The Hindu Business Line : EU forced to reduce sugar subsidy

, THE World Trade Organisation's recent rejection of appeal filed by the European Union against its ruling that subsidies the EU granted to the sugar sector were illegal is likely to provide a shot in the arm for sugar producers and exporters in developing economies.

Last year, on a complaint filed by sugar producers in Brazil, Australia and Thailand, the WTO had ruled that the EU farm subsidies were unfair. Europe spends about $1.5 billion annually to promote export of nearly 5 million tonnes of sugar to the world market.

The practice of subsidy is seen distorting free market conditions, depressing prices and affecting the economies of many developing countries where a large number derives livelihood from the sugar sector. On sugar, worldwide subsidies aggregate $6 billion annually.

Following the rejection of appeal, the EU will have to considerably pare down its export of subsidised sugar as also reduce its spending on farm support.

When implemented, it will have profound impact on the global sugar market, according to experts.

In the world market, the EU accounts for about 13 per cent of global production, 12 per cent of consumption, 15 per cent of exports and 5 per cent of imports.

It is unclear what is the time frame for the EU to implement the reform process; but the ruling would surely accelerate the pace of reform already under discussion. Sugar prices within the EU are expected to rise, directly hitting food processing industries such as confectionery that consume a lot of this food ingredient. A significant part of the EU sugar is from beet.

An increase in internal sugar price would eventually force the EU to open up its borders and allow sugar at lower tariffs. Currently, the EU sugar tariffs are high and imports from developing countries are controlled through a quota system.

Coming on top of the ruling against cotton subsidies given by the US, the latest WTO decision on the EU sugar is expected to prove positive for the WTO negotiations on agriculture and farm reforms required to be carried out by developed economies.

For India the timing of the ruling is not exactly friendly. For four years until early 2004, the country had large production and carried huge stocks of sugar. Exports were undertaken by granting some incentives to liquidate stocks. India is now an importer of raw sugar; and little export surplus is foreseen until 2007.

But, for the raw sugar importers who have to fulfil their export obligation, a rise in world prices would provide some needed cushion.

However, in the medium to long-term, rising world sugar prices should encourage higher production in the country with a view to creating genuine export surplus.

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