SIXTEENTH SPECIAL REPORT
The Environment, Food and Rural Affairs Committee
reported to the House on the Reform of the Sugar Regime in
its Twelfth Report of Session 2003-04, published on 10 July 2004
as HC 550. The Government's Reply to the Report was received on
13 September 2004.
Government response
Introduction
The Government welcomes this constructive, well-informed
and wide-ranging contribution to the political debate on options
for sugar reform launched by the European Commission's Communication
of September 2003. Since the Committee's report was published,
the European Commission has brought forward a further Communication
(presented to the Agriculture Council on 19 July 2004) which explains
in detail their preferred approach. This is expected to be followed
by formal legislative proposals later this year. These further
documents will be submitted for Parliamentary scrutiny in the
normal way. But it is already clear that the Commission's thinking
is very much in the direction of the Committee's report, bringing
prices significantly closer to world levels and moving towards
a more liberalised market-based system.
At the July Council the Government expressed support
for this approach as an important step in the right direction.
But we made clear that we thought more should be done in a number
of respects, including measures to address the impacts of price
reductions on the EU's existing preferential suppliers and in
terms of a greater initial deregulation of the internal EU market,
in order to bring about a more rapid improvement in the balance
of supply and demand and help to eliminate the subsidised export
of surplus production. We also drew attention to the role which
a liberalised sugar regime could play in advancing the WTO Doha
process, the potential for which has been reinforced by progress
on a Framework Agreement in the weeks following the Council discussion.
The publication in September 2004 of the WTO Panel Report on complaints
against aspects of the EU sugar regime from Australia, Brazil
and Thailand is likely to be a further key driver for early change.
We will be seeking to build on all these elements
as discussions and negotiations develop from this autumn. We will
also be looking for the EU to engage with its preferential suppliers,
particularly in the African, Caribbean and Pacific (ACP) Group
of countries, in response to the concerns which they have expressed
in order to find a sustainable and rational way forward for all
interested parties.
In addition to this the Government will continue
to press for an end to the trade distorting effects of the CAP
on a whole, as most recently re-affirmed in the White Paper on
Trade and Investment - Making Globalisation a Force for Good.
Against this background, the Government has the following
responses to the Committee's recommendations.
Recommendation 1
Reform of the EU sugar regime is inevitable and
long overdue. The changes implemented must be sufficient to allow
the Community to honour its existing and future international
commitments. Reform of the sugar regime should be consistent with
that undergone by other parts of the Common Agricultural Policy.
(Paragraph 27)
The Government agrees. We have consistently made
clear that the existing regime is unsustainable in its current
form. The EU's commitments, especially to the ACP suppliers, are
an area of particular interest to us. We have always advocated
that sugar reform should be in line with the successful CAP reforms
agreed in June 2003.
Recommendation 2
We believe that, if reform is going to address
properly the challenges facing the sugar sector, then it must
take a significant step towards liberalisation. However, it would
not realistically be possible to move from such a highly managed
market to a fully liberalised position in a single step. (Paragraph
32)
The Government agrees that significant steps must
be taken towards liberalisation during this reform round. It remains
to be seen how far down that road it is possible to go at this
stage.
The Government agrees that lower prices, lower import
tariffs and the ending of quotas are all highly desirable objectives
for this reform round, whilst taking into account the need to
avoid massive disruption to ACP preferential suppliers.
Recommendation 3
Therefore, our preferred approach to reform is
broadly consistent with the Commission's second option. It envisages
the following changes to the existing arrangements:
- the phasing out of the quota
system;
- a reduction in the internal market price;
and
- a lowering of the import tariff rate. (Paragraph
33)
The Government agrees that lower prices, lower import
tariffs and the ending of quotas are all highly desirable objectives
for this reform round, whilst taking into account the need to
avoid massive disruption to ACP preferential suppliers.
Recommendation 4
To allow the European Union sugar industry time
to adapt to the proposed changes, we believe it is desirable for
the price reductions to be phased in over time. Production quotas
should only be lifted when a market balance has been achieved,
with levels of domestic production and preferential imports matching
demand within Europe. (Paragraph 36)
The Government accepts that a transitional period
is desirable for many sections of the industry, to allow them
time to adapt. We recognise that without sufficient price cuts,
the ending of quotas could create new surpluses within the European
market. However, we also see a possible role for loosening or
reallocating quotas to facilitate the transition to lower prices,
particularly for the relatively efficient producers. Early liberalisation
of quotas would also ensure that price cuts actually translate
into lower market prices for consumers.
Recommendation 5
Reductions in the import tariff rate will also
be made possible, as institutional prices for domestically produced
and preferentially imported sugar are lowered. This will afford
the European Union some leeway in WTO negotiations on the particularly
contentious subject of market access. (Paragraph 37)
The Government agrees. Market access is the most
difficult area of the WTO negotiations for the EU and sugar is
one of the most sensitive products. A reform of the sugar regime
which resulted in lower domestic prices would make it possible
to reduce import tariffs on sugar, which in turn would lock in
the benefits of lower prices and greater competition.
Recommendation 6
It is our strong recommendation that the United
Kingdom adopt the position described above in negotiating with
other Members of the European Union about reform of the sugar
regime. (Paragraph 38)
Noted. The Government's approach is broadly in line
with the above recommendations. At Agriculture Council on 19 July
2004, the European Commission tabled proposals for sugar reform,
including significant cuts in EU price support with a further
review of the regime in 2008. The Secretary of State gave a general
welcome to the proposals as a step in the right direction, while
urging a swifter end to quotas and emphasising the need to address
urgently the impacts on those developing countries which currently
enjoy preferential access to the EU market.
Recommendation 7
In recognising the potential losses to ACP countries
resulting from reform, we believe that transitional aid programmes
should be set up to assist their economies in diversifying away
from dependency upon a European Union commodity regime that has
lost its legitimacy. (Paragraph 39)
The Government agrees. We have always stressed the
need to take account of the concerns of the current ACP beneficiaries.
Transitional support will be required, in some cases to make their
sugar industry more efficient, in others to assist the diversification
out of sugar. We welcome the commitment in the Commission's latest
Communication to draw up an action plan to define appropriate
trade and development measures by the end of 2004 to assist the
affected countries. We believe that this plan should be formulated
in collaboration with the ACP and are keen to help facilitate
dialogue on this. To this end we are commissioning a study with
the Overseas Development Institute that will help those countries
affected determine their priorities for a transitional package.
This will hopefully be a useful contribution to discussions between
the ACP and the EC on the action plan.
Recommendation 8
We agree with the Government that ways have to
be found to ensure the cane refining sector is not put at an unfair
disadvantage during an interim period when preferential suppliers
are adapting to the reform. (Paragraph 40)
We note this and will continue to make the case for
fair terms of competition between all operators.
Recommendation 9
We recognised that some form of producer compensation
will be required to help farmers adjust to the new market conditions.
To minimise market distortion, these payments should be fully
decoupled from production activity, following the principles of
the CAP reform agreed in 2003. (Paragraph 45)
The question of compensation will clearly be a significant
issue as negotiations proceed. The Government agrees that any
compensation should be fully decoupled as part of the Single Payment
to farmers, which will start in other sectors from 2005.
Recommendation 10
Competition will be increased more by abolishing
quotas than through any other policy change. However, if the new
sugar regime does not contain provision for eliminating production
quotas, we recommend that the competition authorities conduct
an investigation into the UK processing industry. (Paragraph 52)
The Government fully shares the analysis that the
current quota system gives rise to major issues of competition
policy. The latest Commission proposals do not envisage the abolition
of quotas during the initial phase of reform from 2005-08. But
increasing competition will be a major UK negotiating objective
and if sufficient progress is not made we agree that the competition
authorities should consider the case for an investigation into
the market.
Recommendation 11
Taking a lead on sugar would mean that the European
Union would no longer have to be so defensive in trade talks,
allowing it to argue its case from a position of strength. (Paragraph
55)
The CAP reforms of 2003 and 2004 have enabled the
EU to adopt an ambitious stance in the WTO trade negotiations.
Along with cotton, sugar liberalisation remains highly significant
in these talks, so reform of this sector would further enhance
the EU's negotiating position and increase the chances of an overall
agreement.
Department for Environment, Food and Rural Affairs
September 2004
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