Bridging Micro- and Macro-Analyses of the EU Sugar Program: Methods and Insights



equilibrium (GE) model of the EU economy in order to assess the effect of the November 2005 sugar
reform and the effect of future international discipline under the WTO.

1. The effects of liberalizing sugar markets

Some ambiguous results. Recent studies have provided some information about the effects of sugar
market liberalization. Clearly, the scenarios vary according to authors, but the variation in the findings
can hardly be explained by differences in the policy changes that are modeled. Some authors find that
even a partial liberalization in the sugar market will generate a very large increase in world prices. El
Obeid and Beghin 's results illustrate such findings (El Obeid and Beghin, 2005). Using a partial
equilibrium model to simulate the removal of trade distortions, they find a large increase in the world
price, especially when domestic support is reduced, in spite of a large drop in demand that follows the
removal of consumption subsidies in some countries. One explanation is the considerable decrease in
the production of sugar in the EU, i.e. a fall of 61% under multilateral liberalization. As a result, the
EU becomes a net importer of some 8 million tons of sugar.

Other models that rely on a relatively similar structure (partial equilibrium model, non spatial, etc.)
lead to different results. For a similar increase in the world price, Wohlgenant (1999) finds that EU
production increases by 2% and that the EU remains a net exporter of 2.5 million tons. Poonyth et al
(2000) also find that EU production is barely affected by the reduction in intervention price required to
export without subsidies, and that, overall, EU exports would remain relatively stable. The OECD
(2005) finds that EU production would decrease by some 60% under their trade liberalization scenario.
Adenauer et al (2004) find that exports would decrease significantly if export subsidies were phased
out. Witzke and Kuhn (2003) find a significant decrease in the production of C sugar for a 30%
decrease in sugar price.

The various general equilibrium approaches also lead to different, although perhaps less contrasted,
results. Under a reform that liberalizes the sugar market, Frandsen et al (2003) show mainly an
erosion of rents. They find that production is only marginally affected by a strong reduction of the
intervention price in France, Germany, Austria and the United Kingdom. Bouët et al (2005) find that
the reduction in EU supply is significant if tariffs are cut by 60% and export subsidies removed, but
the resulting increase in world market price is minimal. Van der Mensbrugghe et al (2003) find that
the EU becomes a very large importer of sugar under a multilateral liberalization of the world market.

Why do the results differ so much? There are many explanations for these discrepancies across
studies. Some refer to the model specification.1 Different assumptions about some key factors such as

1 The sensitivity to the assumption of a homogenous vs differentiated good à la Armington is shown
by Van der Mensbrugghe et al (2003). Models that include an endogenous supply of land in Brazil
(such as Van der Mensbrugghe et al, 2003 or Bouët et al, 2005) tend to show smaller increase in the
world price. Partial equilibrium models often provide larger price effects than the GE ones.



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