World Trade Organization Dispute

European Communities - Export Subsidies on Sugar

Frequently Asked Questions

5 December 2005

1. What was this dispute about?

Under WTO rules, export subsidies on agricultural products are prohibited unless maintained within limits specified in the export subsidy commitment schedules of each Member. In regards to sugar, the annual EC scheduled limits are €499.1 million ($800 million) and 1.2735 million tonnes.

The EC exports, on average, over 5 million tonnes of sugar per year and spends more than €1 billion ($1.6 billion) per year on sugar export subsidies. In addition to exports consistent with its scheduled limits, the EC exports 1.6 million tonnes which it deems to be notionally equivalent to its imports of sugar under special preferential arrangements from certain sugar exporters (called "ACP/India equivalent sugar"). It also exports an additional quantity that is not entitled to EC domestic price support or direct export subsidies (but is indirectly subsidised from the high profits made on sugar sales on the domestic market) and that must, by law, be exported (called "C sugar").

Australia, with Brazil and Thailand, took WTO dispute settlement action against the EC on the basis that the EC is violating its WTO obligations in respect of sugar export subsidies by providing export subsidies in excess of its WTO export subsidy commitment levels for sugar, as the EC fails to apply the required WTO limits to its subsidised exports of the ACP/India equivalent sugar and the C sugar.

2. What was the legal outcome of this dispute?

This dispute was heard by a WTO Panel in 2004, which found against the EC (see http://www.wto.int/english/tratop_e/dispu_e/265r_e.pdf). The EC subsequently lodged a comprehensive appeal to the WTO Appellate Body, which was dismissed in full (see http://www.wto.int/english/tratop_e/dispu_e/265_266_283abr_e.pdf)

The EC argued that a footnote it inserted in its WTO Schedule allows it to provide direct export subsidies to the ACP/India equivalent sugar. The Panel and Appellate Body agreed with Australia's argument that the footnote is without effect as it violates the WTO Agreement on Agriculture ( which requires that all export subsidies as defined in Article 9 of that Agreement, be reduced ).

The EC argued that its C sugar exports do not receive export subsidies. The Panel and Appellate Body agreed with Australia's argument that the EC's regulation of its internal sugar market provides both the finance and incentive for C sugar exports to be made at below cost prices and that this constitutes an "export subsidy" within the WTO Agreement on Agriculture.

Australia appealed the Panel's decision not to rule on the consistency of the export subsidies with the WTO Agreement on Subsidies and Countervailing Measures. The Appellate Body found that this Panel decision was in error but stated that it did not have sufficient argument and information before it to come to a conclusion on Australia's claims.

3. What does Australia expect to gain from this dispute?

Australia is a global sugar trader.

Around 80% of Australia sugar production is exported, nearly all of it at the world price. The industry domestic (ex-mill) price is fixed at export parity in the main producing State (Queensland) and imports of sugar can enter Australia duty free.

The Australian sugar industry is probably more exposed than any other sugar exporter to world price movements.

The findings confirm that all EC sugar exports are subsidised, either directly or indirectly. Based on recent production levels, the outcome of the dispute means that the EC will have to reduce sugar exports by up to 4 million tonnes and will have to reduce its export subsidy expenditure on sugar by up to €1 billion ($1.6 billion).

Provided that the EC fully implements the WTO findings, the Australian sugar industry can in future plan its production and exports on the basis that EC subsidised exports will be reduced from an average of over 5 million tonnes a year to 1.2735 million tonnes and that budgetary expenditure on export subsidies will be reduced from an estimate of up to €2 billion ($3.2 billion) in 2005 to €499.1 million ($800 million) a year.

4. Won't all the benefits go to Brazil as the most competitive supplier?

Australia already competes effectively with Brazil. Australia's costs of production are close to those of Brazil and Australia enjoys freight and distribution advantages over some Brazilian sugar producers.

The Australian, Brazilian and Thai sugar industries compete on world markets, but also cooperate very closely - through the Global Sugar Alliance and bilaterally - on policy issues. They have a common interest in reducing distortions in world sugar markets and all have been strongly supportive of their governments throughout the WTO sugar case.

5. How will this decision affect world sugar prices?

The EC is not the sole determinant of world sugar prices, but the effect will be beneficial. Full implementation will mean that the EC will cease to be the world's second largest sugar exporter. Provided that the EC does not erect any further protectionist barriers against imports, it will once again become a net importer (as it was around thirty years ago).

6. When will the EC have to implement the ruling?

On 28 October 2005, a WTO arbitrator determined that the EC must implement the WTO ruling by no later than 22 May 2006 (see http://www.wto.org/english/tratop_e/dispu_e/265_266_283_arb_e.pdf).

7. What if the EC fails to implement by that time?

The EC would be in breach of its WTO treaty commitments. Any such failure would be particularly marked for sugar, given that the EC has embarked on its own internal reform path for sugar.

If the EC fails to implement, Australia will be entitled to exercise its WTO rights of enforcement including, in some instances, rights of retaliation.

8. Under WTO rules is it possible to negotiate a bilateral settlement as an outcome of the WTO findings? What would happen if Brazil and/or Thailand - but not Australia - were to reach an accommodation with the EC?

The WTO dispute system does not act as a barrier to a bilateral settlement, subject to the proviso that any such outcome does not affect the WTO rights of any other WTO Member.

Any settlement that the EC might seek to negotiate with Brazil or Thailand on the measures taken to comply with the ruling would not affect Australia's rights in regard to full implementation of the EC's obligations.

Australia has been a co-complainant in a number of WTO disputes. In the majority of those cases the co-complainants have cooperated very closely in securing compliance within a commonly agreed time period.

9. The conclusion that the EC-15 must limit its export subsidies to €499.1 million ($800 million) and subsidised exports to 1.2735 million tonnes a year would mean that the EC must reduce its export subsidies by percentages far greater than the Uruguay Round commitment to reduce budgetary outlays by 36% and quantities of subsidised exports by 21%.

The EC has claimed that the figures in its WTO Schedule constitute an excusable scheduling error and that it should be allowed to correct that error. Would Australia be agreeable to that proposal?

The EC scheduled its export subsidy reduction commitments for sugar at levels lower than the minimum Uruguay Round percentage figures. No-one forced the EC to do so.

The EC sought to exclude 1.6 million tonnes of so-called ACP/India equivalent sugar from its reduction commitment levels, as well as its exports of C sugar. The EC did so, knowing that it would be fully accountable, under the WTO anti-circumvention provisions, to demonstrate that any exports in excess of its scheduled commitment levels were not subsidised.

There is no process for adjusting schedules of export subsidy reduction commitments. The schedules of export subsidy reduction commitments are fixed for the life of the WTO Agreement and cannot be changed without a negotiated amendment to the WTO Agreement itself.

The commitment is multilateral. Any Australian agreement would not have any legal force.

The EC has referred to "windfall profits" that might accrue to Australia. Australia notes that the EC has been exporting subsidised sugar at levels far in excess of its WTO commitments for over a decade.

The EC finds itself in a situation no different from that of the United States as a consequence of the EC's own challenge to US export subsidies under the Foreign Sales Corporation (FSC) scheme and also as a consequence of Brazil's challenge to US export subsidies on cotton and other products.

10. How does Australia respond to ACP charges that the dispute will affect their preferred access arrangements?

The WTO Panel, and Mr Vaile in his 28 April press release (see http://www.trademinister.gov.au/releases/2005/mvt033_05.html), have called upon the EC to give effect to both its WTO obligations and its treaty obligations to ACP sugar exporters.

Preferential access for some ACP sugar exporters has not been the cause of EC structural surpluses. The level of access for ACP sugar has been virtually static for around 50 years (1.3 million tonnes), including when the EC was a net importer of sugar. The EC has consistently set its quantities of production eligible for price support at levels well in excess of consumption.

11. Does Australia support special and differential preferences for ACP sugar exporters and for least developed exporters under the Everything But Arms (EBA) arrangement?

Australia did not challenge the special preferential arrangements for ACP sugar exporters. Nor does it oppose the EBA arrangements.

Australia maintains more generous access arrangements for least developed exporters than does the EC under the EBA, which still subjects some so-called sensitive products (bananas, rice and sugar) to strict quota arrangements. More than one year ago, Australia eliminated all tariffs and quotas - without any product exclusions - on imports from least developed countries.

12. But won't the projected unrestricted access for least developed countries under the EBA arrangement further exacerbate the situation for EC growers and processors?

Australia sees no reason why the WTO ruling on export subsidies should have any impact on imports of sugar under the EBA arrangements. Just as there is no reason why the EC cannot continue to honour its commitments to the ACP sugar exporters, there is no reason why the EC should exclude sugar from the EBA beneficiaries.

The EBA arrangements were announced in 2001. There is a transitional period for full liberalisation for sugar, extending until 2009. EC producers have had - and continue to have - a long lead time to adjust to imports from least developed sugar producers.

None of the least developed sugar producers are significant exporters of sugar, indeed some of them are currently net importers. It will take some of them many years to develop the necessary infrastructure to enable them to capitalise on improved access opportunities.

13. Doesn't Australia care about the very large number of people in the EU potentially affected by the WTO decision?

A requirement to reduce export levels to 1.2735 million tonnes would involve a reduction in exports of between 2-4 million tonnes, a figure that is relatively small compared to total EU sugar production of around 20 million tonnes.

A requirement to reduce export subsidy expenditure on sugar from a 2005 estimated level of up to €2 billion ($3.2 billion) to just under €500 million ($800 million) could also free up resources for adjustment programs.

Any effects could be uneven, given that most Member States do not export sugar outside of the EU and given that very few of them produce C sugar. Account would also need to be taken of the fact that much C beet production (production outside of quota) is made at a loss and is really driven by the demands of processors.

Adjustment is never easy, as witnessed by the internal debate over EU sugar reform. Australia itself has undertaken several painful adjustments as a consequence of the agricultural subsidy practices of the EU and others. However, in Australia's experience, deferral of reform only increases the inevitable pain of adjustment as well as denying industry the opportunity to modernise and manage production in line with market circumstances.

14. Won't the findings on cross-subsidisation capture all forms of legitimate domestic support?

No. EC cross-subsidised exports are not an occasional event.

Given a choice, EC sugar producers would find it more profitable to sell sugar on the domestic market. The EC intervention (floor) price is 2-3 times more than the world price and, because of supply management arrangements, the real domestic support price has been some 10% to 20% above the very high intervention price.

As the EC itself acknowledges, the disposal of sugar surpluses on world markets is an integral part of EC price support.

Such forms of cross-subsidisation were identified as agricultural export subsidy practices around 50 years ago.

EC sugar production and export levels are not driven by world market prices, but are derived from the mechanisms of the EC sugar regime.

The EC sugar regime prohibits the sale on the domestic market of all surplus to quota sugar production (i.e. C sugar). C sugar production has risen from 11% of domestic production in 1995 to 24% in recent years. In some years, C sugar exports have reached levels of 3 million tonnes, or 50% of total exports.

All EC sugar is consistently produced at below the total average cost of production. Sales of C sugar at world market prices cover less than 30% of production costs. There are no independent producers of C sugar and C sugar is clearly cross-subsidised from quota sugar profits.

15. Are there implications for all sugar exporters exporting below costs of production? Are we not "all sinners"?

No. Exports below costs of production do not come within WTO definitions of an export subsidy. The fact that sugar exports are occasionally made at below costs of production (during times of low world prices) does not mean that such sales are cross-subsidised from domestic support prices.

In the case of Australia, the domestic (ex-mill) price for raw sugar is set at export parity and around 80% of production is exported. It would be unsustainable for exports to be financed from domestic prices. Moreover, Australian producers selling into the domestic market are not protected against imports. Imports can enter duty free.

In the case of 'C' sugar, the export of such sugar - which cannot be sold on the domestic market and which has been consistently sold at prices well below costs of production for over a decade - was found to benefit from an export subsidy because there was a payment on the export financed by virtue of governmental intervention. All three elements must be present: a payment (in the form of sales below total average costs of production); a payment on the export; and a payment on the export financed by virtue of governmental intervention (e.g. domestic price support).

16. What does Australia think of the EC sugar reform proposals?

Australia commends the commitment of the EU to reform of its sugar regime (see Mr Vaile's 25 November 2005 press release).

As a consequence of the WTO dispute outcome, reform is inevitable and needs to be swift and deep. If the reforms do not achieve significant production cuts, the EC would be faced with recurring surpluses of up to 4 million tonnes a year. The WTO dispute outcome means that surpluses of such magnitude cannot any longer be disposed of on the export market as an adjunct of price support.

The current reform proposals are a step in the right direction. However, they do not envisage market access improvements. Nor, seemingly, would they serve to improve internal competition between Member States. As such, EC sugar processors would continue to be shielded from price competition and conceivably, could continue to command prices at levels well above official support prices.

17. Why was it necessary to take this case, given that the EC has embarked on this internal reform process?

Attempts have been made to reform the EC sugar regime as long ago as 1972. All of them have failed.

This dispute has ensured that there will be reform. The dispute has given impetus to reform.

18. What is the likely effect of this dispute on the Doha negotiations?

The outcome of this dispute confirms that high cost producers such as the EC cannot circumvent their existing WTO export subsidy commitments by the unlimited disposal of sugar surpluses on world markets.

Importantly also, the outcome of this dispute confirms that a WTO Member cannot circumvent its negotiated export subsidy commitments by a unilateral qualification to a WTO Schedule - in this case a footnote - purporting to exempt a quantity of subsidised exports, notionally equivalent to imports, from reduction commitment obligations.

The EC's in-principle commitment to the elimination of agricultural export subsidies through the Doha Round will need to be undertaken from a much smaller base in the case of sugar.