7 October 1980

(b) Some features marking the world sugar economy

3.18 World sugar production reached 92 million tons in 1977 and 1978, and had been steadily increasing from its level of less than 70 million tons in 1969. Total world consumption of sugar also increased from 68 million tons in 1969 to almost 90 million tons in 1979. During the period 1969 to 1979 world trade in sugar varied between 18.5 million tons in 1969 and 28 million tons in 1977 while total world stocks of sugar on 31 December varied between 28 million tons in 1974 and 46.3 million tons in 1978. Sugar prices have been very sensitive to the balance between supply and demand. While for 1970, the annual average of the ISA Daily Price (raw sugar, f.o.b. and stowed Caribbean port in bulk) was 3.68 US cents per pound, the annual average for 1974 reached almost 30 US cents per pound, and the monthly average for November 1974 was more than 56 US cents per pound.⁴

3.19 During the period between 1971 and 1974, world consumption exceeded world production and in 1974 world sugar stocks fell to the lowest level in many years. During the same period world prices followed a rising pattern, reaching exceptionally high levels in the third quarter of 1974. In 1975, however, there was a reversal of the supply and demand situation, owing to the fact that world production increased while consumption declined by some three million tons. In 1976 and 1977, world sugar production continued to increase at an even faster rate. In 1977, it was 32 per cent higher then in 1969 and 16 per cent higher than in 1974. In 1977, the crop area of beet was 850,000 hectares greater than in 1974. As to consumption, it too had continued to rise in recent years. The rise was slower, however, than that of production and consequently, in 1978, world stocks reached a record level, exceeding the average level of the 1969-1975 period by 40 per cent. In the summer of 1978, world prices fell to their lowest level since 1971. The situation improved somewhat late in 1978, but remained low until the end of 1979, when prices started to increase rapidly. By the end of 1979 world market prices for sugar were about twice their level of one year earlier and corresponded to the price level in 1975/1976. The main reasons for these developments were a decline in total world production of 3.7 per cent from 1978/1979 to 1979/1980 and an expectation of reduced supplies to be offered on the world market by some major exporters.

3.20 The International Sugar Agreement 1968 entered into force in 1969. Owing to rising prices on the world market the basic export tonnages stipulated by the Agreement were raised in 1970 and 1971 and suspended in 1972, when, moreover, reserve stocks were released. The Commonwealth Sugar Agreement expired in 1974 and was replaced by a protocol concerning sugar annexed to the Lomé Convention whereby the European Communities undertook to import at guaranteed prices a total of 1.3 million tons of sugar (refined sugar equivalent) from a number of developing countries.

3.21 In 1978, world trade in sugar was at about the same level as in the preceding years with the sole exception of 1977, during which it established an all-time record, with world exports of more than 28 million tons of sugar (raw sugar equivalent). As 1977 was the year which preceded the entry into force of the new International Sugar Agreement, 1977 (ISA), this had a certain influence on the volume of trade. In 1978, the first year of the provisional entry into force of the ISA, the exporting countries which had acceded to it had to limit their exports to their minimum levels, i.e. 81.5 or 85 per cent of the basic export tonnages provided for by the Agreement, owing to the depressed prices on the world market. These minimum levels were maintained throughout 1979, but early in 1980 following the rapid increase in sugar prices, export quotas under the ISA were suspended. The European Communities, for their part, had not acceded to this Agreement.

(a) Introduction

4.1 The Panel has carried out its considerations of the matter referred to it for examination in the light of its terms of reference as expressed in paragraph 1.3. It has based its considerations on arguments presented to it by the parties to the dispute (Chapter II) and on various factual information which was available to it, notably that concerning the sugar market system of the European Communities and features of the world sugar market (Chapter III).

4.2 When examining the Community system for granting refunds on exports of sugar, the Panel found that such refunds were granted to enable Community sugar to be exported and that the refunds thus granted were financed out of the European Agriculture Guidance and Guarantee Fund. The Panel considered this Fund to be a government fund of the type mentioned in the Notes and Supplementary Provisions concerning Article XVI:3.⁵

4.3 The Panel therefore found that the Community system for granting refunds on exports of sugar must be considered to be a form of subsidy and which was subject to the provisions of Article XVI. The Panel noted that the parties to the dispute were in agreement with this interpretation.

(b) The Complaint

4.4 The Panel understood the complaint of the Government of Brazil to be that the application of the Community system for granting refunds on exports of sugar has resulted in that the European Communities had more than an equitable share of world export trade in sugar, in terms of Article XVI:3, had caused or threatened to cause serious prejudice to Brazilian interests in terms of Article XVI:1 and that the application of the Community system was not in conformity with the guidelines for joint action stipulated in Article XXXVIII to further the principles and objectives of Article XXXVI.

(c) Relevant GATT provisions

4.5 The Panel therefore noted that the relevant GATT provisions concerned were the following:

(i) Article XVI:1, last sentence:

(ii) Article XVI:3, last sentence:

(iv) Article XXXVIII:1

(d) "More than equitable share"

(i) General

4.6 The Panel noted that no complete definition of the concept "more than equitable share" had been provided, and neither had it in the past been considered absolutely necessary to have an agreed 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 in light of the circumstances related to the present complaint try to determine any causal relationship between the increase in Community exports of sugar, the developments in Brazilian sugar exports and other developments in the world sugar market, and then draw a conclusion on that basis.

4.7 The Panel furthermore noted Article 10:2(a) and (b) of the Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade, and which has been accepted by the parties to the dispute:

"2. For purposes of Article XVI:3 of the General Agreement and paragraph 1 above:

4.8 The Panel also noted that Brazil had presented its complaint before final data for 1978 were available and that it would even at the conclusion of its work only have preliminary data for 1979 at its disposal. The Panel nevertheless felt that it was appropriate to include not only 1978, but to the extent possible, also 1979 in its considerations, as the Community export system with respect to sugar had remained the same as in previous years and the effects of the application as the system may have been even more significant than previously. Furthermore, the complaint by Brazil also covered threat of serious prejudice. The Panel therefore felt it appropriate to take into consideration any available information about developments in recent periods and that this would be in conformity with earlier practice.⁶

4.9 Table 4 shows the shares of world export trade for the European Communities; Brazil and "Others" for the two periods which the Panel considered to qualify as "previous representative periods", namely 1971-73 and 1972-74 and for the years 1976 to 1979, to which the complaint referred. The Panel found that whichever of the two previous representative periods is used for comparison, the outcome would be fairly similar.

4.10 For the years 1976 and 1977, the Community share of world export trade in sugar showed some increase compared to average shares in 1971-73 and 1972-74, the increase corresponding to 0.5 to 2.1 percentage points. The very low market share for Brazil in 1976 was mainly due to a certain lack of sugar available for export caused by a reduced crop in 1975, low carry-over stocks and a continued increase in domestic consumption. In 1977, Brazilian sugar exports showed a good recovery and corresponded in absolute terms to the average for previous representative periods, but the market share did not reach the previous level. However, the Panel felt that Brazilian sugar exports in 1977 corresponded roughly to the quantities of sugar available for export, and that the comparatively low market share for Brazil was not necessarily due to increased Community exports.

4.11 For 1978, subsidized Community sugar exports were increased further, resulting in a significant increase in the Community share of world export trade in sugar. Exports from Brazil could not be increased in spite of ample supplies available for export and which would in themselves permit larger shipments to have been made. In 1978, the market share of Brazil was comparable to that in 1977 but remained inferior to the averages for the years 1971-73 and 1972-74. Preliminary data for 1979, available to the Panel, confirmed that the situation of 1978 had persisted in 1979 available to the Panel. It was evident that the increase in Community sugar exports had been effected through the use of subsidies. The Panel therefore felt that the Community share of world export trade in sugar had increased in such proportions that a thorough examination of the situation was required.

(ii) Displacement

4.12 The Panel undertook systematic analysis of data for imports of sugar into a number of countries and also examined these data in detail with the parties to the dispute. The cases thus examined were selected markets which the representative of Brazil claimed constituted traditional outlets for Brazilian sugar had traditionally been offered for sale (countries listed in Annex Table IX). The purpose of the analysis and examination was to determine whether subsidized Community sugar exports had displaced Brazilian exports of sugar.

4.13 Table 5 shows total Brazilian and Community shares and that for "others" for a selection of markets examined (countries listed in Annex Table IX). For this selection of markets as a whole, the Community share started to increase in 1976 and was for the years 1978 and 1979 around two and a half times of what it had been in previous representative periods. Brazil's share which had been extremely low in 1976 (for reasons mentioned above), showed a good recovery in 1977, and the share then attained was more or less kept in the following years, but nevertheless remained inferior to the

Brazilian share of the market in 1971-73 and 1972-74. The Panel therefore found that there was a change in the relative positions of Brazil and the European Communities for this group of markets as a whole.

4.14 Systematical analysis of trade statistics for individual markets did not produce statistically significant conclusions, and it was evident that developments had also been influenced by factors such as particular trade relations, competition from other exporters and prevailing market prices. The size and destination of Brazilian sugar exports in 1978 and 1979 were apparently also influenced by national sugar export policy. As an illustration it can be mentioned that in the major outlet for Brazilian sugar, i.e. the United States market, Brazilian sales which had been very low in 1975 and 1976 reached a level comparable to that of 1971-73 in 1977 and 1978. In 1979, Brazilian sales of sugar to the United States market exceeded 1 million tons, nearly twice the sales in previous years, resulting in Brazil having a share of that market of almost one fourth.

4.15 An examination of individual markets indicated that there was simultaneously a decline in Brazilian sales and an increase in imports from the European Communities only in a few markets (e.g. Lebanon, Morocco, Sudan and Tunisia), but in the majority of markets examined it was not possible to establish a clear relationship between developments in imports of sugar from Brazil and developments in imports of sugar from the European Communities. This systematic analysis thus did not provide clear and general evidence that Brazilian supplies had been directly displaced by subsidized exports of Community sugar.

(iii) Special factors

4.16 The entering into force on 1 January 1978 of the International Sugar Agreement, 1977, apparently had a strong impact on the volume of world sugar trade in 1977 already. In 1977, total world exports of sugar exceeded 28 million tonnes, with an increase of one quarter from the previous year, the largest annual increase ever recorded. These developments were due to efforts made by exporters to ship as much sugar as possible before the entry into operation of export quotas under the ISA on 1 January 1978, and also to an expectation prevailing among refiners and importers that prices might increase with the entry into force of the ISA.

4.17 However, as supplies continued to be affluent, world market prices for sugar remained depressed throughout 1978 and most of 1979. With a situation of depressed prices for sugar in the world market, major exporting members were committed to limit their exports to 85 per cent or less of their basic export tonnages stipulated in the ISA.⁷ For major sugar exporting countries having acceded to the ISA, the result was a substantial contraction in their exports. In practice this meant that nearly 2 million tonnes of sugar was withheld from world markets by these countries both in 1978 and 1979. However, these efforts did not immediately result in a better market equilibrium as total supplies offered in the world market remained in excess of demand, due to increased exports under special arrangements not subject to the limitations under the ISA and to increased exports from countries not being members of the ISA. Among the non-members to the ISA, the European Communities accounted for nearly three quarters of the total supplies coming from these countries in 1978.⁸ As a consequence, supplies of sugar to the world market remained high in 1978 and 1979 and prices did not improve before late in 1979. Major exporting members of the ISA were thus unable to obtain any immediate benefits of their efforts to stabilize the world sugar market. Export quotas were maintained at their minimum level in 1978 and 1979, and it was impossible to increase basis export tonnages as well. In this situation, Brazil was committed to limit its exports to 81.5 per cent of its basic export tonnages under the ISA, but this reduced quota was filled and even exceeded slightly both in 1978 and 1979.

(iv) Effects of the operation of Community regulations

4.18 The Panel proceeded to an examination of whether the increase in 1976 to 1979 in Community sugar exports, notably the increase in the Community share of world sugar export trade could be contributed to the operation of the Community regulations. With regards to production, the Panel noted that the Community system may put an economic but not necessarily legal limit to the size of the production.

4.19 Some basic data for production, trade, consumption and stocks of sugar, for Brazil and the European Communities are shown in Annex Table I, and, for comparison, world totals for the same in Annex Table II. 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 Brazilian sugar production showed a stronger increase over the same period.

4.20 Graph 1 shows developments in Community sugar production, consumption and target prices from 1969 to 1979. 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. Preliminary data for 1979 indicated that area, yields and total production remained at a level comparable to that of 1978.

4.21 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 increase exportable surpluses of sugar.

4.22 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 to 135 per cent in 1976 and reduced further to 127.5 per cent in 1978 and maintained at that level for 1979/80 (Annex Table VIII).

4.23 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 was followed by a smaller area planted with sugar beets in 1977 and 1978, total production continued to increase, as yields were higher. The steps taken (i.e. reduced maximum quotas for 1978 and 1979 and the collection of production levies at their maximum level for 1977/78, 1978/79 and 1979/80) were therefore not sufficient to prevent the exportable surplus from increasing further in 1977 and 1978, and to remain at a high level in 1979.

4.24 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 3 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.

4.25 The Panel noted the strong increase in the total amount spent by the European Communities on refunds of sugar in 1977, 1978 and 1979. This was partly due to larger Community exports entitled to refund and to falling world market prices, but partly also due to the annual increases 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.

4.26 The Panel felt that in those conditions neither exportable surpluses or sugar nor the amount of export refunds 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

4.27 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 and 1979 - Table 3). 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 injured 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. In such situations, Brazilian sugar, (notably white sugar), which in the absence of long-term contracts was offered at prevailing world market prices (i.e. London and New York quotations), was at a disadvantage and had difficulties in competing with subsidized Community sugar (e.g. in Iran, Israel, Kuwait and Nigeria).

4.28 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 (Annex Table VII). However, towards the end of the crop years 1975/76, 1976/1977, and 1977/1978 the weighted average refund had tended to exceed that difference (Annex Table VII). 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.

4.29 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, inevitably must have had an amplifying effect on the depressed world market prices for sugar, both white and raw sugar.

(e) Articles XXXVI and XXXVIII

4.30 The Panel noted the principles and objectives stipulated in Article XXXVI and the guidelines for joint action given in Article XXXVIII to further the objectives set forth in Article XXXVI, and that Brazil being a developing country could expect to enjoy benefits in accordance with these provisions. In this connection, the Panel also noted that the European Communities has made considerable exports in favour of a number of developing countries and had pursued an active and constructive policy towards the setting-up of international agreements.

4.31 However, the Panel also noted that in the particular situation in the sugar market in 1978 and 1979, when Brazil and other developing countries took action through the ISA to improve the market situation, the European Communities increased its subsidized sugar exports to an extent that inevitably reduced significantly the effects of the measures taken by Brazil and other sugar exporters. It was evident that the magnitude of subsidized Community sugar exports together with the extensive use of maximum export refunds, tended to accentuate the detrimental effect on export earnings of other sugar exporters directly faced with the competition from Community sugar. The Panel felt that even though the European Communities was not a party to the ISA and not bound by the same obligations as members to that Agreement, it would nevertheless be appropriate to collaborate with other contracting parties in conformity with the guidelines given in Article XXXVIII and thus further the principles and objectives of Article XXXVI.

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

DRAFT STATISTICAL ANNEX

Tables I to X omitted

- Annex Tables pp. 32-48 of original -

⁴ Annex Tables I and II show developments in production stocks and trade for Brazil, the European Communities and totals for the world 1969-79. Tables III and IV show developments in world market prices: 1969-79.

⁵ "Notwithstanding such determination by the CONTRACTING PARTIES, operations under such a system shall be subject to the provisions of paragraph 3 where they are wholly or partly financed out of government funds in addition to the funds collected from producers in respect of the product concerned." (BISD Volume IV page 68.)

⁶ BISD Twenty-Fifth Supplement, page 48. L/4833 paragraph 4.13.

⁷ Article 41 of the International Sugar Agreement, 1977.

⁸ ISO Annual Report for the year 1978, page 32.

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