MODELLING THE EFFECTS OF AN ABOLITION OF THE EU SUGAR QUOTA ON

Transcription

1 MODELLING THE EFFECTS OF AN ABOLITION OF THE EU SUGAR QUOTA ON INTERNAL PRICES, PRODUCTION AND IMPORTS STEPHAN NOLTE 1,*, JEROEN BUYSSE 1, BART VAN DER STRAETEN 1, DAKERLIA CLAEYS 2, LUDWIG LAUWERS 2 and GUIDO VAN HUYLENBROECK 1 1 Ghent Unversty, Department of Agrcultural Economcs, Coupure lnks 653, 9000 Gent, Belgum 2 Insttute for Agrcultural and Fsheres Research, Merelbeke, Belgum * Correspondng author. Tel.: +32 (0) ; fax: +32 (0) ; e-mal: Stephan.Nolte@Ugent.be Paper prepared for presentaton at the 114 th EAAE Semnar Structural Change n Agrculture, Berln, Germany, Aprl 15-16, 2010 Copyrght 2010 by author(s). All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes.

2 Abstract We apply a spatal prce equlbrum model of the world sugar market to smulate an abolshment of the EU quota system n 2015/16. To overcome the normatve nature of the approach, we calbrate the model by attachng a non-lnear cost term to each trade flow. Ths s n some regards smlar to postve mathematcal programmng. We suggest an economc nterpretaton and an econometrc specfcaton of the cost term. Producton n the EU ncreases to almost 16 mllon tons. Twelve member states ncrease producton, seven reduce t. Preferental mports are sgnfcantly reduced. Smulated effects are found to be more pronounced the hgher the world market prce. Keywords: CAP, structural change, sugar, TRQ, spatal modellng, trade preferences, PMP; 1. Introducton The reform of the European Unon s (EU) common market organsaton for sugar enterng nto force n was assessed as a success by the European Commsson (Agra-Europe Weekly, 19 June 2009, European Polcy News: 4-5). The maorty of EU beet sugar producton s now concentrated n the member states wth the most effcent ndustres. The prce for consumers and ndustral users of sugar was decreased, processors and beet growers were compensated for ther loss of quota and the latter even for a part of the reducton of the statutory prce for sugar beet wthn the quota. The restructurng scheme 2 was successful n reducng the overall sugar quota 3 of the EU by almost 6 mllon tons, equvalent to one thrd of the pre-reform level of A- and B-quotas. Ths reducton n quantty was regarded necessary n order to keep the common market n balance, once mports from Least Developed Countres (LDC) under the Everythng but arms ntatve (EBA) and ACP (Afrcan, Carbbean and Pacfc countres) under the European Partnershp Agreements (EPA), the successor of the Lomé and Cotonou treates, became fully duty and quota free as of 2009 and 2015, respectvely. As a consequence, the commsson decded not to enact a further mandatory quota cut n February 2010, as t would have been enttled to, should the restructurng process not lead to a suffcent reducton n quantty (Agra-Europe Weekly, 29 January 2010, European Polcy News: 2). Agrcultural Economsts, however, whle acknowledgng the success of the reform wth respect to the specfed obectves were dsapponted by some specfc aspects whch led to a needless loss of effcency. In partcular, they crtcsed that free movement of quotas especally between member states s stll not possble and that the ncentves set by the restructurng scheme led to the persstence of sugar sectors n member states that are not compettve. A proper mplementaton of one or both of these measures could have facltated 1 Councl Regulaton (EC) 2006/ Councl Regulaton (EC) 2006/320.

3 a structural adapton of the EU sugar ndustry embodyng a full concentraton of producton n regons wth a comparatve advantage for beet producton and of processng enterprses beng able to optmally explot economes of scale (Nolte and Grethe, 2010). The current CMO s exprng after the sugar marketng year (MY) 2014/15. No concrete proposal for a successor has yet been tabled, but statements from staff of the European Commsson (Agra-Europe Weekly, 19 June 2009, European Polcy News: 4-5) as well as the general envronment of agrcultural polcy changes, such as for nstance the abolshment of the dary quota, make an abolshment of the quota a rather lkely possblty. In that case, producers n the EU would stll be protected by comparatvely hgh MFN tarffs even more so, snce a quck completon of the Doha round of WTO (World Trade Organsaton) negotatons does not seem very lkely n the next fve years. However, ncreased competton wthn the EU alone can be expected to lead to a substantal structural reallocaton of sugar producton to more compettve regons. It wll also most lkely lead to dscouragement of a part of the preferental mports from ACP, LDC and others and thus to an ncreased market share of domestc producers. In case of world market prces as hgh as currently, t seems even possble that the EU mght re-emerge as an exporter of sugar on the world market wthout export refunds, although t s hghly questonable whether ths current hgh level of world market prces s sustanable n the medum and long run. The obectve of ths paper s to model the abolshment of EU sugar quotas n 2015/16 n order to analyse ts mpact on producton, prces and mports of the EU. For that purpose, An ESTJ 4 spatal prce equlbrum (SPE) model s appled. The preferental mports of the EU, whch are next to quota bound producton and relatvely stable consumpton the only varable element n the current market balance, are of crucal mportance for the effectveness of the EU sugar polcy. They are also of nterest of ther own, though, snce for the countres of orgn, they are a maor source of export earnngs and agrcultural gross domestc product (GDP). Therefore, the SPE model, whch s partcularly suted to smulate blateral polcy changes for homogeneous products, s an adequate choce as a tool for ths analyss. The approach s known, though, to perform poorly n reproducng observed trade matrces. To overcome ths problem we calbrate the model by attachng a non-lnear cost term to each trade flow. Ths approach s smlar to postve mathematcal programmng (PMP), a method 3 Includng renouncements of Inulnsyrup and Isoglucose. 4 Enke (1951), Samuelson (1952), Takayama and Jugde (1964).

4 developed n the 1990s to solve the problem of normatve farm or sector supply models beng unable to reproduce an observed set of decson varables. The abolshment of quotas n the EU can be vewed as a structural break n the sugar polcy wth the potental to nduce a consderable reallocaton of producton between member states. As a consequence, soelastc supply functons, whose parameters are estmated over a rather lmted range of observed prce varatons, wll have dffcultes n properly depctng the supply response to ths structural break, most notably the possble lqudaton of sugar ndustres n some member states. Thus, we decded to employ a dfferent functonal form, whch wll be descrbed n more detal below. In the next secton, we wll gve a short overvew of the modellng approach. In secton three, we wll defne the scenaros wth respect to the development of the world market prce, whch wll be a crucal determnant of the mports of varous preferental tradng partners, of possble exports of EU producers, of the prce level on the communty market and thus of the level of producton and the structural consoldaton of the EU sugar ndustry. In secton four, we present and dscuss the results and n the fnal secton, we draw conclusons wth respect to both the stated research obectve and the adequacy and potental of the appled model. 2. The modellng approach 2.1. The orgnal SPE model The model we use for the smulaton of the scenaros formulated n secton three has frst been developed and descrbed by Nolte (2008a) and snce been appled for the smulaton of varous scenaros of EU and world sugar polces (Nolte, 2008b; Nolte et al., 2010). For reasons of transparency and flexblty, t s formulated as a Mxed Complementarty Problem (MCP) rather than an optmsaton problem (Nolte et al., 2010). In ts basc, uncalbrated verson, the equatons of the model are as follows: 5 5 Endogeneous varables are wrtten n captal letters whle exogenous parameters are wrtten n lower case letters.

5 D S β ( PD c _ subs ) = α (1) = MAX ε { 0,γ + δ ( PS + p _ subs ) } (2) EST η = ζ * stock _ shr * D * PD (3) D + EST X sch,, PD 0 (4) sch S + ost X sch,, PS 0 (5) sch S quota PPQ 0 (6) X sch, trqsch,,, PQ sch,, 0 (7) ( PS + PPQ + PQ + loadng *(1 + tar _ av + freght sch,, sch,,, + tc sch ) + tar _ sp + exw_ fas ex _ sub sch,, + unloadng + nld _ transport PD, ) X sch,, 0 (8) wth beng the set of consumng regons, the set of producng regons and sch beng the set of dfferent schemes under whch sugar can be traded between two regons. Equatons (1) and (2) represent demand and supply functons. In the soelastc demand equaton, D stands for demand n country, PD for the consumer prce, and c_subs for consumer subsdes. β s the (negatve) own prce elastcty of demand and α s a calbrated ntercept. S represents supply n country, PS the producer prce and p_subs producer subsdes. Supply functons are soelastc for most regons. In soelastc supply functons, the parameter γ s zero and the exponent ε s the own prce elastcty of supply. For some beet producng countres, among them the EU member states, the addtve parameter γ s negatve whch allows producton to cease at a postve prce (Nolte and Grethe, 2007). The MAX-functon ensures supply cannot assume negatve values. Endng Stocks EST (3) are modelled as a share (stock_shr ) of domestc consumpton and as a functon of the domestc prce. ζ s a calbrated ntercept and η s the elastcty of stockholdng wth respect to the own prce. In Equatons (4) and (5), X sch,, represents trade flows from country to (ncludng domestc sales) under scheme sch. Total demand n regon plus the endng stocks cannot exceed the sum of shpments to that regon and total trade flows from regon cannot exceed the regons total producton plus openng stocks ost. The latter are dentcal to the endng stocks of the prevous perod. Complementary slackness provdes for consumer and producer prces to become zero f the

6 equatons do not hold wth strct equalty. Equaton (6) requres producton of regon to be smaller or equal than the producton quota of that regon. If supply falls short of the quota, the quota loses ts value and the quota rent PPQ becomes zero. Equaton (7) lmts trade flows under certan schemes to a tarff rate quota (TRQ), trq sch,,. If the TRQ s not flled, complementary slackness provdes for the quota rent PQ sch,, to become zero. Equaton (8), the prce transmsson equaton, requres that the duty pad prce of mported sugar be ether larger than the domestc prce n the mport market - n whch case no mports take place - or equal to the prce n the mport market - n whch case mports do take place. The duty pad prce of mported sugar on the mport market conssts of the margnal costs of producton (PS ), any rents for producton quotas and for TRQ, transportaton costs from factory to port (exw_fas ), loadng and unloadng costs for ocean vessels (loadng, unloadng ), ocean freght rates (freght, ), transacton costs (tc sch ), ad valorem and specfc tarffs (tar_av sch,,, tar_sp sch,, ), export subsdes (exs sch,, ) and transportaton costs from the port or the factory to the wholesale market (nld_transport ) Crtque of the SPE model and response The SPE model n ts orgnal form essentally behaves as a normatve.e. optmsaton model notwthstandng t usually beng used as a tool of postve economc analyss. The Lnear Programmng (LP) formulaton of the transport module s techncally restrcted to a non-degenerate soluton of a maxmum of 2n-1 trade flows, n beng the number of regons. The model suffers thus from two sources of msspecfcaton whch usually prohbt t from reproducng an observed matrx of trade flows, even f all real world constrants were captured adequately, whch s also almost mpossble for a suffcently complex model. Frst, the soluton of the normatve transport model represents an optmal stuaton, whch s usually not the case n realty, nter ala due to the condtons of full nformaton and ratonalty of all agents not beng fulflled. Second, however well the (lnear) model s specfed, the restrcton to a maxmum number of trade flows does not allow to replcate observed trade matrces for most products whch contan a larger number of observed trade flows. In partcular, t does not allow for cross-haulng. As a consequence, the model performs poorly n reproducng observed matrces of trade flows as s notced by many authors (Bröcker, 1988; Harker, 1988; Batten and Westn, 1989; Roy, 1990; Ostrovsky, 2005; Nolte, 2008b, to name but a few), some of whch also tred to offer alternatve approaches for the modellng of spatal trade n homogeneous commodtes. None of these, however, proved successful n replacng the SPE model.

7 As a consequence of the mentoned ponts of crtque and varous observed trends n nternatonal agr-food trade, notably the growng mportance of ntra-ndustry trade, consumer concerns about food safety and the emergence of botechnology n agrculture, Sarker and Surry (2006) argue that trade models restng on the assumpton of homogeneous products wll n future be less and less suted to study trade n agr-food products. Some recent developments on global agrcultural markets, however, seem to pont n another drecton. In md 2007, for nstance, the sugar refnng ndustry n the Persan Gulf, whch had by then been suppled entrely by raw sugar from Brazl, swtched completely to raw sugar of Indan orgn for a perod of more than a year. Indan sugar had become compettve, because the country had a large exportable surplus n that year and ocean freght rates surged at the same tme, affectng freght costs from dstant Brazl relatvely stronger (ISO, varous ssues). Ths example clearly rebuts the assumpton of product heterogenety for the case of raw sugar. In fact, no exstng spatal modelng framework allowng for cross haulng would have been able to reproduce ths complete swtch of orgns as a result of changng cf prces of raw sugar from dfferent orgns. A further example llustrates that a complete shft cannot only occur between orgns, but even between dfferent crop speces: In the frst half of the gran marketng year 2008/09 South Korea s reported to have replaced mports of maze from the US completely by mports of feed wheat from Ukrane (AgrMarket, 2009). As a consequence, whle the hypothess of Sarker and Surry appears to be vald for processed agr-food products, t must be reected for agr-bulk commodtes, especally those not ntended for fnal human consumpton, as s the case wth the two examples dscussed above. For these cases, we rather advocate a modfcaton of the SPE framework, whch s able to cope wth the descrbed problems as an alternatve to the orgnal SPE on the one hand and to models restng on the assumpton of heterogenety wth regard to orgn, the so-called Armngton (1969) assumpton on the other hand The calbrated SPE model Nolte (2008b) suggests to overcome the problem of non-reproducblty of observed trade matrces by attachng addtonal cost terms to each trade flow, an approach that was orgnally developed by agrcultural supply modellers (Howtt, 1995) to overcome a smlar problem as the one we deal wth n trade modellng: The soluton of an LP farm or hgher aggregate supply model dd not reflect the observed producton program of the farm. The reasons are smlar to those we mentoned already: The neoclasscal assumptons are not fulflled n

8 realty and the number of actvtes s bound by the number of bndng, lnearly ndependent constrants, besdes the fact that all models suffer, of course, from the fact that real world constrants cannot be captured fully n the model. In the case of SPE as well as supply models, t s necessary that the addtonal cost terms be at least partly non-lnear n order to overcome the lmtaton n the number of trade flows and actvtes. The absolute value of the addtonal cost terms as well as ther frst order dervatve wll have a large nfluence on the smulaton behavour of the model. It s therefore essental that both be emprcally well-founded. The absolute sze of the cost term s determned endogenously by the calbraton procedure, but only for trade flows and actvtes that are observed n the base equlbrum. The frst order dervatve of the cost term needs to be postve n order to avod non-convextes of the model whch would lead to multple local rather than one global optmum of the model. In realty ths would mean, that the costs of trade between two regons are ncreasng wth the amount of trade of the product n queston. However, an ncrease n freght costs cannot be observed, and there are good arguments to even assume the contrary, decreasng freght costs due to economes of scale. Furthermore, dscussons wth traders led to the result that an SPE model parametersed wth emprcally well-founded freght costs proves to be an excellent ndcator of local prces. For the specfcaton of the calbratng cost terms, these consderatons lead to three mportant conclusons. Frst, the frst order dervatve of the cost term does not reflect freght costs, but other component(s) of total trade costs, usually summarsed as transacton costs. Second, ths frst order dervate cannot be all to large, snce otherwse t would conflct wth the observaton of the SPE s hgh predctve power for prces. Thrd, the absolute sze of the cost term for non-observed trade flows can be very well approxmated by the freght cost. An attempt to calbrate SPE models whch s smlar to ours has recently been made by Pars et al. (2009). In ther approach, they tackle the net trade poston of a country by attachng lnear cost terms to trade flows. As a result, the model s not only able to reproduce an observed net-trade poston of a country, but also to reproduce observed local prces and to elmnate nconsstences n observed trade costs. Due to ther calbraton term beng lnear, however, the model s stll lmted to 2n-1 trade flows, and thus not able to reproduce observed trade matrces, or more precsely, only as one soluton out of an nfnte number of possble solutons due to ther model not beng strctly convex, at least n the base perod.

9 As a possble explanaton of how transacton costs are nfluenced postvely by the volume of trade between two regons, we use the hypothess that exporters n one country pursue a rsk mnmsng strategy by dversfyng ther export destnatons. Heckele (2002) llustrated that the presence of rsk can provde a ustfcaton for a non-lnear obectve functon n the case of calbrated constraned supply models. The same argument s applcable to trade models where traders have to manage rsk. In partcular, they mght want to nsure themselves aganst prce crashes n specfc markets and thus be wllng to export to markets where lower than optmal fob prces for ther products can be fetched. They also mght be wllng to sell for a lower than optmal fob prce n order to be present n certan markets whch could potentally become optmal fob prce destnatons. To test the hypothess of ncreasng transacton costs as a functon of the quantty traded between two regons, the model s solved wth all quanttes, prces and rents fxed exogenously and trade costs varable. Ths step, whch n some aspects s analogue to the frst step of classcal PMP, s performed for sx consecutve years, for whch data on producton consumpton and stock changes (F.O. Lcht, 2009) as well as blateral trade data (ITC, 2007; Eurostat, 2009; USDA, 2009) are avalable (1999/ /05). 6 One fundamental dfference between our approach and the analogue frst step of orgnal PMP s, however, that we use a pror nformaton on the value of rents. In dong so, we avod the nconsstency of the frst step of PMP as descrbed by Heckele and Wolff (2003). In the next step, we compare these trade costs to observed freght rates and calculate the dfference. On routes where trade s both observed and smulated by the normatve, uncalbrated verson of the SPE, ths dfference s zero. In case trade s observed, but not smulated by the model, the dfference was negatve. In cases where trade s not observed, but smulated, whch happened very rarely, the dfference s postve. In the next step, an OLS (ordnary least square) regresson of the relatonshp between the trade cost dfference and the share of the trade on one route n the total producton of the exportng country s performed. Many trade flows that occur, though, are not determned by economc reasonng of the nvolved agents, but rather poltcally nduced. That s, of course, the case for trade that occurs under TRQs, but unfortunately also n less obvous stuatons, such as for nstance the former C-sugar, now out-of-quota sugar, exports of the EU whch are not drectly subsdsed, but are also not flowng freely, snce the set of destnatons s determned by the lcensng polcy of the EU. Another case are the exports of 6 Unfortunately, the qualty of the blateral trade data s rather poor (Nolte, 2008a) and the data needs to be processed to match the balances of supply, demand and stock changes. Ths affects the relablty of the estmatons.

10 Cuba to Chna and Russa. To avod a bas n the estmaton results from that drecton, we nclude only those observatons where we can be relatvely sure they follow economc rather than poltcal ratonales,.e. those by establshed exporters of sugar at world market condtons. 7 The regresson confrms the hypothess that per unt trade costs ncrease wth the share of domestc producton that s shpped to one destnaton, wth a coeffcent of Euro per percent of domestc producton. 8 It also confrms the expectaton that ths ncrease s not very large. Although the regresson and the coeffcent are hghly sgnfcant, the r 2 of the model s rather low, ndcatng, that although there s certanly a postve correlaton between the two varables, there are other determnants whch have a much stronger nfluence on transacton costs and/or measurement errors of freght costs mght have occurred. In the next step, analogue to the second step of classcal PMP, we replace the prce transmsson equaton of the normatve SPE by equaton (9), contanng an addtonal, calbrated cost term for every possble trade flow. ( PS + loadng + PPQ + PQ *(1 + tar _ av + freght sch,, sch,,, + tc sch ) + tar _ sp + exw _ fas ex _ sub sch,, + unloadng + nld _ transport + θ sch,,, ) + ι * X sch,, sch S PD X sch,, 0 (9) In equaton (9), ι s the estmated coeffcent of transacton costs as a functon of the producton share whch s traded on one route. θ s a lnear parameter 9, whch s calbrated such that when added to ι multpled by the producton share, the result s the dentcal to the calculated dfference between observed freght cost and endogenously determned trade costs n the frst step of our calbraton procedure. The resultng model perfectly reproduces the observed matrx of trade flows, analogue to the thrd step of PMP. 3. Scenaros After the expry of the current CMO as of the MY 2015/16, we use as a reference scenaro for our analyss the contnuaton of current polces, specfcally, current levels of quotas and tarffs. Our man counterfactual scenaro embodes an abolshment of the quota regulaton and 7 Guatemala, El Salvador, Honduras, Ncaragua, Costa Rca, Colomba, Brazl, Argentna, South Afrca, Thaland and Australa. 8 The regresson equaton s: Cost dfference / ton, = β 0 + β 1 * producton share + ε, ; R 2 : 0.024; F-test: Complyng wth the hypothess that exporters are wllng to pay a premum to be present n a market, ths parameter s negatve n most cases. In general, the larger the exports to that market,.e. the more mportant ths market s for the exporter, the hgher ths premum.

11 of any prce polcy nstruments n the current CMO such as prvate storage ad n case of and undercut reference prce or addtonal mport quotas n case of a prce surge. A second dmenson of scenaros s derved from dfferent expectatons wth respect to the development of the world market prce, whch wll especally have an nfluence on the amount of preferental mports. As a reference, we take proectons from FAPRI (2009) and convert the Carbbean fob prce for raw sugar n US$, n a mddle east cf prce for whte sugar n Euro. The commonly appled world market prce for whte sugar s a London fob prce. If, however, the EU ceases to export sugar, ths prce s not applcable anymore. We thus choose the mddle east as a reference locaton, snce t s extremely unlkely that that regon mght change ts net trade poston. As scenaros for a lower and hgher than expected world market prce, we deduct or, respectvely, add one standard devaton calculated from a ten years tme seres of world market prce observatons. These prces amount to 238 US$ and 382 US$ per ton of raw sugar, respectvely, nstead of 310 US$, fob Carbbean. The resultng Near East cf landed prces for whte sugar n real 2004/05 Euro, as they wll be used n the model, are 251 for the reference stuaton, 204 for a low and 298 for a hgh world market prce. Addtonally, t would also have been nterestng, to model the effects of an agreement of the Doha Round of WTO negotatons, and ts nterplay wth the effects of the quota abolton. Ths extra dmenson of scenaros would, however, have ncreased the total number of scenaros to 12 rather than sx as t s now. In case of a varaton of the appled modaltes, whch also would have been nterestng, the number of scenaros would even ncrease further. We, therefore, settled wth the two dmensons of world market prce development and EU quota polcy n order to keep the analyss focused. 4. Results The results of the smulaton runs are presented n tables 1 and 2 below. Table 1 shows the results for the EU and ts member states. In the reference scenaro, wth a perpetuaton of the quota system and standard assumptons about the world market prce development (the column s shown n bold letters), the total EU producton quota s almost flled wth only two member states producton, Greece s and Romana s, fallng short. The nternal prce s at 431 per ton, and thus comfortably above the reference prce whch s at 323 n real terms. 10 Total mports under preferental schemes amount to 5 mllon tons ,40 n nomnal terms.

12 An abolton of the quota n 2015/16 leads under standard assumptons regardng the world market prce to an ncrease of EU producton to 15.8 mllon tons. The nternal prce falls to 370, dscouragng a substantal share of preferental mports whch fall to 2.9 mllon tons. The world market prce s nterestngly almost unaffected by the abolton of EU producton quotas. Out of 19 member states whch contnued to produce sugar after the restructurng perod from , twelve are smulated to ncrease ther producton beyond ther quotas after abolton, seven are smulated to decrease producton. These are, as wdely expected, member states located at the southern and northern perpheres of the EU, ncludng the two member states whch are smulated not to fll ther quotas already n the reference scenaro. Out of those member states whch expand ther producton, Germany, France and Poland see the largest absolute ncrease, Hungary, Germany and Belgum the largest relatve ncrease. In case of a lower world market prce of 204, the EU prce strongly decreases n the nonabolton scenaro to 379. Producton n the EU s affected negatvely, wth three addtonal member states not fllng ther quota. Preferental mports ncrease as a result of the low world market prce. An abolton of the quota nevertheless leads to an aggregate ncrease of EU producton, wth 13.9 mllon tons. Ths s, however, less than under the standard world market prce development. The decrease of preferental mports s also less pronounced. Under assumptons of a hgh world market prce of 298, the communty prce ncreases to 490. Only Romana fals to fll ts quota under the non-abolton scenaro. Preferental mports are about 300,000 tons lower than under standard assumptons about the world market prce. An abolton of EU quotas under ths settng s smulated to trgger a strong producton ncrease to 17 mllon tons, whch s almost equvalent to the pre-2006 level of quotas. Preferental mports, on the other hand, declne sharply to 1.7 mllon tons. In both nstances of world market prce varaton, the abolton of the quota system does not have a noteworthy effect on the world market prce of sugar. [Insert Table 1 here] Table 2 presents results for preferental mports of the EU under the varous polcy and world market prce scenaros smulated n ths paper. The EU currently mports sugar under four dfferent schemes and s smulated do so n 2015/16. The frst of these s called CXL. 11 Countres whch suppled certan member states pror to ther EU membershp negotated these quotas upon accesson n order not to be worse of n terms of market access. The 11 Number of the WTO goods schedule of the EU (140 n roman numerals).

13 scheme s strctly quota restrcted and all countres holdng quotas, beng compettve exporters at world market prces, fll these quotas under all scenaros, despte an n-quota tarff of 98 per ton (raw sugar). The second scheme of quotas s granted to a number of western Balkans countres and quota lmted as well. Whle Croata flls ts quota under all scenaros, Serba and Albana (not vsble due to roundng) are adaptng ther exports as a response to a fallng EU prce or an ncreasng world market prce. The next group of countres whch are granted preferental access are the LDC. In the mplementaton phase of the Everythng But Arms Intatve, mports of LDC were quota lmted. These quotas were abolshed, however, as of October 2009 and mports snce can flow freely. Imports under the non-abolton scenaro and standard world market prce development are about 1 mllon tons. If the EU quota system s abolshed, mports from LDC decrease strongly to 176,000 tons and all but sx countres cease to export under ths scheme. Under a low world market prce, mports from LDC are naturally hgher, under the nonabolton as well as under the abolton scenaro. Under hgh world market prces, most, but nterestngly not all, countres reduce ther exports to the EU n the non-abolton scenaro. Ths effect of countres ncreasng ther preferental exports n spte of a hgher world market prce (Ethopa, Sudan and Zamba) 12 s the sometmes combned result of hgher producton due to an overall ncreased prce level and prces n other (domestc and export) markets ncreasng less than the communty prce level. Under the assumpton of hgh world market prces, an abolshment of the EU producton quotas for sugar and the resultng prce decrease on the communty market entrely dscourage preferental mports from LDC. The last group presented n table 2 are ACP countres 13, whch under the EPA wll enoy quota and duty free market access as of 2015/16 as well. Under the non-abolton scenaro and standard world market prce development, these mports are smulated to be 3.1 mllon tons at the end of the proecton horzon. The abolton of the EU producton quota and the resultng prce decrease lead to a reducton of these exports by more than one thrd to 1.9 mllon tons. Under hgh world market prces, mports from ACP are 3.5 mllon tons n the non-abolton scenaro. The abolshment of the quota leads to a much smaller reducton than under standard world market prce development. Under low world market prces, mports are smulated to be 2.8 mllon tons. In case of producton quota abolshment n the EU, mports fall by more than half to 1 mllon tons. 12 The same can be observed for Serba and Zmbabwe under ther respectve preferental schemes. 13 Countres belongng to both groups, LDC and ACP, are lsted under LDC.

14 [Insert Table 2 here] 5. Conclusons The paper apples a ESTJ SPE model wth calbrated non-lnear cost terms attached to each trade flow n order to smulate the effect of an abolshment of the EU producton quota system for sugar after the expry of the current CMO n 2014/15. The varables n the focus of the analyss are producton quanttes, domestc and world market prces, and preferental mports of the EU under varous schemes. The strong ncrease of world market prces n the second half of 2009 shows that preferental mports of the EU can be nhbted by hgh world market prces snce exportng countres may fnd t more proftable to export to regonal markets or to substtute mports on ther domestc markets. Therefore, two sub-scenaros takng nto account a lower than expected and a hgher than expected world market prce are smulated. Under all world market prce scenaros, the abolton of quota leads to an ncrease n producton n the EU and correspondngly to a decrease n preferental mports. The hgher the world market prce, the more pronounced s ths tendency. Under no scenaro, the EU turns to exportng sugar to the world market agan. If world market prces are developng as proected by FAPRI (2009), producton n the EU wll ncrease by 2.5 mllon tons to almost 16 mllon tons. Member states n the geographcal center of the EU, whch are known as more compettve producers of sugar beet, ncrease ther level of producton beyond the quota, whereas countres at the southern and northern lmts of the communty decrease ther producton. No country ceases to produce sugar under any of the smulated scenaros, although the functonal form of the supply curves explctly allows ths to happen. It must, however, be noted that t s questonable whether sectors whch are smulated to shrnk very strongly are stll vable at that level of producton. The smulaton revealed that the world market prce for sugar by vrtue of the abolton of quota lmtaton of LDC and ACP mports, as well as reducton of the nternal prce by the 2006 CMO reform has ganed a strong nfluence on the nternal prce level of the EU. Table 1 shows that under the non-abolton scenaro, a world market prce varaton trggers a movement of the communty prce n the same drecton whch n our cases s even more pronounced than the world market prce shft tself. Ths s due to preferental tradng partners alternatve markets are usually shelded by ad valorem tarffs so the prce level on these markets, whch they compare wth the EU prce n order to decde where to shp ther exports, also vares stronger than the world market prce. Snce the quota-bound producton n the EU s not prce responsve, these prce varatons cannot be dampened by reactons of EU

15 producers. Ths changes f the producton quota n the EU s abolshed. The world market trggered varatons of the communty prce then are merely one ffth of the world market prce varatons themselves, prce varablty s thus sgnfcantly reduced. The sub-scenaros for dfferent world market prce developments must, however, not be confused wth temporary prce spkes, to whch producers, unlke n our model, cannot react. The effects of such prce spkes on preferental mports can be expected to be more pronounced than what s shown n our results. Whle the EU prce turns out to be nfluenced by the world market, the quota polcy of the EU proved not to have the potental to prompt a sgnfcant effect on the world market prce. The paper also ntroduced a new method of modellng nternatonal trade by calbratng an ESTJ SPE model wth quadratc cost terms. Ths approach goes beyond the work of Pars et al. (2009), who engaged n calbratng a SPE wth lnear cost terms, n several regards. Wth the cost terms beng non-lnear, we are able to buld a strctly convex model whch perfectly calbrates to any observed base stuaton. We, furthermore, offer an economc explanaton for the cost functons we ntroduce and engage n an econometrc specfcaton of these. Several questons wth respect to the mplcatons and the further potental of ths approach are stll open and currently beng addressed n a techncal paper. These are, among others, possble solutons for the mmense data requrement for a geographcally suffcently dsaggregated model to perform meanngful trade polcy analyss and an enhanced emprcal base for the estmaton of the cost functons. We apply functonal forms for the supply of the EU (and some other beet producng countres) whch are dfferent from soelastc functons and allow producton to cease at a postve prce. Ths leads to functons whch are very prce responsve f compared to standard elastctes from lterature. Implctly, our supply functons have elastctes usually larger than 2, n some cases even more. 14 However, t s commonly acknowledged, that current margnal costs of sugar producton n the EU move somewhere between 300 and 450 per ton and that EU producton s not compettve at prces below per ton. The only way, though, to smulate ths wth a contnuous functon s to choose one wth a rather hgh prce elastcty, whch furthermore ncreases, the closer t moves to zero. 14 Ths s also a result of the supply functons beng combned beet supply and processng functons. The latter s assumed to be perfectly elastc n the long run.

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18 Table 1. Model Results for the EU (2015/16) Quota Abolshment of Quota Quota Low P WM Standard Hgh P WM Low P WM Standard Hgh P WM (1) P WM ( /t, real 2004/05) (2) P EU ( /t, real 2004/05) (3) Demand EU (mll. t WSE) (4) Imports EU (mll. t WSE) (5) Producton EU (mll. t WSE (6) Austra (1000 t WSE) (7) Belgum/Luxemburg (8) Czech Republc (9) Denmark (10) Span (11) Fnland (12) France 3,437 3,437 3,437 3,437 3,721 4,322 4,673 (13) Germany 2,898 2,898 2,898 2,898 3,483 3,920 4,216 (14) Greece (15) Hungary (16) Italy (17) Lthuana (18) Netherlands ,030 (19) Poland 1,406 1,406 1,406 1,406 1,606 1,799 1,930 (20) Portugal (21) Romana (22) Slovaka (23) Sweden (24) UK 1,056 1,056 1,056 1,056 1,127 1,226 1,294 Source: Own Smulatons.

19 Table 2. Model Results for EU Imports, 1000 t WSE (2015/16) Quota Abolshment of Quota Low P WM Standard Hgh P WM Low P WM Standard Hgh P WM (1) Total 5,649 4,952 4,668 4,753 2,860 1,673 (2) CXL (3) Cuba (4) Brazl (5) Australa (6) Other Countres (7) BALKAN (8) Croata (9) Serba (10) Albana (11) Other Countres (12) LDC 1,297 1,034 1, (13) Benn (14) Congo, D.R (15) Ethopa (16) Gabon (17) Gunea (18) Madagascar (19) Malaw (20) Mozambque (21) Senegal (22) Serra Leone (23) Sudan (24) Zamba (25) Bangladesh (26) ACP 3,501 3,092 2,779 3,114 1,927 1,009 (27) Congo, Rep (28) Côte d Ivore (29) Maurtus (30) Swazland (31) Zmbabwe (32) Barbados (33) Belze (34) Domncan Republc (35) Jamaca (36) Sant Ktts and Nevs (37) Trndad and Tobago (38) Guyana (39) Papua New Gunea (40) F (41) Other Countres Source: Own Smulatons.