The European Commission may be forced to tweak plans for shaking up EU sugar policy to reflect a rebuke handed down by a world trade panel that attacks its elaborate and lavish subsidy system, diplomats said on Thursday.
Brazil, Australia and Thailand appear to have won a clear victory against the EU at the World Trade Organisation (WTO) with their claim that the bloc broke WTO farm rules by exceeding limits on sugar export subsidies. The EU is expected to appeal.
The preliminary verdict will almost certainly force a rethink of the Commission's proposals presented last month to reform the EU's 35-year-old policy, diplomats said. These call for sharp price and output cuts, and would start in July 2005.
"They have to have a fallback (plan)," one said. "They have to do some serious tinkering...I think they would have some options up their sleeve. And I don't believe the proposals that were out in July really took into account the WTO outcome."
One of the trickiest areas for the Commission to reconsider will be how to control the EU's non-subsidised sugar exports, known as "C" sugar, since the current reform proposal suggests that rules governing these shipments would remain untouched.
This was another element of the WTO challenge, with the three complainants alleging that "C" exports are in fact subsidised since EU producers have already received high amounts of financial aid to grow and process sugar beet.
Under current rules, "C" sugar must be exported from the EU with no subsidy although certain amounts may also be carried over by EU member states into the following July/June season.
On export subsidies, the EU reform proposal already calls for cuts to its subsidised sugar shipments and the bloc has also pledged to end its aid for farm exports within the WTO's current Doha round, providing other big farm spenders do the same.
So far, one thing seems certain. Nothing is likely to happen soon and maybe not for at least one year, perhaps more. Assuming the final verdict, due for release in September, goes against Brussels, the bloc can be expected to appeal. This means it could be another year for any decision takes effect.
The EU's major rows over farm trade have often run for several years. Through the 1990s "banana wars", it battled with the United States and top exporter Ecuador over EU limits on banana imports. A deal at the WTO ended the dispute in 2001.
On sugar, the Commission says it will respect the WTO's rule on confidentiality, and say nothing until September.
"We now have to see when the WTO panel (verdict) is rendered public whether or not we appeal this decision and whether we need to do anything in terms of changing the proposals...to accommodate the results of the panel," Arancha Gonzalez, the Commission's trade spokeswoman, told a news briefing.
Analysts have suggested that if the EU is no longer allowed to ship surplus sugar, it would have to avoid creating "sugar mountains" which would have to be eaten up by industry users.
Before this week, Commission officials had said privately that if the WTO panel ruling went against the EU, then measures might be needed to discourage production of "C" sugar: an annual volume that varies between 2.5 and 3.0 million tonnes.
One way could be to impose a levy on sugar produced above the usual quotas that are allocated each year to EU member states by the Commission, finely tuned to meet internal demand.
"In effect, we are talking about an export tax and there are WTO rules about those. Export taxes have also been discussed in the Doha context. It may not be their answer," a diplomat said.
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