EU Sugar Policy Regime and Implications of Reform

The European Union (EU) is one of the leading sugar producers and traders in the world. This position was built over time through the application of protectionist policies that regulated production, prices, exports, and imports. Since its creation in 1968, the existing EU sugar policy-commonly referred to as the Common Market Organization (CMO) for sugar-had changed only marginally. In 2006, however, a new sugar regime took effect, largely influenced by three factors: tariff- and quotafree access to least developed countries (LDCs) beginning in 2009, which would likely result in increased sugar imports; enforcement of World Trade Organization (WTO) commitments; and the accession of 10 new member states to the EU in 2004, which exacerbated preexisting sugar supplyand- demand imbalances. What Is the Issue? The EU sugar policy was reformed under multiple pressures, both internal and external. The reform package targeted a limited set of policy instruments, such as support prices and quotas, with the hope of improving the efficiency of the industry and making it more sustainable. However, the partial nature of the reform, which left several key policy interventions unchanged, raises concerns about the implications of the reform on the EU sugar industry and on international trade. Because the EU is the world's second largest producer and exporter of sugar and the third largest importer, the EU sugar reforms have important consequences for both global and U.S. sugar markets. This report examines the current EU sugar regime and uses a model-based approach to assess the potential market and trade implications of the implemented reforms. What Did the Study Find? Current sugar regime - The CMO for sugar is complex, encompassing a variety of policy instruments, including price support, production quotas (sugar and substitutes), export subsidies, and import barriers. The reforms targeted only a few of these instruments, principally cutting the intervention price, or the price guaranteed to EU producers. The 36-percent cut in the intervention price is designed to lower the market price and discourage sugar imports from LDCs. The reforms also included a voluntary buyout scheme for production quotas and a disallowance of exports of nonquota sugar, a step taken with the aim of reducing domestic production and bringing export subsidies within WTO limits. The reforms did not address interstate quota trading (which could induce a significant shift in production from high- to low-cost regions), leaving in place, as before, national quota allocation. The reforms also retained production quotas on sugar substitutes (isoglucose, or high-fructose corn syrup), albeit at higher levels, preventing greater competition within the EU among different types of sweeteners. To read the full report go to: http://www.ers.usda.gov/Publications/ERR59/