Summary
The debate on future UK sugar sector trade policy is intensifying. A British Sugar commissioned study recommends future UK sugar trade policy should: recognise the distortions in global sugar markets; ensure future UK policies address these distortions; avoid any unilateral cuts in sugar tariffs and replicate existing EU trade arrangements. The reports treatment of the subsidisation issue ignores the current effects of EU policies on EU27-UK trade in sugar and the knock-on effects this has on ACP/LDC suppliers, which are now being squeezed out of the UK market. The report also underestimates the difficulties of securing acceptance of the proposed apportionment of existing bilaterally agreed EU28 sugar TRQs between EU27 and UK markets post Brexit.
British Sugar has commissioned an independent report on future UK sugar policy from The European Centre for International Political Economy (ECIPE) and the business advisory service consultancy firm Flint. The analysis undertaken was based on the following assumptions:
- the UK will leave the customs union and single market
- the UK and EU will agree an FTA which provides fully duty free-quota free access including for agriculture;
- UK trade relations with other countries will remain unchanged (2).
The reports’ conclusions highlighted:
- the context of future UK sugar policy formulation arising from ‘the extent and size of the distortions within the global sugar market’ which amounts on average to €110/tonne across the six most influential sugar producing and exporting countries (1) (EU, Brazil, USA, India, Thailand and Australia – although the value of subsidization in each country varies greatly) (2);
- the danger arising for domestic beet sugar producers ‘if the UK unilaterally cut tariffs’, since the UK beet sector ‘could be placed at a significant and unfair competitive disadvantage’ (1);
- the need to set in place appropriate policy measures ‘to ensure that the UK beet sugar industry can compete on an equal footing with these subsidised sugar producers and exporters after Brexit’ (1);
- the need for the UK government to ‘replicate the existing EU trade arrangements after Brexit’ (1).
These policy choices would it was maintained ensure minimal effects on prices and losses for consumers and the availability of sugar across the whole product range (1).
However it was acknowledged that trade outcomes will be heavily influenced by the non-tariff measures applied. Any increase in UK-EU27 non-tariff barriers was seen as likely to lead to a decline of both imports and exports of around 45% (2). This would then lead to an increase in UK imports of sugar from non-EU sources of about 12% and an increase in UK sugar exports to the rest of the world by around 15% (2).
The report suggested that if DFQF trade in sugar between the EU27/UK cannot be agreed in order to offset the subsidization policies of the EU the UK government should ‘split the expected import volume into a new tariff rate quota (TRQ) and an out-of-quota volume charged at the EU’s most-favoured nation (MFN) tariff’. It suggests the ‘TRQ and out-of-quota volume should be set at a level that corresponds, in average terms, to the level of EU sugar subsidisation’.
Overall the study concludes:
- ‘Brexit is likely to result in a decrease in UK-EU bilateral sugar trade due to the cost of NTBs in an UK-EU FTA scenario’, the extent to which this occurs will depend on how NTMs are addressed under future UK/EU27 trade arrangements (2).
- This would result in ‘less UK-EU bilateral trade …. a realignment of UK production to the domestic market, and an increase in imports from the UK’s main sugar trade partners, including Brazil and the LDC and ACP countries’ (2).
- Future UK sugar sector tariff policy should be designed to counteract the average level of subsidization amongst major sugar exporters, although the diversity of levels of sugar sector subsidization ‘illustrates the difficulty of using a single MFN tariff to create a level international playing field on which UK industry can compete’ (2).
- The UK would be better served by replicating the existing EU tariff system, with this involving ‘taking the UK’s average share of sugar quotas over the last three years, while also maintaining unrestricted access for Least Developed Countries (LDC) and African, Caribbean and Pacific (ACP) countries’, while honouring its WTO commitment (2).
The analysis contained in the report has led British Sugar to advocate for a post-Brexit UK sugar policy which allows the UK sugar industry to ‘remain globally competitive, but also recognises the benefit continued access to this market provides to Less Developed Countries (LDCs) and African, Caribbean and Pacific Countries (ACPs)’ (1).
| Comment and Analysis
The ECIPE/Flint report has left unaddressed the issue of the impact of EU subsidisation policies in the context of a continuation of free trade between the EU27 and the UK. This is currently a major issue of concern to ACP/LDC sugar exporters. The abolition of EU national sugar production quotas has seen an almost 20% increase in EU28 sugar production, with this giving rise to a major expansion of EU27 sugar exports to the sugar deficit UK market. This is occurring to such an extent that it is squeezing out ACP sources of supply to the UK market (3). ACP/LDC sugar exporters have attributed this in part to the maintenance of voluntary coupled support (VCS) payments in the sugar sector which helps sustain sugar production in less efficient sugar producing areas of the EU (3). The theory behind the EU’s move over to ‘decoupled’ farm support payment (i.e. payments not linked to the production of individual crops) was that patterns of production of specific crops would shift to the most efficient production zones and would decline in less efficient production zones, which would specialise in other products to which they are better suited. The CVS payments hold back this process of production readjustment in the 10 EU member states where such payments are made. However factoring in the relative profitability of sugar vis a vis other arable crops and the impact of lower prices on sugar production in more competitive EU sugar production estimates from the University of Wageningen simulated using an Equilibrium Displacement Model (EDM) suggest VCS payments lead to a net increase in EU sugar production of around 1.3% equivalent to 260,000 tonnes of the latest EU sugar production (4). This is likely to be an under-estimate since sugar beet production in the most efficient production zones has been subject to multi-annual supply contracts between growers and processors, a situation which would reduce the beet production effects of lower prices. The ECIPE/Flint report seems to accept the trade and production implications of EU subsidisation policies should be addressed if there is no reciprocal UK/EU FTA established post-Brexit, but largely ignores the current impact of EU subsidisation policies on ACP/LDC suppliers of the UK market under current arrangements. In terms of WTO rules the ECIPE/Flint analysis of the impact of EU subsidisation policies would appear to fall foul of the consistency of existing EU VCS programmes with existing WTO rules on the provision of agricultural support In this context any UK moves to set up protective measures which implicitly challenges the consistency of EU measures with WTO rules likely to cause friction in UK/EU trade relations, given the implications this could carry for wider EU agricultural trade policies. In addition the approach to the apportionment of existing EU28 sugar TRQs proposed in the ECIPE/Flint report based on ‘historical trade flows’ is likely to be challenged by current beneficiaries. Governments of these countries are likely to be reluctant to give up any access to the EU27 market where the trade policy framework, is known and where domestic sugar consumption trends are stronger, in exchange for access to a UK market where the future sugar sector trade policy framework is unknown and domestic sugar consumption growth trends are weaker. In addition, the recent nature of the opening of some of the bilaterally negotiated EU28 sugar TRQs is such that there is no significant historical basis from the apportionment of TRQs between the UK and EU27 markets. A further area of concern in the ECIPE/Flint analysis is the inadequate attention given to sugar related rules of origin for food and drink products, which is likely to be critical given estimates that up to 85% of the sugar used in the UK goes into processed food and drinks. The nature of these rules of origin on what constitutes UK originating sugar could carry profound implications for the commercial attractiveness of cane based refined sugar products to the UK food and drink processing industry. There is a need for ACP/LDC sugar exporting countries to look carefully at how future EU27/UK rules of origin related to sugar used in processed food and drink products are structured. A case can be made for insisting that post-Brexit UK food and drink manufacturers should be allowed to utilise cane sugar products in goods exported to EU27 market without endangering any preferential access the UK may negotiate to EU27 markets, where the cane sugar originates in ACP/LDC sugar exporting countries allowed duty free-quota free access to the EU27 market. The reason for this is very simple: undercurrent EU rules the refining of sugar does not alter the origin status of the raw sugar processed, which is still defined as originating in the country of origin. This approach should also be applied to UK-EU27 trade in refined and specialty sugar products which are sourced from ACP/LDC countries which enjoy full duty free-quota free access to EU27 markets yet undergo processing in the UK. |
Sources
(1) British Sugar, Blog: ‘What is a fit for Purpose UK Sugar Policy Post Brexit?’, 26 March 2018
https://www.absugar.com/blog-archive/what-is-a-fit-for-purpose-uk-sugar-policy-post-brexit
(2) ECIPE/FLINT, ‘UK sugar trade in the global market after Brexit’, February 2018
https://www.absugar.com/perch/resources/flint-global-uk-sugar-trade-in-the-global-market-after-brexit-february-2018.pdf
(3) ACP/LDC Sugar Industries Group, ‘Written evidence ACP/LDC Sugar Industries Group to the Environment, Food and Rural Affairs Committee’
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/environment-food-and-rural-affairs-committee/postbrexit-trade-in-sugar/written/78499.pdf
(4) Wageningen University Research, ‘Impact of coupled EU support for sugar beet growing: More production, lower prices’, December 2017
https://library.wur.nl/WebQuery/wurpubs/fulltext/430039