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COMMERCIAL ISSUES
The cost of sugar is a crucial factor in the
competitiveness of the chocolate, biscuit and confectionery industries;
it accounts for up to 40 percent of the cost of a product. Thus, it is
not surprising that the EU’s artificially high sugar prices seriously
threaten the internal and external competitiveness of ASI’s member
industries. Unless substantial reforms are enacted, the export of
processed products is at risk of becoming a loss-making business. The
ASI industries simply can not afford to continue to pay two to three
times what their non-EU competitors pay for sugar.
Food processors do benefit from some assistance in
the form of export refunds. However these subsidies do not fully cover
the difference between EU and world sugar prices, and even if they did,
they are subject to Uruguay Round reduction commitments in the near
future. Indeed, confectionery products are subject to cuts on export refunds for
Non-Annex II products.
From 2000/01 onwards, the maximum budgetary outlay for such refunds for processed foods is
restricted to 415 M Euros, yet the needs of the industry are estimated
at 550-600 M Euros annually.
Failure to reform the sugar regime will severely
curtail the ability of ASI businesses to compete in world
markets—which is particularly threatening to these businesses because
they are increasingly reliant on foreign markets to achieve their
revenue and profitability goals. In 1999, they exported high-value
products worth a total of 3.14 billion Euros to countries outside of the
EU. In value terms, this represents more than 10 percent of the ASI
sector’s production volume and 10 percent of the total value of EU
agri-food exports.
ASI products are generally branded products that
incur heavy investment costs to become established in a market and
require continuity of supply in order to stay in a market. Losses in
foreign market share are likely to be long-term losses.
ECONOMIC ISSUES
1. The
Food-Processing Industry’s Contribution to the EU Economy
ASI alone represents 1,900 companies, over
290,000 employees, and an annual turnover of 39 billion Euros. ASI and
all the other food and beverage industries affected by the sugar regime
together employ around 1.5 million people in the EU. These are far
greater numbers than employment in just sugar beet farming and
processing. Indeed, the Committee of Industrial Users of Sugar (CIUS)
estimates that only 25 jobs are created for every 10,000 tons of
exported sugar, while the equivalent quantity of sugar exported in
Non-Annex II products generates up to 500 jobs or 20 times the number of
jobs created by the basic product.
Considering jobs alone, exports of processed products are highly
preferable to equivalent exports of basic sugar.
Value-added processed foods are also important to
European agribusiness because they expand domestic agricultural
production by stimulating demand for raw materials and first stage
processing. And value-added processing increases contributions to the
state in the form of taxes. Currently, food-processing industries
account for 15 percent of total EU industrial production.
Given these considerations, it is clear that
supporting the food-processing industries is in the EU’s economic
interests. However, because the cost of sugar accounts for up to 40
percent of the cost of a product, and because European food-processors
pay up to three times more for sugar than their foreign competitors,
exports of processed products are at risk of becoming a loss-making
business.
In fact, it is realistic to expect that, because
of the European price of sugar, value-added food-processing companies
will begin considering the possibility of relocating to third countries
that can provide better sugar prices, more favorable production
conditions, or preferential agreements with the EU and/or other trade
partners. If a mass migration of companies were to occur, it would
displace thousands of workers and result in significant losses of tax
revenues at all levels of government. The food-processing industry is a
growth sector in many parts of the globe, and it is imperative that the
EU take part in this development.
2. The
Cost of the EU Sugar Regime
The European sugar industry has long claimed that
the current sugar program is self-financing and has no effect on the EU
budget. Though this is true in purely budgetary terms, the higher sugar
prices associated with the regime mean that European consumers pay an
annual “sugar bill” of seven billion Euros to protect, primarily,
the interests of sugar producers.
Reform of the sugar regime is also important
because of the environmental damage it causes. By guaranteeing high
returns to farmers, the regime stimulates production, which in turn
stimulates the demand for fertilizers and pesticides. Excessive use of
fertilizers and pesticides pollutes the environment, increases disease
and pest resistance, and increases human and animal morbidity and
mortality.
Finally, the sugar regime hampers EU credibility
in the WTO. No other trade barrier constrains the Commission’s
leverage to negotiate robust trade agreements more than the EU sugar
regime.
POLICY RECOMMENDATIONS
For
the previously discussed reasons, the European Commission and the
Agriculture Council must now recognize and move to rectify the
inequities and inefficiencies linked to the sugar regime. ASI asks the
Commission to reduce the sugar support price by a percentage similar to
past (and future) export subsidy reductions, which would cause subsidies
to ASI industries and the need for subsidies to decline in tandem.
In
addition, ASI proposes that if domestic food processors cannot find
adequate A and B sugar sold at the target price (because sugar
manufacturers create an artificial shortage), they should be allowed to
buy C sugar.
Benefits of the Recommendations
The reform,
if introduced as recommended above, will do the following:
1.
Gradually phase out the costs and inefficiencies of the
status-quo;
2.
Decrease the EU sugar processing industry’s incentives for
anti-competitive behavior; and
3.
Help
Europe comply with the export subsidy reduction commitments of the
Uruguay Round. (The Commission has already published a regulation
stating that a cut in A and B quotas will be necessary next year in
order to comply with GATT limits on export subsidies, although cutting
the price of sugar would negate the need to cut quotas.)
POLITICAL ISSUES
1.
Past attempts to reform the EU sugar regime
Reform of the CAP for commodities other than sugar
(e.g. cereals or dairy) were successful largely because subsidies for
these products placed a large burden on the EU budget. Since the sugar
regime is self-financing, there is no similar budgetary pressure for
sugar. Neither has there been pressure from environmental groups.
Although price supports encourage intensive agricultural methods—methods
that generally attract the attention of such groups—sugar beets are
usually grown in mixed farming enterprises and therefore are not a major
concern for environmentalists.
Nonetheless,
the need for reform of the sugar regime is becoming more urgent in light
of recent reports that, in anticipation of joining the EU sugar regime,
the five “first wave” Central and Eastern European applicants for EU
membership are reversing their initial actions toward liberalizing their
sugar sectors.
The Millennium Round will put the EU under additional pressure to reform
the sugar regime.
2. The sugar lobby
In most developed countries, agriculture is
unique among other industries; its political lobby organizations are
extremely powerful and effective. This is especially true in the EU (not
to mention the US), where the agriculture lobby has diverted
decision-makers from any radical change of the CAP.
Nonetheless, sugar producers’ arguments in
favor of maintaining the regime in its current form are unconvincing:
Argument #1: The world price of sugar is not a
true price, but instead, reflects a “dumped” price. In fact,
since most countries have already reformed their agricultural policies
and lowered trade barriers, the world price of sugar has become more
representative of sugar’s actual value. Australia, Thailand and Brazil
have expanded their sugar production by 59, 26, and 66 percent
respectively over the past five years because their producers were
making profits at current world prices. The world price is actually a
solid reflection of the value at which efficient producers in these and
other countries can profitably produce and export sugar.
Argument #2: Reforming the sugar regime will
force most, if not all, producers out of business and cause a loss of
jobs and investment for the Community. In reality, the regime
enables a handful of large producers to reap windfall benefits, and it
diminishes the EU’s ability to obtain market-opening commitments in
trade negotiations concerning other products. Moreover, employment in
the EU sugar refining sector (52,000 full-time jobs) pales in comparison
with the more than 1.5 million workers affected by the sugar regime via
their employment in the EU food and drink industry.
Argument #3: Beet growers need the sugar
regime’s price supports to remain profitable. In fact, it is
generally accepted that sugar beet is one of the most profitable crops
to grow in the EU, second only to potatoes. If sugar beet subsidies
were reduced, many growers would simply switch to other crops that they
can grow more efficiently. This is especially true since sugar beets are
commonly grown in mixed farming enterprises.
Argument #4: That EU sugar regime costs
European taxpayers nothing because sugar producers finance it through
their exports to third countries. In fact, European consumers bear
the burden of the regime by paying an extra seven billion Euros annually
for their sugar.
Argument #5: The EU needs to protect its sugar
industry because most other countries have protectionist sugar programs
that put EU producers at a disadvantage in world markets. As
previously mentioned, several countries have already reformed their
sugar policies and lowered trade barriers. Of the major trading nations,
only the United States and Japan have sugar prices comparable to EU
prices. While it is true that most countries do have policies that
intervene in their sugar markets, these policies often are aimed at
protecting or subsidizing consumers rather than just supporting
producers. The EU sugar regime is
focused only on ensuring high returns for sugar producers at the
expenses of consumers. The EU sugar lobby is particularly critical of
the U.S. sugar program, which does heavily distort trade and is the only
U.S. agriculture protection program that was not reformed by the FAIR
Act of 1996 (Farm Bill). Yet several organizations in the United States
representing business, consumers, environmentalists, think-tanks, and
other interests are strongly lobbying the U.S. government with the goal
of reforming the U.S. sugar program. The Coalition for Sugar Reform was
organized in 1997 and has since successfully pushed for the introduction
of two bipartisan bills in the U.S. Congress. If approved, these
bipartisan bills would phase out the U.S. sugar program over a three to
four year period. If the EU’s true goal is to force the United States
to reform its sugar subsidy program, the EU’s best strategy is to
reform its own sugar regime first.
3.
Stakeholders
3.1
Council of Agriculture Ministers/Member States’ Agriculture Ministers
This Council is responsible for formulating
agricultural policy for the EU. Because each minister’s priority is to
respond to the political pressure in his or her own member state rather
than to fix the problems of the system as a whole, this group is a
primary target for agriculture lobbies.
In order to persuade the Council to take up the reform cause, widespread
support will be needed in the member states that carry the most votes on
the Council.
3.2 Special
Committee on Agriculture
This body plays a key role in advising the
Council of Agriculture Ministers. It is made up of officials from member
states’ agricultural ministries who, like the ministers themselves,
have proven to be fairly impervious to the influence of interests other
than agriculture (such as consumer interests).
3.3
The African, Caribbean and Pacific Countries (ACP)
The ACP
countries that are party to the so-called Sugar Protocol benefit from
the EU’s sugar policy and will therefore oppose reform of the EU sugar
regime. The Protocol allows its 18 signatories to export to the EU
annually specified quantities of cane sugar at prices closely related to
the high prices received by EU sugar beet farmers.
3.4
European Fertilizer Manufacturers
By reducing
the price of sugar, sugar beet production will drop, which will, in
turn, cause a decrease in the demand for fertilizers and pesticides. The
European fertilizer and chemicals industries therefore will be
negatively impacted by reform of the sugar regime and will oppose any
reform of the present regime.
3.5 The
Commission
The
Commission has also shown itself to be responsive to the sugar lobby.
Common sense dictates that those who have responsibility for the
Community as a whole are likely to give higher priority to its general
interest than to those who represent only the interests of a single
member state. It is fair to say that reform of the sugar regime is in
the long-term interest of the Community as a whole.
3.6 The
European Parliament
The
European Parliament operates on a partisan rather than national basis.
Members of the European Parliament (MEPs) are nominated by political
parties that have organized within several countries, if not on a
Europe-wide basis. Once selected, MEPs sit by party, not by nation. With
the growth of this party system (nine party groups are currently
represented in the Parliament),
it has become more and more likely that MEPs will represent the
interests of all European citizens. In 1995, for example, the Parliament
called for “ real reform of the sugar regime, which would reduce
over-production, sort out quotas and stop damaging the interests of
consumers.”
3.7 Member
States’ Trade Ministers
Because
these ministers generally support trade liberalization, they are also
likely to support reform of the EU sugar regime. The regime is the most
trade-distorting program of the CAP; it complicates the European Union’s
trade relations with countries all over the world; it poses a serious
threat to the food-processing industry’s export potential (which is a
growing industry in the majority of member states); and it reduces the
efficiency of EU sugar production to the point that producers must rely
on support to compete in third countries.
3.8
Consumer Groups
Given their
high stake in this issue, consumers represent a very important source of
potential support for reform of the sugar regime. In the past, however,
consumers have not been able to make their voices heard on this issue,
partially because the sugar regime is only one of many targets for
consumer groups. Joining consumer voices with a broader and more focused
coalition will increase the visibility of their position on sugar.
3.9
Environmental Groups
The Green
Party has become a serious political force in Europe along with other
environmental organizations. Even though, for the previously mentioned
reasons, they have not made reform of the sugar regime one of their
priorities, they can lend a strong voice to ASI’s efforts. There are
two reasons why environmental groups should become more vocal on the
sugar issue. First, high sugar prices stimulate intensive production and
therefore the use of fertilizers and pesticides. Second, reform of the
EU sugar regime will force the United States to reform its sugar program—which
will help mitigate environmental degradation in the Everglades wetlands
by reducing the incentive for sugar farming in that area.
3.10 Food
Manufacturing Sector
Second
stage food processors’ export potential is threatened by the sugar
regime. Accordingly, these industries are going to be very eager to
support sugar reform.
3.11 Media
Europeans
pay over seven billion Euros every year to finance the sugar regime.
Yet, largely because this payment takes the form of high sugar prices—instead
of a tax or a budgetary item—the common EU citizen does not know about
it. Gaining media coverage of the problems associated with the sugar
regime will be critical to enhancing public awareness of the issue and
influencing decision-makers.
3.12 The EU Member States
The quota
(A and B) allocations in six member states are significantly higher than
those of other states.
It will be particularly important to convince these countries to support
reform because their votes are heavily weighted in the Council. Votes by
England, France, Germany, and Italy are weighted by a factor of ten.
Spain is weighted by eight, and the Netherlands is weighted by five.
England and
the Netherlands have already expressed their willingness to reform the
regime. These countries are very efficient at both the farmer and the
manufacturing level and therefore see no reason for the high burden on
consumers.
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