A structural econometric model of the European sugar sector and the potential implications of the GATT/WTO

Considerable controversy once again surrounds the implications of the General Agreement on Tariffs and Trade Uruguay Round (GATT UR) on the sugar sector world wide. Given the economic importance of the sugar sector along with the complexities of policies associated with this sector, the main objective of this study is to formulate a structural econometric model of the European sugar (EU) sector. In the process of developing the econometric model, particular attention was paid to historical and current EU sugar policy. Production blocks for each of the member states where possible were estimated, whereas for the demand component the EU was treated as single region. The structural model consists of a total of 104 equations, of which 23 are behavioral and the rest are identities. Statistical tests and visual inspection of the plots of actual and simulated values of relevant variables, indicates the model adequately replicates the historical patterns of supply and utilization of the EU sugar sector.; The estimated short run supply elasticities individual member states are in the range of 0.03 to 0.65. The long run supply elasticities are in the range of 0.05 to 0.55. EU sugar quota are shown to have a significant effect on sugar production in several countries, but in no countries does a one percent increase in A- and B- sugar quota increase production by more than 0.54 percent. Many of the differences in supply elasticities across countries can be explained by differences in institutional arguments concerning how sugar is priced. The income elasticity of demand for sugar is 0.715 and the price elasticity of demand for sugar is −0.304 in the EU. The estimated results indicate that the world price of sugar has major influence on the EU sugar sector and vice versa.; The estimated model is used to evaluate the implications for the EU sugar sector, first of the GATT UR exports provision and second, the implications of a hypothetical but plausible scenario where the next round of trade negotiations of WTO leads to gradual elimination of subsidized exports. To be in compliance with GATT UR exports provision, the EU proposed to reduce production quotas. However, in this study the implications of subsidized exports reduction is evaluated by reducing both quota production and intervention price. Quota reduction influences production only whereas intervention price reduction influences both production and consumption. Given the structure of the model if the EU uses reductions in the intervention price of sugar as the only policy tool to reduce subsidized exports, sugar production in some countries within the EU will increase, (e.g. in France 25 thousand tons in 1997/98) and in some countries production will decrease, (e.g. UK by 11 thousand tons in 1997/98/98). In the EU consumption increases by 179 thousand tons in 1997/98. World sugar prices will increase by 7.30% in 1997/98 and in 2000/01 it will increase by 9.90%.