Sugar Subsidies in the European Union - Mechanisms and Effects

Abstract: For various political and economic reasons European sugar farmers and producers have received large subsidies from the EU. The goal of this thesis is to analyze these sugar subsidies and their effect on world market prices and production level in the EU, using statistical data from the mid 1980’s and onward. The analysis encompasses the mechanisms and consequences of EU sugar subsidies with a particular emphasis on the world market price of sugar and domestic EU sugar production. Because the so called ACP countries have a special trade preference, their exports of sugar to EU will also have effects on the world market price. These are reviewed as well. Alleged fixed costs in the EU sugar industry, implying scale economies, are also checked for. Evidence of a negative correlation between export subsidies and the world price are found. There is also a correlation between production subsidies and production volume, especially when measuring subsidies as a percentage of costs. EU imports from ACP’s show virtually no correlation with the world market price, although the correlation is, as expected, negative. Some evidence of scale economies in the EU sugar industry has also been found.