Sponsored by American Sugar Alliance S TOWE M OUNTAIN L ODGE S TOWE, V ERMONT S TOWE, V ERMONT A...

Sponsored by American Sugar Alliance STOWE MOUNTAIN LODGE

STOWE, VERMONTAUGUST 1 –6, 2014

www.sugaralliance.org/symposium

Global Free Trade in Sugar: Within Reach or Mirage?

A Discussion

ProSunergy31st International Sweetener Symposium, August 1 – 6, 2014


This Question Has Context:

• NOT ONLY ABOUT SUGAR: one should not disconnect international trade issues for sugar from that of other goods,

• For economists, “Free Trade” is an extension of “Free Markets”

• Can “Free Trade” be fair? Can different business environments compete fairly?


Why Free Trade?

“Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.”

David Ricardo, The Principles of Political Economy and Taxation, 1821


Why Not Free Trade?

“Free trade? Free trade! The call for free trade is as unavailing as the cry of a spoiled child, in its nurse's arms, for the moon, or the stars that glitter in the firmament of heaven.

It never has existed, it never will exist.

Trade implies, at least two parties. To be free, it should be fair, equal and reciprocal.”

Henry Clay, "Defense of the American System“, 1832


Free Trade is a Model

• “Free Trade” is a model for international commerce … based upon the Free Market model for domestic commerce.

• Both models work well … under assumptions.

• However, if these assumptions are not fulfilled (at least in large part), the models do not work.

In particular, to be efficient

a single – international or domestic – market

requires a single currency.



• Economics is not an experimental science but history offers economic policy lessons.

• If Free Trade is so good, why did not one developed country develop through free trade?

The Free Trade Model and History

The Free Trade Model and History

A 1929 lesson: protectionism is bad 1947 GATT – 1995 WTO: For the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.”Bretton Woods institutions: IMF / IBRDTill 1972, managed exchange rates: the absence of protectionism requires rules (think of inter-state commerce)


Free Trade & Fair Trade: Whose Rules?

Competitive discrimination – favorable or unfavorable:

• Fiscal & monetary policies

• Labor law

• Safety regulations

• Security rules

• Property law

• Environmental law

• Industry Support Systems


Sugar: A Glut of Support Systems

Worldwide, the sugar industry is notorious for permanent and widespread domestic and trade “special treatment”:

• State ownership

• Tariffs

• Managed prices (feedstock)

• Soft loans

• Preferential tax treatment

• “Single desk” selling

• Etc.


Sugar: A Glut of Support Systems …


Australia Brazil China Colombia EU Guatemala India Indonesia Mexico S. Africa ThailandTRANSPARENT SUPPORTDomestic Market Controls

Guaranteed Support Prices Supply Management/Controls Market Sharing/Sales Quotas Domestic/Export Revenue Equalization Measures

Import ControlsImport Quota/TRQ Import Tariff Import Licenses Quality Restrictions

Export SupportExport Subsidies Single Desk Selling

NON-TRANSPARENT SUPPORTDirect Financial Aid

State Ownership Income Support Debt Financing Input Subsidies

Indirect Long Term SupportPrograms to Improve Effi ciency Ethanol Programs (mandates/tax breaks) Consumer Demand Support

Table SUM. 1: Summary of Support for Sugar Industry in Selected Countries, 2008

Source: LMC International,2008

… Keeps World Market Prices Below Cost


0

5

10

15

20

25

30

35

40

World Sugar Dump Market Price:Historically Does Not Reflect Actual Cost of Producing Sugar

-- Cents per pound, raw value --

World Average Cost of Production

Sources: Price - USDA, New York Board of Trade/ICE, Contract #11, raw cane sugar, stowed Caribbean port; Monthly avg prices through June 2014.Cost of Production - "Sugar Production Costs, Global Benchmarking Report," LMC International, Oxford, England, July 2014.

31J

Over past 25 years:World average cost of producing sugar (18 cents)

has averaged 50% more than world price (12 cents)

World Price (Only 20-25% of sugar

sold at this price)

26

17

Brazil avg.

Sugar Industry Support Trends

Despite the Uruguay Round Agreement on Agriculture, for sugar (and for agriculture in general) we find:

• Continued / increased support in many countries

• Upward tariff adjustments

• Reliance on support mechanisms outside UR disciplines

• Reliance on trade partner passivity (WTO dispute settlement)

• Unease at exchange rate disruptions


Sugar Industry Support Trends: Producers

65% of world exports are supplied by:

• Brazil: Soft loan increases: US$ 620 M for sugar innovation & US$ 2.5 B

2014 credit line for the industry Tax rebate system renewed (“REFIS 5”)

• Thailand: government-induced switch from rice to sugarcane

• India:

US$ 1 B in new 2014 soft loans for the mills

2014 export subsidies (13% of world market price)

Government intention to increase import tariff from 15 to 40%



In major importing areas:

• China: US$ 800/t subsidy for 3,8 Mt (“The mills were rejoicing”) Government storage program / Import quotas

• EU: R&D support for sugar beet / GMO rejection

• Africa: South Africa: in April, sugar tariff increased from 0 to 23%

(US$ 106/t) Mozambique, Kenya, Tanzania, … looking to increase tariffs

Sugar Industry Support Trends: Consumers

The ASA’s “Zero for Zero” Sugar Policy Proposal

• The principle: Once foreign subsidies that are distorting world prices are

eradicated, U.S. sugar policy would be eliminated.

• ASA Chairman Ryan Weston: “Efforts to unilaterally disarm U.S. sugar policy before such

changes materialize will do nothing to further free-market principles while leaving American consumers dependent on other countries for a vital food ingredient.”

“U.S. sugar farmers are efficient by world standards, and the only reason we need a policy is world market distortion.”



Nails in the Coffin?• Between 2001 and 2008 alone, the Cairns Group found that

India’s “total trade distorting support” to farmers had risen from $8.2 B to $37.6 B, while in China it rose from $320 M to $13.9 B. In the EU, the figure fell from $36.1 B in 2001 to $10.3 B in 2011 while in the US for the same years it fell from $21.5 B to $14.4 B.

• The WTO has been unable to adopt the Trade Facilitation package agreed at Bali last December. India wants to breach its Uruguay Round commitments by stockpiling food staples at above-market prices for security purposes.

Free Trade Under Fire?


• A free market is not a market without rules.

• Global free trade is a mirage: as long as global economic, fiscal and monetary policy coordination remains a dream, free trade will not be the equivalent of a free market.

• International trade in sugar is especially far from fulfilling free market conditions: subsidies are rampant and unequal.


Thank you


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