Lord Palmerston, who served twice as Prime Minister in the mid-19th century said, that amongst nation states, there is no such thing as permanent friends only permanent interests. Brazil, Thailand and Australia banded together to launch a complaint against the EU sugar regime at the World Trade Organization (WTO) which led to in 2006 change in policy – EU rationalized the industry, involving reduction in both sugar output by some 5 million tonnes and internal price of sugar by 36%. Ten years later or recently, Brazil launched a complaint against Thailand at the WTO for its supportive policies for the sugar sector which includes a subsidy for cane producers that has led to increased production in the past few years, despite a long period of low sugar prices.
In their submission to the WTO in March 2016, Brazil asserted that subsidies for Thai sugar producers have dragged down global prices for the sweetener. This has had the effect of raising Thailand’s exports as a share of the global market from 12.1% to 15.8% in the past four years. Over the same period, Brazil’s share fell to 44.7% from 50%, according to the trade ministry.
But how credible is Brazil’s complaint of loss of market share. Following the credit crunch in 2008, some 80 sugar factories have closed down. The industry, by and large is heavily indebted, with reports of bankruptcy protection continues to surface, albeit with less frequency in the recent past. Further, gasoline subsidy by the previous government to check inflation had significant impact on the ethanol sector which had to contend with rising costs. Nonetheless, according to the US sugar lobby American Sugar Alliance, Brazil’s sugar industry has also been a beneficiary of government support (see figure).
In an effort to avoid being challenged at the WTO, Thailand’s Office of Cane and Sugar Board has finalized a plan to overhaul its sugar policy. This will include: repealing its current 70:30 profit sharing system between growers and millers which is underpinned by a quota system that will have to be quashed; and floating of domestic prices instead of the current system of high domestic prices which is considered as a cross-subsidy by critics of the policy.
Brazil has been emboldened into taking the matter to WTO knowing well that the current Thai sugar regime, to some extent, mirrors EU’s quota system and therefore chances of succeeding with the challenge is better than even. In upholding the challenge against the EU, WTO noted that exports generated by the EU system benefited from prohibited (indirect) export subsidies.
As Thai government plans to expand its sugar sector along with sugar-based biobased products sector, this is probably a good time to revisit the sugar policy that was introduced in 1984 through the Cane Sugar Act. In September 2016, the government approved licences for investors to build 25 new sugar factories. At the same time 17 expansion projects were approved. Parallel to this is the strategy to expand sugarcane production – over the next 10 years, cane acreage is to increase to 2.56 mln ha from the current 1.6 mln ha. The goal is to expand sugarcane and cane sugar production to 180 mln and 20.4 mln tonnes, respectively.
On 3rd November, government officials and sugar industry representatives from Brazil and Thailand met in Brasilia to resolve the trade dispute behind closed doors. Arguably, Brazil’s sugar industry ballooned following the launch of the Proálcool programme in 1975 which incentivised ethanol production and cross-subsidized sugar production. It should not be begrudging Thailand for doing the same thing. Doubtless these points would have been discussed at the meeting. One suspects, that Unica, the industry group spearheading the case to WTO, is probably trying to leverage the situation to continue to maintain its interest as the prominent group in the sugar sector in Brazil.