Summary
The Common Agricultural Policy (CAP) sugar regime produces an annual harvest of subsidised profit for food processors and big farmers, and it perpetuates unfair trade between Europe and the developing world.
Reform could benefit millions of people in poor countries. The current system disproportionately benefits a wealthy minority in Europe.
The sugar regime is an anachronism within the expensive absurdity of the CAP. Insulated from successive reforms, the sugar sector remains one of the most distorted markets in European agriculture.
It is also a flashpoint for international tensions over trade. An ongoing review of the CAP sugar regime provides an opportunity to address the problem. Failure to grasp that opportunity will be bad for Europe,
worse for developing countries, and potentially disastrous for the future of the rules-based multilateral trading system.
The EU sugar regime is a notoriously complex system, but it produces a problem that can be very simply stated: too much sugar. Each year, Europe - a high-cost producer - generates an export surplus of approximately 5 million tonnes.
This surplus is dumped overseas through a system of direct and indirect export subsidies, destroying markets for more efficient developing-country producers in the process. Meanwhile, high trade barriers keep imports out of Europe.
The livelihoods of agricultural labourers and small farmers in developing countries suffer both as a consequence of the EU's exports to world markets, and because of restricted access to European markets.
The EU claims that Europe is a 'non-subsidising' sugar exporter. This is the basis of its defence at the World Trade Organisation (WTO), where the sugar regime is under challenge. But this defence is untenable.
The EU's position at the WTO is built on economic sophistry. Behind the statistical fog emanating from Brussels, Europe is the world's most prolific subsidy-user and biggest dumper. Currently,
the EU is spending €3.30 in subsidies to export sugar worth €1. In addition to the €1.3bn in export subsidies recorded annually in its budgets, the EU provides hidden support amounting to around €833m on nominally unsubsidised sugar exports.
These hidden dumping subsidies reflect the gap between EU production costs and export prices.
Heavy export subsidies and high import tariffs are a consequence of the wide gap between EU guaranteed prices and world prices. Domestic prices are maintained at levels three times those prevailing on world markets. Shorn of diplomatic niceties,
the CAP sugar regime has the appearance of a price-fixing cartel operated by governments on behalf of big farmers and sugar-processing companies. The regime maintains a system of corporate welfare, paid for by EU taxpayers and consumers,
with the human costs absorbed by developing countries.
Europe's most prosperous agricultural regions - such as eastern England, the Paris Basin, and northern Germany - are among the biggest beneficiaries of sugar subsidies. We estimate the average support provided to 27 of the largest sugar-beet farms in the UK at €206,910.
But the biggest welfare transfers are directed towards corporate sugar processors. The 25 per cent profit margin achieved by British Sugar, a subsidiary of Associated British Foods, is among the highest in the manufacturing sector in the EU.
British Sugar is among the most vigorous lobbyists for maintaining the current regime, having built an entire campaign on a selective and misleading interpretation of facts.
Other companies benefit from export subsidies worth millions of Euros each year. We estimate export-subsidy receipts for six major sugar processors at €819m in 2003. The French company Beghin Say tops the league with receipts of €236m,
followed by the German company Sudzucker, Europe's largest processor, with receipts of €201m, and Tate and Lyle with €158m.
Developing countries figure prominently in the ranks of losers from CAP-sponsored sugar dumping. Translated into foreign-exchange losses, world-market distortions associated with EU sugar policies cost Brazil $494m,Thailand $151m,
and South Africa and India around $60m each in 2002. These are large losses for countries with significant populations living in poverty, acute balance-of-payments pressures, and limited budget resources.
Trade preferences mitigate the losses caused by the sugar regime - but only marginally. Countries in the African, Caribbean, and Pacific (ACP) group enjoy preferential access to the European sugar market at prices linked to EU guaranteed prices.
Least Developed Countries (LDCs) also have preferential access for a limited quota. This is a transitional arrangement under the Everything But Arms (EBA) initiative, through which the EU is committed to providing duty-free access from 2009.
The EU likes to point to the EBA initiative as an example of its commitment to development - and it must be said that the initiative has helped some countries. But in sugar, as in other areas of trade policy, EU generosity has its limits.
Market-access rights are severely restricted to accommodate the concerns of processing companies such as British Sugar, Beghin Say, Sudzucker, and the sugar-beet lobby.
EBA arrangements allow Least Developed Countries to export a volume of sugar equivalent to 1 per cent of EU consumption. In other words, a group of 49 of the world's poorest countries are allowed to supply Europe, one of the world's richest regions,
with only three days' worth of sugar consumption. Mozambique and Ethiopia, two of the world's poorest countries, have a right to export a combined total of 25,000 tonnes in 2004. Just fifteen of the biggest sugar farms in Norfolk produce more than this.
When it comes to choosing between reducing poverty in Africa and supporting big farm and industrial interests in Europe, EU governments have made a clear choice.
We estimate the costs of EU market restrictions for Ethiopia, Mozambique, and Malawi. Total losses since the inception of the EBA in 2001 amount to $238m. Projected losses for 2004 are $38m for Mozambique and $32m for Malawi.
The figures highlight a shameful lack of coherence between EU aid and trade policies. For every $3 that the EU gives Mozambique in aid, it takes back $1 through restrictions on access to its sugar market.
Export losses undermine investment and restrict the scope for diversification. For individual countries, the costs are large in relation to national financing capacity.
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The losses for Mozambique in the current financial year are equivalent to total government spending on agriculture and rural development.
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Ethiopia's losses are equivalent to total national spending on programmes to combat HIV/AIDS.
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Malawi's losses exceed the national budget for primary health care.
The ultimate losers from the CAP sugar regime are men, women, and children in the world's poorest countries. For those countries where more than half of the rural population lives below the poverty line, EU import restrictions translate into increased vulnerability,
more poverty, absent or deteriorating health services, and diminished opportunities for education. The same is true for rural populations in countries such as South Africa and Thailand, where wages and conditions are adversely affected by EU dumping.
Reform of the EU sugar sector must address four central concerns.
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First, the EU has to stop the direct and indirect subsidisation of exports. Continued dumping of surpluses must be rejected. For practical purposes, this means that the EU should adopt a 'zero export' regime for sugar, which in turn means cuts in production quotas.
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The second priority is to improve market access for the poorest countries. Governments of the Least Developed Countries have indicated a preference for retaining quotas through which they can export to the EU at a remunerative and predictable price. If this option is adopted,
the quota should reflect their export capacity.
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The third priority is the protection of ACP interests. It is widely accepted that reform of the sugar regime will result in lower guaranteed prices, for which large growers in Europe will be generously compensated. But as EU prices fall, so too will those received by ACP exporters.
For a large group of ACP countries this poses a serious threat. Some will face severe adjustment costs and the threat of social and economic dislocation. For this reason, it is imperative that the EU provides generous and timely support to aid countries undergoing adjustment.
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Finally, the sugar regime should be brought into line with public interest in the EU. That means enhancing the capacity of small-scale family farmers in Europe to contribute to the creation of an agricultural system that is sustainable in social and environmental terms.
There is a growing danger that corporate interest groups will exploit the debate about reform of the CAP for their own ends, overriding public interest in the pursuit of subsidised profit. Sugar processors and large farm organisations have launched a Europe-wide lobbying effort aimed at perpetuating the current system.
Britain is one of the focal points for the campaign. British Sugar and the National Farmers' Union are attempting to sway public opinion against reform behind the populist banner of a 'Save Our Sugar' campaign. That campaign is built on distortion and the pursuit of self-interest.
This paper sets out the case for a reform model built on a fundamental realignment of EU sugar policy. It starts out from a position of pragmatism, rather than market fundamentalism. Advocates of deep liberalisation and transition to world-market prices ignore two fundamental problems. First,
no politically plausible price cuts are likely to eliminate EU export surpluses, especially if implemented with large direct income aids to compensate the biggest farms for income losses. Second, deep price cuts in the EU would devastate the ACP and LDC industries that currently export at prices linked to CAP guaranteed prices.
They would also undermine small-scale family farming.
Our reform option incorporates a recognition that price cuts will take place as part of the reform process, but it argues for deep adjustments through quota cuts and expanded market access for least developed countries. We propose four key measures, as follows:
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A cut of around 5.2 million tonnes, or one-third, in the EU quota to end all exports, facilitate an increase in imports from least developed countries, and realign domestic production with consumption. The cut would take place in two stages:
Stage 1: An immediate prohibition on non-quota exports (2.7 million tonnes) and a domestic quota cut of around 2.5 million tonnes.
Stage 2: An incremental, graduated cut in quotas over the period 2006-13 to accommodate an additional 2.7 million tonnes in imports from Least Developed Countries at prices linked to those on the EU market.
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The elimination of all direct and indirect export subsidies with immediate effect.
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A programme of increased aid and compensation for ACP exporters, financed by a transfer of the €1.3bn now allocated to export subsidies. The programme would include a 'quota buy-back' option, under which ACP countries could sell their quota back to the EU in return for a guaranteed flow of assistance.
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Redistribution of CAP support towards smaller farmers, and an EU-wide investigation of the activities of sugar processors, conducted by national competition authorities.
Perhaps more than in any other sector, the sugar regime demonstrates why CAP reform cannot be treated solely as a domestic EU affair. The EU's position as a major global producer, exporter, and importer means that decisions taken in Brussels will have implications not just for a large group of poor countries,
but for millions of desperately poor people within those countries. That is why the EU needs to display a sense of international responsibility commensurate with its market power.
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