European Communities - Export Subsidies on Sugar Complaint by Thailand

Essay by mama_jangUniversity, Bachelor'sB, February 2009

download word file, 27 pages 3.0

Downloaded 1145 times

IntroductionThe world market for sugar is expanding, so is the production and competition. This market is boom due to greater demand tendency on the final product which uses sugar as a main ingredient such as soft drinks, bakery and other industries. These give rise in number of new producer’s entrants however only the strong productive efficient industries can stand in the competitive world. European communities is one of the biggest exporters of sugar both raw and refine sugar as well as Thailand, Australia and Brazil, the complainants party of the dispute on well known successive sugar case issue with very powerful European communities as a respondent to the case.

This paper is aiming to discuss mainly about the dispute case between European communities: export subsidies-Thailand as complainant. The rest similar successful-related cases which have Australia and Brazil as complainant are the supported evidence for the major focus on this paper’s discussion.

Both policy structures of the EC and Thailand is contained in this report as one section to understand a basic behavior in each market in order to further the reader understanding in the occurrence of this export subsidies dispute between the two focused parties. After the consideration of each market nature, then, the judgment process and the important articles used is necessarily provided in the paper as well as some possible articles which might be used to penalize the EC’s over limit subsidization in the world of equality, no powerful influence over the judgment as the additional thoughts of this report.

Analysis of the costs, benefits and impacts in the end of the dispute settlement solution are contained here in this paper by using tables, diagrams and graphs explaining in both in terms of statistical data in some presented years and economic analysis for further result after the judgment is preceded.

Concluding the result and effect that is consequently due to the reformation of the European Communities on Thailand, the report concerned complainant, to give the readers the overview of this dispute settlement are contained here also.

The occurrence of the disputeMost of developing countries undoubtedly have lower cost of production comparing to developed country including the EC. Developing countries currently produce more than two-third of all sugar. Moreover this developing group is expected to be responsible for almost all of the production growth through 2010. Although, the value of the sugar market was almost 10,000 million dollars, in 2001, the value of sugar exports fell to 6,000 million dollars. The reason of this declining in sugar exports value is said to be because of some government interventions drive the world price of sugar downward. It is also believed that this is occurred due to the influence of the large country. European Communities, which is large enough to influence the world price to lower according to the higher production, intervene their domestic market by guaranteeing high price to domestic producers through giving subsidy. As a result of the very high price in the EC market, their domestic producers were able to export surplus sugar at the price below their cost of production. Moreover, they give direct subsidies to producers than permitted which is paid according to the amount imported into the union under the special trade agreement among the ACP countries (African Caribbean Pacific countries). Their action causes the reduction in world price of sugar and this is why the value of sugar market is decreasing, thus, limiting chances for growth in this market.

Therefore this leads to the submission of the request of the panel for consultation by Australia, Brazil and Thailand. This aid of EC to their sugar producers is consider unfair in terms of keeping others away from this market cause world prices is kept down. These similar cases between the EC and Thailand or Brazil or Australia are successful since WTO ruled the EC’s aid as illegal and finally the EC needs reforms to make sugar industry more competitive and trade-friendly.

However the EC received complaint from Australia, Brazil and Thailand (our case) of giving export subsidies on sugar and sugar containing products above its reduction commitment levels. This leads to discussion and agreement on what EC should implement to solve the dispute.

Policy in the European CommunityThe EC’s policy of intervention price system guarantee a high price for produced sugar of a certain production quotas called A and B. Sugar produced in excess of these quotas, called C sugar, in EC cannot be sold in the same year it being produced. It must be carried over for the next year quotas, under this framework; exporters of C sugar are able to export this amount of sugar at a price below its total cost of production.

The export subsidies provided by the EC also cover the difference between the world market price and the high prices in the community so that the EC is able to export those products. Moreover the support price for the sugar quota is large enough to cover all the fix cost of production while world price covers only the marginal cost part. The exporters of C sugar are thus able to export at a lower cost. Another important factor that makes the sugar exports of the EC able to dump in the market is due to the re-export subsidization on an import amount of sugar from the ACP/India countries which composed of African, Caribbean, and Pacific countries and India. The EC does this on a purpose in order to give preferential terms to raise the poorer nations. Indeed subsidization on this imported amounts are not included into the reduction commitments and even exceed the permitted level.

According to the complaints from the three countries including Thailand, they believed that the EC violates A.III:4. Because the granted export subsidies on sugar of EC accords a less favorable treatment to imported sugar than that accorded to the like product, sugar, in their domestic market.

Besides this complaint of violation on A.III:4 there is claimed that the EC regime in excess of the reduction commitment levels is inconsistent to articles in SCM agreement and in the agreement on agriculture as well.

Retaliation policy in ThailandSince European community conducted an unfair trade, they provided both export and import subsidy on sugar. First, they distort the domestic price system by guarantee the high price for sugar that is produced within certain production quota A and B. Second, the production of sugar in excess of quota A and B (C sugar) must be exported or carried over for next year’s production quotas. Since, EC provided export subsidy on C; therefore, exporter of C sugar are able to export C at the price below its total cost of production. Moreover, EC provided export subsidy on C sugar and sugar incorporated product in excess of commitments that has specified in Section II of part IV of its Schedule of Concession.

With the above unfair trade, Thailand retaliated by requesting consultations with the European Community as a first stage to settle this dispute.

Thailand claimed that EC’s subsidies on quota A and B was considered as less favorable treatment to imported sugar which lead to the use of domestic sugar over imported sugar, this is according to AIII as mentioned. Moreover, EC granted export subsidies in excess of the commitment level specified in Section II of Part IV of its Schedule of Concession.

Thailand considered that the above subsidies are inconsistent with the EC’s obligations undera.Article III:4 of GATT 1994;-b.Articles 3.1(a), 3.1(b) and 3.2 of the SCM Agreement; and-c.Articles 3.3, 8, 9.1 and 10.1 of the Agreement on Agriculture.

In addition, Thailand also asked for the establishment of the panel as to force the undeniable appointment. This is WTO process when consultation fails to settle the dispute. After the judgment, the Thailand’s complaint is proved true, the EC did violate the WTO rule so it has to follow all recommendations indicated in panel report. From the dispute settlement, the EC is allowed to implement within a reasonable period of time. However if the EC fails to act according to the report, the complaint country can put EC into another negotiation in order to agree on an acceptable compensation for the worse off party, like Thailand.

The related articles to the dispute judgmentSince the European communities are large country, therefore such subsidization conflicts to interest of other contracting parties. According to A.XVI of GATT 1994 about subsidies, this says that if any subsidization is determined to be unfair to the interest of other contracting parties, the granting of the action country has to be discussed with others for the possibility of limiting this subsidization. European communities did the discussion with other parties and come up with reduction commitment levels.

European communities give the import and export subsidy on sugar, which considered as an unfair trade (giving injury or loss of sale to other exporting contracting parties) under WTO rules. Firstly, they hurt the domestic pricing system by guaranteeing the high price for sugar that is produced within certain production quota A and B. Secondly, the production of sugar in excess of quota A and B (C sugar) must be exported or carried over for production quotas of next year. Since, EC give export subsidy on C, therefore, exporter of C sugar can export C at the price below total cost of production. Moreover, thirdly, the European communities provide export subsidy on C sugar that is over the amount of commitments that has specified in Section II of part IV of its Schedule of Concession. As a result, European communities’ sugar producers produce at the lower cost and export huge quantity at lower price to the world. Other exporting contracting parties is harmed due to this lower world sugar price.

With the above unfair trade, Thailand retaliates by requesting consultations with the European Community as a first stage to settle this dispute. Thailand claims that subsidies of the European communities on quota A and B are considered as less favorable treatment to imported sugar which lead to the use of domestic sugar over imported sugar, this is according to AIII, paragraph 1 (National Treatment on Internal Taxation and Regulation). By European communities’ subsidization to domestic sugar production, this concerns the internal quantity available for sale as well as distribution. It is stated that such implementation should not be valid to domestic production. Moreover, European communities grant export subsidies in excess of the commitment level specified in Section II of Part IV of its Schedule of Concession.

Thailand considers that the above subsidies are inconsistent with the obligations of European Communities. The Articles that related to the “European Communities Export subsidies on sugar” are as follows:Article III: 4 and XVI of GATT 1994European Communities violates A.III:4 by granting export subsidies on sugar of EC accords a less favorable treatment to imported sugar than that accorded to the like product, sugar, in their domestic market. According to Article XVI, Section B, European Communities should stop giving subsidy on export of sugar as it results in the sale of the exported sugar at a lower price than the price quoted to domestic buyers for the like products. Furthermore, such subsidization led to the increase in sugar export amount from European Communities, therefore, lower the world sugar price.

Articles 3.1(a), 3.1(b) and 3.2 of the SCM Agreement, Articles 3.3, 8, 9.1 and 10.1 of the Agreement on Agriculture; violation will be addressed in the following.

Agreement on AgricultureAll three parties, the complainants which are Thailand, Brazil and Australia, agree that European communities have the advantage of C sugar from the subsidies and these advantages are against with the Article 9.1(c) of the Agreement on Agriculture. Mainly in this Article 9.1 involves about the allowance of reduction on the commitment level. Because of the European communities do not subject to C sugar to the quantity of reduction requirement, therefore all three parties submit that European communities is inconsistent with the Article 3.3,8 and 9.1 of the Agreement on Agriculture.

In this part of the Article 9.1 consists of the types of export subsidy that considered as a reduction in the commitment level under Agreement on the Agriculture. For example, when there is the sale or regulation of export by the government at the lower price, by comparing to the price that is set for the like product to the consumer in the domestic market or in the other way, it will go along with the export subsidy commitment because it involves with the internal transportation and freight cost on the export shipments that are provided by the government but not come from the domestic side.

From the Article 3.3 of Agreement on Agriculture, this is the “Incorporation of Concessions and Commitments”. It states that with the provisions of paragraphs 2(b) and 4 of Article 9, a member should not give export subsidies that are listed in Article 9.1of SCM agreement as a result of the agricultural products or groups of products that is in the excess of the budget and agreeable quantity commitment levels. And it should not give any subsidy to any agricultural product that not in the timetable of its member that has already mentioned at first.

The overall pictures that Thailand has complained about the European communities export subsidy on sugar is as followed: According from Article 9.1;There is the excess of export quantity that goes beyond the commitment level and the expenditures that the EC uses for export subsidies on sugar are in over amount of its budget.

As it is stated in the Article 3.3 of the agreement on agriculture, the member should not provide export subsidy that according from Article 9 paragraph 1. And in the Article 8, Export competition commitments, which stated that each member accomplishments should not provide export subsidy more that the level that agreeable with the commitment that specified in the schedule of each member. Therefore, from Article 3.3 and 8 of the Agreement on Agriculture said that the subsidies that are allowable by the EC to its exports of sugar are inconsistent.

According to article 10.3, it provides that where a Member exports an agriculture product in quantities that exceed its quantity commitment level, that member will be treated as if it grants WTO-inconsistent export subsidies for the excess quantities, if the Members do not present adequate evidence to establish the contrary. However, European Communities has not demonstrated that the exports of C sugar and African Caribbean pacific and India sugar in excess of its annual commitment levels are not subsidized.

In this dispute the panel investigates about the exports of C sugar that will be considered as subsidy or not, according from the Article 9.1(c) of the Agreement on Agriculture. Article 9.1 (c) requires three elements. First of all, it requires that payments must be made. Secondly, it requires that those payments need to be made on the export of an agricultural product. And thirdly, it also requires that those payments must be financed by governmental action. Therefore, since European communities of export subsidy is consistent with the Article 9.1 paragraph c, this export subsidy is subject to reduction of commitment according to this Agreement on Agriculture. With the judgment of the Appellate Body, European Communities agree to accept this recommendation and also require a reasonable period of time to implement them.

The responsiveness of the European communities is that from the Article 10.1 of Agreement on Agriculture the export subsidy that is not listed in 9.1 parts should not be applied to threaten or results to the circumvention of commitment level of the export subsidy. Hence, the European communities reply that export subsidy on C sugar did not be beneficial at all. For the reasons from its submissions, the European Communities requests to the panel that; the exports amount of C sugar do not benefit from export subsidies according from the definition of Article 9.1(c) of the Agreement on Agriculture. The claim of the complainants from Article 10.1 of the Agreement on Agriculture is outside with the terms of reference by the Panel, therefore the exports of C sugar does not benefit from other export subsidies. Conclusively, exports of C sugar are not in the excess of the reduction commitments of European communities.

Agreement on Subsidies and Countervailing MeasuresThe “Subsidies and Countervailing Measures agreement” or “SCM agreement” is designed to protect the unfair trade condition. In this agreement, it imposes multilateral controls on how governments may provide subsidies to their domestic industries, and how to manage the use of countervailing measures against the import subsidies by other WTO members. This agreement does two things which are, it controls the use of subsidies and it regulates the actions countries can counter the effects of subsidies as well. It states that the country can set up its own investigation and countervailing duty (CVD) on the import subsidy, which will affect the domestic producers. However, it is noted especially in this case that European communities is large and being influential, the complaining parties do not impose CVD to counter its export subsidy in the first place.

All three parties, Thailand, Brazil and Australia, which are the complainants to the European communities, agree that the export subsidy that is allowed for the quota exports amount of on C sugar are prohibited subsidies under the Subsidies and Countervailing Measures Agreement. According to that, the European Communities export subsidies is not allowed under Article 3.1(a) of the SCM Agreement, the European Communities of export subsidy also violates Article 3.2 of the SCM Agreement as well. Moreover, Australia and Brazil also claimed that the government of EC sugar was also against with Article 3.2 of the SCM Agreement.

In the SCM agreement, it is about the prohibition of subsidy. In the Article 3.1 of SCM, it states that the following subsidy that in the Article 1 of this agreement, by not include the one that except in the Agreement on Agriculture, should be prohibited. And also in the Article 3.2 of the Subsidies and countervailing measures, it also says that a member cannot give or maintain the subsidy that referring as in the Article 3.1 of this agreement. In the Article 1 of SCM agreement states about the purpose of this agreement that the government should not give the subsidy to the one as following; when there is a financial offering by the government or public to the member countries; when the government activities are grants, loans, and equity collaterals, and also the guarantee of the loans; when the government revenues that is not collected such as the tax credits; when the government provides goods and services such that general infrastructure or the good that has been purchased.

The European communities oppose that the SCM Agreement cannot be used with the agricultural products such as sugar etc. The European communities then use the Article 21.1 of the Agreement on Agriculture, and claim that this provision is analyzed by the Appellate body. The Article 21.1 of this agreement states that the provisions of GATT 1994 and of the other multilateral trade agreements in the Annex 1A of WTO agreement can apply accordingly to the provisions of this agreement. The European Communities respond back that the Agreement on Agriculture has the specific provisions that dealing with the same thing.

If a panel finds out that the measure is to be inconsistent with one of the multilateral trade agreements, then a panel will resolves the dispute. The panel may withhold from making a finding that the measure is also inconsistent with another multilateral trade agreement. In the specific circumstances of this complaint, however, this is not the case. According from the Article 4.7 of the subsidies and countervailing measures agreement, meaning that a Member must withdraw the subsidy within 90 days from the adoption date of the panel, which report by the Dispute Settlement Body (DSB).

For these reasons, Thailand ask the requests from the Panel to find that European communities export subsidy on sugar are not allow accordingly from Articles 3.1(a) and 3.2 of the Subsidies and Countervailing Measures Agreement, and also with Article 4.7 of the Subsidies and Countervailing Measures Agreement, that the DSB (Dispute settlement body) ask the EC to take out export subsidies, which are inconsistent with the Agreement on Agriculture in 90 days. European communities must limit its subsidies and lower expenditure on export of sugar.

Nowadays, the Subsidies and Countervailing Measures agreement is still left to be unaddressed by the panel because it is not in a position to complete the examination of the complaint on European community according to SCM Agreement. The reason is that the Agreement on Agriculture is insufficient to fully resolve the dispute especially in relation to implementation of a remedy because there is insufficient material before it.

In the conclusion, Thailand requests that the Panel to find that; the European communities give subsidies on sugar which against to the Article 9.1(c) of the Agreement on Agriculture to its exports of C sugar; the exports of African Caribbean countries(ACP) and India Equivalent Sugar are also considered as the reduction commitments of EC which also against to the Article 9.1(a) of the Agreement on Agriculture; the quantity of sugar that EC give subsidy to is over amount of its export quantity reduction commitment, this is also by the article 9.1 of Agreement on Agriculture; the amount of the expenditures that the European communities use for subsidies are beyond the level of its budget and the subsidy that by the EC to its exports of sugar are inconsistent to the Articles 3.3 and 8 of Agreement on Agriculture.

The Panel finds out that the subsidies on exports of sugar of European communities are not the export subsidies that accordingly with the Article 9.1 of the Agreement on Agriculture, Thailand can request the Panel that these subsidies are export subsidies that against to the Article 10.1 of the Agreement on Agriculture.

Thailand asks the Panel that the export subsidies of EC for quota of sugar, African Caribbean countries(ACP), and India Equivalent Sugar used does not go along with the Articles 3.1(a) and 3.2 of the Subsidies Agreement. According from the Article 19.1 of the DSU (Understanding on Rules and Procedures on Governing Agreement) and Article 4.7 of the Subsidies and Countervailing Measures Agreement, Thailand want the panel to tell the DSB to request the EC that it must bring its export subsidies for sugar within 90 days, according to the Agreement on Agriculture.

European communities rejected the announcement of the panel and made another appeal to extend the case completion. However, the Appellate Body of WTO verified its verdict that European communities’ sugar policies are illegal by breaking WTO rules in over-subsidizing export of sugar. The outcome of this case marks a major step forward in fighting against unfair agricultural subsidies and export dumping. This put more pressure on European communities’ sugar policies reform process. Nevertheless, European communities informed DSB that it would require reasonable period of time to the implementation. However, European communities did not follow the reasonable period of time as it stated. There is a need to request Arbitrator of Appellate Body to determine another reasonable period of time for implementation. As a result of irresponsible of European communities according to theirs declaration, the reduction commitment level, so the Appellate Body announced that the complaining parties won the case and, that European communities actually violated Agreement on Agriculture (as in the above detailed) by giving export subsidy above the commitment level. As a result, European communities’ action proved to incur loss of sale and hurt Thai’s domestic market.

Because the Europeans were unwilling to agree through negotiations to cut sugar subsidies within the indicated period of time as WTO requirement under the ruling said the member of the WTO Appellate Body. Therefore the complainants can force the EC to another negotiation to give them the compensation promptly with the stop of subsidization to match the reduction commitment level and what WTO ruled out by 22nd May 2006.

Impacts after WTO Panel addresses on EC and the external of ECEU is the world’s largest consumer of sugar and the second largest producer of sugar. However just the northern states such as France (the biggest sugar beet producers) and Germany are efficient producers, the Mediterranean states such as Italy and Greece are inefficient producers. Moreover, EU is the major agricultural sector in the EU’s Common Agricultural Policy. Thus, EU is considered as one of the most heavily protected sugar market. Sugar subsidies cost EU 1.7 billion a year. The WTO panel report, which is against EU sugar export subsidization policy, provides impacts on EU domestic and exporting market, and the world market.

The pressure from the Doha Round of WTO trade negotiations which required EU to reduce reliance on sugar export subsidies by removing without delay the export subsidy given to ACP sugar and insisting that C-sugar will be no longer export, and the WTO panel ruling against sugar export subsidies of EU are the factor that drive the reformation of CAP.

In the EU market, the report impacts are on EU export and it also on the support of the reformation of CAP. The new CAP is expected to lower sugar price and rationalize production in EU. The reform start with the proposal of the EU Commission to lower sugar price by approximately 1/3, a reduced quota of 3 million tons raw value and reduce reliance on subsidized exported. However the above proposal is not enough to meet the result of the WTO panel, the panel suggest that EU to lower sugar export by 2 to 3 million tons (EU may increase cut in production or reorganize sugar policy until the over-quota production will not be counted as subsidized export, or may do both options).

Table 1 Demonstrating the Euro price cut option:CAP reformation also includes reform of production quota A and B as these quotas are subjected to be merge and decrease. However, the production of C-sugar is still remained. The quota allocation system will change from fixed amount per countries to be transferable between member states, so the new system will encourage the production of sugar to be in an efficient state.

EU will shift from giving subsidies to de-coupling by giving the area above the supply curve to their domestic price level only, not guaranteeing whole amount and costs a lot on subsidy expenditure as much as before reformation. Beet growers will receive direct payment to compensate their loss due to price cut. This income payment will be granted without the obligation to grow sugar beet. (However, some grant producers in member states may use part of these payments to production and that will confirm that beet will still grow.)The consequences of the reform are on EU sugar production, EU sugar consumption, ACP sugar production, EBA (Everything But Arms countries) sugar production, Least cost countries production and world market.

The aid of European countries on their domestic producers influence world market price level to be lower since they are large and the subsidies both direct and indirect gave rise to their production therefore they can sold cheaper in the world market. The sugar production in EU, thus, must be lower by ¼ from 20 million tons to around 16 million tons. This will result in the cease of sugar production of inefficient producers in EU (EU producers who incurs high production cost). After the reform of CMO Common Market Organisation (which will take place over the next six years), EU may change the position from the large net exporter to a small net exporter or may be trade neutral or possibly become a small net exporter. The production will little by little shift to more efficient countries such as Brazil and other developing countries, Thailand.

The total sugar consumption in EU will have no significant change even domestic price has already reduced.

The major EU sugar export markets (the big Middle Eastern markets of the United Arab Emirates, Saudi Arabia, and Algeria) have declined over last ten years because they have invested heavily in sugar industries by themselves which will resulted in loss up to three million tons of EU exporting of sugar.

Initially, one of the major recipients of EU subsidy is ACP for guarantee low price and this grant was considered to be above the negotiated Uruguay Round limit. However, following the lower EU sugar price, there will be the lower of the ACP’s (inefficient sugar suppliers like African, Caribbean, and Pacific) guaranteed raw sugar price. In addition, the ACP sugar will be integrated to the Economic Partnership Agreements to make EU to conduct according to WTO rules. However, the ACP countries will not be able to compete with the new price; therefore, some ACP’s countries may not be able to continue the production and turn to be sugar importers, but some countries may be able to remain in business by restructuring but it seems to be very hard time for them. The loss in ability to use export subsidies will lead to quota cut in the EU as ACP is predicted to be unable to fulfil the total amount of quota provided by EU. Fortunately, EU promises to assist ACP countries to increase their competitiveness. Moreover, according to WTO Panel address, ACP has three basic ways to follow:1) Obey with the Panel report2) Construct a trade negotiation settlement with contracting parties3) Accept retaliatory measure.

The EBA was given the same guaranteed minimum price the ACP also got but it is on very small quota and it was supposed to be ended in 2006. However, the reform is lengthening the price guarantee to be beyond 2006. Nevertheless, it is really difficult for EBA to become major sugar suppliers to EU because of the instability of the EBA agreement to encourage investment stability and the declining of agricultural export in LDC. Moreover, there exists the obligation that the import price from EBA cannot be lower than the ACP price. In addition, the ACP sugar will be integrated to the Economic Partnership Agreements to make EU to conduct according to WTO rules. However, EU promises to help.

The lower of EU sugar production and export will enhance the most efficient sugar producers (least cost countries production) to increase export of sugar especially Brazil, the biggest seller of sugar cane. Brazil is predicted to assume predominant share of the EU’s current export market.

According to the removal of EU subsidy on exporting of sugar, the world price of sugar is expected to be higher. Moreover, the reduction will increase world trade in raw sugar. However, according to the below table, the table 1, there has been long-term negative trend in real commodity prices; moreover, sometimes the commodity price also decline in nominal term. Therefore, EU reform will provide a short-term world sugar price increase but it is unlikely to boost the world market price in long-term.

Table 2:There exists other reason which is able to support the decline in world sugar price. It may not be true that the policy reform, which causes a reduction in sugar world supply due to reduction in EU export, will increase demand on world exporter and cause the price to rise in response to higher production cost. On the contrary, lower cost producers will become leading exporter and they will be able to expand their shipments at the long-run world price. This is why Thailand and other developing countries benefit from winning the dispute. Therefore, sugar production expands faster in lower cost production areas than in high cost countries so it is possible that sugar price will not increase in the long-run. Growth in sugar market will no longer be limited by the over-subsidization of the inefficient producers, the European Communities. This reason will be support by Figure A.

Figure A:Welfare considerations•The social welfare transfer to EU sugar consumer and the welfare of EU sugar producer declineThe sugar subsidy currently transfers the wealth from EU consumer to ACP and EU producer. However, without the current level of support to producers and high level of border protection which is the high guaranteed price level, a lot of EU production will struggle to compete with efficient (low cost) producer such as Thailand, Brazil and Australia. Furthermore, the new EU quota allocation system will shift the production to focus on efficient state. Thus, after the reformation, the welfare transfers to ACP and EU producers will be reduced. On the contrary, the EU consumers will receive welfare gain in because of the lowering on domestic price.

Table 3:This table shows the actual market price in EU member market and it shows that the sugar market price in EU is declined. The lower EU internal price will lower sugar production in some of the EU member countries. EU-15 countries will reduce the production or will completely go out of production. During 1996-2001, the average production for the remaining six countries which are Sweden, France, the UK, Poland, Germany, Austria were accounted as 13.8 million tonnes which closed to the amount of sugar consumption in EU-15 at that time.

Selecting Greece as an example, Greece is less productive country which still maintains excess production capacity. Greece now has five plants which each operates at under capacity and this is done to maintain the level of employment. According to the new CAP, at lease two plants will be ceased from production and sugar beet production will be reduced and finally phased out. Greece has to shift to grow other crop in place of sugar farm. Moreover, the biggest problem for the Commission is how to convince the sugar grower to accept alternative sugar production.

•The welfare which EU was used to distribute to the ACP will fall due to price cuts and reduced export to EUThe ACP countries are used to get income transfer from EU by the amount of $500 million in 2001. Under the CAP reformation, ACP face higher risk than EU members because sugar is the major source of income of ACP countries as their resources are limited and fewer economic alternative.

Table 4:From this table, we can clearly see that ACP loses most of their revenue due to EU minimum price. On the contrary, ACP will still sell into protected market because ACP can reduce the cost with higher production so that ACP will be able to maintain production. Moreover, the countries may be able to maintain their competitiveness once the guaranteed EU price is cut if they can restructure and modernize their facilities. For example, Mauritius is attempting to reduce the production cost to 10-20 cents/lb by 2008 and reduce the number of sugar mill from 14 to 7. The country is investing more in mechanization and it also improves irritation systems. Moreover, the countries which sugar industries will be able to survive are Mauritius, Fiji, Swaziland, Guyana, Guysuco (Fiji is the most unsafe one). These countries concentrate on the reformation of their sugar industry. In contrast, Trinidad, Barbados, Tobago, and St. Kitts will cease sugar production. For Trinidad and Tobago, they have only one sugar mill which is government owned and have the debt burden over $130 million.

•The welfare gain will shift to non-ACP or non-preferential producers.

Finally, the EU production and ACP imports will be reduced as much as five millions tons and that may turn EU to become trade neutral or small net exporter. Thus, the welfare will be transferred to third countries because the decline in EU sugar export will enable the effective competitor like Thailand, Australia, and Brazil to displace the EU in many major markets in Asia, the Middle East and Russia.

Figure BFrom the Figure B, during 2004-2005, EU is ranked as fourth largest sugar exporter, which EU is preceded by Brazil, Australia and Thailand. These fours exporters are account for 60% of the world total export. In addition, it is predicted that if EU become trade neutral, the other seven net exporters will fulfil EU position.

Figure C:Figure D:Thailand will gain from this transfer from the EC since it is one of the lower cost developing countries producers and it also gain more than Australia. However, Brazil will be the countries that receive the largest welfare transfer because Brazil can produce sugar at the lowest cost comparing to other net exporting countries and the sugar supply of Brazil has large price elasticity which means that Brazil can easily shift the huge quantities of sugarcane (which is used to produce ethanol) to sugar production and Brazil also has large land that is capable to expand into new production. Therefore this is why the end of this dispute between Thailand and the EC or Brazil and the EC or Australia and the EC were so successful.

•The welfare gain also transfer to raw sugar refiner.

The reduction in EU export of sugar also leads to an increase in premium between the cost of white sugar and raw sugar so it becomes more profitable to raw sugar refiner. Moreover, there is an expansion of sugar refining capabilities in Middle Eastern such as Saudi Arabia, Dubai, Syria, Egypt and also some countries in African and Asia.

Economic analysis result on Thailand sugar marketIn any market, one of the important factor to be maintained is the stability in the price level so does the world sugar market. Since sugar is a special agricultural product it has time for growing and harvesting. For example, sugar cane, one type of sugar, is a multi-year crop which is typically 5 to 7 years therefore it is very difficult to match each production with price conditions and there is an overproduced tendency which will finally drive the world price downward similarly to the EC export subsidies on sugar. The sugar market is recently stable more than it was.

The sugar sector is distorted by protection, causing price instability and leading to dumping consequently a removal of the protection can stabilize the sugar market. This is why the EC policy should be reformed in order to make the price stability in this market. Since the action of the EC causing a dumping market, thus, the removal of export subsidies will significantly raise prices. This will raise production and exports accordingly.

To show how this beneficial to the complainants, Thailand, it is necessary to illustrate in the following graph. The below graph shows two exporting countries one is large country which the EC and the other is a small country which is certainly Thailand the main focus of this paper. The large country demand and supply curve is more elastic than the small one however as already mentioned developing countries have lower costs of production and accounted for almost all the sugar production. Therefore the domestic price in Thailand is lower than the domestic cost or price of the European Communities. Note that, even a lower cost developing country can provide, a small country cannot support the whole demand for import in the world sugar market so that the EC can be export to support the rest of the demand for sugar import. Assume that the subsidization level is all eliminated.

Figure E:According to figure E, the protection, export subsidy regime, is removed from sugar market therefore the supply curve in the world market will move leftward to the black line and the total quantity of exports will be OQ5 which includes the export from the EC and partly from Thailand already. Consequently the price the EC receive is lower from P1 to Pw, reducing domestic producers’ incentive to produce as much as before as a result of no guarantee of very high price at P1 from the government intervention there is only Q1Q2 as an export amount. However this elimination of subsidization policy of European Communities is beneficial to Thailand because it induces the increase in production, so does the export amount from Thailand to the world market due to the higher price Thailand receives from Pw (which is greater than the non-removal subsidization case). In general, Brazil and Australia case can end up similarly like this since the sugar market in these three complainants are relatively smaller than the EC sugar market.

In conclusion, this is why the three parties want to win the dispute settlement since it will gain a better situation. The EC is finally be penalized through the order to adjust or maintain the reduction commitment level from about more than 5 million tones a year to 1.2735 million tones a year; and their budgetary expenditure on such subsidies must be reduced to 499.1 million Euro or 800 million dollars a year. These cases between the EC and Thailand or Brazil or Australia are the successful as it can force the EC by using the WTO judgment to make them reduce the subsidy amount back to its reduction commitment level. Eventually, the developing countries can export more at a higher price.

Bibliography:Final act. Embodying the results of the Uruguay Round of multilateral trade negotiations. Ministry of Commerce, October 1994.

Agriculture report-Trade Dispute Over E.U. Sugar Subsidies, 15th November 2004, broadcast November 16th, 2004FAO corporate document repositoryEuropean Commission to appeal against WTO sugar ruling, Business Line, Monday, October 18 2004Tralac Trade Brief no. 3/2005 www.tralac.orgISO for the Sugar Beverages Group, prepared by Mr A.C. Hannah, Chief Economist, Commodities and Trade Division