Sugar policy with bitter aftertaste

Sugar is one of the sacred cows of Swiss agricultural policy. Since the earliest days of sugar beet production in the late nineteenth century, it has been a symbol of Switzerland's economic and food independence. This explains the high degree of protection and subsidisation in the sugar regime, which has also been fiercely defended by a powerful lobby over the years.

Sugar beet production has grown fivefold since 1965, the area under cultivation has more than doubled (21,145 ha) and the number of farms (6,900) has decreased by one-third. Thanks to technological advances and intensive mechanization, Switzerland's yields are among the highest in Europe (12,000kg of sugar/ha).

The net result is that self-sufficiency has risen from 55 per cent in1990/92 to almost 100 per cent at present! In other words, barring poor weather conditions, Swiss sugar production roughly meets domestic consumption (250,000 tons). More than 90 per cent of its imports (270,000 tonnes) are re-exported to the European Union (EU) as processed products. Some 80 per cent of the sugar produced locally or imported into Switzerland goes into the manufacture of foodstuffs (syrup, chocolate, soft drinks, fruit juice, cookies, etc.).

Meaningless preferential system

In 1989 Switzerland decided to grant tariff preferences for sugar from developing countries, in the form of a Frs 22-tariff reduction per 100kg and a zero tariff for an annual quota of 7,000 tons of raw cane sugar. The Government’s express objective was to improve the competitiveness of sugar producers in the South «vis-à-vis those of industrialized countries, which at times benefit from substantial subsidies». Besides, the new system of tariff preferences in favour of developing countries took effect on 1 April last. In theory it will allow duty-free access (see box on mandatory stocks) for imports from the least developed countries (LDCs) as from 1 September 2009.

Whereas this preferential regime was designed to promote sugar exports from developing countries to Switzerland, European sugar still made up over 95 per cent of imports in Switzerland at end-2006 . This was partly due to the subsidized export price (lower than the domestic price), as well as to advantages stemming from quality, the low cost of transportation and processing, and from the habitual supply practices.

Against developing countries, for the EU

Everything changed suddenly early this year for three reasons, namely, the Swiss production shortfall caused by poor harvests in 2006, the new EU sugar regime adopted in early 2006 that meant reduced surpluses and less export licenses to Switzerland, and plummeting world prices.

These factors caused a substantial and rapid increase in sugar imports from developing countries, including Brazil, Thailand, Colombia, Guatemala, Costa Rica and Paraguay. Their share in Swiss sugar imports was 55 per cent in April and as much as 67 per cent in May. This put pressure on the Swiss market price, which fell below the European level.

The reaction was swift. Under pressure from the Aarberg and Frauenfeld sugar companies (SAF), the Federal Cabinet in early July announced the suspension of tariff preferences for white sugar from developing countries. It was the first time that Switzerland had ever resorted to such a safeguard clause, which is permitted under World Trade Organization rules. The customs duty (Frs 56/100kg) was now 170 per cent, and was meant to offset the difference between the Swiss price (Frs 103), and the world market price (Frs 40-48). Switzerland has admittedly exempted the LDCs from this measure, but at no cost to itself in reality, as these countries in any case lack the export capability for taking advantage of the preference.

Why the sudden decision? According to the State Secretariat for Economic Affairs (Seco), the unduly low Swiss market price jeopardised Switzerland's good trading relations with the EU. It made it impossible to continue to comply with Protocol 2 of the free trade agreement on processed agricultural products. This provision took effect in February 2005 under the second round of Bilateral Agreements, and imposes comparable sugar price levels in Switzerland and the EU. Already difficult to gauge, these reasons conceal yet another motive – fear that market pressure could disrupt the Swiss sugar regime and erode the SAF quasi-monopoly, which is the cornerstone of the system.

Survival of the fittest

It is still too early to draw final conclusions about this safeguard measure, but initial figures would suggest a negative impact on producers in the South. Between May and late September, sugar exports from developing countries to our country contracted 78 per cent to just 22 per cent of Swiss imports. The number of exporting countries in the South fell from 11 to 3, the survivors being only the most competitive like Brazil. In actual fact, the big winners in this change of regime are the EU and the Swiss sugar companies.

Alliance Sud has strongly deplored the Federal Cabinet's decision, first of all as disproportionate, because there were other possible solutions less harmful to the developing countries. Second, it is ethically questionable, for not only does it void the very notion of «preferences» of its meaning and substance, but it also imposes a comparative disadvantage on developing countries by making their sugar more expensive than EU sugar. Third, it means that the Federal Cabinet is ready to grant preferences – and hence a comparative advantage – to developing countries, provided they do not use them, for it will withdraw them as soon as those countries are able to take real advantage of them. Fourth, it is inconsistent, in that it amounts to a tariff increase, which puts Switzerland at odds with its own principled stances at the WTO and in negotiating bilateral agreements with countries such as Colombia (where it advocates market liberalisation).

Correction urgently needed

A correction is therefore needed. As the safeguard measure is expiring at the end of December, Switzerland has to establish a new system of tariff preferences for sugar from the South as of 2008. It has now done so, but in a totally unsatisfactory manner. It has decided to reintroduce a preference of Frs 22/100kg – though only for a quota of 10,000 tonnes – the remainder will benefit from a tariff reduction of Frs 7!

Alliance Sud regards these new measures as entirely insufficient. In the first place, the tariff reductions are much too small to make sugar from developing countries at least competitive with that of the European Union – which is highly subsidised. Second, the quota is much too small – about 3.7 per cent of Switzerland's imports! – to pass for a serious attempt to encourage exports from developing countries. During the consultation process, Alliance Sud had proposed a tariff preference of Frs 30 francs (bearing in mind current transportation and transaction costs) and a minimum quota of 30,000 tonnes.

If Switzerland's preferences for sugar from the South turned out to be largely inoperative up to the end of 2006, they will look like nothing short of meaningless gesturing as of 2008. Reducing them to an almost symbolic level raises doubts over the coherence of Switzerland's foreign policy and contradicts Seco's philosophy of international cooperation, which aims to support the development of Southern countries by strengthening their trade capacity and granting preferential access to our markets.

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Developing countries paying for Swiss emergency stocks

In 1948 Switzerland instituted a system of mandatory food stocks in preparation for the risk of shortages in the event of war, natural disasters or failed harvests. Sugar is among the food staples concerned. The current stock is 75,000 tons, which should cover four months of local consumption. It is financed by a levy on all sugar imports, including those from developing countries that benefit from tariff preferences. This tax is incorporated in the national tariff that was notified to the World Trade Organization in 2000 – and constitutes an additional, more or less hidden customs duty.

This tax was increased from Frs10 to Frs16/100 kg (60%) on 1 June «in response to rising maintenance costs», says Réserve suisse, the authority responsible for managing the stocks. However, as if by chance, the timing coincided with the Seco proposal to counter imports from developing countries by eliminating tariff preferences. Consequently, the tariff on sugar is now Frs 56, comprising Frs 40 in customs duty plus a Frs 16-tax for Switzerland’s reserves. Swiss farmers do not have to pay this charge.

Switzerland’s assertion that sugar from the least developed countries (LDCs) will enjoy duty-free access (zero tariff) to its market in September 2009 is not quite true. Those imports will in fact be subject to the tax of Frs 16 per 100 kg. It is time to end this anachronism and unfairness whereby the poorest countries must finance the sugar reserves of one of the richest countries on the planet.

Contact: Michel Egger