Description of Scenarios

In this study, four scenarios are calculated with the model described above. The sce-narios and the assumptions made are described in this section, whereas in the next section,

4.2, the results will be presented and discussed. The projection horizon for all scenarios shall be 2015/16.

4.2.1.1 Scenario 1: Baseline Scenario

The first scenario to be calculated with the SPE model established for this study is a baseline scenario which will serve as a benchmark for the other three simulations. Trade and domestic sugar policies are assumed to be continued, unless changes are already decided.

These changes are on the part of the EU the implementation of the 2006 reform of the EU’s CMO for sugar, the accession of Bulgaria and Romania including the implementation of im-port quotas for their suppliers previous to accession, phasing in of unlimited market access for LDCs and according reduction and finally abolition of the SPS quotas, and reallocation of Protocol quotas of countries which are unable to fill them to other participant countries of the sugar protocol. On the part of the USA, NAFTA market access for Mexico and CAFTA-DR market access for sugar from Central American countries and the Dominican Republic is phased in as planned. Remaining sugar TRQs are adjusted in order to meet projected imports by FAPRI.

The BDI, and thus ocean freight rates for sugar, moved upwards in 2007 (see figure 2-3). This move is captured for the baseline scenario and all others, by estimating ocean freight rates for 2006/07 as described in 4.1.2.2.3 with the average BDI of 2006/07 as ex-plaining variable. In the remaining years of the projection horizon the BDI is assumed to return linearly to its average level of the base period.

Against the results of this baseline scenario the results of the following three counter-factual scenarios are compared to investigate the projected effect of the policy changes on production, consumption, prices and trade flows.

4.2.1.2 Scenario 2: WTO Agreement

The first counterfactual Scenario, referred to as DOHA, simulates the implementation of a possible WTO agreement. As a reference for how such an agreement could be shaped, the proposal of Chairman Falconer in July 2007 is taken. The suggestions of the Falconer proposal in terms of market access are summarized in table 4-3 below.

Table 4-6: Proposed Formula for Agricultural Tariff Cuts

Industrialized countries Developing Countries Current tariff in ad

valorem equivalents

Tariff reduction Current tariff in ad valorem equivalents

Tariff reduction

0-20% 48-50% 0-30% 32-33%

20-50% 55-60% 30-80% 37-40%

50-75% 62-65% 80-130% 41-43%

> 75% 66-73% > 130% 44-49%

Source: Agra-Europe Weekly (2007).

Tariff reductions would happen in four categories, so-called bands. The band with the highest tariffs in ad valorem equivalents would face the strongest tariff cuts. The widths of the bands are different between developed and developing countries as are the proposed tar-iff cuts. The tartar-iffs of industrialized countries falling into the highest band are those above an ad valorem equivalent of 75%. These would have to be cut by between 66% and 73%. The highest band for developing countries on the other hand would comprise only those tariffs exceeding an ad valorem equivalent of 130% and proposed reductions thereof would be be-tween 44% and 49%. The sugar tariffs of as well the EU as the USA would fall in the highest band and are thus subject of reductions of 70%.⁷⁸ The same is true for the sugar tariffs of most industrialized countries. Among the group of developing countries, only Turkey and Panama fall in the highest band.⁷⁹ A number of other developing countries, among them the big importers China and India have bound their tariffs in the UR and with accession respec-tively so high above the applied levels that no reductions need to be done.⁸⁰

Falconer suggests different options for the future of the special safeguard clause. For this study it is assumed that it is not used for sugar markets of developed countries anymore, in particular the EU. It is furthermore assumed, that no country declares sugar as a sensitive product, which would allow for smaller tariff cuts on the one hand, but require the applying country to open additional TRQs, or as a special product. Reduction commitments for do-mestic support suggested by the Falconer Proposal are not accounted for in the scenario. The

78 For the implementation of tariff reductions in the model the arithmetic mean of the proposed range is used.

79 Some other countries fell into the highest band with their bindings, their applied tariffs were, however, not affected by reduction commitments for the bound tariffs. A special case is Morocco, which applies currently an ad valorem tariff plus a variable duty. Since the model is not stochastic, the variable duty is modeled as a spe-cific tariff. Both measures together bring Morocco in the highest band for developing countries and its tariff are in the DOHA scenario modeled as the bound ad valorem equivalent minus the reduction commitments.

80 In cases where countries operated preferential tariffs for other countries or groups of countries, these are in the model reduced by the same percentages as the MFN tariffs.

only country for which domestic support is modelled explicitly is the EU, where the scale is minor. What remains is, of course, the elimination of all export subsidies.

Some countries, especially Japan and South Africa, operate sugar policies which are highly intransparent and actually not in line with Uruguay Round commitments (see, e.g.

Van der Mensbrugghe et al., 2003). The effects these policies have are accounted for in the Base period by ad valorem tariff equivalents. For the simulation of the DOHA scenario, the policies applied by these two countries are reduced to their UR bound tariffs minus the nec-essary reduction. While in the case of South Africa this affects merely the internal price level and the quota rents of some preferential importers from SADC, in the case of Japan the pro-ducer incentive price is also affected massively.⁸¹

4.2.1.3 Scenario 3: EU Liberalization

The second counterfactual scenario simulates a complete liberalization of all EU sugar policies. All policy measures such as production quotas, tariffs, TRQs and export sub-sidies are abolished. The only policy measure which is retained is the decoupled direct pay-ments.⁸²

4.2.1.4 Scenario 4: Full Liberalization

The last scenario is a full liberalization of all sugar market and domestic polices by all countries in the model.

4.2.1.5 Sensitivity Analyses

The results of all equilibrium model studies depend crucially on assumptions and pa-rameters for which the empirical foundation is often rather weak. The study at hand is no exemption from this rule. To investigate the extend to which results of policy changes might be over- or underestimated as a consequence of misspecification of parameters and assump-tions, a series of sensitivity analysis is performed.

The parameters which are regarded crucial are the supply elasticities of sugar and the BDI. Thus, the baseline scenario and the full liberalization scenario are calculated again un-der the assumption of

81 The complete list of policy changes introduced can be seen in the Annex tables.

1. A permanent increase of the BDI to its 2007 peak⁸³ 2. A doubling of all supply elasticities

3. A halving of all supply elasticities⁸⁴

4.2.2 Results and Discussion⁸⁵