Factors Affecting Trade of Sugar - Assignment Example

? A STUDY ON Factors Affecting Trade of Sugar Submitted by Macro-Micro Economics October Factors affecting tradeof Sugar Sugar is a protected commodity in the world market. It is affected by government interventions, price changes, production, and a growing market for sugar substitutes. Sugar is produced in 120 countries with an annual production of 165 million tonnes a year. 70% of this production is for domestic consumption while 30% is traded in the world. Since only a small portion of the production is being traded freely, it is subjected to government policies and production so that any change affects the trading practices of the commodity. These are trade barriers such as quota and bilateral agreements that limits trading opportunities of least developed countries. As 120 countries partake of sugar allocations imposed by importing countries, it is important to understand if trade barriers create equal opportunity. Sugar producers believe that by removing these restrictions and opening of markets, supply is ensured, rational pricing will be maintained, and smaller countries can have an equal share of sugar quota ( GATRL, 2009). The top sugar producing countries in the world are Australia, Brazil, China, Columbia, European Union, India, Mexico, Pakistan, Thailand, and United States. World production as of 2010/2012 estimates is 168,647 metric tons raw value. BraziL has the biggest share of production followed by India and next by China. The rest is accounted for by Asian production (SUCDEN). With a global population of 7 billion, sugar consumption is estimated at 171.4 million tons and a per capita consumption of 21.kg. Per capita sugar consumption is highest in Brazil, Australia, and Cuba. US have the highest per capita consumption of 32 kg. exceeding the world average, while China has the lowest (Taylor, R. & Koo, Won (2011). Since sugar trading is intertwined in the world market, sugar policies affect the market. For instance, poor countries are already disadvantaged as US supports their farmers, provide domestic controls, tariff quotas, and other initiatives such as bilateral agreements and other farm programs. Quota allocation in US is still based on US sugar trade that existed from 1975 to 1981, and has not changed ever since (Sugarcane.org) Tariff quotas and bilateral agreements limit the free trade of small producing country with the US while farmers support policy is addressed to maintain the domestic farmers. Quota system controls the volume of sugar imports by limiting amount of sugar that enters US on a zero rate tariff rate. The amount set for import must meet the US World Trade organization requirement which is 1,117,195 tons of raw sugar and 22,000 tons of refined sugar. Any over quota export under the system is not advisable since US imposes a higher tariff rate. (Edwards, Chris, 2009). Bilateral arrangement disenfranchises smaller producing countries as they are out on agreements. For instance, the North American Free Trade Agreement with Mexico gives it a distinct advantage over other countries since US provided them with tariff free and attractive provisions including a guaranteed quota that increases yearly.(Office of The United States Trade Representative, n.d.) For fair treatment, the recent talks of world organizations such as the Uruguay rounds, AEFA, and APEC are all aimed toward trade liberalization. (Economic & Research Services, USDA, 1997) Simulations and five scenarios have been expounded to know effects. The Uruguay Rounds will expand global trade and social welfare of countries and regions, except China. AEFA trade liberalization would increase social welfare of ASEAN in limited way. All APEC members tend to gain in the liberalization since high import protection is eliminated. (See FAO Explanation (Annex 1) Koo, Woo ‘s scenario of trade liberalization of both US and EU, and retaining of sugar subsidies will allow most sugar producing countries to survive. However, if only the U.S. eliminates the program, Koo said all U.S. sugar producing regions are threatened. . In Brazil a Laissez-faire policy is observed, that means lesser intervention, plain and simple. Their policies that are directed to sugar and ethanol markets encourage free trade subject to taxes of their country like any other commodity. (Barros, A & Lopes, C).Since it supplies 50% of sugar needs of the world, necessarily it is integrated with other markets. Policies and practices of countries affecting sugar trade are: loan program and Tariff Rate Quotas in the US; internal support and export subsidies in EU, South Africa and Mexico; state trading enterprises for Australia, Brazil, China and India; for developing countries – high tariffs, lower labor costs and weak environmental standards; and for Non-WTO members, independence from WTO rules on market access, internal support, and export subsidies.( U.S. G.A.O Program cited in Koo, Woo , 2000). World sugar requirement is filled by 80% sugar coming from sugarcane and 20% beet sugar. 50% of the beet requirement is produced by the European Union and exported as raw sugar. Therefore it has a need to import refined sugar for its domestic requirement. Sugar policy of EU is similar with US that imposes quota management, guaranteed price and trade measures. The policy that pertains to trade is the quota free imports, duty free access of the least developed country to the European markets .(EU) The effect of preferential treatment has a significant effect to trade. It creates wealth and significant contribution to countries that have been given the chance to respond to demands. But a lot of the participating countries are left behind in trade preferences. A unified approach of negotiations should be set by the international organizations to settle imbalances of trade. 901 words Annex 1 FAO EXPLANATIONS 1. The trade liberalization of the Uruguay Round will expand global trade and social welfare would increase in all regions or countries, except China (China is excluded from the UR trade liberalization). The developing countries gains are large relative to their smaller size of economies and high trade orientation. The gains in UR trade liberalization promote the increase of demand for sugar. Sugar production of importers would decline and sugar production of exporters would increase, except EU and MYS/SGP. 2. AEFA trade liberalization in all sectors would improve the ASEAN's social welfare, but the distribution of gains is uneven in ASEAN regions. AEFA trade liberalization in sugar sector would increase the social welfare of all ASEAN countries, although the improvement is rather limited. The terms of trade improve for Thailand, while the other three ASEAN countries, Indonesia, MYS/SGP, and the Philippines, decrease because of their demand for Thailand's sugar. When all the import protection in sugar sector among ASEAN regions are eliminated, sugar exports of Thailand would increase and imports of Indonesia, MYS/SGP, and Philippine would increase. 3. All APEC members would gain in the APEC trade liberalization, however non-APEC members would lose. In the experiment of trade liberalization in sugar sector, the terms of trade of the main exporters of sugar, Thailand and AUS/NZL, increase. In the case of trade liberalization in all sectors, the increase in demand for agricultural products among USA/CAN, AUS/NZL, China and Indonesia would improve their terms of trade. In the APEC sugar trade liberalization, sugar production in AUS/NZL and Thailand would increase the most. USA/CAN, Japan, China, and Indonesia would decrease their sugar production, because of high import protection to APEC regions is eliminated. The production of ROW and Brazil would also decrease because of trade diversion. The pattern of changes in the experiment of trade liberalization in all sectors is similar to the sugar trade liberalization experiment. 4. Finally, global trade liberalization would promote welfare increases in all regions. Similar to the UR scenario, developing countries' gains are large relative to the size of their economies. The pattern of change in terms of trade is also the same as previous scenarios. In the global trade liberalization scenario, AUS/NZL, Thailand, Brazil and ROW would increase their production of sugar, while EU would decrease much of its production. The increase of production and exports of AUS/NZL and Thailand would be less than APEC trade liberalization scenario, because some trade opportunities would transfer to Brazil and ROW. Source: ERS.Economic & Research Services. Impacts of the Trade Liberalization on the World Sugar Market. FAO Corporate Documents Depository.   References Barros, A. & Lopez, C. ( Aug.2012). Brazilian Sugar Policy. Datametrica, pdf. Chris. (2009)Agricultural Regulations and Trade Barriers. CATO Institute. http://www.downsizinggovernment.org/agriculture/regulations-and-trade-barriers ERS.Economic & Research Services. Impacts of the Trade Liberalization on the World Sugar Market. FAO Corporate Documents Depository. http://www.fao.org/docrep/005/x0513e/x0513e06.htm EU. European Commission. Sugar. Agriculture and Rural Development http://ec.europa.eu/agriculture/sugar/ GATRL. 2010 Trade Barriers Cause Sugar High Prices. Global Alliance for Trade Reform & Liberalization. http://www.globalsugaralliance.org/resources.php?action=viewResource&id=66 Koo, Won (2000). The U.S. Cane and Beet Sugar Industry under Alternative rade Liberalization Policy Options. Agri SUCDEN Sugar. World Sugar Production. Market & Statistics Report(n.d.) Taylor, R. & Koo, Won. (2011), 2011 Outlook of the U.S. and World Sugar Markets, 2010-2020. Center for Agriculture Policy and Trade Studies, North Dakota University. Pdf. p.2. Office of The United States Trade Representative (n.d.)< http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta> Sugarcane.org. Sugar Policy ( n.d.) Read More