Brazil scored a second victory in two months on August 4 in its campaign against agricultural subsidies when a panel of the World Trade Organization ruled that $1.4 billion of subsidized European Union sugar exports are illegal. The EU is the world's second biggest sugar exporter after Brazil. The co-complainants in this case were Thailand and Australia.
The earlier victory, in which Brazil was a lone complainant, came on June 18 when the WTO had ruled that U.S. cotton subsidies violate WTO trade rules. The two anti-West verdicts represent a major advance in the war against farm subsidies and export dumping.
These are also seen as WTO's growing pressure on the EU, the United States and Japan to scale back subsidies they pay to their farmers worth $184 billion a year. Incidentally, these rulings have come soon before and after the 147-nation WTO agreement on framework for negotiations reached on August 1 under which the subsidizers agreed to scrap farm export aid by a date that has yet to be determined.
The latest WTO ruling - it is an interim ruling and the final one will come in the first week of September and often it remains unchanged - appears to be part of a domino effect of the changed atmosphere in which the very word 'subsidies' is seen in bad light and those who commit this malpractice, it is ironic to note, now feel proud to assert that they seriously intend to scrap the subsidies, although their behaviour often smacks of hypocrisy.
The ruling could lead to a wave of complaints at the WTO against other farm subsidies by other countries and there is a curiosity to know if Brazil will, while riding on the crest of its just-won legal victories in cotton and sugar, mount other cases.
The EU exports up to 5 million tonnes of sugar each year despite its commitment, under the earlier Uruguay round, to reduce its subsidised exports to just over one million tonnes.
In other words the European exports, according the WTO ruling, up to four times the permitted amount of subsidized sugar each year. Oxfam has estimated that EU sugar export dumping depresses world prices and led to foreign exchange losses in the region of $494m for Brazil, $151m for Thailand, and $60m each for South Africa and India in 2002.
The interim ruling found that EU exports of around 2.7 million tonnes of what it claims to be unsubsidized sugar - the so-called non-quota or 'C' sugar - are actually cross-subsidized by EU support provided for the production of quota sugar.
The EU is only able to export non-quota 'C' sugar at prices below the average total costs of production because the support prices for quota sugar are sufficient to cover the fixed costs of production while the world prices cover only their marginal costs.
The EU also subsidizes the re-export of 1.6 million tonnes of sugar - the equivalent of imports from the African, Caribbean and Pacific (ACP) countries and India. These subsidized exports further exceed the amount permitted under WTO rules. However, the panel ruling does not affect the right of the EU to import sugar from the ACP and India on preferential terms.
Sugar is one of the European Union's most heavily subsidized crops and it is the government support that has helped its producers become the second-largest exporters in the world.
The EU sets quotas for sugar production for the European market, and producers must export any surplus sugar at lower prices. For exports of surplus sugar produced under quota, the EU refunds the difference between the domestic price and the one on the world market. This support amounted to Euro 1.47 billion, or $1.77 billion, this year.
Sugar consumers in the 25-nation bloc pay three times more than their counterparts on the world market. It accounts for as much as a quarter of total soft-drink production costs. Six European sugar companies received a total of Euro 819 million, or $986 million, in export subsidies last year, according to Oxfam.
If the EU decides to abide by WTO ruling and doesn't export its surplus sugar any more, it will have to reduce prices. Otherwise, there may well appear sugar mountains like famous butter and cheese mountains of Europe.
Thailand, which annually exports sugar worth about $1.4 billion will gain from the ruling as, its exporters say, the world sugar price is expected to rise by at least 10 per cent. Australia expects a significant impact on world prices but wouldn't say how high prices would go.
An important aspect of the WTO ruling is that it could change the face of the global sugar trade by attracting more investment in refining capacity. A cut in EU white sugar exports could lead to an increased premium between the cost of white and raw sugar, making it more profitable to refine raw sugar.
Currently, the whites-over-raws premium is $70 per tonne and it could rise in coming years as the EU cuts its refined sugar exports which now account for around a third of global availability.
Market analysts expect increased investment in sugar refining capacity in Middle Eastern centres such as Dubai, Egypt, Syria and Saudi Arabia, as well as in parts of Africa and Asia, and Brazil itself. A slide in EU refined sugar exports would enable Brazil, Australia and Thailand to capture major markets in Asia, the Middle East and Russia.
Australia speculates a slash in EU sugar exports by around two-thirds, to about 1.3 million tonnes a year, or much lower than the four million tonnes the EU shipped in 2004. But any such reduction would be replaced by increased output from leading producer Brazil as well as Thailand.
Brazil says the WTO decision, if implemented by the EU, could increase its export earnings by $750 million a year. The ruling also opens the door for other producers to raise their production. They include South Africa, Central America and India which is also the world's largest consumer of the sweetener.
Thai exporters do not expect a rise in sugar prices on the heels of the WTO ruling since other producers will simply ramp up production and the market's basic scenario won't change. However, there could be at least a 10 per cent boost in prices when the ruling becomes final.
Meanwhile, the coincidence of the timing of the WTO panel ruling with the EU's domestic timetable for sugar policy reform increases pressure on the EU to implement major changes in its sugar regime.
The question is whether the EU will give priority to the interests of the poorest countries or implement reforms that continue to protect the vested interests of a few leading sugar farmers and processing companies.
Despite the EU's claims to the contrary during the dispute, the WTO ruling does not affect the EU's right to import sugar on preferential terms; it only affects its right to export on subsidized terms an equivalent amount in excess of its reduction commitments. The impact of the panel ruling on the EU's trade with developing countries depends on how the EU chooses to implement its findings.
The European Union's proposals for sugar reform, released earlier this month, fall far short of what will be required to bring EU sugar policies into compliance with WTO rules.
In particular, they would allow for the continued production and export of non-quota 'C' sugar. The WTO ruling confirms Oxfam's view that all EU sugar exports are effectively subsidized since average EU costs of production exceed the price at which EU sugar can be viably exported.
The EU's sugar reform proposals would fail to end overproduction and export dumping unless EU drastically cuts the EU production quota by around one-third or 5.2 million tonnes to end all export dumping, facilitate an increase in imports from the least developed countries, and realign domestic production with consumption.
The interim ruling has important political implications as well. Together with the outcome of the WTO panel on US cotton subsidies, this verdict proves that the EU and the US use agricultural subsidies in violation of their international commitments and in a way that damages developing countries.
To prove that they are serious about making the current negotiations a 'development round', the EU and the US have no choice but to improve rules that effectively end agricultural export dumping.
The outcome of both panels' verdicts legally establishes the fact that the rich states have failed to abide by subsidy rules that they crafted during the Uruguay Round. This gives the developing countries an important moral and legal victory which should serve to strengthen their determination in the current negotiations.
In case both the US and the EU opt to make appeals against the WTO rulings and then these are rejected which is the most likely outcome, they will have to make a choice between two options.
They can either implement the rulings in good faith or face possible trade sanctions. The latter option - refusing to comply with WTO rules - would further weaken the multilateral rules-based system, of which they are the founders as well as the major beneficiaries.
Such an option is fraught with critical consequences particularly after having arrived at a consensus decision to pursue the Doha round under the just-agreed framework for negotiations.