Why unwinding preferences is not the same as liberalisation: the case of sugar



Introduction

Much discourse on the WTO, other areas of liberalisation or CAP reform seems to assume
implicitly that there are just two states - protectionism or liberal trade - and that they apply
equally to all parties. Whilst a moment’s reflection is sufficient to dispel such illusions, the
implications arising from the subtleties of actual policy change are nonetheless overlooked.
The case of sugar illustrates very clearly how the overall effects of a policy change may be
very different from those assumed to arise from headline captions such as ‘reform’ and
‘liberalisation’ that are used to describe them.

Sugar throws the issues into particularly sharp relief because it accounts for the greatest
single static gain for beneficiaries from EU (and probably global) trade preferences and does
so in a variety of ways which produce different distributions of gains. The current changes to
the EU regime will alter substantially both the value and the distribution of gains for
preference recipients whilst assisting non-recipient producers outside Europe only to the
extent of reduced competition in third markets. Achieving the same third market effect in a
different way could have resulted in greater gains for the lowest-cost global producers along
the lines of those expected from ‘liberalisation’.

Sugar is also of particular interest since it concerns three of the six programme countries for
the Development Cooperation Ireland (DCI) development cooperation programme. These are
Mozambique, Tanzania, and Zambia. It is important to think through the broad potential
effects of the EU sugar changes on these countries since these cannot necessarily be inferred
from what is known about the typical effects of liberalisation.

The first two sections describe the ways in which preferences confer benefits on countries
receiving them and, specifically, how ACP sugar exporters have gained from the
status quo
ante
. The gains are complex because preferential sugar enters the EU through several
schemes that confer different gains on the exporting states and are vulnerable to change. The
third section completes the picture by describing the three most direct sources of change.
Having set the scene, the paper sets out an analytical framework relevant to assessing any
trade policy changes that fall short of multilateral liberalisation. This is then used to assess
the potential implications for the ACP of the CAP changes agreed in November 2005 and the
Economic Partnership Agreements currently under negotiation.

The paper concludes that net effects of the recent changes in EU sugar policy are likely to be
different in these three countries, although there exist so many uncertainties that it is not
prudent to be too categorical. Overall, though, imports by the EU from the three sugar
exporting DCI programme countries will be smaller than would otherwise have been the case.

The value of preferences

Trade preferences can exist only if there is protection: if supply to a market is restricted then
the possibility arises to reduce some barriers for some external suppliers. All of the OECD
states offer some form of preferential market access to certain developing countries. One of
the fundamental mechanisms whereby protection supports domestic producers is by
restricting supply in order to maintain prices at higher levels than would otherwise apply. In
some cases these restrictions (and their price effects) are substantial. They create what may
be termed trade policy rents: policy artificially restricts supply resulting in economic rents for
some operators.



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