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WTO disputes

Statement to Sub-Committee D (Environment and Agriculture) of the House of Lords Select Committee on the European Unionby HE The Hon. Richard Alston, Australia’s High Commissioner to the UK, 9 November 2005

The WTO and EU Sugar Reform

Chair and members of the Committee

1. Thank you for the opportunity to present an Australian perspective on EU sugar reform. I will begin with some comparisons of the drivers of Australian and EU sugar reforms. I will then address the multilateral context, including the WTO dispute rulings and the development dimension of sugar trade (which is no less important than cotton). I note that the EU has been active in the WTO in supporting efforts for the reductions in the harmful impact of cotton subsidies granted by some developed countries. In my view, there is no reason to have a distinction between liberalisation or reform of cotton and sugar.

The Australian sugar industry is committed to efficiency

2. Australian sugar producers are not afforded any tariff or non-tariff protection against imports. Australia exports around 80% of its sugar production, mostly at the world price. Australia exports around 4 million tonnes of sugar a year, roughly comparable to the annual output of Sudzucker, the world's largest sugar producer.

3. There is no cross-subsidisation of exports from domestic market prices. The domestic (ex-mill) price is set at export parity. Australia is the second lowest cost sugar producer in the world. The only support available to the industry is tied to reform[1], directed towards making the industry even more competitive. Restructuring is ongoing, including exit packages for cane growers.

4. The world price and competition with other low cost producers - such as Brazil - compels the industry to ongoing efficiencies. Australia's national competition policy is also a driver of reform.[2]

The EU sugar industry must reform, for internal and external reasons

EU sugar reform is a domestic imperative

5. It is not for nothing that the EU sugar sector is known as the "white gold" of European agriculture. Also, as described by EU institutions, it operates as a system of "tacit collusion" between sugar processors within and between Member States, as well as in pricing on third markets.

6. There is a domestic imperative to reform the EU sugar regime, which has escaped all meaningful reforms since its inception in 1968. The EU sugar regime is out of step with other EU agriculture regimes.[3]

7. Returns to beet growers are far higher than for any other EU agricultural sector. Moreover, significant price support is provided to processors.[4]

8. European sugar processors are giants in world sugar trade, many of them have monopoly status and are largely exempt from the normal EU or Member State competition rules. There is no price competition between EU sugar producers, not least in the UK market (as documented by the UK competition authorities)

9. Under the EU sugar regime, sugar processors receive a larger slice of the price support cake than do growers.[5] Similar arrangements prevail between Tate and Lyle and the guaranteed prices for imports from preferential ACP suppliers under the Sugar Protocol to the Cotonou Agreement.

10. While rewarding sugar processors, the sugar regime holds to ransom downstream manufacturers of food and beverages – who account for around 70% of EU sugar consumption - by forcing them to buy sugar at three to four times the world price, which effectively taxes their exports.[6]

In the absence of production cuts, implementation of the WTO dispute rulings would lead to unmanageable domestic surpluses

11. The EU exports around 20% of sugar production to third countries, at prices some 30% below the cost of production. The EU is the world's second largest sugar exporter, despite production costs far in excess of most cane sugar producers. More EU sugar is exported to third countries than is traded between EU Member States. The EU Commission has described export disposal of surpluses as an integral part of domestic price support.

12. In accordance with its WTO obligations, the EU must implement the WTO dispute rulings by no later than 22 May 2006. As a consequence of the WTO dispute outcomes, the EU has no alternative but to reduce its sugar production and to do so swiftly. Otherwise it will face recurring annual surpluses of over 4 million tonnes which cannot any longer be disposed of on the world market. The EU needs to reduce its sugar exports from an average of 5 million tonnes a year and its expenditure on direct export subsidies from an estimated €2 billion a year in 2005.

13. The reforms proposed by the EU Commission involve a high risk strategy. The Commission reform proposal includes a two-step cut totalling 39% in the price for white sugar, compensation to farmers for 60 percent of the price cut through a decoupled payment and a voluntary restructuring scheme. They do not envisage mandatory cuts in production quotas[7], rather mechanisms to encourage cessation of production by some producers. On the basis of Australia's own experience in structural adjustment, the design of exit packages is difficult and likely to require subsequent fine-tuning if producers do not find the packages sufficiently attractive to change lifestyles, no matter how carefully the incentives may have been calculated.

14. The WTO treaty binds the EU to limit its subsidised sugar exports to 1.273 million tonnes a year and its annual budgetary outlays to €499.1 million tonnes a year.[8]

15. Moreover, Article 300(7) of the Treaty Establishing the European Community binds the institutions of the EU and their Member States to observe the EU's international treaty commitments.[9]

The development dimension

16. Oxfam and others have documented the damage caused to developing countries. In the recent WTO dispute, Australia was a co-complainant with two developing countries (Brazil and Thailand). The WTO challenge was supported by the sugar industries of a number of developing countries, including some smaller, impoverished nations. The submissions of Colombia and Paraguay to the WTO Panel highlighted the damage caused to their economies.

17. Australia is mindful of the interests of ACP sugar quota holders and is particularly mindful of the interests of its Pacific partner Fiji, where the relative economic impact of reductions in price guarantees to ACP quota holders could be significant. Australia welcomes EU proposals to provide adjustment assistance to affected ACP members, in particular Fiji. [10]

18. ACP sugar exporters are not responsible for EU sugar surpluses.[11] The EU does not need to export over 5 million tonnes a year in order to maintain access for ACP sugar imports. Nor does it need to spend an estimated €2 billion a year on export refunds on its own sugar to deliver price guarantees of an estimated total value of €450 million a year to ACP sugar quota holders. [12]

19. Australia is also mindful of the interests of the many developing countries which do not enjoy preferential access to the EU sugar market. Some of them have GDP per capita close to that of least developed countries and significantly lower than some of the ACP quota holders.

Conclusion

20. The EU can no longer externalise its surplus problems, nor use disposal on world markets as an integral part of price support.

21. Failure to achieve meaningful reforms will come at a cost to the European taxpayer and to the EU's processed food and beverages sector, as well as to third country sugar producers.

22. Additionally, failure to commit to reform in a timely manner and to comply with the WTO commitments within the prescribed period - by 22 May 2006 - would not be helpful to the EU's own efforts to secure rapid implementation of the many WTO rulings in its favour, nor to securing the EU's wider Doha Round objectives.

23. There could also be adverse consequences for other EU goods sectors, should the WTO complainants choose to exercise their WTO rights of retaliation against any imports from the EU, in the event that the EU does not meet its commitments within the WTO implementation period.



[1] Notified to the WTO Committee on Agriculture as "green box" (non trade distorting) support

[2] In Queensland, where most Australian sugar is produced, the Queensland Government has legislated to free up delivery arrangements between canegrowers and millers. The Queensland Government has also foreshadowed legislative adjustments to the statutory compulsory acquisition powers of Queensland Sugar, which currently is the sole exporter of raw sugar produced in Queensland.

[3] The real level of support is not limited to budgetary outlays, but comes at a cost to the European taxpayer and to the European food processing and beverages sector. The sugar regime is not self financing, or even largely so.

[4] In addition to an estimated €2 billion in export refunds (only partially financed by producer levies) sugar processors receive substantial off budget price support, at levels higher than the intervention price (see below)

[5]European sugar processors, many of them giant agribusinesses, receive substantial price support for processing. Processor payments to beet growers are limited to 42% of the intervention price. The intervention price is currently €632 per tonne. In recent years the internal market price for sugar has been as high as €725 per tonne.

[6] It is also inequitable between food processors, as most of them are not eligible for the significant export subsidies provided to manufacturers of processed fruit and vegetables (which receive the full export refund for sugar content).

[7] In fact, the Commission has proposed that an additional quota quantity of 1 million tonnes of quota sugar be made available and allocated to quota holders on the basis of previous C sugar production.

[8] Since formal adoption of the WTO rulings – on 19 May this year, the EU is required to take steps to reduce its subsidised exports. However, the EU's subsequent "declassification" decision in September provides for an increase of nearly 2 million tonnes in exports, to an estimate record level of 7 million tonnes in 2005/2006.

[9] The EU Commission and EU Council - as well as the EU Member States - would be in breach of their own internal treaty commitments if they fail to take action to limit sugar exports and export subsidy expenditure to the maximum permitted under the WTO treaty rules, by the expiry of the WTO implementation period (22 May 2005).

[10] Australia's total aid flows to Fiji in 2005/2006 are A$30.5 million, an increase of 22% on the previous period.

[11]Their guaranteed access has been frozen at 1.3 million tonnes a year for more than thirty years, before the EU switched from a net importer to a leading world sugar exporter.

[12]It is instructive that the WTO Panel found that there were no linkages between EU export subsidies and the access afforded to ACP sugar quota holders and that implementation of the rulings would not require any change to the existing arrangements with those ACP members.

Last Updated: 9 January 2013
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