Sugar Projections (20% reduction in tariff and world price with a strong euro) (the Special Safeguard Provisions in operation -- Trigger Price) Euro/ton / / / / / / /2002* 2002/2003* 2003/2004* 2004/2005* 2005/2006* 2006/2007* 2007/2008* 2008/2009* 2009/2010* Marketing Year EU Support Price World Price with Strong Euro (2) (b) World Price with Strong Euro plus Tariff & Additional Duties under SSP's Trigger Price World Price with Strong Euro plus Tariff (1) (b) (1) Standard tariff is further reduced by 20% for raw sugar (2) World Price is based on New York Spot Price, No. 11 (a) World Price projections are based on a weak Euro -- 1 Euro = 0.80 USD (b) World Price projections are based on a strong Euro -- 1 Euro = 1.20 USD * The additional duties imposed under the Special Safeguard Provisions are calculated from marketing year 2001/2002 onwards Source: OECD 2000, CEC 1995, author s calculations 14

15 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of Graph 8 Euro/ton / /1997 The Level of Protection for EU-15 White Sugar Projections (20% reduction in tariff and world price with a strong euro) (the Special Safeguard Provisions in operation -- Trigger Price) 1997/ / / / /2002* 2002/2003* 2003/2004* 2004/2005* 2005/2006* 2006/2007* 2007/2008* 2008/2009* 2009/2010* Marketing Year EU Support Price World Price with Strong Euro (2) (b) World Price with Strong Euro plus Tariff & Additional Duties under SSP's Trigger Price World Price with Strong Euro plus Tariff (1) (b) (1)Standard tariff is further reduced by 20% for white sugar (2) World Price is based on London No. 5 white sugar contract (a) World Price projections are based on a weak Euro -- 1 Euro = 0.80 USD (b) World Price projections are based on a strong Euro -- 1 Euro = 1.20 USD * The additional duties imposed under the Special Safeguard Provisions are calculated from marketing year 2001/2002 onwards Source: OECD 2000, CEC 1995, author s calculations 4. Conclusions The Common Market Organisation of sugar EU has been providing high level of support to the sugar sector where producer prices are supported well above the world market prices. The levels of support have stimulated sugar production in resulting in exportable surpluses of sugar. The EU has been subsidising the disposal of sugar surpluses to the world market. At the beginning of the URAA implementation period, the required reduction in the volume of exports and budgetary outlays for export subsidies did not cause any difficulties for. However, the commitments have become very binding by the end of the URAA implementation period, where the total sugar production quotas for marketing year 2000/2001 are reduced by 498,800 tons in order to stay within the final marketing year 2000/2001 commitment. The gradual reduction of standard tariffs (replacing the ad valorem import duties) by a total of 20 percent in six years has not improved the market access for nonpreferential sugar into internal market. The URAA commitments under minimum access will not increase sugar imports to because was importing more than 10 15

16 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of percent of consumption under its preferential trade agreement with the ACP countries and India. Projections for the Next WTO Round indicate that is able to stay within the future WTO commitments for export subsidy under two major conditions: the temporary cut in production quotas for 2000/2001 will be a permanent feature yearly until marketing year 2009/2010 and the maximum level of average subsidy per ton for sugar will be 300 by 2009/2010. The enlargement of by including the ten Central and Eastern European (CEE) countries will necessitate further cuts in the sugar production quotas because the Luxembourg Group (Poland, Hungary, Czech Republic, Slovenia, and Estonia) being a net exporter of sugar will pressure to cut the sugar production quotas by at least 225,000 tons after its accession. The projections strongly indicate that the inclusion of the CEE countries into will push sugar regime to further reforms, and the reforms will have to include the CEE countries as well. Sugar production quotas allocated to the CEE countries should not exceed their current production level. In fact, the production quotas allocated should be less than their current production level because there is a need to cut the sugar production quotas by at least 225,000 tons after the accession of the Luxembourg Group into. It will not be fair to the current 15 Member States of if further cuts in the sugar production quotas have to be absorbed by them in order to stay within the future WTO export subsidy commitments. If the Euro remains weak, will not have any problems in its border protection for sugar, but if the Euro is strong, will certainly face problems in its border protection with further tariffs reduction in the Next WTO Round. However, a 36-percent reduction in tariffs would give third countries significant access to internal market, leading to an increase of imports in sugar that will pressure to cut the sugar production quotas further with the intention to lower the surplus of quota sugar exported with export refunds in order to stay within the WTO commitments for export subsidies. In fact, may choose the option of reducing the tariffs for sugar by a minimum of 15 percent cut required under the WTO instead of larger tariffs reduction because the margin for sugar border protection will be enough even if the Euro is strong. In conclusion, further reductions in the export subsidy commitments and tariffs for sugar will put pressure on sugar regime for further reforms in the Next WTO Round. The Next WTO Round will lead to further cuts in the sugar production quotas or the minimum support prices for sugar producers or both measures at the same time. At the moment, Commission has been favouring further cuts in the sugar production quotas instead of lowering the minimum support prices for sugar producers. One likely reason that Commission has not been favouring cuts in the minimum support prices for sugar producers may be because there is not enough money left in Budget for direct payments in compensating the sugar producers for the cuts in the support prices. The EU s Agenda 2000 has put a limit to the total agricultural spending of for year 2000 to 2006 at the amount of 40.5 billion per year (in real terms). As a consequence, may not be able to cut the sugar support prices until year 2006 because of the inability to pay direct compensation payments to the sugar producers. In the future, Commission has to be prepared to cut the sugar support prices as well because the accession of the CEE countries will put a considerable amount of pressure on sugar regime in the Next WTO Round. In short, 16

17 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of further reforms in sugar regime cannot be avoided because the current sugar regime cannot be sustained until year References C.A.P. Monitor (2000). A continuously up-dated information service on the Common Agricultural Policy of the European Union. Agra Europe, London. CEC (1995). Commission Regulation (EC) No 1423/95 of 23 June Official Journal of the European Communities, the Commission of the European Communities. DG AGRI (2000). Working Paper Etablissement de la quantite garantie dans le cadre des quotas de production dans le secteur du sucre au titre de la campagne de commercialisation 2000/2001. DG Agriculture, European Commission, Brussels. DG AGRI (2001a). Working Paper Document de travail pour la notification des exportations dans le cadre du GATT (Campagne 1999/2000). DG Agriculture, European Commission, Brussels. DG AGRI (2001b). Working Paper Fixation des acomptes des cotisations a la production dans le secteur du sucre pour la campagne de commercialisation 2000/2001 en application des articles 5 et 6 du reglement (CEE) no. 1443/82 de la commission. DG Agriculture, European Commission, Brussels. EUROSTAT COMEXT database. Internal and External Trade of. Updated FAOSTAT. Food and Agriculture Organisation of the United Nations Statistical Databases. Updated Available at ISO (1999). The 1994 GATT Uruguay Round Agreement on Agriculture and the World Sugar Market. Market Evaluation Consumption and Statistics Committee, International Sugar Organisation, 19 October 1999, London. NEI (2000). Evaluation of the Common Organisation of the Markets in the Sugar Sector. Agricultural Economics and Rural Development Division, Netherlands Economic Institute, September 2000, Rotterdam. OECD (2000). OECD Agricultural Outlook Publication Service of the OECD, 2000, Paris. UNCTAD TRAINS database. United Nations Conference on Trade and Development Trade Analysis and Information System. WTO Notifications. World Trade Organisation. Available at 17

18 Pressures for reforms in sugar regime due to the next WTO round on agriculture and the enlargement of APPENDIX 1 The three pillars of the URAA. Reduction Commitments Special Arrangements Export Subsidies reduce expenditure by 36% over 6 years adherence to food aid rules reduce volume by 21% over 6 years negotiate later on reduction in export credits Market Access reduce existing and new tariffs by 36% on average over 6 years guaranteed access opportunities for exporters through tariff-rate quotas (TRQ) minimum reduction of 15% per tariff item special safeguard provisions in the case of import surges or low world prices Domestic Support aggregate level of trade-distorting support (aggregate measure of support AMS amber box) reduced by 20% over 6 years many developing countries subsidies exempted blue box and green box payments are exempted Source: IATRC 1994 APPENDIX 2 Average subsidy per ton calculated from EU notifications to the WTO. AVERAGE SUBSIDY PER TON (in euro/ton) 1995/ / / / /2000 SUGAR