25 October 1979

(i) World export trade

4.9 The Panel considered that its examination should be based not on the concept of "free market" introduced by Australia in presenting its contentions (see paragraph 2.20) but on the concept of "world export trade" mentioned in Article XVI:3 of the General Agreement. In that connection the Panel referred back to various discussions that had taken place in the past regarding the term "world export trade" and its interpretation.⁷ In the event, the Panel did not consider it necessary for the purpose of determining whether a market share was a "more than equitable share of world export trade" to establish market shares in relation to concepts other than those of total world exports, taking into account the fact that a consideration of shares of the free market involved methodological difficulties that would make any comparison difficult.⁸

(ii) Time periods considered

4.10 The Panel noted that the Australian complaint referred to the post-1975 period. Regarding the years preceding the period subject to complaint, the Panel felt that 1975 did not appear to be sufficiently representative, as world market prices were abnormally high in 1974/1975. The strong rise in sugar prices in 1974 was mainly due to the fact that for the fourth successive year total world consumption exceeded world production and stocks were declining, and the supply situation was particularly bad in Europe. Mainly due to a bad crop in 1974, there was a shortage of sugar in the European Communities in 1974/1975, and some exports were delayed from 1975 to 1976. The Panel also had some doubts as to whether 1974 would qualify as a fully representative year, but nevertheless thought that the years 1972 to 1974 would still be an acceptable approach. The three most recent calendar years for which market conditions could be considered as normal were then 1971 to 1973, or with some reservations 1972 to 1974. Furthermore, 1977 could also be compared to an average of 1972, 1973 and 1976. In view of the difficulties involved in selecting what could be considered to be the "previous representative period", the Panel felt it necessary to consider various alternatives and to make a set of comparisons.

(iii) Equitable share

4.11 The Panel noted that no definition of the concept "equitable share" had been provided, and neither had it in the past been considered absolutely necessary to agree upon a precise definition of the concept. The Panel felt that it was appropriate and sufficient in this case to try to analyse main reasons for developments in individual market shares, and to examine market and price developments, and then draw a conclusion on that basis.

(iv) Market shares

4.12 Table 2 shows the European Communities' share of world export trade in sugar for some previous representative periods and for periods subject to complaint. Table 3 is a compilation of the comparisons the Panel made in order to determine the direction and magnitude of the changes in Community market shares. The Panel found that the final result was very much the same whichever of the previous representative periods was used for comparison. In any case it appeared that the Community market share had increased in 1976 and 1977 compared to previous periods. The increase in the Community market shares for both 1976 and 1977 was nevertheless rather small, in no case exceeding 2.1 percentage points, which was the increase for 1977 compared to 1972-1974.

4.13 In 1978, the Community export system with respect to sugar remained the same as in previous years. However, the Panel felt that this year constituted a special case, for the following two reasons: at the time when Australia presented its complaint, the year 1978 had not yet ended and the data for that year were not formally finalized at the time the Panel drew its conclusion; 1978 was also the year in which the International Sugar Agreement, 1977, came into operation modifying certain elements of the international sugar market. Despite these facts the Panel nevertheless felt that the year 1978 should be taken into consideration, be it on the basis of preliminary data noting that this would be in conformity with earlier practice.⁹

4.14 An examination of available data for 1978 indicated that Community sugar exports had increased from 2.7 million tons in 1977 to 3.6 million tons in 1978. The share of Community sugar exports in world exports exceeded in 1978 14 per cent which meant a level 5-6 percentage points higher than the market shares in various reference periods considered. This increase in the Community market share corresponded to roughly 1.5 million tons of sugar.

4.15 With respect to the year 1978 the Panel, in addition, noted that the International Sugar Agreement, 1977 (ISA) came into operation on 1 January 1978. Australia limited its exports in accordance with obligations it had taken upon itself under that Agreement. The European Communities did not participate in the ISA.

4.16 The Panel therefore concluded that given the significant increase of Community exports in 1978 both in absolute and relative terms it was justified to examine more thoroughly the conditions under which this development took place.

(v) Displacement

4.17 The Panel was of the opinion that the term "more than an equitable share of world export trade" should include situations in which the effect of an export subsidy granted by a signatory was to displace the exports of another signatory, bearing in mind the developments in world markets. With regard to new markets, traditional patterns of supply of the product concerned to the world market, region or country, in which the new market is situated, should be taken into account in determining what would be "more than an equitable share of world export trade".

4.18 The Panel therefore proceeded to a detailed examination of sugar export statistics, notably in order to see if and to what extent the increased Community sugar exports had displaced Australian sugar exports.

4.19 The Panel noted that total Australian sugar exports had shown a fairly steady increase up to 1978, while Australia's share of world export trade had on the average remained fairly stable with three-year averages for both 1971 to 1973 and 1972 to 1974 at 9.5 per cent and the average 1976 and 1977 at 11.1 per cent For 1978, the Panel estimated the market share of Australia to be around 8 per cent. In the latter year, Australian export had been limited by obligations under the ISA. However, Australia had fulfilled, and even exceeded, its ISA quota in effect for 1978.

4.20 An examination of individual markets enabled the Panel to distinguish between the following five groups of markets, for which data are shown in Table 4.

4.21 Group I (countries where both Australia and the European Communities had sold sugar in recent years, directly competing with each other) in Table 4 consists mainly of China, the United States and the USSR. For this group as a whole, both Australian and Community sales increased in 1976 and 1977, but declined strongly in 1978 by 123,000 tons for the European Communities and by 428,000 tons for Australia. In the case of Australia, the decline in 1978 was due to a reduction in sales to China and the United States, while for the European Communities a strong decline in sales to the USSR was only partly compensated for by increased sales to China and the United States. In the case of the United States, Community exports increased for the third consecutive year, while Australian exports to that market showed a strong decline in 1978. However, the increase in Community exports to the United States for 1978 corresponded to less than 10 per cent of the decrease in Australian sugar exports to that market. In the case of China, Community sales which had been negligible until 1978, reached 93,000 tons or approximately 6 per cent of total imports into China in that year. This might have partly replaced Australian sales to this market, which fell by 138,000 tons from 1977 to 1978, but it must be noted that also supplies from other sources (e.g. Cuba and India) at the same time increased considerably.

4.30 Some basic data for production, trade, consumption and stocks of sugar, for Australia and the European Communities are shown in Annex Table I¹⁰, and, for comparison, world totals for the same in Annex Table II¹⁰. A simple comparison of the figures in these tables indicates that the increase in the Community sugar production corresponded roughly to the world average until 1978. For illustrative purposes, it can be mentioned that the Australian sugar production showed a stronger increase until 1978, when the area harvested was however reduced by 44,000 hectares, resulting in a reduction in production.

4.31 Graph 1¹¹ shows developments in Community sugar production, consumption and target prices since 1969. Up to 1977 the Community area under sugar beet increased with the increase in the Community target price, the price policy apparently being a stimulating factor. Although the increase in the target price was halted in 1977, and the area of sugar beet was reduced, total Community sugar production continued to increase because of higher average yields. It can be seen from Annex Table I and Graph 1 that there was a downwards shift in the Community sugar consumption in 1975 contributing, together with a continued growth in production, significantly to increased exportable surpluses of sugar.

4.32 The Panel noted that the fixing of production quotas was of decisive importance for the application of the price system for sugar in the European Communities. It also noted that in 1975 the basic quota was raised from 7.82 million tons to 9.14 million tons and the maximum quota was maintained at 145 per cent of the basic quota. The basic quota was then maintained in the following years, but the maximum quota was reduced first in 1976 (to 135 per cent) and again in 1978 (to 127.5 per cent) (Annex Table VIII)¹⁰. Furthermore, the Panel noted that sugar produced in excess of the basic quota, but within the limits of the maximum quota, was subject to a production levy of up to 30 per cent of the intervention price. Although this step resulted in a smaller area planted with sugar beets in 1977 and 1978, total production continued to increase, as yields were higher. The steps taken were therefore not sufficient to prevent the exportable surplus from increasing further in 1977 and 1978.

4.33 The Panel understood the community system of regulations concerning the sugar Markets to imply that the quantity exported from the European Communities with an export refund would be limited by the total of maximum production quotas, plus imports under special arrangements minus domestic consumption. Any sugar produced in excess of maximum quotas must be disposed of on external markets without benefiting from any refund. Table 6 shows Community exports totally and with a breakdown into exports with refunds and exports without refunds in 1972-1978. A comparison of figures for 1976, 1977 and 1978 with averages for 1972-1974, indicates clearly that the increase in Community sugar exports in 1976-1978 mainly consisted of increased exports with export refunds, i.e. sugar produced within the maximum quota. Both in 1976 and 1977, exports without refunds were inferior to the average for 1972-1974. Although Community exports without refund (C - sugar) showed some increase in 1977 and 1978, the reduction in maximum quotas and the application of production levies had not prevented that exports with refund continued to increase even in 1978, and still counted for 76 per cent of Community sugar exports.

4.34 The Panel also noted the strong increase in the total amount spent by the European Communities on refunds of sugar in 1977 and 1978. This increase was partly due to larger exports entitled to refund and to falling world market prices, but the Panel noted that the increase was also partly due to an increase in the Community market intervention price for sugar. When examining the question of whether Community export refunds could be subject to budgetary limits, the Panel noted that if the appropriations originally allocated to the Guarantee Section of the European Agriculture Guidance and Guarantee Fund proved to be insufficient in any particular year, the Commission could have recourse to a supplementary budget during the financial year and there would thus be no legally fixed budgetary limits for how much could be spent on export refunds for sugar.

4.35 The Panel felt that in those conditions neither exportable surpluses of sugar nor the amount of refund granted had been effectively limited as a result of the Community system or its application. There was no element in the system and its application that would prevent the European Communities from having more than an equitable share of world export trade in sugar.

(d) Effect on world market prices

4.36 In examining more in detail the granting of export refunds on sugar by the European Communities, the Panel noted that for the quasi-totality of exports with refunds, the refunds were granted under the tendering procedure (e.g. for 91 per cent in 1976, 97 per cent in 1977 and almost 100 per cent in 1978, - Table 6). Under the tendering procedure, the Commission fixed maximum amounts of refunds and for a given quantity, taking into account the supply situation and prices within the Community, prices and potential outlets on the world market, and costs incurred in exporting sugar. The Commission's determination of what were world market prices for sugar was based on the amount of refund proposed in the tenders which were occasionally based on prices lower than the average quotations for white sugar published by the Paris Exchange.

4.37 The Panel noted that the weighted average of export refunds usually corresponded to the difference between the Community intervention price at f.o.b. stage and average spot quotations for white sugar on the Paris Exchange. However, towards the end of the crop years 1975/1976, 1976/1977 (and apparently also 1977/1978) the weighted average refund had tended to exceed that difference. The Panel also noted that from the middle of 1976 on, Community export refunds were increased sharply with only little difference between weighted average refunds and maximum refunds. These developments coincided with a sharp decline in world market prices. Furthermore, the premium for white sugar had diminished, and at times white sugar had been quoted at prices lower than those quoted for raw sugar.

4.38 The Panel felt that since the Community sugar exporters were leading the world market for white sugar, traditionally covering more than half of the world market for refined sugar, the availability of exportable Community surpluses of sugar combined with the possibility of non-limited amounts available to cover export refunds, may well have had a depressing effect on world market prices for sugar, both white and raw sugar.

In the light of the foregoing findings, the Panel reached the following conclusions:

⁷ Discussions at the ninth session of the CONTRACTING PARTIES (1955) (SR. 9/41, page 6) and those of the Panel on French assistance to exports of wheat and wheat flour (1958), (BISD, 7S/52).

⁸ With respect to export statistics, the International Sugar Organization (ISO) gives the following definition of the term "free market": "Free market means the total arrived at by adding together each country's net exports after deducting its net exports, if any, under special arrangements" (Sugar Yearbook 1977, page 347). This definition is based on a series of definitions approved by the International Sugar Council in May 1978 (Statistical Rules under the ISA, 1977, Rule S-1). It might be noted that the definition contained in Article 2 (13) of the International Sugar Agreement, 1977, itself is slightly different and only refers to imports: "Free market" means the total of net imports of the world market, except those resulting from the operation of the special arrangements referred to in Chapter IX of this Agreement; ...". It is notably the term "special arrangements" which causes the main difficulties. In its present form, the definition of "free market" has been applied only from January 1978, and data for 1970 to 1977 have been calculated according to the new definition. As an illustration: until 1975, certain imports into the United Kingdom (Commonwealth Sugar Agreement) and the United States (US Sugar Act) were in fact taking place under special arrangements (i.e. outside the "free market"). This means that the ISO figures for "net exports of sugar to the free market" for the years 1970 to 1977 contain a varying amount of trade which has actually taken place under special arrangements (i.e. outside the "free market"). Furthermore, the figures show "net exports" and not total exports. All this had resulted in some particular results, notably for the European Communities, mainly because the European Communities is at the same time an importer and an exporter of sugar.

⁹ BISD, 25S/48.

¹⁰ The Annex is not reproduced.

¹¹ The Graph is not reproduced.

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