Examination of Witnesses (Questions 80-93)
26 APRIL 2004
MR KEVIN
WATKINS AND
MR MATT
GRIFFITH
Q80 Alan Simpson: Can you give us a thumb
nail sketch? I think you described the LDCs' position as being
a very conservative one that falls well short of their production
capacity. That is not a usual negotiating position. You do not
begin from: what do we want? Not very much. When do we want it?
Not too soon. Why are we starting from that position?
Mr Watkins: It is not a very typical
negotiating strategy but it is not a very typical negotiating
environment. The LDCs and the ACP countries know the power that
the beet processing industry has in Europe and I think they are
treading a very thin line. At one level, they see the industry
as the defenders of a regime which in principle they want to extend,
which is a quota based, guaranteed price regime. They see them
as strong allies in that area but, at the same time, the last
thing British Sugar, Beghin Say and Sudzucker want is more sugar
coming in from the LDCs and the ACPs. Our view is that the LDCs
have erred on the side of caution in the specific number they
have come up with, which I think is 1.5 million tonnes. If you
speak to LDC ministers privately about this, many of them acknowledge
that quite openly. Mozambique in particular almost certainly has
an export capacity significantly in excess of the sort of numbers
that are incorporated into that proposal.
Mr Griffith: It is important to
realise how weak a political position a lot of the LDCs are in,
especially in relation to these negotiations. They know that a
moral case does not get you very far in Brussels. I think they
have essentially weighed up their options to see what is the best
deal for them when they have a strong European sugar lobby which
says, "We accept your case but it has limits." It will
be interesting to see what the European sugar lobby comes up with
in terms of figures because around the time of the EBA they were
putting out a scare story saying that LDC capacity was 4.5 million
tonnes. I hope maybe they will aim for that in terms of the quotas
that LDCs are allowed, but I think it is very much a re«al
politique of the LDCs' position that makes them pitch for the
quotas they are going for.
Q81 Mr Wiggin: I think you described
your position as there being no win win. I wondered which problems
would still remain if we took up your option, if we could?
Mr Watkins: Clearly there are
going to be adjustment costs in Europe. There is no point in us
pretending otherwise. Ultimately, trade is about adjustment costs.
We heard earlier some arguments about why we should support the
European industry at the expense of Brazil and Thailand. The unfortunate
truth from the perspective of the British industry and the wide
European industry on this is that we are just not that efficient
at producing the stuff. If we believe in open markets and rules
based trading systems, we have to accept that fundamental reforms
are needed. That then raises the question of how do you compensate
losers and I think that is a domestic, political issue for Europe.
I personally find something slightly curious about providing lots
of taxpayer money to support some of the richest farmers in Britain
by way of compensation in the sugar beet sector, but if that is
the way Europe wants to go I guess that is a domestic, political
choice. Our primary concern is to stop the damage that we are
inflicting on other countries as a result of these policies.
Q82 Mr Wiggin: You freely admit that
there would be damage. I think Mauritius was one of the examples
and I just wondered if there are any other things that we should
consider as well, any other repercussions that we have to be careful
of?
Mr Watkins: I think there is a
series of repercussions. Clearly, there are countries within the
ACP group that stand to lose the profitability of their industries
altogether because of price reform in Europe. Their concerns have
to be addressed. In my view, those are principally concerns for
the Caribbean and I think Britain has special responsibilities
in those areas. There is a second layer of countries within the
ACP group that has problems, the ones I mentioned: Fiji, Guyana
and Mauritius, where I think industries are undergoing restructuring
but need support and social welfare protection to facilitate the
adjustment process. Then there are other countries like Mozambique,
Ethiopia, Zambia and Malawi that do have the capacity to export
more. With those countries, the prime responsibility is through
our aid programme to support industries in a way that can distribute
the benefits more widely, because the sugar industry does not
always have the greatest record in this area, and secondly to
enhance the supply capacity. There are issues around ports and
transport infrastructure that have to be addressed.
Q83 Mr Wiggin: Would you characterise
British Sugar's concern for the less developed world as altruistic
or opportunistic and do you think you should be addressing DfID
or international development rather than this Committee?
Mr Watkins: I think they are opportunists.
Three years ago, these were the guys who were trying to block
all LDC imports into Europe through the Everything But Arms initiative.
They invested very heavily in public relations to do that. There
is no question where British Sugar's interests lay in this. They
lay with British Sugar and its major shareholders. Yes, I think
DfID and the British Government more widely has a responsibility
to assert the wider public interest in Europe and also the interests
of developing countries in this debate. I think, to DfID's credit,
they are doing that rather effectively. This is an area in which
DfID and DTI have taken the concerns of developing countries on
board in a serious way.
Q84 Mr Jack: Why are you advocating a
number of countries who wish to develop their agricultural economies
to go down the route of producing a commodity where the west is
just beginning to wake up to the health implications of too much
sugar consumption and might well, in the timescale you are talking
about, be reducing its intake?
Mr Griffith: Primarily because
we are development NGOs and we lobby for development concerns.
We have taken on board the health concerns. A WHO report came
out I think which said that global sugar production had to be
cut by half. Our remit puts us as having to represent the interests
of developing countries.
Mr Jack: Given the natural climatic advantage,
particularly in the case of some of the countries that you have
put forward, there are other crops which they could grow, which
might be more in tune with the health agenda in the west. Are
you going to tell me that you can go down twin tracks, so you
can still argue for sugar quite happily as well as arguing for
better access for a range of other crops? I am interested in why
there is dependence on sugar.
The Committee suspended from 5.28pm to 5.54pm
for a division in the House.
Q85 Chairman: We left a question hanging
in the air from Mr Jack.
Mr Griffith: Of course we agree
that it is preferable that sugar consumption declines but we have
to ask the question about who should adjust to this decline in
demand. Should it be the EU or the LDCs. The other important question
to ask is what alternatives are there for LDCs and what crops
or products are they able to export competitively. Although we
agree it is important that diversification occurs, the list of
candidates for potential products you could export is not particularly
long and not particularly promising. You just have to look at
the example of Ethiopia where they are currently trying to move
out of coffee, which is suffering from terrible prices, into sugar.
LDCs find themselves in an unenviable position and within that
context sugar presents a valuable opportunity.
Q86 Mr Jack: Does that not raise the
question that the more liberal the sugar market becomes the more
commoditised it becomes and you are out of one frying pan into
another one?
Mr Watkins: It seems to me there
is a general problem in primary commodities. I think anybody who
looks at international trade trends in a detached way would have
to say that people who are overwhelmingly in primary, unprocessed
commodities need to start adding value locally and climbing the
value chain. There is no question but that that is the right strategy
and it is a strategy that a lot of us as NGOs support and the
British Government supports as well. The fact is that for a lot
of countries there are very limited choices. Ethiopia is a classic
example. The government, with the support of the international
community, by the way, and the European Union, has been developing
a rural development plan to try to diversify out of coffee. Sugar
is one of the routes it has gone down. I think you are right.
There is a frying pan/fire syndrome here but the fact is this
is a country with very limited options. If it is the case that
we as Europeans change our dietary patterns to reflect health
concerns and demand goes down, clearly all suppliers to the European
Union are going to have to adjust. There is no question about
that but we have to start from where we are in the market. Where
we are in the market is in a very unfair place, where very large
companies in Europe enjoy enormous advantages relative to much
smaller companies in sub-Saharan Africa and elsewhere.
Q87 Mr Jack: Let us move on to a central
part of your evidence to the Committee which is that the European
Union's subsidised sugar regime, particularly in terms of the
export rebates, has caused dumping on the world markets to such
an extent that you have made some calculations, for example, that
it has cost Brazil $494 million, Thailand $151 million and so
on. We have heard that there is a very small amount, relatively
speaking, of EU sugar that gets "put" on to the world
market. You can put whatever label on it you like. How can you
be sure that the quantity that the EU puts into the market place
has caused such a depression in terms of the world price of sugar?
Mr Watkins: The answer to that
is that a number of economic models have been developed to look
at this by the World Bank, by research institutes and others.
They come in detail to somewhat different conclusions, but the
broad consensus is that the package of EU policies—that
is to say, the export subsidisation part and the import restriction
part—has the effect of lowering world prices by somewhere
between 19 and 23 or 24%, depending on which model you believe
in. It has to be said—and we said this in the paper—that
this is an immediate, static, one-off effect and the long term,
dynamic effect will depend on how different suppliers respond
to shifts in relative prices, which is much more speculative.
The figure that we base those losses on is on the basis of models
developed by the World Bank and others and widely used in agricultural
economics.
Q88 Mr Jack: Did those models take into
account the figures that we heard from earlier evidence about
the tremendous growth, for example, in the output of the Brazilian
sugar industry?
Mr Watkins: I think we have to
be honest about this in the EU. This story that Brazil is a major,
subsidising exporter of sugar is absolute nonsense. The OECD annually
has a measure called the producer support equivalent. It is used
by all of the OECD countries to calculate the support that is
given to individual sectors relative to the value of output. The
support that is given to the European Union sugar industry is
equivalent to something like 50% of the value of output. This
is on the OECD's data. For countries like Brazil and Australia,
it is in the order of 5 to 6%. This is a special pleading argument
which is absolutely not borne out by any plausible analysis. If
you look at cost of production data which have been presented
in the WTO dispute involving Brazil and the WTO, developed by
Landlaw Mills and other companies here, they basically show that
Brazil, Thailand and a couple of the countries in southern Africa
are producing at somewhere around a quarter of the price of the
European Union. These are the facts. Europe is one of the world's
highest cost exporters and it is the second biggest exporter in
the world. That cannot be right.
Q89 Mr Jack: That is a very interesting
economic treatise but it does not answer the question that I asked.
The question that I asked related to the quantity of sugar that
was produced. I am not knowledgeable enough to know whether the
world market and/or the world consumption of sugar during the
period of growth of Brazilian supply have gone step in step or
whether in fact Brazil has increased in total the amount of sugar
that it is putting into the market place. Do you know the answer
to that?
Mr Watkins: Brazil has massively
expanded its supply into the international market.
Q90 Mr Jack: I am interested to understand
the economics of this market place. Does that represent a net
extra, an increase, in the world availability of sugar?
Mr Watkins: It does. The world
sugar market is in a state of structural over-supply.
Q91 Mr Jack: If Brazil has increased
so that there is more sugar available, do the various economic
models that you have chosen to do the calculations manage to either
reflect or take out the fact that the world price by definition
must have been influenced if there was a net increase in supply?
Mr Watkins: The models that we
have referred to in the paper are studies specifically of EU policies
in the sugar sector and in one case of OECD policies in the sugar
sector. Nobody disputes two facts. First of all, that Brazil has
been expanding its share of the world market and massively increasing
the quantity that it puts on to the international market. Secondly,
of course, this has been one of the factors driving down international
prices. To go back to the basic principles of trade here, Brazil
is a non-subsidising exporter that is able to export profitably
at international prices without subsidies.
Q92 Mr Jack: The point I am getting at
is that your analysis indicates that we do not really know what
the interplay of all the forces is in determining what the world
price might be. Your line of argument is talking about the European
subsidy regime making it possible to sell at whatever the world
price is in relation to the high internal price structure within
Europe, but what I am trying to understand is whether in the global
market place for sugar, if you take the last 10 or possibly 20
years, as Brazil has increased its output of sugar, has it increased
in total the amount on the world market? The impression I am gaining
is that the answer to that question is yes. The second impression
I am gaining is that we cannot quite work out what effect that
additional production has had on the world price but it must have
contributed to the downward trend.
Mr Watkins: Nobody on any side
of this debate disputes the facts as you present them. The issue
here is that you have one major player on the international market
that subsidises in a way that puts it in a different league than
everybody else. That major player is the European Union. The European
Union is the major subsidised distorter of international trade.
By analogy, you could say that an expansion in the increase of
exports of European computers on non-subsidised terms might drive
down the world price of computers. That might be undesirable but
you could not say it is an unfair trade practice. In the case
of sugar, we are talking about one major player in the international
market who is systematically distorting and depressing prices
at the expense of everybody else and that player is the European
Union.
Q93 Mr Jack: Let me ask whether, in your
judgment, there are other ways in which these distorting factors
could be dealt with. Do you think there is a call for a multilateral
discussion among sugar producers to try and get to an equitable
basis for doing business in the world sugar market? Is there a
way in which the sugar producers of the world could, by a multilateral
agreement basis, come to a better way, a more equitable way, of
trading in sugar other than the variety of subsidies? We could
have an argument all night long as to what is a subsidy and how
does it get through to the price of sugar. We might end up by
agreeing to disagree, but the fact is that sugar does seem to
get some help from various routes so is there another way of resolving
the problem?
Mr Watkins: This is an important
question. If you look across commodity sectors, whether it is
cocoa or coffee and other sectors, the major exporters, because
they have been very badly hit by a structural and long run depression
in their export prices, are revisiting some of the old ideas of
the 1970s about supply management agreements, buffer stock arrangements
and that sort of thing. The story seems to be that those agreements
tend not to get very far beyond principle because of rivalries
within the group of exporters. Cote Devoir in Indonesia find it
difficult to agree on an equitable share in the cocoa market.
Brazil, Honduras, Mexico and others find it difficult to agree
on an equitable share in the coffee market. I suspect in sugar,
where you have a much bigger, more diverse group of exporters,
that those problems would resurface writ large. It seems to me
that the most immediate thing that we can do to improve the terms
on which sugar exporters trade is to stop this subsidised dumping
of sugar by the major player in the market, which is the European
Union.
Chairman: That is a very strong point
on which to finish. You have given us a lot of information. If
on reflection there is anything else you want to tell us, write
to us within the next couple of weeks. Thank you both very much
indeed.
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