Economic Impacts of Trade Liberalization on the World Sugar Market

Most governments have imposed distortion policies and trade arrangements to insulate domestic sugar prices from international competition. Since 1975, sugar policies in the European Union, Japan, and the United States have attempted to raise and arguably stabilize the domestic prices of sugar well above world prices. This situation has caused structural surplus in world sugar markets and therefore resulted in low prices. This study analyzed the impact of unilateral and multilateral trade liberalization by major exporting and importing countries on global output, consumption, trade patterns and volume, and the price of sugar. This paper argues that the trade protectionist policies of major consuming countries have resulted in two tier pricing: lower international prices applicable to the traded sugar, and higher domestic prices relevant to the sheltered local production. In addition, this paper provides lessons about sugar policies and the process of sugar policy reform by selectively drawing on trans-national experiences. Using economic theory and empirical evidence, the paper estimates the welfare loss suffered by consumers as a result of such policies. Evidence is also provided to discredit the traditional arguments in favor of protectionism and trade restrictions, among which are reminiscent of the infant industry argument, food security and protection of local jobs. Arguing for liberalization, the paper suggested that as the number of countries pursuing the liberalization increases, the impacts on world prices will be quite substantial. With absolute global liberalization, the production in the major consuming countries such as the US, the EU and Japan could fall by 9.46%, 3.3% and 7.5% respectively. On the other hand, production in Australia, Brazil, and the rest of the world would increase by 11%, 6.9% and 3.5% respectively. The world price will increase by 20.1%. This paper shows that this constitutes an optimum allocation of resources as countries with superior comparative cost increase production at the expense of high cost producers. Thus we hold the view that will have net welfare effects globally.Table of Contents 1: Introduction 1 1.1 Background of the Study 1 1.2 Research Problem and Methodological Orientation 2 1.3 Rationality of the Study 3 1.4 Organization of the Paper 3 2: Literature Review and Theoretical Backgrounds 4 2.1 Modeling Trade Liberalization Impacts on Agriculture 5 2.1.1 Empirical models 7 2.1.2 Models of Sugar Liberalization 8 2.1.3 Evaluating the Effects of Protectionism and Liberalization 10 2.2 Liberalization and Welfare Enhancement 13 3: Economic Characteristics of Selected Sugar Markets 16 3.1 The United States 21 3.1.2 Consumption of Sweeteners 22 3.1.3 Trade in Sugar 24 3.2 Sugar in the European Union 25 3.2.1 Sugar Production 25 3.2.2 Sugar Consumption 26 3.2.3 Trade in Sugar 26 3.3 Brazil’s Evolving Sugar Industry 27 3.3.1 Sugar Production 28 3.3.2 The Fuel Alcohol Sector 29 3.3.4 Sugar Consumption 30 3.3.5 Sugar Trade 31 3.4 Sugar in Japan 33 3.4.1 Sugar Production 33 3.4.2 Consumption of Sweeteners 34 3.4.3 Trade in Sugar 35 4: The Government’s Protectionist Policies and Societal Welfare 36 4.1 Motivations of International Protection on Sugar Trade 36 4.2. Government Interventionist Policies 38 4.3. Impact on the Global Market and Domestic Welfare 43 4.4 Protection and Trade Agreements 48 4.4.1 International Sugar Agreements and Treaties 48 4.4.2 Dependency on the Trade Policy of the Countries 53 4.5 Markets, Productions and Trade Policies 60 4.5.1 Food Security 61 4.5.2 Production Characteristics, Land and History 62 5: Liberalizing the Sugar Market 67 5.1 Extent Factors as Catalyst of Liberalization 67 5.1.1 Liberalization in Australia 68 5.1.2 Brazilian Reform Process 69 5.1.3 Sugar Policy Reform in Thailand 70 5.1.4 Pricing Cane: Cooperative Strategies in Jamaica and Mexico 71 5.2 Privatization of Sugar Mills 73 5.2.1 Using trade protection 73 5.2.2 Writing Off Debt 74 6: Conclusion and Policy Recommendation 78 6.1 Summary 78 6.2 Lessons and Policy Recommendations 79 6.3 Concluding Remarks 82 Appendix 84 References 9