Sugar reform - the winners and losers

Reform of the current preferential EU sugar regime is imminent, with think-tanks, politicians and industry participants among others assessing this complex and heated topic. But who stands to lose the most through reform, asks MTT researcher Ellen Huan-Niemi.

According to Huan-Niemi​, any changes to the EU regime must take into account the interest of the African, Caribbean, and Pacific (ACP) countries and the least developed countries.

For several decades, Europe has supported and protected 'its own', with sugar from developing countries only entering the EU sugar market through preferential trade agreements.

In the EU sugar regime, the unique features of the trade concessions are that sugar under preferential import quotas can enter the EU market duty free and the price paid for sugar equals to the high EU sugar price.

Swaziland, Zimbabwe, Mauritius, Guyana and Fiji are some examples of the ACP countries that have access to the trade preferences for sugar, writes Huan-Niemi. Preferential treatment has contributed substantially to the export revenues of these countries, as the EU sugar price is triple the world market price at the moment, she continues.

Last week the EU farm commissioner Franz Fischler proposed three alternatives for reforming the EU sugar regime: preservation of the current sugar regime, complete liberalisation of the sugar regime, or the combination of production quotas elimination and a significant cut in the intervention price for sugar.

A complex and vital issue​ Ellen Huan-Niemi contends that liberalisation of the EU sugar regime would benefit only a few countries, especially Brazil, Thailand, Australia or South Africa. Production costs in these countries are low due to an ingrained and efficient infrastructure for sugar production, whereby adequate supplies of resources to increase production are available.

The losers would be the ACP countries and the world's poorest countries because these countries would not be able to compete due to high production costs or scarcity of resources available for establishing the necessary infrastructure.

The removal of preferential treatment would be detrimental to the ACP countries and harmful for the employment prospects of poorly educated rural farm employees. For example, preferential sugar contributes to 20 per cent of Guyana's total GDP and over 50 per cent of its agricultural production, she adds.

Moreover, the sugar industry directly and indirectly employs 26,000 people who provide a living for 150,000 people out of a total population of 750,000 people.

"Guyana's sugar industry and the livelihood of the rural poor will most probably be threatened if Guyana is faced with competition from the massive and dominant sugar industry of Brazil. As a result, the rural poor will incur the bulk of the burden of structural change. This will be working against the United Nations Millennium Development Goal of reducing poverty and hunger,"​ said Huan-Niemi.

Free trade does not help the poorest​ Some maintain that the current preferential access to the EU market for selected developing countries is an inefficient instrument for supporting the economies of developing countries and there is uncertainty as to who gets the benefits.

They argue that direct aid would be a better choice, or it would generally serve the developing countries better to have free access for their products in the markets of developed countries.

In contrast to the 'banana regime', more than 95 per cent of the income benefits from the high EU price for sugar are accrued to the developing countries and sugar traders are getting less than 5 per cent of the income benefits, continues the MTT researcher. In comparison, Huan-Niemi claims that a substantial part - sometimes as high as 70 per cent to 80 per cent - of direct aids for developing countries are repatriated back to the donor countries with only a minor slice reaching the developing countries.

For Huan-Niemi, the question is how much of the aid money will finally reach the rural poor who are incurring the burden of structural change. Also, the preferential sugar system may be administratively burdensome, but the system is so deeply entrenched that transaction costs are minimal due the learning experience of several decades.

Finally, she writes, the theory of 'survival of the fittest' will not help the least developed countries because these countries will not be able to compete with developing countries that have the infrastructure for sugar production. For example, Mozambique''s sugar industry had been destroyed by flood and civil unrest. Under the 'everything but arms' trade concession, the sugar industry in Mozambique was rebuilt after preferential market access for sugar was given to Mozambique.