Introduction

1. A United Nations Sugar Conference met in Geneva during September and October, and prepared the text of a new International Sugar Agreement. The new Agreement, which is open for signature between December 1st and 24th, is now submitted to Governments for approval. It is intended to come into force for a period of five years from January 1st 1959, when the I.S.A. of 1953 expires.

2. Canada is an importing member of the present I.S.A. in which 29 countries participate, including other large importers such as the United Kingdom, the United States, and Japan. The main sugar exporters also participate, including the West Indies and other British Colonies, Australia, Cuba, the Dominican Republic, China (Taiwan), and Indonesia. Members of the I.S.A. of 1953 are listed in an appendix, which also indicates prospective new members.

3. The immediately following paragraphs summarize the considerations relevant for deciding whether Canada should sign the new Agreement, and set out specific recommendations. The second part of the Memorandum contains a more detailed explanation of the Agreement.
   
   Summary of Main Considerations of Interest to Canada

4. The new I.S.A., like the present one, is an export quota type of Agreement. It is intended to stabilize raw sugar prices in world markets between 3.25 and 4.00 cents per lb. Main considerations of interest to Canada are:

   1. The price range appears satisfactory to Canada. Price stability is helpful to our sugar producers and consumers.

   2. Canada's adherence to the new I.S.A. would be helpful in our trade relations with exporters of sugar, including Commonwealth and non-Commonwealth countries. It would also demonstrate Canada's desire to support workable commodity arrangements.

   3. The new I.S.A. has been improved from the standpoint of importing countries.

   4. The new I.S.A. does not involve onerous obligations for the Government. Our participation would assist in the efficient administration of the Agreement from the importers' standpoint.

   Recommendations

5. It is recommended¹³³ that Canada adhere to the new Agreement, and that the necessary authority to sign be granted by Cabinet. It is recommended that the new Agreement be brought into force provisionally on January 1st 1959, and that the Agreement be ratified as soon as possible, and if possible before June 1st 1959, in accordance with its provisions relating to accession.
   
   DETAILED EXPLANATION OF THE I.S.A.
   
   Objectives and General Operation

6. The objectives of the I.S.A. are to assure sugar supplies to importers and markets to exporters at equitable and stable prices, to facilitate increases in consumption and corresponding increases in supply, and to assist in the maintenance of the purchasing power of producing areas, especially those largely dependent upon the production or export of sugar.

7. The free market which the I.S.A. is intended to stabilize consists of that part of international trade in sugar which is not subject to exclusive or preferential arrangements; in recent years, it has accounted for about 40% of international trade in sugar, or for about 15% of world consumption. Sugar production and trade have for long been subject to special arrangements. For example, the U.K. and producers in Australia, South Africa, the British West Indies, Fiji, and Mauritius are parties to the Commonwealth Sugar Agreement under which the U.K. buys up to 1.8million tons of raw sugar annually at a fixed price. The United States regulates its imports of sugar by means of quotas which divide the American market almost exclusively among U.S. producers, Cuba and the Philippines. The I.S.A. is not intended to replace existing regulations which control trade in sugar, but rather to restrain the intensification of exclusive arrangements, and thus to maintain the size of the free market. The free market is a residual source of supply to many countries which give priority to other sources of supply. Thus fluctuations in supply and demand fall mainly on the free market which is therefore particularly sensitive to changes in market conditions.

8. The I.S.A. aims at achieving price stabilization in the free market by adjusting supplies of sugar to market conditions. Exporting countries which participate in the I.S.A. share in agreed proportions an over-all annual quota for exports. The size of this global quota is determined by subtracting from total free market requirements the amount of sugar which is likely to be exported to the free market by non-participating countries. The quotas of participating exporters may be reduced, increased, or removed, during the course of a year so as to maintain free market prices within the range stated in the Agreement. The Agreement is administered by a Sugar Council, on which all participating countries are represented.
   
   Main Changes in the New International Sugar Agreement

9. The I.S.A. of 1958 is patterned substantially along the lines of the I.S.A. of 1953, as amended in 1956.¹³⁴ A number of improvements have been made in the new Agreement, however, particularly from the viewpoint of importing countries. When the 1953 Agreement was concluded, there were in existence substantial surpluses of sugar held by exporting countries. These stocks, however, were reduced to more normal levels by 1956, and market conditions today therefore differ considerably from the conditions which existed in 1953.

10. The changes made in the new I.S.A. take into account these altered conditions, from the viewpoint of importers, as follows:
    
    

    1. Price and Export Quota Provisions. The price range of 3.25 cents to 4.00 cents per lb. f.a.s. Cuba remains unchanged. A feature of the new I.S.A., however, is a provision for increasing export quotas in effect by 21/2 per cent when the prevailing price exceeds 3.75 cents, unless the Sugar Council agrees otherwise.

    2. Obligation to Hold Greater Minimum Stocks Exporters to the free market under the new I.S.A. are obligated to hold at least 121/2% of their basic export tonnage as a minimum stock reserve, as compared with 10% under the 1953 Agreement. In addition, exporting members of the Commonwealth Sugar Agreement have undertaken to hold reserve stocks of at least 50,000 tons in connection with the new I.S.A. These undertakings mean that exporters will be obligated to hold a minimum reserve of about 850,000 metric tons of raw sugar. Such stocks are earmarked for the free market for the purpose of relieving a tight market situation.

    3. Provisions for Earlier Reporting of Shortfalls. Exporters will be obligated to follow a more rigorous schedule for reporting whether they are unable to fill their quotas, under penalty of a reduction in their share of the market in succeeding years for non-compliance. Earlier reporting of shortfalls will enable other exporters to expand output in the same year to make up for the deficits.

11. The Agreement has also been improved from the viewpoint of exporters. Member countries which are both importers and exporters of sugar, but are not net importers, will be bound under the new Agreement by the general obligations of importing countries in respect of their import trade. It is also clear that a country which adheres to the Agreement as an importer is obligated to refrain from becoming a net exporter during the term of the Agreement.

12. In addition, the quota provisions of the Agreement have been adjusted so as to make the I.S.A. more attractive to new exporting members. As a result, it seems likely that all major exporting countries will adhere, including countries such as Brazil and India. A further number of importing countries, such as Norway, Morocco, and Malaya may also adhere.

13. The I.S.A. of 1958 also contains a new provision concerning voluntary arrangements for multilateral options which may be agreed upon between interested exporters and importers. If such arrangements were concluded, the interested importing countries would have the right to purchase specified quantities of sugar at the maximum price whenever the prevailing price exceeds the maximum; and the interested exporting countries would have the right to sell the same quantities at the minimum price whenever the prevailing price falls below the minimum. The scheme is reminiscent of the present International Wheat Agreement.

14. This provision of the new Agreement arose from the desire of a number of countries to achieve even greater stability in free market prices for sugar. A number of Delegations at the Conference, including Canada, considered the scheme impractical in countries where the sugar trade is conducted by private firms. There is no obligation on Canada or any other participant to enter such a scheme.
    
    Appraisal of the New Agreement from Canada's Standpoint

15. Canada's interest in the new Agreement may be analyzed under the sub-headings of domestic considerations, obligations falling on the Government, and international relations.

16. Domestic Considerations. The price at which Canadians import sugar is largely determined in the free market, because our preferential tariffs encourage imports of Commonwealth sugar at a more or less fixed margin above the world price. Canada imports more than 80% of the sugar which is consumed in the country, and stability of import prices is therefore a matter of some concern. As a participant in the I.S.A., Canada has a substantial voice in administration and is in a position to contribute to the effective operation of the Agreement from the importers' standpoint.

17. Canadian refiners usually hold substantial stocks of raw sugar, and have an interest in stable prices at a reasonable level. For the growers of sugar beets a reasonable level of prices is also desirable, and the avoidance of sharply fluctuating prices facilitates crop planning. Canadian consumers fall into two categories. Industrial consumers account for more than 40% of sugar used in Canada, and since these industries must sell their products in a competitive market they are interested in stability and in avoiding excessive prices for sugar. Housewives also are sensitive to changes in the price of sugar.

18. Obligations Falling on the Government. If Canada adheres to the new I.S.A., the main obligation falling on the Government would be the same as under the old Agreement, that is to restrict imports of sugar from non-participating countries to the quantity imported in any one year 1951, 1952, or 1953. In Canada's case this quantity happens to be zero. This obligation could be readily accepted in 1953, because the Canadian preferential tariff ensures that our imports of sugar come mainly from Commonwealth countries which participate in the I.S.A., except for the special case of Cuba which is also a member of the I.S.A. Our preferential tariff operates today in the same way as in 1953. Thus the Government's obligation to restrict imports from non-members is not an onerous one. If, as seems likely, more exporting countries adhere to the new I.S.A. the scope of this obligation would be further limited. In any case, there are escape clauses which Canada might use if it were considered desirable to import sugar from a non-participating country.

19. International Relations. The main sugar exporting countries inside and outside of the Commonwealth, such as Australia, the West Indies, Cuba and the Dominican Republic are less developed or developing countries, and several of them depend upon selling sugar for the greater part of their income. These countries value Canada's co-operation in the I.S.A., since we are the world's fourth largest importer. The United Kingdom, on behalf of its colonial areas such as Fiji, Mauritius, and British Guinea, also values Canada's participation.

20. While the sugar exporting countries have a common interest in persuading importers such as Canada to adhere to the I.S.A., their interests naturally diverge over the matter of selling sugar directly to Canada. Before the I.S.A. of 1953 was concluded, Cuba had persuaded the Canadian Government to arrange for the importation of non-Commonwealth sugar. In effect, Canada by-passed the preferential tariff and facilitated entry of 150,000 tons annually of non-Commonwealth raw sugar during the years 1951-53 inclusive. When the I.S.A. of 1953 was negotiated, the United Kingdom, the West Indies, and Australia insisted on the insertion of Article 16 (2). This Article permits these countries, in effect, to withdraw from their I.S.A. obligations if a non-Commonwealth government makes a special arrangement with an importing Commonwealth country concerning the sale of sugar. As a result of this Commonwealth position, Cuba chose not to renew the special arrangement of 1951-53 with Canada. The Cuban Sugar Institute, however later concluded a private arrangement with Canadian refiners for the sale of 85,000 tons of sugar annually, beginning in 1954. Since this arrangement was non-governmental, it fell outside the letter of Article 16 (2) of the I.S.A., and the Commonwealth exporters did not protest.

21. The Dominican Republic, however, was not satisfied with the effect of these arrangements, since there was no provision for facilitating sales of Dominican raw sugar to Canada after 1953. At the United Nations Sugar Conference of 1958, therefore, the Dominican Republic desired to eliminate Article 16 (2) from the new I.S.A. The other Commonwealth countries concerned, and particularly the West Indies, desired to retain Article 16 (2). The Canadian position was that this Article did not in any way limit the freedom of action of Canada. Our Delegation was able to resolve the impasse between the Dominican Republic and the Commonwealth countries concerned by stating for the Conference record that Canada is not bound by the provision of Article 16 (2). This Article remains unchanged. (The statement of the Canadian Delegation is appended).

22. The Dominicans no doubt will continue the efforts they have been making since 1954 to have the Canadian Government guarantee them a share of our market, employing their imports from Canada as a bargaining counter. Thus while the problem of trade relations with the Caribbean Sugar countries is not entirely resolved, it has nevertheless been understood that Article 16 (2) is not a matter for international controversy.

[GORDON CHURCHILL]
[S.E. SMITH]

¹³³ Approuvé par le Cabinet le 18 décembre 1958./Approved by Cabinet on December 18, 1958.

¹³⁴ Voir Canada, Recueil des traités, 1954, N11; 1957, N5 et 1959, N3. Voir aussi volume19, les documents 428 à444.
See Canada, Treaty Series, 1954, No.11; 1957, No.5 and 1959, No.3. See also Volume19, Documents 428-444.