Sugar is one of the most protected agricultural commodities world-wide. Many coun-tries support their domestic markets by trade barriers and domestic policies. These are not only industrialized countries, like the European Union (EU), the USA and Japan where sugar prices are supported to be a multiple of the world market price (Mitchell, 2004), but also some developing countries such as South Africa or India and, of course, planned economies like Cuba and to some degree still China have highly distorting policies in place. Frequently, these are blamed to depress the world market price for sugar considerably, which is also con-firmed by scientific analyses (Mitchell, 2004). While producers in the countries which pro-tect their sugar markets are generally the beneficiaries and thus in favor of these policies, those countries which currently produce to world market conditions like Brazil, Thailand and Australia are hit by these distortions in their export interests and hence oppose them. Also consumers in the countries with high levels of protection are adversely affected, as well as the sugar using industry. Another group of beneficiaries of the protection of primarily indus-trialized countries are producers in countries which have preferential access to these markets and can sell their sugar for the high prices prevailing there. However, also some developing countries have granted preferential access to their sugar markets to other countries.
The Uruguay Round Agreement on Agriculture (URAA) did not bring about major changes to this situation. Trade barriers for imports in excess of possible tariff rate quotas (TRQs) are still prohibitive in the countries mentioned above. In recent years, however, sev-eral steps towards reforming the sector have been embarked upon by some of the protecting countries, most notably by the EU. The first substantial step towards opening the EU market for sugar was the adoption of the “Everything But Arms” (EBA) Initiative by the Council of the European Union1 in 2001, which extended the Generalized System of Preferences (GSP) to duty and quota free market access for sugar from Least Developed Countries (LDCs) from 2009 onwards with an implementation period with gradually increasing duty free TRQs and tariff reductions.2 The first major reform of the Common Market Organization (CMO)3 for sugar followed after a long process of discussion in 2006 after it had been virtually immune
1 Council Regulation (EC) 416/2001 (OJ L60, 01.03.2001, pp. 43-50).
2 In the so-called Presidency Compromise for the 2006 CMO reform the Council agreed on a clause to ‘auto-matically open the procedure to decide whether measures such as suspension or temporary withdrawal of trade concessions, surveillance or other safeguard measures need to be applied’ in case the annual increase of a coun-try’s sugar exports under EBA exceeded 25%. Commission officials state, however, that this clause is not to be interpreted as a safeguard for EU market balance, but as an effort to tackle fraud in the form of triangular trade.
3 Council Regulation (EC) 318/2006 (OJ L58, 20.02.2006, pp. 1-31).
in all former rounds of reforms of the EU’s Common Agricultural Policy (CAP). Also the USA took in recent years steps in the direction of more openness by granting increased mar-ket access to its neighbors under several Free Trade Agreements (FTAs). It is, however, questionable whether the next farm bill will bring major changes to the overall current US sugar policies (Sapp, 2007).
In addition to the reform steps by single countries, the current round of WTO (World Trade Organization) negotiations has the potential to greatly impact sugar markets, although it is uncertain if and when such an agreement will be signed. If the July proposal by Chair-man Falconer is taken as a benchmark for a possible agreement (Agra-Europe Weekly, 2007), the envisaged tariff cuts would bring an end to the prohibitive effect of Most Favored Nation (MFN) tariffs in all major distorting industrialized countries. Various external and internal pressures could furthermore lead countries to liberalization beyond a possible WTO agreement.
Any major steps of liberalization in the sugar market can be expected to have rela-tively great impacts on production, consumption, and prices. This is since the levels of pro-tection in the sugar market exceed those in markets for other agricultural products signifi-cantly, and thus liberalization will have larger consequences. Besides the effects of liberalization on the global sugar market and the positions of big players like the EU, the USA or Brazil therein, it is especially interesting to look at the impacts it may have on the sugar sectors of countries which are beneficiaries of preferential trade arrangements. Trade preferences for sugar account for the bulk of the value of all agricultural trade preferences granted to developing countries (Grethe, 2005), which is due to the high gap between pro-tected and world market prices. If these prices fall, the value of preferential market access will erode or may vanish completely for these countries.
Both the EU and the USA have a long tradition of preferential access commitments to their sugar markets and both are currently extending the number of beneficiaries and the overall quantities which they import on a preferential basis. In the case of the EU, preferen-tial sugar imports started with the sugar protocol attached to the first Lomé Treaty with Afri-can, Caribbean and Pacific (ACP) countries which granted thirteen former colonies TRQ restricted access of a total of 1.3 million tons white sugar equivalents (WSE) to the EU mar-ket at guaranteed prices. Further marmar-ket access will be given to the group of LDCs, which is
to become unrestricted from 2009 onwards.4 In the case of the USA, sugar has been im-ported under a quota system as a form of development aid for a long time.5 The overall amount of preferential market access is currently expanded under the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) and the North American Free Trade Agreement (NAFTA) (USDA, 2006).
Some of the countries which are beneficiaries of these agreements sell their entire production under preferential conditions and their industries are highly threatened by the erosion of these preferences. Others are competitive sugar producers and their sectors will though being negatively affected not shrink, because they can export their production to other importers. In many cases, this is likely to happen again under bilateral preferential agreements, which also exist in great number among developing countries and also include preferential market access for sugar. Due to the complex system of preferential trading ar-rangements governing the world sugar market, the result of a significant liberalization of trade will be the termination of many current trade flows and the establishment of new ones.
The results of possible liberalization scenarios on the world sugar market have been analyzed in various studies with equilibrium models.6 Some of these studies used net-trade models, in which sugar is regarded a homogeneous good. In this category of models a coun-try is either an importer or an exporter of sugar, but not both at the same time. Furthermore, it is not specified in such a model to which country an exporter exports or from where the imports of an importing country come. Preferential trade and how it is affected by policy changes must, therefore, be ignored by these models. All other model-based studies, which are unlike the former able to depict these situations, rely on the Armington Approach (Armington, 1969) and treat sugar from different origins as imperfect substitutes. The expec-tations expressed above, the termination of current preferential trade flows and the creation of new ones, which are shared by most experts, could not be reproduced by these models. A study which combines the strengths of both approaches, the treatment of sugar as a homoge-neous good on the one hand and the ability to account for bilateral trade flows on the other hand, has not been published so far. In Nolte (2006) the attempts which were made by other modelers to overcome the problems of the Armington Approach are surveyed. As an alterna-tive, the study suggests the application of the Spatial Price Equilibrium (SPE) modeling
ap-4 Besides these two, there are some other preferential market access commitments in place which are of less importance in terms of quantities.
5 The system of import quotas has been converted in a TRQ system after being challenged successfully in the General Agreements on Tariffs and Trade (GATT) in 1990 (Mitchell, 2004).
proach (Takayama and Judge, 1971), which in fact is able to depict bilateral trade flows un-der the assumption of homogeneous goods. The author constructs a small SPE model of the world sugar market and shows that under a liberalization scenario the results could comply with the expectations.
To be a useful tool for economic analysis, however, an equilibrium model should have the potential to provide insights which go beyond the ad hoc estimations of experts.
Due to the rough regional aggregation and policy coverage, the model used by Nolte (2006) necessarily failed to do so. For this study, the SPE model is extended to the coverage of 90 consuming regions and 104 producing regions of sugar with a detailed depiction of domestic and trade policies. A special functional form for the supply curve of some producers which was developed by Nolte and Grethe (2007) is chosen to be able to depict the situation that these countries entirely stop the production of sugar in case the price falls too much. The objectives of this study are to analyze with the help of this model the following research questions:
• How will the situation on the world sugar market in the next decade develop, if no fur-ther policy changes are expected?
• In particular, what will be the situation after the implementation of those reforms which are already on the way, i.e. the full market access for LDCs to the EU from 2009 on-wards, the 2006 reform of the CMO, and the implementation of increased market access under several FTAs by the USA? What will the situation on the EU market be? Which internal price will prevail? Which of the current and future preferential exporters will still be present on the market and what will be the overall amount of imports? What will be the overall amount of domestic production in the EU and what will be the shares of indi-vidual member states? How much will sectors which are affected by preference erosion shrink and what will be the new destinations of exports of former preferential suppliers?
• How will the potential further steps of unilateral or multilateral liberalization affect these outcomes? What will, for instance, the effects of a possible WTO agreement be? What will be the effects of a liberalization of the policies of the EU alone? How will the world sugar market look like if all global distorting policies are abolished?
6 A selection of these will be surveyed in this study.
The study is structured as follows: In chapter two, the world sugar market is de-scribed qualitatively and quantitatively. A special focus is put on the elaboration of proper-ties which distinguish it from the markets for other agricultural commodiproper-ties. The sugar mar-kets and policies of thirteen major players are reviewed. With this information, the second part of the chapter discusses what preferable and necessary features of an equilibrium model-based analysis of the world sugar market would be. Chapter three provides a rough classifi-cation of equilibrium models which have been used to analyze the world sugar market before and reviews the structure and results of some model-based studies published in recent years.
In the fourth chapter, the analysis with the SPE is intensively discussed by first giving an introduction of the underlying theory, then describing the methodological structure and em-pirical base of the SPE model used in this study, and finally describing and interpreting pro-jections for different policy scenarios simulated with the model. Chapter five summarizes the core results and draws some conclusions. Finally, weaknesses and drawbacks of the SPE method are discussed and an outlook is given about how the analysis can be improved in future studies.7
7 Throughout the whole text, the word ‘chapter’ refers to the highest level of outline structuring of the text. The word ‘section’ refers to all lower levels.