European Review of Agricultural Economics Vol 37 (2) (2010) pp. 165–186
doi:10.1093/erae/jbq011
Advance Access Publication 10 May 2010
Modelling preferential sugar imports of the
EU: a spatial price equilibrium analysis
Stephan Nolte*,†, Harald Grethe ‡, Jeroen Buysse †, Bart Van der
Straeten †, Dakerlia Claeys §, Ludwig Lauwers § and Guido Van
Huylenbroeck †
†
§
Ghent University, Belgium; ‡University of Hohenheim, Germany;
Institute for Agricultural and Fisheries Research, Merelbeke, Belgium
Review coordinated by Paolo Sckokai
Abstract
A spatial price equilibrium model with a large coverage of countries, policies and
regional trade arrangements is applied to simulate preferential sugar imports of the
European Union (EU) in 2015/16 under different assumptions with respect to the
expansion of the sugar sectors of various least developed countries in order to
benefit from unlimited EU market access. These are analysed under three different
policy settings: a continuation of current policies, except for export refunds which
are phased out by 2013, a continuation of current policies including export refunds
and finally a World Trade Organisation agreement. Preferential imports are estimated
to clearly exceed current estimates by the European Commission. In all scenarios,
however, they are not found to threaten the reference price of the new Common
Market Organisation.
Keywords: sugar, Common Agricultural Policy, World Trade Organisation, partial
equilibrium model, bilateral trade, spatial price equilibrium model, mixed
complementarity problem
JEL classification: F11, F13, Q11, Q17, Q18
1. Introduction
The European Union’s (EU) sugar policy has recently undergone its first
major reform since the formation of the Common Market Organisation
(CMO) in 1967. Key instruments of the EU’s sugar policy before and after
the reform include production quotas and import tariffs, resulting in rather
high support of the intra-community price of sugar compared with other
crop products covered by the EU’s Common Agricultural Policy (CAP).
*Corresponding author: Department of Agricultural Economics, Ghent University, Coupure links
653, 9000 Belgium. E-mail: [email protected]
# Oxford University Press and Foundation for the European Review of Agricultural Economics 2010; all rights
reserved. For permissions, please email [email protected]
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Received October 2008; final version accepted January 2010
166
S. Nolte et al.
Table 1. The EU sugar sector prior to the 2006 reform, 3-year average 2003/04– 2005/06
(thousand tons of WSE)
Aggregate quota
Production
Demand
Imports
Exports
17,554
19,377
17,242
2,977
5,327
Source: F.O. Licht (2007), Eurostat (2009), own calculations. Data include Romania and Bulgaria, which acceded the
EU only in 2007.
Note: WSE, White Sugar Equivalent.
1 Under the regime of the old CMO, sugar produced in excess of a firm’s quota was termed
C-sugar. This could not be sold on the domestic market and had either to be stored and marketed
in the following year, which was referred to as carry over, or to be exported without subsidies
(European Commission, 2004).
2 A review of the WTO panel and the arguments put forward by the plaintiffs and the defendant
can be found in Hoekman and Howse (2008) and Conconi (2008).
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At the same time, the EU has imported sugar under various preferential
schemes. Since the level of production quotas together with these imports significantly exceeded the EU consumption, excess sugar was exported with subsidies. In the Uruguay Round of the World Trade Organisation (WTO)
negotiations, the EU committed to binding and reducing these subsidised
exports in quantity and in value terms. Production, consumption and trade
of sugar in the EU under the old CMO are shown in Table 1.
After withstanding the waves of reforms that considerably changed the face
of other sectors covered by the CAP in the last few decades, a reform of the
sugar policy finally became inevitable. Various, mostly external, forces had
put the policy under pressure (FAO, 2005). Imports of sugar from least developed countries (LDC), after completion of the phase-in period of the Everything But Arms (EBA) initiative of the EU in 2009, threatened to cause an
oversupply to the EU market. Furthermore, the unilateral preferences
granted by the EU to African Caribbean and Pacific (ACP) countries in the
form of quota-limited access to the EU sugar market had to be brought into
conformity with WTO rules by 2008. The expected and finally realised
outcome of this process was Free Trade Agreements (FTA) with regional
groups of the ACP countries, so-called Economic Partnership Agreements
(EPA), which would in essence offer ACP countries the same market access
as LDC and thus lead to increased imports, too. Additionally, in 2004, a
WTO panel ruled against the EU in favour of a complaint filed by Thailand,
Australia and Brazil. As a consequence, the EU was not allowed anymore to
exclude C-sugar1 exports and a quantity equivalent to the imports from ACP
countries from its WTO export subsidy limitation commitments.2 This ruling
also implied that any further surpluses arising from the implementation of
EBA and the EPA could not be re-exported with export subsidies to keep
Modelling preferential sugar imports of the EU
167
3 In the period before and shortly after the adoption of the reform, a number of scientific studies
analysed the impact on various stakeholders of the sector. Gohin and Bureau (2006), for
instance, analyse the effects the 2006 reform and alternatively a ban of subsidised exports
would have on the sugar sector of the EU15. Bogetoft et al. (2007) examine the effect of the
reform on sectoral profits and quota utilisation under various alternatives for the re-allocation
of the quota among farmers. Buysse et al. (2007) use a farm-level approach to analyse supply
response and income effects under the reform for Belgium.
4 These are isoglucose, a starch-based sweetener which in North America is referred to as high
fructose corn syrup (HFCS), and inulin syrup, a sweetener produced from chicory roots.
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the internal market in balance, even if the EU were ready to bear the additional
budgetary burden.
The reform which the council of ministers agreed upon in November 2005
(European Council, 2006a) introduced cuts of the administered minimum
prices for sugar and sugar beet, by 36 and 39.7 per cent, respectively. For
the latter, the beet growers are partly compensated by the introduction of
decoupled payments. Rather than a quota cut, the council enacted a restructuring regulation (European Council, 2006b) in which sugar-producing enterprises were given the opportunity to renounce production quota in exchange
for a restructuring aid payment. In the first two years of the restructuring
period, this was a lump sum of EUR 730 per ton of renounced quota. This
amount was decreased to EUR 625 and EUR 520 per ton in the third and
the fourth year, respectively.3
The restructuring process had a rather sluggish start during the first two
years of the implementation phase, but it has been accelerated by the amendment of the restructuring scheme by the council in September 2007 (European
Council, 2007). This amendment significantly increased the incentives for
renouncing a certain share of the quota and thus led to a broad participation
of companies in all member states.
After this latest round of restructuring, 5.7 million tons of quota for the production of sugar and other caloric sweeteners covered by the CMO4 had been
renounced, which is only 0.3 million tons short of the original objective of the
restructuring regulation. As a result, the distribution of production quotas for
the remaining duration of the current CMO is known. Since consumption is
usually very stable, the only remaining uncertain factor influencing the
balance of the EU sugar market is the future preferential imports. LDC will
have unrestricted market access from 2009/10 onwards. After the implementation of the EPA, ACP countries will eventually enjoy the same conditions.
The objective of this study is to simulate these preferential imports of sugar
in 2015/16, the expiry date of the current CMO. For this purpose, a partial
equilibrium model of the world sugar market is developed and applied. As
stated by Elobeid and Beghin (2006), the world sugar market has complex
North–South, South–South and North–North components. Not only is the
EU sugar market highly distorted, but so are those in other industrialised
and developing countries. Similarly, preferential market access is granted
by both groups of countries to various other countries, mostly developing
countries. The world sugar market is thus a textbook example for the
‘Spaghetti Bowl’ (Bhagwati, 1995) of a complex network of regional and
168
S. Nolte et al.
5 Net-trade models are, for example, used by Elobeid and Beghin (2006), Dillen et al. (2008) and
Grethe et al. (2008) to analyse policy alternatives on the sugar market.
6 Some recent examples are Van Berkum et al. (2005), Van der Mensbrugghe et al. (2003) and
Elbehri et al. (2000).
7 Various model analyses simulating the EU sugar market have been published in recent years,
but their results are not valid anymore because the political environment has changed. For
example, Frandsen et al. (2003) analyse the effects of a reduction in border protection and a
quota cut in an elaborate global CGE model. They assume, however, that C-sugar can still be
exported, which is not possible anymore after the ruling of the WTO panel.
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preferential trade arrangements (PTAs). To address this situation properly, a
spatial modelling approach is chosen, which, unlike net-trade models, is
able to treat bilateral trade flows endogenously.5 To our knowledge, all
spatial equilibrium models that were used to analyse the sugar market in the
recent past rely on the Armington (1969) approach.6 To avoid the well-known
problems of this approach when modelling homogeneous commodities such
as sugar (see e.g. Kuiper and van Tongeren, 2006), the model is programmed
as a spatial price equilibrium (SPE) model, assuming homogeneity of sugar
from different origins.
The study adds to the existing literature in several ways. First off, it is to our
knowledge the only equilibrium analysis of the sugar market which is both
able to depict bilateral trade flows endogenously and to assume homogeneous
products. This argument shall further be elaborated in Section 2. Second, the
analysis which is performed takes into account not only the EU preferential
market access commitments, but has a comprehensive global coverage of
PTAs, which include sugar by both developing and industrialised countries
and can therefore take into account interdependencies between these
schemes. The ability to depict bilateral trade flows driven by complex and
overlapping PTAs for homogeneous products is a strength of the SPE
approach, which is undervalued in the existing literature. Third, the analysis
accounts for recent policy changes, such as the results of the latest round of
restructuring of the EU sugar sector and the unrestricted market access
granted to ACP countries beginning in 2015.7
We simulate preferential imports under two different assumptions with
respect to the expansion of the sugar sectors of various LDC in order to
benefit from unlimited EU market access. These different assumptions are
each analysed under three different policy settings: a continuation of current
policies but with abolished export refunds, a continuation of current policies
including export refunds and, lastly, a WTO agreement.
Preferential imports are estimated to clearly exceed current estimates by
the European Commission. In all scenarios, however, they are not found to
threaten the reference price of the new CMO.
In the next section, the model used in this study is described in detail. In
Section 3, we describe the scenarios analysed, i.e. the different assumptions
regarding the development of production capacities in LDC and the political
environment. In Section 4, results are presented and in the last two sections,
the analysis is discussed critically and conclusions are drawn.
Modelling preferential sugar imports of the EU
169
2. Model description
2.1 Technical description
8 See those cited in footnote 6.
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Equilibrium models that have been applied to analyse policy changes can be
broadly divided into two categories, net-trade models and gross-trade or
spatial models, the latter of which are able to account for bilateral trade
flows endogenously. Bilateral trade relationships are prevalent and important
in the sugar market. One important example is the preferential treatment the
EU grants to imports from developing countries of the ACP and LDC
groups. Sugar is also included in various regional trade arrangements, many
of which among developing countries.
Net-trade models analysing the sugar market cannot explicitly take these trade
relationships into account. In the model, a country is either an importer or an
exporter of sugar, but cannot be both at the same time. The EU has large
import quantities under various preferential schemes and at the same time sizeable exports with export subsidies and therefore cannot be properly depicted by
net-trade models. Furthermore, the origin a region purchases its imports from or
the destination it sells its exports to is not specified by a net-trade model. Preferential trade relationships must thus be ignored or treated as fixed.
The bilateral models applied to the sugar market in the past, which in contrast are able to depict these trade flows endogenously, all rely on the Armington (1969) assumption of product heterogeneity with regard to origin.8 For
sugar, which ‘is a true homogeneous commodity’ (Elobeid and Beghin,
2006), this assumption is unrealistic. Furthermore, applying the Armington
approach leads to the well known small shares problem (see e.g. Kuiper and
van Tongeren, 2006): exporting countries whose initial market share in a particular import market is small can never gain a significant share, even if the
prices of their products on that import market are strongly reduced. This is
exacerbated if the initial trade between two countries is zero, since the Armington specification only allows for changes relative to the initial market share. In
this case, trade between these two countries will never occur. The implications
for modelling imports of the EU under EBA and EPA are obvious: since many
of the countries eligible for both schemes are not exporting sugar to the EU in
the base period, the preferential tariff cuts of the EU would not have any effect
on these countries. The same holds for the EU’s most favoured nation (MFN)
imports, which are very small in the model base period.
Therefore, in this study we apply an SPE model (Takayama and Judge,
1971), which allows for the combination of the strengths of both approaches:
the depiction of bilateral trade flows and the retention of the homogeneous
goods assumption. The model contains sugar in white equivalents (WSE) as
a sole product and 106 producing and 90 consuming regions.
In the original form, as suggested by Samuelson (1952), the SPE model
is solved by maximising a quasi-welfare function. This method is still
170
S. Nolte et al.
Di = ai ∗(PDi − c subsi )bi
(1)
Sj = MAX{0, gj + dj ∗(PSj + p subs j )1j }
(2)
Di ≤
sch
Sj ≥
sch
Xsch,j,i
⊥PDi ≥ 0
(3)
Xsch,j,i
⊥PSj ≥ 0
(4)
j
i
Sj ≤ quotaj
Xsch,j,i ≤ trqsch,j,i
⊥PPQj ≥ 0
(5)
⊥PQsch,j,i ≥ 0
(6)
(PSj + PPQj + PQsch,j,i + exw fasj
+ loadingj + freight ji + tcsch − ex sub j,i )
∗(1 + tar avsch,j,i ) + tar spsch,j,i
⊥Xsch,j,i ≥ 0
(7)
+ unloadingi + inld transporti ≥ PDi
9 To explain the concept of integrability is beyond the scope of this article. The interested reader is
referred to Takayama and Uri (1983), Langyintuo et al. (2005) and Rutherford (1995).
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followed by many contemporary analyses applying the SPE approach
(Anania, 2006; Bouamra-Mechemache et al., 2008; Wilson et al., 2008).
As can be seen from the block of equations below, our model is not
programmed as an optimisation problem. Instead, it is formulated as a
mixed complementarity problem (MCP) which solves the first-order conditions of an underlying optimisation problem. As is shown by Kuhn and
Tucker (1951), both formulations of the SPE problem are usually equivalent; however, unlike the formulation as an optimisation problem, the MCP
formulation allows for handling of non-integrable models, for which no
single objective function to be maximised can be constructed. Nonintegrability is caused, for example, by ad valorem tariffs (Rutherford,
1995),9 which are a widely applied instrument in the world sugar market
and are also applied in the model developed for this study. The model is
programmed in GAMS and solved with the PATH solver (Dirkse and
Ferris, 1995). The first version of the model has been developed and
described by Nolte (2008).
The equations of the model are
Modelling preferential sugar imports of the EU
171
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with i being the set of consuming regions, j the set of producing regions and
sch being the set of different schemes under which sugar can be traded
between two regions.
Equations (1) and (2) represent demand and supply functions. In the isoelastic
demand equation, Di stands for demand in country i, PDi for the consumer price
and c_subsi for consumer subsidies. bi is the (negative) own price elasticity of
demand and ai is a calibrated intercept. Sj represents supply in country j, PSj the
producer price and p_subsj producer subsidies. Supply functions are isoelastic
for most regions. In isoelastic supply functions, the parameter gj is zero and
the exponent 1j is the own price elasticity of supply. For some beet-producing
countries, among them the EU member states, the additive parameter gj is negative, which allows production to cease at a positive price (Nolte and Grethe,
2007). The MAX function ensures supply cannot assume negative values. In
equations (3) and (4), Xsch,j,i represents trade flows from country j to i (including
domestic sales) under scheme sch. Total demand in region i cannot exceed the
sum of shipments to that region, and total trade flows from region j cannot
exceed the regions total production. Complementary slackness provides for
consumer and producer prices to become zero if the equations do not hold
with strict equality. Equation (5) requires production of region j to be smaller
or equal than the production quota of that region. If supply falls short of the
quota, the quota loses its value and the quota rent PPQj becomes zero. Equation
(6) limits trade flows under certain schemes to a tariff rate quota (TRQ), trqsch,j,i.
If the TRQ is not filled, complementary slackness provides for the quota rent
PQsch,j,i to become zero. Equation (7), the price transmission equation, requires
that the duty-paid price of imported sugar be either larger than the domestic
price in the import market – in which case no imports take place – or equal
to the price in the import market – in which case imports do take place. The
duty-paid price of imported sugar on the import market consists of the marginal
costs of production (PSi), any rents for production quotas and for TRQ, transportation costs from factory to port (exw_fasj, exw standing for ‘ex works’,
fas for ‘free alongside ship’), loading and unloading costs for ocean vessels
(loadingj, unloadingi), ocean freight rates (freightj,i), transaction costs (tcsch),
ad valorem and specific tariffs (tar_avsch,j,i, tar_spsch,j,i), export subsidies
(ex_subsch,j,i) and transportation costs from the port or the factory to the wholesale market (inld_transporti).
As can be seen from the description of the equations, the model covers a
wide range of agricultural and trade policies. These policies are subsidies
for consumers and producers, production quotas, scheme-specific TRQ,
export subsidies, ad valorem and specific tariffs. The scheme dimension of
trade flows facilitates the implementation of trade policies in the model.
Each country can usually receive shipments under at least two schemes.
These are domestic sales, for which usually no tariff is charged, and
imports under MFN conditions. Countries which have preferential import
schemes in place or countries which are members of a PTA can receive shipments under additional schemes. The most important of these are the
Caribbean Community and Common Market (CARICOM), the Dominican
172
S. Nolte et al.
Republic–Central American Free Trade Agreement (DR-CAFTA), the traditional system of TRQ granted by the USA to various developing countries,
the West African Economic and Monetary Union (UEMOA), the Common
Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC),
all of which overlap in members or beneficiaries with the preferential
import schemes of the EU. Tariffs under these schemes are obviously lower
than the MFN tariffs or are even completely abolished. Trade under some
of the regional or preferential schemes is quota-limited, as, for example,
under the EU’s EBA initiative before 2009/10, while under other schemes
trade is unlimited, as, for instance, under CARICOM.
The base period of the model is 2003/04–2005/06.10 Data for production and
consumption of sugar are taken from F.O. Licht (2007) and for regions not
covered, data are from ISO (2007).11 Prices are taken from USDA (various
years) and European Commission (2007a). All prices are converted in real
2004/05 EUR for the base period and for the simulation runs. The whole set
of regional prices of the model is calibrated by a standard procedure as
described in the introduction of Jansson and Heckelei (2009), taking the
London FOB price for white sugar in the base period as a numeraire price.
Market and trade policies are extracted from Grethe et al. (2008) for the
EU and from USDA (various years) as well as from ITC (2007) for other
regions. Ocean freight rates for key routes in international sugar trade are
obtained from ISO (various years), whereas ocean freight rates for other
routes are estimated with an ordinary least square regression model from a
large set of panel data (approximately 11 thousand observations) from the
same source.12 Other components of transport costs are obtained from
10 Supply reacts to price changes with a significant lag. We therefore left prices in 2005/06 out of the
base period since prices rose strongly during that year, but triggered a global supply response
only one year later. The data of 2003/04 –2005/06 are not the most recent data available; however,
in the years afterwards, freight rates as well as world market prices were much more volatile
than in the chosen period, so the reliability of the observed price –quantity combinations on
which to calibrate the supply functions would have suffered. Furthermore, data for the EU of
any more recent 3-year period would be difficult to incorporate in the model since it would overlap with the implementation period of the 2006 reform. We, therefore, decided to use less recent
data and let the effects of the reform be determined endogenously by the model.
11 F.O. Licht data are, as are the data of our model, stated per sugar marketing year, whereas data
from ISO are stated per calendar year. The ISO data are integrated by treating the calendar year
of 2004 as data of the marketing year 2003/04 and so forth. Since the marketing year covers the
period from October till September, the overlap is 9 months. This will keep the potential error
small, in addition to the fact that data for only very small countries are extracted from ISO.
12 The regression equation is as follows:
Freight i,j = b0 + b1 ∗ Distance i,j + b2 ∗ BDI + b3 ∗ Panama i,j + b4 ∗ Suez i,j + 1i,j .
Independent variables in the regression are the distances between main ports of two regions,
the Baltic Dry Index (BDI) of bulk shipping costs and dutiable canal passages. The loading and
discharging capacity of ports is found to be insignificant. For the end of the projection horizon,
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2.2 Base data and parameters
Modelling preferential sugar imports of the EU
173
Garside et al. (2004) and various local press reports. Elasticities of supply and
demand are based on those used by other partial equilibrium models (Stout
and Abler, 2003; FAPRI, 2007). Rates of technical progress, i.e. the autonomous
annual growth rates of production (factor and output prices being equal), which
reflect especially the progress in plant breeding, and consumption trends are
taken from Grethe et al. (2008) for EU member states and accession candidates
and are derived from FAPRI (2008) projections for the remainder.13 The rates of
technical progress are adjusted such that the world market price in the reference
scenario meets FAPRI (2008) projections for 2015/16. This is because FAPRI
world market price projections take into account explicitly important cross-price
relationships, such as interdependencies with energy markets.
Various scenarios are simulated with the model described in the previous
section based on different assumptions about how sugar sectors of selected
LDC will expand until 2015/16 and about the political situation at that
time. In this study, we analyse two scenarios of sector expansion combined
with three policy scenarios, resulting in a total of six scenarios.
The scenarios with respect to sector expansion are as follows.
Optimistic: This scenario takes into account investment projects in the
sugar sectors of these countries which either have been launched already
or for which financing has already been granted (European Research
Office, 2007; ISO, various issues-a). Supply functions of the respective
LDC are calibrated to meet the envisaged production quantities at projected
prices in 2015/16. This scenario is regarded as the most likely. Although
this is not exactly an overconfident scenario, it is labelled ‘optimistic’ in
contrast to the second scenario.
Conservative: An expansion of these sectors by merely applying standard
rates of technical progress is assumed.
The final production quantities for the LDC in question under both scenarios are shown in Table 2.
The scenarios for sugar policies in 2015/16 are the following:
REF: The reference is a situation in which the EU continues its current policies, but abolishes export subsidies, as has been indicated by former EU
Commissioner Fischer-Boel. This policy setting, in combination with the
‘optimistic’ scenario of production increase in the LDC, is regarded as
the reference scenario of the analysis.
it is assumed that the BDI stays at its average level during the base period of around 4,000 points.
For reasons of space, data and estimation results are not reported here. Details on the estimation
procedure and the results can be found in Nolte (2008: 15 – 18 and Annex XIII).
13 For regions not represented in any of the four studies, the parameter values of regions with similar socio-economic and agro-climatic conditions are adopted.
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3. Scenarios
174
S. Nolte et al.
Table 2. Sugar production of selected LDC in 2015/16 under different assumptions (thousand tons of WSE)
Mali
Mozambique
Zambia
Tanzania
Ethiopia
Sudan
Optimistic
Conservative
219
482
679
437
920
894
35
291
296
255
400
813
Table 3. Proposed formulae for agricultural tariff cuts
Industrialised countries
Developing countries
Current tariff in ad
valorem equivalents (%)
Tariff
reduction (%)
Current tariff in ad
valorem equivalents (%)
Tariff
reduction (%)
0–20
20– 50
50– 75
.75
48–50
55 –60
62 –65
66 –73
0–30
30–80
80 –130
.130
32–33
37–40
41–43
44–49
Source: WTO (2007).
EXS: The second policy scenario is identical to the reference scenario, but
export subsidies are maintained within the limits of the EU’s WTO
commitments.
WTO: In the third policy scenario, the conclusion of a WTO agreement
along the lines of the Falconer proposal of July 2007 is simulated. The
details of the suggested tariff cuts are presented in Table 3. The arithmetic
means of the listed ranges are applied to cut the bound rates of all countries
in the model which are members of the WTO. In cases where the applied
tariff of a certain country exceeds the new bound tariff, the applied tariff
is fixed at the new bound rate. In other cases, the applied tariff is left
unchanged. Additionally, it is assumed that no country declares sugar as
either a sensitive or a special product.
4. Results
4.1 Optimistic scenario
Table 4 shows the results of the different scenarios for the EU, and Table 5
shows the results for production quantities in individual member states.
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Source: European Research Office (2007), ISO (various issues-a), F.O. Licht Commodity Analysis (2007), own
simulations.
Modelling preferential sugar imports of the EU
175
Table 4. Model results for the EU (2015/16)
Optimistic
PWM (EUR/ton, real 2004/05)
PEU (EUR/ton, real 2004/05)
DemandEU (million tons of WSE)
ImportsEU (million tons of WSE)
ProductionEU (million tons of WSE)
Conservative
REF
EXS
WTO
REF
EXS
WTO
249
392
18.1
5.3
13.1
247
417
18.0
6.5
13.2
266
371
18.2
5.9
12.6
253
422
18.0
5.1
13.2
252
431
18.0
6.4
13.3
270
375
18.2
5.8
12.7
Table 5. Model results for sugar production in 2015/16 in the EU member states (thousand
tons of WSE)
Quota
Austria (1000 tons of WSE)
Belgium/Luxemburg
Czech Republic
Denmark
Spain
Finland
France
Germany
Greece
Hungary
Italy
Lithuania
Netherlands
Poland
Portugal
Romania
Slovakia
Sweden
UK
351
676
372
372
498
81
3,437
2,898
159
105
508
90
805
1,406
10
105
112
293
1,056
Optimistic
Conservative
REF
EXS
WTO
REF
EXS
WTO
351
676
372
372
498
80
3,437
2,898
73
105
416
82
805
1,406
10
37
112
293
1,056
351
676
372
372
498
81
3,437
2,898
119
105
508
90
805
1,406
10
42
112
293
1,056
346
676
372
292
393
67
3,437
2,898
32
105
249
68
747
1,406
10
33
112
293
1,056
351
676
372
372
498
81
3,437
2,898
128
105
508
90
805
1,406
10
43
112
293
1,056
351
676
372
372
498
81
3,437
2,898
144
105
508
90
805
1,406
10
44
112
293
1,056
351
676
372
310
420
70
3,437
2,898
41
105
286
71
778
1,406
10
34
112
293
1,056
Source: Own simulations.
In the reference scenario (column Optimistic/REF), the EU price decreases to
EUR 392 per ton compared with the base period where the price on the
common market was EUR 712 per ton. This is considerably above the reference price determined in the 2006 CMO, which is EUR 323 per ton in real
terms.14 Total imports amount to 5.3 million tons and total production is
14 EUR 404.4 in nominal terms.
Downloaded from erae.oxfordjournals.org at UB Hohenheim on March 8, 2011
Source: Own simulations.
176
S. Nolte et al.
15 These are Finland, Greece, Italy, Lithuania and Romania. Cyprus, Malta and Estonia did not have
a sugar industry before 2006. Bulgaria, Slovenia, Latvia and Ireland gave up their quotas during
the restructuring process. Portugal has also given up its quota. Production shown in row 20 is
produced in the Azores.
16 The common world market price for white sugar is a London FOB price; however, since the EU
will possibly not be an exporter of sugar in the future, which in fact happens in some of the scenarios simulated here, such a price is not applicable. The price used in this model can be compared with the former price by adding ocean freight rates for white sugar to the Near East.
17 CXL is not an acronym, but the number (140) of the goods schedule of the EU that is attached to
the text of the 1994 General Agreement on Tariffs and Trade (GATT).
18 The Cuban sugar sector is an exception. The Cuban government effectively controls sugar production and exports. It is thus difficult to predict how the sector will react to market signals, if at
all.
Downloaded from erae.oxfordjournals.org at UB Hohenheim on March 8, 2011
13.1 million tons. All but five member states fill their quota.15 The world
market price PWM is a Near East CIF-based price.16 It is simulated to be
around EUR 249 per ton.
The preferential imports of the EU are shown in Table 6. Many of the
countries listed in this table have preferential access not only to the EU, but
also to various neighbouring countries and in some cases to the USA. It is particularly interesting to analyse this situation with an SPE model since the
effects of changes in relative profitability of various possible outlets from
the point of view of the exporting country can be assessed endogenously
and in detail.
Total imports in the reference scenario (column Optimistic/REF) increase
to 5.3 million tons at the end of the projection horizon. The first group of
countries shown in the table export to the EU under CXL17 quotas. These
quotas are granted to former suppliers of countries that join the EU to maintain
their current market access. These imports increase from 89 thousand tons in
the base period to 575 thousand tons in 2015/16 under all scenarios since the
quota for Brazil is expanded after accession of Bulgaria and Romania. The
countries possessing quotas under the CXL scheme are highly competitive
producers on the world market. Therefore, their quotas are completely filled
under all scenarios.18
The Balkan countries reduce their exports to the EU from 232 thousand tons
in the base period to 181 thousand tons. Serbia and the FYR Macedonia stop
their exports to the EU and substitute imports on their domestic markets after
the price on the EU market decreases from its pre-reform level. On the other
hand, a new quota was introduced for Croatia in 2007, which is now by far the
largest supplier from this group of countries, the only other being Albania.
Both countries fill their quotas entirely under the reference scenario
(column Optimistic/REF).
The next two groups in Table 6, the LDC and the ACP countries, account
for the biggest share of imports. The two groups overlap, i.e. about 40
countries belong to both groups. In the base period, it is quite straightforward
to classify imports from a country as ACP or EBA imports because under both
schemes they were strictly limited by scheme-specific quotas. At the end of
the projection horizon, in 2015/16, it is not as easy, since imports under
both schemes are quota-free and subject to basically the same conditions.
Modelling preferential sugar imports of the EU
177
Table 6. Model results for EU imports in 2015/16
Base
Period
Source: Own simulations.
89
54
22
9
4
232
–
1
231
104
4
12
14
–
–
–
3
–
28
–
–
16
9
–
19
1,440
12
20
491
148
48
32
42
–
125
16
30
163
–
–
175
124
582
Conservative
REF
EXS
WTO
REF
EXS
WTO
5,338
575
54
508
9
4
181
180
1
–
2,073
3
49
920
–
27
19
23
77
306
95
6
58
491
–
–
2,509
–
133
402
471
85
10
88
264
–
6
–
284
–
13
205
547
–
6,460
575
54
508
9
4
181
180
1
–
2,345
4
66
920
23
28
26
50
79
331
97
6
91
492
133
–
3,359
57
143
459
529
127
29
111
532
137
19
27
313
5
21
290
562
–
5,917
575
54
508
9
4
1
–
1
–
1,759
–
–
920
–
–
–
32
–
328
–
–
52
426
–
–
2,304
–
–
391
472
84
10
105
168
–
12
–
299
–
18
211
534
1,279
5,056
575
54
508
9
4
181
180
1
–
1,083
4
66
399
23
28
26
52
–
140
97
6
–
109
134
–
3,216
57
144
461
535
130
23
98
447
112
19
11
315
5
21
275
565
–
6,374
575
54
508
9
4
181
180
1
–
1,919
4
67
403
23
28
26
55
–
143
98
6
815
116
135
–
3,699
58
145
466
777
154
30
126
551
139
19
27
318
5
22
295
570
–
5,763
575
54
508
9
4
1
–
1
–
593
–
–
380
–
–
–
34
–
124
–
–
–
55
–
–
2,296
–
–
393
478
56
10
106
171
1
13
–
300
–
18
212
537
2,298
Downloaded from erae.oxfordjournals.org at UB Hohenheim on March 8, 2011
Total
CXL
Cuba
Brazil
Australia
Other countries
Balkan
Croatia
Albania
Other countries
LDC
Benin
Congo, D.R.
Ethiopia
Gabon
Guinea
Madagascar
Malawi
Mali
Mozambique
Senegal
Sierra Leone
Sudan
Zambia
Bangladesh
Other countries
ACP (including SPS)
Congo, Republic of
Côte d’Ivoire
Mauritius
Swaziland
Zimbabwe
Barbados
Belize
Dominican Republic
Jamaica
Saint Kitts and Nevis
Trinidad and Tobago
Guyana
Surinam
Papua New Guinea
Fiji
Other countries
MFN
Optimistic
178
S. Nolte et al.
19 As indicated above, the term ‘ACP’ refers to non-LDC ACP countries in the remainder of this
section.
20 This scheme is used to fill the balance between preferential raw sugar imports under other
schemes and the traditional supply needs of EU refineries as stipulated in the CMO. With
increasing imports, this balance will vanish in the medium run and the scheme will therefore
disappear.
21 The 124 thousand tons imported by the group ‘other countries’ under the ACP scheme, are, as
mentioned above, imports of LDC, which also had quotas under the EU ACP sugar protocol in
the base period.
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Thus, in Table 6, all countries which belong to both groups are listed under
LDC. Their exports to the EU in the base period which occurred under the
ACP scheme, however, are listed under ‘other countries’ in the ACP group.
The results for both groups are discussed by scenario in the following
paragraphs.
The imports from LDC under the EBA initiative were quota-limited in
2003–05 and amounted to 104 thousand tons. Under the reference scenario
(column Optimistic/REF), they increase sharply to roughly 2.1 million tons.
A large number of LDC utilises the newly acquired market access. The
biggest beneficiaries in terms of export quantities are Ethiopia, Mozambique
and Zambia, all three of which are listed in Table 2 as countries which
embarked on projects of expanding their sugar sectors. These three can
increase their exports to the EU by several hundred thousand tons. Tanzania,
although having increased its production significantly compared with the base
period, does not export to the EU anymore at the end of the projection horizon
and is thus not listed in Table 6. The increased production in Tanzania is
instead sold on the domestic market, which enjoys a much higher degree of
protection than the EU market in 2015/16.
ACP countries19 exported about 1.4 million tons of sugar to the EU in the
base period, including special preferential sugar (SPS).20 Under the reference
scenario, these imports increase to 2.5 million tons in 2015/16. Nonetheless,
not all countries increase their exports to the EU. The abolition of quota
restrictions on their exports to the EU comes along with a strong decrease
of prices the ACP countries can fetch on the EU market. Thus, Mauritius
and some Caribbean islands reduce or even abolish their exports to the EU.
The main beneficiaries are Côte d’Ivoire, Swaziland and Guyana, which
increase their exports after the abolishment of quotas by more than 100 thousand tons. The Dominican Republic and the group of ‘other countries’ both of
which did not have preferential access at all in the base period can even
achieve higher gains in market access.21 The MFN imports which the table
displays for the base period are actually not imports to the EU, but are
imports of Bulgaria and Romania prior to their accession. In the reference
scenario, no imports under MFN conditions occur.
If export subsidies are retained (column Optimistic/EXS of Tables 4 and 5),
the EU price increases to EUR 417 per ton. Because of quota constraints in
most member states, the response of production is limited. Therefore, the
increased size of the EU market translates almost entirely to additional preferential imports, which increase to 6.5 million tons. The world market price for
Modelling preferential sugar imports of the EU
179
4.2 Conservative scenario
In the ‘conservative’ scenario, merely standard rates of technical progress are
assumed to drive the growth of the LDC sugar sectors. The aggregate amount
of preferential imports is hardly affected; however, as discussed below, the
sources of imports change considerably. Under the reference policies
(column Conservative/REF of Table 4), the EU price is EUR 422 per ton
and thus 8 per cent higher than under the reference scenario (column Optimistic/REF). This leads only to slightly higher production because of the quota
limits in most member states. The alternative policy settings in the conservative case have basically the same effect as under the ‘optimistic’ scenario. The
world market price in all cases is about 2 per cent higher.
Imports from CXL and Balkans countries do not react to the higher EU
price under any of the ‘conservative’ scenarios due to the quota limit
(Table 6). On the other hand, imports from individual LDC and ACP countries
are affected strongly under the ‘conservative’ scenario if compared with the
‘optimistic’ scenario. In most cases, as can be expected, imports from
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sugar is hardly affected if compared with the reference scenario. Imports from
CXL and Balkans countries are at their quota limit and cannot react to the
increased EU price (Table 6). On the other hand, imports from LDC rise by
13 per cent to 2.3 million tons and those from ACP countries rise by 34 per
cent, to 3.4 million tons. The Dominican Republic considerably increases
its exports to the EU as a response to a price change of merely 6 per cent. Bangladesh and Jamaica, which did not export to the EU at all in the reference
scenario, begin to enter the EU market with their entire domestic production.
In case of a WTO agreement (column Optimistic/WTO of Tables 4 and 5),
the EU price falls to EUR 371 per ton and is thus 5 per cent lower than in the
reference scenario. Imports increase to 5.9 million tons. Total EU production
falls by half a million tons. This decrease takes place in those member states
which did not fill their quota already in the reference, as well as Austria,
Denmark, Spain, the Netherlands and Slovakia. The world market price
increases to EUR 266 per ton, 7 per cent higher than the reference.
The price decrease on the EU market discourages any imports from Croatia,
leaving Albania as the only supplier from the Balkans group with an insignificant amount (Table 6). Imports from LDC and ACP fall by 15 and 8 per cent,
respectively. Most countries choose to decrease their preferential exports to
the EU because of an absolute erosion of their preferential margin.
However, some ACP countries, e.g. Guyana, increase their shipments to the
EU compared with the reference. This is due to an increase in the relative preferential margin. This means that, as a consequence of a WTO agreement, the
preferential margins in other export markets or the degree of protection on
their domestic markets is eroded to an even greater degree than in the EU
market. Under this scenario, imports under MFN conditions occur, all
coming from Brazil. This would be the first time since the initiation of the
CMO that this takes place in significant quantities.
180
S. Nolte et al.
5. Discussion and limitations of the model
The model applied in this paper proves useful to analyse preferential and nonpreferential imports of the EU under various economic and political scenarios,
while taking into account conditions in individual countries of origin and in
various PTAs these countries are members of, as well as the interactions of
these conditions. Models with other trade specifications that have been
applied to the global and EU sugar market in previous studies, such as nettrade models or Armington-based bilateral trade models, would not be
suited to carry out such an analysis satisfactorily for the reasons discussed
in Section 2.
However, as with all model analyses, the results of this study must be interpreted with care. Several assumptions can be questioned, such as the elasticities of supply and demand, the technical progress shifters and other parameters
of the model. For this study, no sensitivity analysis is performed. Sensitivity
analyses in earlier studies with this model suggest that the results are
especially sensitive to supply elasticities. Different assumptions about the
future development of the traditionally volatile ocean freight rates did not
have a strong impact on aggregate results, but showed significant effects on
preferential exports of individual countries.
Besides the parameters, policy assumptions can also be questioned. For
example, we assumed for this study that, in case of a WTO agreement, no
country would declare sugar a sensitive or a special product. Former EU
Commissioner Fisher-Boel, however, indicated that this might happen in
the EU. With a TRQ of 485–675 thousand tons that would have to be
opened in this case, total imports after a WTO agreement would move somewhere between what is simulated in the policy reference and the WTO scenarios, i.e. 5.1–5.9 million tons. Investigating the effect this would have on
individual countries cannot be done so easily and would require further
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countries listed in Table 2 decrease under all policy settings if compared with
their counterparts under the ‘optimistic’ scenario as do imports from LDC as a
group. Imports from all other LDC and ACP countries increase due to an
increase in the price on the EU market. There are, however, some interesting
exceptions. Under the ‘conservative/EXS’ scenario, the imports from Sudan
are considerably higher than under the ‘optimistic/EXS’ scenario, despite a
lower production. This is because the revenue producers can fetch for
exports to the EU is higher than for domestic sales. Moreover, contrary to
expectations, imports from Zimbabwe are lower under the ‘conservative/
WTO’ scenario than under the ‘optimistic/WTO’ scenario, despite a higher
price in the EU. The country is, as well as Zambia, a member of the
COMESA. Zambia’s production in the conservative scenario is considerably
lower, which lifts the price level in this region. It is therefore attractive for
Zimbabwe to increase exports to COMESA members at the expense of
exports to the EU.
Modelling preferential sugar imports of the EU
181
22 Since these and other factors are difficult to foresee, we rely on FAPRI projections for the world
market price development in our reference scenario.
23 Heckelei and Britz (2005) give an overview of state of the art of PMP. Their overview also contains
a study (Jansson and Heckelei, 2004) in which an SPE is calibrated to reproduce observed data.
In this study, however, the objective is to estimate a consistent set of regional prices and transportation costs on the basis of observations of these parameters, rather than a matrix of trade
flows and additional trade costs, as in our case.
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model analysis. The same is true if one were to assume that some of the other
WTO members would declare sugar as sensitive or special.
The development of the world market price for sugar is a potential further
source of uncertainty of the analysis. In addition to the instability which is
inherent for any crop prices due to the volatility of yields, the uncertainty
of the world sugar prices is enhanced by the link between the sugar and the
energy markets and by sectoral policies. In particular, the flexibility of Brazilian sugar producers to allocate their cane yield between sugar and ethanol production, as well as the sugar policy of India, which leads to cyclical periods of
over- and undersupply and thus exports and imports, are perceived as major
roots of uncertainty in market forecasts (see e.g. ISO, various issues-b).22 In
general, a higher world market price than assumed in this study will increase
the relative profitability of LDC and ACP countries supplying regional or
domestic markets instead of the EU market and thus lead to lower preferential
imports and vice versa.
Finally, the SPE modelling approach can be criticised. It is unable to reproduce any matrix of bilateral trade flows which is observed in the base period.
This inability comes from the model’s quasi-normative nature. By using such
a normative model, one implicitly assumes first, that all constraints of all
agents in the model are known and implemented correctly by the modeller
and second, that all agents in the model possess all information, are fully
rational and are utility-optimisers. Reality does, of course, not fully comply
with these assumptions. One attempt to solve this problem for agricultural
supply models was the development of positive mathematical programming
(PMP) by Howitt (1995) and others. A similar procedure could also be
applied to calibrate an SPE to an observed matrix of trade flows.23 The
approach, however, while solving one problem leaves open other questions,
such as how to determine the second-order derivatives of the additional cost
terms or how to treat trade flows which are not observed in the base period,
both of which will significantly affect the simulation behaviour of the calibrated model. It remains, thus, a challenge to find a solution for this
problem. An important lesson for the modeller is that a normative or quasinormative approach, such as an SPE, suffers particularly from a misspecification of real-world constraints and relationships, since the less accurately they
are represented, the further the model will deviate from the observed data,
which is not the case for positive models. Hence, when applying such
models, a special focus on the validity of base data, such as, for example,
the consistency of prices and policies, is required.
182
S. Nolte et al.
6. Conclusions
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The present study analyses the effects of two scenarios of a production
increase in selected LDC under three different scenarios of world and EU
sugar trade policies in 2015/16. Although the production of LDC in the ‘optimistic’ scenario exceeds that under the ‘conservative’ scenario by more than
1.5 million tons, this leads to an increase in EU preferential imports of less
than 300 thousand tons. If current trade policies are further pursued by all
countries and the EU abolishes export subsidies, which is chosen as a reference scenario for the end of the projection horizon, imports are simulated to
move in a range between 5.1 and 5.3 million tons. If the EU decides to
further export sugar within its WTO limit of 1.374 million tons, these
exports translate almost fully into additional preferential imports which
increase to 6.4–6.5 million tons. The latter results exceed the forecasts of
the European Commission (2007b) by almost 50 per cent. That study
expects preferential imports of 4.4 million tons by 2014 under the same political conditions (no WTO agreement and retention of subsidised exports).
Export subsidies do not have a notable effect on the world market price
under any scenario. They do not have a significant effect on EU production,
either, due to the binding quota in most member states. They have,
however, an effect on the revenue of the beet growers and processors and
thus on the quota rents.
In contrast, a WTO agreement is found to have a sizeable effect on the
world market price under the ‘optimistic’ and ‘conservative’ scenarios. The
EU price for sugar is simulated to be between EUR 371 and EUR 375 per
ton in real terms in the ‘optimistic’ and ‘conservative’ scenarios. This
means that the reference price of the 2006 CMO, which is EUR 323 per ton
in real terms, is not threatened to be undercut in any of the scenarios.
Two important conclusions can be drawn for EU policies. First off, the
current CMO seems to be ready to stand the test of a WTO agreement, as
well as increased imports under EBA and the EPA. Second, export subsidies
are not effective in supporting increased production in the EU, but rather
provide benefits to preferential exporters, although, of course, at the
expense of other sugar-exporting countries.
The analysis of the individual sources of preferential imports shows that –
in many cases – they are very sensitive to rather small price changes. The
choice of the modelling approach proves to be very useful in the analysis of
these reactions, which, at first glance, seem to contradict common sense in
some cases. All of them can, however, be explained technically, as well as
economically. In conclusion, the ability to depict bilateral trade flows
driven by complex and overlapping PTAs for homogeneous products is a
strength of the SPE approach, which is undervalued in the existing literature.
The analysis has revealed that, for many of the LDC and ACP countries,
under most scenarios the EU is not the most profitable export market after
the 2006 reform. As a conclusion, it can be useful, from a CAP policy-maker’s
point of view, to closely monitor the trade relations of LDC and ACP among
Modelling preferential sugar imports of the EU
183
each other, with other countries granting preferential access and especially
with exporting countries. Any changes in these relationships can have significant effects on the balance of the EU sugar market.
Acknowledgements
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