Select Committee on Environment, Food and Rural Affairs Written Evidence

Memorandum submitted by the Australian sugar industry (Australian Canegrowers Council Limited, Australian Sugar Milling Council and Queensland Sugar Limited) (O45)



  1.  Sugar is one of the world's most distorted trading markets. The EU sugar regime causes greater distortions in international trade than the sugar policies of any other country. The EU sugar regime is not an instrument of development policy. Its objectives are internally focussed, yet they impose large domestic and international costs. The level of assistance provided to the EU sugar industry is significantly higher than assistance to other crops. The high cost of EU sugar reduces the international competitiveness of the UK food and beverages industries. These industries account for over 70% of EU sugar consumption.

  2.  The EU sugar regime is not self financing and EU sugar prices are set at a level which enables cross subsidisation of C sugar exports. Quotas are set at levels that are too high and act as a disincentive to structural adjustment. The basic instruments of the EU sugar regime can be changed to deliver better outcomes. A mix of policy solutions including significant reductions in support prices, significant cuts in production quotas, the elimination of export subsidies and the provision of decoupled income support paid on a regional basis is necessary.


  3.  Production and export subsidies are freely acknowledged—including by the EU Commissioner for Agriculture—as distorting the world trade system. Production and export subsidies are no less trade distorting for agricultural products than they are for manufactured goods. Market access restrictions and unfair competition on world markets are a direct consequence of those subsidies.

  4.  At the multilateral level, steps were taken nearly 50 years ago to eliminate export subsidies on manufactured goods and to impose stricter disciplines on the more trade distorting forms of production subsidies in the manufacturing sector. However, until the conclusion of the Uruguay Round, disciplines on agricultural subsidies were virtually non-existent. Subsidies on agricultural products are now subject to modest disciplines, in particular in regard to export subsidies, where budgetary outlay and quantity commitments apply to subsidised exports. Sugar is not exempted from those disciplines, but the level of market distorts applying to sugar is well behind that for other crops. More, rather than less, effort is required to reduce market distortions in the sugar sector.

  5.  Many countries provide high levels of support to their domestic sugar industries, with consequential protective barriers against imports. However, the EU and US stand alone in providing country specific market access regimes. The EU is unique in providing export subsidies for its sugar, including export subsidies for the so called equivalent of its imports under preferential arrangements. It is also unique in that it its sugar regime effectively prohibits access to sugar from low cost exporters except at the margin[27].

  6.  Australia has limited access to the US market but has no access to the EU market, except under limited inward processing arrangements. The adverse impact of the EU sugar regime on the Australian sugar industry has been compounded by successive enlargements of the EU, which, on every occasion, have served to close off third country access to the markets of the new EU members.


  7.  The EU is not alone in protecting its sugar industry. In common with the US and some other developed economies, the EU maintains high internal guaranteed prices and high levels of border protection against sugar imports.

  8.  The applied EU sugar tariff is

700 a tonne (or 419% for white sugar), effectively prohibiting imports outside of preferential quota schemes.

  9.  Unlike any others, the EU also extensively subsidises its sugar exports. The EU is the world's second largest sugar exporter, with exports averaging around 5 million tonnes a year. The EU heavily subsidises sugar exports to developing countries. In calling for others to eliminate export subsidies and other forms of export competition that are damaging developing countries in Africa in the cotton sector, the EU's international credibility will be at stake if it fails to be responsive to the trade distortions caused by its own sugar regime.

  10.  A special safeguard has been applied against sugar imports for nearly a decade, at variance with the objective of normal safeguard arrangements as temporary protection measures to facilitate adjustment. The protection extends to imports of processed products containing sugar, as a variable import levy is applied to the sugar content of imported products.

  11.  Maintaining such high levels of protection is at odds with calls by the EU and others to developing countries to open up their markets. The continued use of a special safeguard on sugar and protection at the processed product level is also against the spirit of the EU's WTO obligations requiring WTO Members to convert quantitative import restrictions and variable import levies into ordinary customs duties.

  12.  While the EU points to its position as the world's second largest importer of sugar, imports have been virtually static for around 30 years. During the Uruguay Round, the EU refused to provide WTO-bound market access guarantees to ACP members at then prevailing import levels. In fact, imports from ACP sugar protocol holders have declined[28]. The EU exports three times as much as it imports and spends about twice as much on export subsidies alone than it delivers to ACP sugar exporters under the guaranteed price arrangements of the ACP/EU Sugar Protocol. Sugar imports from least developed countries are subject to restrictive quota limits. Full liberalisation under the Everything but Arms arrangement has been deferred until 2009, with some seeking to trade off unlimited access for quota access at guaranteed prices[29].

  13.  Successive EU enlargements have led to an erosion of market access opportunities for third country sugar producers such as Australia. For example, as a consequence of the application of the EU sugar regime to the UK market some 30 years ago, imports were reduced. Another example is the current EU enlargement, EU beet sugar will displace third country cane sugar in the Slovenian market (Slovenia imported around 18,000 tonnes of cane sugar). Slovenia was a frequent importer of Australian raw sugar from 1996 to 2000, until its preparations for accession to the EU commenced in earnest. Should Romania join the EU, a market of 400,000 tonnes of cane sugar could well be lost to third countries.

  14.  It is important to note, imports from ACP quota holder under the ACP/EU Sugar Protocol are not responsible for EU sugar surpluses. The total quantity of quotas under the Sugar Protocol is less than 1.3 million tonnes, compared to EU domestic production of 15-18 million tonnes and exports of 5 million tonnes. Imports from the ACP—at levels unchanged since inception of the Protocols—have formed part of EU domestic consumption for more than thirty years and traditionally account for around 50% of UK consumption. As imports under the Sugar Protocol receive guaranteed prices comparable to those accorded to EU domestic sugar producers, such imports do not undercut domestic price support. Yet the EU continues the practice of subsidising the export of the so-called equivalent of imports from ACP countries, at a cost of around

800-900 million to the EU budget[30], in addition to close to

500 million on export subsidies that is partly recoverable from producer levies. The expenditure on export subsidies on the so-called equivalent is a direct charge to the EU budget and is not subject to producer levies, despite the fact that the sugar in question is clearly EU-domestic sugar.


  15.  The EU sugar regime is not an instrument of development policy[31]. Its objective is to deliver improved incomes to its own producers. Other internally focussed objectives relate to the stabilisation of markets, guaranteeing regular supplies to consumers and promoting increased technical and economic efficiency. That the regime's objectives are internally inconsistent and impose a large domestic and external costs has, to-date, not weighed heavily in policy decisions. The regime is in fact extremely economically inefficient. Although it may deliver supplies to consumers it does so only at very high prices.

  16.  Some are arguing that the access arrangements for certain ACP countries provide justification for retaining the basic instruments of the EU sugar regime. EU domestic support for sugar is nearly

6 billion, with an additional

1.6 billion spent on export subsidies. The EU spends more per tonne on export subsidies alone than the estimated per tonne revenue for ACP sugar quota holders under the guaranteed price arrangements.

  17.  Current EU expenditure on export refunds in the sugar sector dwarfs that for all other agricultural products. In 2001-02,

1.6 billion was spent on direct export subsidies in the sugar sector, compared to around

950 million on milk products (the next most heavily subsidised EU export sector). For third country competitors operating in global markets, whether the subsidies in question are partly funded by producer levies or from the EU budget is not relevant. The EU is spending over

500 per tonne on direct export subsidies to secure a return of

145 per tonne from the world market.

  18.  The guaranteed prices delivered to certain ACP sugar exporters should not be used as an excuse to defer EU sugar reform. There are alternatives to the current assistance which could deliver more equitable and better targeted development assistance. Such assistance does not need to be contingent on maintaining a link between ACP guaranteed prices and EU domestic sugar prices. If the EU were to cease the practice of subsidising exports of the so-called equivalent of imports from the ACP, between

800-900 million would be available for development assistance without the need for any additional budgetary expenditure.


  19.  The EU sugar regime has remained fundamentally unchanged for over thirty years. As acknowledged by the European Commission, the introduction of subsidy disciplines as an outcome of the Uruguay Round scarcely affected the EU sugar regime[32]

  20.  Sugar production in the EU is not a cottage industry. Sugar beet is a rotational crop. It is not the sole source of income for sugar beet growers. Support for sugar beet growers is far in excess of the support for other crops. According to the EU Commission, sugar beet growers' profits are seven times greater than that for cereal, oilseed and protein crops[33]

  21.  The EU sugar regime also provides significant subsidies to sugar manufacturers[34] many of them multinationals, whose rates of return are far beyond those experienced for most industries. One EU sugar manufacturer—Sudzucker—is the world's largest sugar producer. Sudzucker produces more sugar than the total amount that Australia exports (Australia is the world's fourth largest sugar exporter). It is estimated that sugar manufacturing in the EU is in the hands of 30 firms.


  22.  The level of EU subsidies to sugar manufacturers—together with import controls and controls on supply to the domestic market—is probably without parallel in other industry sectors. Yet the EU sugar regime penalises the EU's own food and beverages processing industry, which accounts for over 70% of EU sugar consumption.

  23.  EU processed food manufacturers are paying up to four times the world price for EU sugar. The architecture and structure of the sugar regime delivers market prices at least 10-20% above the intervention price. EU competition policy does not have full application to the agriculture sector. The EU sugar regime is anti-competitive It precludes price competition between domestic and imported sugar and between Member states under the national quota system. It has been described by the EU Commission as a system of "tacit collusion". It is effectively financed by a consumer tax, whose true costs have never been documented, unlike taxes forming part of budgetary revenue.

  24.  The EU processing industry is protected against imports by sugar levies applied to imported products containing sugar, but, except for the processed fruit and vegetable sector, its access to export subsidies for incorporated sugar is extremely limited[35] The international competitiveness of the EU processed foods and beverages sector is further compounded by restrictive inward processing arrangements and the denial of access to surplus to quota sugar (which must be exported)[36]

  25.  Further, unlike the direct payments provided in the cereals and oilseeds sectors the EU provides price supports to sugar producers. The sugar production quotas have effectively become minimum production targets. Because of the high value accorded to quotas and high domestic support prices available to quota production, substantial quantities are produced in excess of quota and exported on world markets at below costs of production over sustained periods. The surplus to quota sugar—which cannot be sold on the domestic market—is clearly cross subsidised through quota support. Quotas are set at levels significantly in excess of consumption. For the EU-25, the quotas will be 17.4 million tonnes, for a projected production of 20 million tonnes and consumption of 16 million tonnes. Taking into account imports under existing WTO-market access and other treaty concessions, the EU exportable surplus is expected to remain in the order of 6 million tonnes. If there are no changes to the EU sugar regime, the surplus will be exported, with benefit of direct subsidies or cross subsidies, at levels well in excess of the EU's WTO export subsidy commitments. It is therefore apparent that the regime in its present form allows no scope for the EU to accord improved market access for sugar as an outcome of the Doha Round. Nor does it permit the EU to observe its existing WTO export subsidy commitments.


  26.  The EU sugar regime is not self financing. In addition to EU budgetary expenditure on direct export subsidies (less than half of which is recovered by producer levies), EU consumers are taxed by the high institutional support prices and the effective absence of competition between EU sugar producers. In addition, sugar producers such as Australia bear a high cost in competing against the subsidised disposal of surpluses on world markets. It is apparent that subsidised surplus disposals represent a cheaper option for the EU than that of intervention storage.

  27.  In addition to directly subsidised exports of quota sugar, the EU exports up to 3 million tonnes of "C" sugar each year. There are no independent producers of quota sugar and "C" sugar. "C" sugar production and exports are stimulated by the quota system and high prices for quota sugar. They are financed from the profits of quota production. The level of "C" sugar exports suggests that EU institutional prices are set at a level far beyond what is necessary to deliver a fair income to EU growers.


  28.  Current quota levels guarantee that quota production alone will be considerably in excess of EU consumption needs and that EU domestic sugar production will always go well beyond EU self-sufficiency objectives. It is clear that imports under the EU's international commitments are not responsible for EU domestic production surpluses.

  29.  The system of national quota allocation, together with the high institutional support prices, constitutes an institutional disincentive to structural adjustment, which, according to the EU Agriculture Commissioner, is supposed to be an element of EU agricultural policy. Instead structural adjustment is forced on third country producers such as Australia, by the subsidised disposal of surpluses on world markets as an alternative to the more costly EU budgetary option of intervention purchasing and storage. But the much more attractive and cheaper option is to cut the intervention price. The EU's own consultant NEI, found that lowering the support price would be the most effective way to overcome the regime's problems.


  30.  Australian industry incomes depend on world prices (around 80% of sugar is exported). Australia is among the world's lowest cost sugar producers, but cannot compete against EU subsidised exports. Australia and all other major sugar exporters are locked out of the EU market[37]. We are forced to compete on a shrinking world market, in competition with EU exports which receive subsidies more than four times greater than the world price. The EU is spending twice as much on export subsidies as the estimated value of Australian sugar exports.

  31.  It is freely acknowledged within the EU that subsidies have a trade distorting effect. Protection against imports is direct consequence of production-based domestic support provided by the EU, the USA and several other developed economies. But only in the EU is the subsidised disposal of surplus production on world markets part of sugar supply management.


  32.  There is an urgent need for the EU to reform its sugar regime. The higher domestic prices arising from the EU sugar regime have encouraged higher production and lower consumption within the European Union. They have reduced the international competitiveness of EU food and beverage industries. The global effect of this has been lower and more variable world sugar prices and trade volumes. The policies have changed the pattern and often direction of world trade flows. They have not encouraged the development of vibrant internationally competitive sugar industries in ACP countries and they have impeded the development of such industries in other developing countries.

  33.  In the EU the effects are perverse. The high prices paid for EU sugar production in combination with the high level of export subsidies encourage the shift of resources to an industry where the EU's comparative and competitive advantage is limited. This reduces the international competitiveness of other EU businesses, particularly those in the food and beverage manufacturing sector. As a partial offset for this loss of competitiveness, the EU pays subsidies in the form of export refunds to food and beverage manufacturers on the sugar contained in their exported products. The consequence, EU export earnings are lower and EU national income is lower than would otherwise have been the case.

  34.  In the context of reform, no one policy measure is likely to be sufficient to reduce the distortionary effects of the EU sugar regime. A mix of measures may be necessary.

  35.  It is suggested that a mix of solutions including significant reductions in support prices, significant cuts in production quotas, the elimination of export subsidies and the provision of decoupled income support paid on a regional basis is necessary.

  36.  Price reductions would increase the competitiveness of sugar using industries in the EU and contribute to the EU's WTO commitments to reduce the volume and value of subsidised sugar exports.

  37.  Price reductions accompanied by cuts in production quotas would assist in bringing support offered to sugar producers in line with that offered to producers of other agricultural products.

  38.  The removal of export subsidies would reduce the impact of the EU sugar regime on the world sugar market, encouraging the growth and development of the world sugar market.

  39.  Direct income support which is unrelated to the quantity of sugar actually produced could be provided to producers in specific regions on a needs basis linked to their total agricultural activity rather than single commodity production. This would achieve the objective of ensuring farmer and regional incomes while avoiding the payment of unintended benefits to efficient producing regions and large companies.

  40.  Taken together these policy suggestions represent a feasible package for moving away from the current price support arrangements to a less market distorting system while maintaining returns to those farmers with the greatest need. They would also reduce the price of sugar to consumers and increases the international competitiveness of the EU's sugar using industries. Developing countries would receive an income boost through higher world prices and a more targeted EU aid programme.

  41.  An even handed reform of the sugar regime in concert with other agricultural programs will deliver outcomes that are consistent with Common Agricultural Policy objectives.

31 March 2004

1 billion in export subsidies.

27   Australia is not allocated any part of the WTO "MFN" quota of 85,000 tonnes. The quantity is equivalent to the amount allocated to Australia under the USA WTO tariff rate quota. Back

28   Imports of raw sugar for refining under the Special Preferential System have declined. The EU's WTO market access obligations are limited to 1.3 million tonnes equivalent to imports under the ACP/EU and India/EU sugar protocols and 85,000 tonnes of raw sugar for refining under a general quota allocated to some Latin American countries. Back

29   Except for some speciality sugars, Australia grants duty free access to sugar from all sources (speciality sugars are subject to a duty of 5%). As from July 2003, Australia granted duty free access to all least developed countries without any quota restrictions or product exclusions. Back

30   In part, because the EU reserved to itself the right to exclude around half of its directly subsidised sugar exports from its WTO export subsidy reduction commitments. The EU was not accorded a WTO waiver for this unilateral exemption from WTO obligations. Back

31   Although it undoubtedly confers benefits to ACP sugar protocol holders, those benefits are unevenly distributed between developing country sugar producers and it is generally acknowledged that there are better development policy instruments. Back

32   EU Commission Staff Working Paper: Reforming the European Union's sugar policy-summary of impact assessment, page 9. Back

33   Sugar: International Analysis- Production Structures within the EU, page 61. Back

34   The current EU sugar regime guarantees a minimum 42% of the intervention price to sugar processors. Because of high levels of protection against imports and also because of the system of national quota allocation, EU sugar manufacturers receive market prices some 10-20% in excess of the intervention price. In addition, sugar manufacturers receive over Back

35   Processed fruits and vegetable are eligible for export subsidies under the standard arrangement applicable to sugar, but export refunds for sugar contained in more highly processed products are subject to a monetary limit which must be shared with other processed products incorporating basic agricultural products (such as milk). Back

36   In a letter to the Financial Times of 12 June 2003, the Director-General of the UK biscuit, Cake, Chocolate and Confectionery Alliance advised that the UK was now importing more biscuits and confectionery than it exported, due to high EU sugar prices. Back

37   Except for a residual quota of 85,000 tonnes of raw cane sugar shared between Latin American suppliers. In contrast, Australia's access to the US market is 85,000 tonnes and to the Japanese market access is not bound by quota restriction. Back

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