South-Western College Publishing - Economics  
European Sugar Subsidies to be Cut
Subject Sugar Subsidies
Topic International Trade
Key Words

Subsidies, Tariffs, Quotas, Exports, Imports

News Story

Europe produces nearly 20 million tons of sugar a year, making it the third-largest sugar producer after Brazil and India. In a recent announcement by the European Commission, that production could be seriously reduced because of an overhaul of the current system of export subsidies, quotas, and tariffs that have historically blocked sugar imports. The current system also buys sugar production from farmers and processors at guaranteed prices.

No details of the revisions were given, but it was suggested that sugar prices could be reduced by as much as 39 percent as production subsidies are removed and other adjustments to the old system are made. If farmers receive less for their output, it is not as profitable for them to use their resources in the production of sugar. Production will fall and sugar production workers will lose their jobs.

The plan was immediately protested by developing nations that export sugar to Europe because of the higher prices received there. These countries are worried that their own sugar industries will be devastated by the reduced prices that will result.

Consumer groups have also voiced concern about the proposal, because they fear it would reduce competition in the sugar industry by forcing small firms out of business. "As a result [of less competition], consumers may enjoy little, if any, benefit in terms of lower sugar prices," said Jim Murray, director of the European Consumers Organization.

Mariann Fischer Boel, the European Commission agriculture commissioner, said, however, that changes were needed to modernize a system that has remained largely untouched since it began nearly 40 years ago.

"If we did nothing, then Europe's sugar industry would suffer a long and painful death," she said. "If the changes are made," Ms. Fischer Boel said, "we will be able to guarantee a viable and sustainable long-term future for Europe's sugar producers."

Large buyers of sugar said the price cut does not go far enough and warned that some big commercial producers could still tacitly collude to keep prices high even after the support system is revised. Alain Beaumont, secretary general of CIUS, which represents sugar users like Coca-cola and Heinz said, "We believe it is a real opportunity to increase competition in the sugar industry. But the price cut is a minimum."

The commission said the changes would bring the European sugar industry into line with other areas of agriculture, including cereals and dairy products, where subsidies have been overhauled in the last few years.

Ms. Fischer Boel said farmers forced out of sugar production would be given aid to help them diversify into new areas. The commission also announced a 2006 aid package of 40 million euros for some countries in Africa and in the Caribbean and Pacific regions that rely on high sugar prices in Europe. But those countries denounced the aid as inadequate and called for a more gradual reduction in sugar prices.

Questions
1.

Discuss the effect of lower subsides on sugar production.

2. If European sugar prices fall, what do you expect to happen to sugar exports from the European community to other countries.
3. Why does the representative of Coca-Cola think that prices need to be cut further?
Source Graham Bowley, International Herald Tribune, "Europe's Plan on Subsidies Aims to Cut Sugar Prices," The New York Times Online, June 23, 2005.

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