Scandal of sugar quotas shakes world economy

Charlotte Denny, Guardian News Service, London

Davos, the annual talk-fest of corporate leaders and politicians, is supposed to be the meeting place of the inner elite of globalization. Business deals are made in the corridors while trade ministers hammer out tricky details in the latest negotiations.

But when Britain's trade secretary Patricia Hewitt arrives at the Swiss ski resort this week, she may find it lonely. Neither Pascal Lamy, Europe's top trade negotiator nor his American counterpart Robert Zoellick will be there, a sign that the global trade round launched two years ago in Doha is as frozen as the slopes outside delegates' windows. The American presidential election and the changeover of EU commissioners virtually rule out any chance of picking up the pieces of the round that broke down in Cancun last September.

Hewitt will no doubt make the usual warm statements about Britain's desire to see developing countries gain a fair deal in the negotiations. But for a real assessment of in whose interests British trade policy really works, look no further than the attempts to clean up Europe's absurd sugar market.

In a bizarre reversal of geography, Europe is the world's largest exporter of white sugar, even though it costs twice as much for European producers to grow the stuff than farmers in poor countries. The high prices European consumers pay for sugar subsidizes European exports which destroy the livelihoods of more efficient farmers abroad.

In any sane world, Europe would import most of its sugar from countries such as Colombia, Malawi, Brazil, Guatemala and Zambia. Instead European sugar is dumped abroad at below cost prices, putting farmers who could otherwise sell in local markets out of business. The biggest beneficiary in Europe is the sugar industry, handed a monopoly by Brussels to process at fixed prices, making companies like British Sugar one of the most profitable in the food sector.

Four years ago, Lamy tried to reform the sugar market, when Europe introduced its much hyped "everything but arms" deal under which exports from the world's poorest countries are supposed to enter Europe without tariffs or quotas. British Sugar got together with its fellow beneficiaries and ensured sugar was excluded from immediate reform.

Instead, sugar quotas for developing countries will be gradually increased over the next 10 years, not at the expense of European farmers but of the small handful of former colonies allowed a tiny slice of the market.

Hewitt agrees that the situation is scandalous and has to be reformed. The mandate on the regime runs out next year, and the government has been consulting on alternatives. Don't hold your breath expecting radical reform however, when European agriculture ministers hammer out a final deal later this year.

In Britain, the Department for the Environment, Food and Rural Affairs is in charge. The reformers at the Department of Trade and Industry are impotent against the sugar lobby, among the most determined in London, and the reluctance of other European countries to take on their farmers.

British Sugar has formed an unholy alliance with Tate and Lyle, the company which processes the tiny amount of sugar imported from former colonies. The two have already started a sophisticated lobbying campaign.

This time, British Sugar is presenting itself as the "friend" of the developing world -- or at least those privileged few countries allowed a slice of the action -- conveniently glossing over how, thanks to its lobbying last time, this group bore most of the costs of the last botched reform.

The sugar lobby says that unpicking the arrangement would open the door not to the poorest countries but to big sugar farmers in Brazil and Australia. In a truly cynical twist, they argue that the system is good for poor countries.

In fact the beneficiaries in the developing world are largely winners through the historical accident of having been European colonies, not through any attempt to design a policy to help the poor.

Of the 17 countries allowed to export into Europe, only four are classified by the World Bank as truly poor. Four-fifths of the market is dominated by just five countries -- Mauritius, Fiji, Guyana, Swaziland and Jamaica -- none of which is classified by the Bank as least-developed.

Research commissioned by the European commission shows that full liberalization of the sugar market would cut European production from 20 million tonnes a year to just 6 million tons. Under the regime, just 1.9 million tons is imported from the developing world: With liberalization this would rise to 10 million tonnes while EU exports would fall to zero.

The impact of this on the world sugar market would be dramatic -- global sugar prices would rise by 30%, making an enormous difference to the livelihoods of millions of small farmers around the world. European consumers would be better off as well, even with higher world sugar prices, given that European prices are three times the world average.

Full liberalization is one option being considered by the EU, but is the least likely outcome -- Denmark is the only country that supported it at the last agriculture meeting.

"It's real snouts-in-the-trough politics," says one NGO observer of the agriculture council. Every EU country bar Luxembourg has a sugar industry, and the reform model each supports is the one where their farmers have the least to lose. Defra's preferred option is for a cut in EU sugar prices which would open up the market to higher imports, but would ensure that the large sugar farmers of eastern England remained in business.

It's not surprising perhaps that Defra is so pusillanimous -- at a time when the rural sector is in recession, sugar is one of the most profitable crops in Britain.

Matt Griffith, a trade analyst at Cafod says the negotiations by agriculture ministers proceed as if the global trade talks were just a sideshow.

In reality, the two are linked: Europe promised in Doha to cut export subsidies, with a view to phasing them out, and must reform its sugar sector to achieve that promise. Zoellick has cunningly thrown the spotlight back on Europe by breaking the deal he made with the Commission ahead of Cancun to soft pedal on agricultural reform.

Last week in a letter to his counterparts at the World Trade Organization he called for the talks to be revived this year, with a renewed U.S. commitment to the elimination of export subsidies.

This is a clever move by Zoellick: Had he thought there was a real chance of the talks being restarted anytime soon he would have called for a meeting of negotiators at the Geneva headquarters of the WTO.

But judging that there was no chance of any progress that might require Washington to make concessions at an inconvenient point in the presidential elections, he indulged in a bit of cost-free PR. Most of America's export subsidies are disguised in schemes that abide by the letter of global trade agreements if not the spirit.

All of which leaves Europe in a tricky position when it comes to overhauling the sugar regime. The most likely option is that agriculture ministers will put off any substantive reform, tacitly admitting that the Doha round is going to last a lot longer than its Jan. 1, 2005 deadline.

Britain could use its influence in the EU to achieve real reform of the sugar market this year. But that would involve putting the interests of developing countries ahead of those of British farmers. In a few months' time we will have a chance to judge whether ministers' pro-development rhetoric means anything.