Preferences Erosion and Trade Costs in the Sugar Market: The Impact of the Everything but Arms Initiative and the Reform of the EU Policy

The changes recently introduced in the EU Common Market Organization for sugar will interact with preferential imports from developing countries and least developed countries that enjoy preferential treatment for exports to the EU, as well as by trade and adjustment costs. This paper focuses on the impact of the EU Commission’s sugar policy reform and the Everything But Arms initiative on the African, Caribbean and Pacific countries and the Least Developed Countries. Simulations are run with an empirical model structure comprising a partial equilibrium model for the world sugar market and a gravity model to replicate least developed countries bilateral trade with Europe. Particularly, the gravity approach is employed to model the abolition of import tariffs for sugar originating in least developed countries, subject to trade costs, while the partial equilibrium approach is employed to assess the effects of EU Commission’s sugar policy reform and the Everything But Arms initiative on world markets. Results suggest that the African, Caribbean and Pacific countries will experience significant reduction in their export revenue, whilst the initial impact on least developed countries may be limited but increasing in the medium run.