Claiming high local sugar prices are draining millions of euros in revenue, Latvia's top confectionery firms threatened last week to move production abroad if the government does not address their concerns.
Laima, the country's largest chocolate factory, and baked goods producer Staburadze said they were losing some 1 million euros per year as a result of a law that forces them to buy local sugar at prices of up to 450 lats (750 euros) per ton, well above average market prices of 160 lats.
Latvian law requires companies to use sugar grown by local beet farmers for all goods intended for the local market. Imported sugar cane, which even after a 120 lat tariff and VAT only costs about 300 lats per ton, can be used for exports only.
Estonian confectioner Kalev, by comparison, pays market prices for imported cane sugar, partly because Estonia lacks a sugar beet industry and has no local farmers to protect.
"We are in a very difficult situation. We are suffering. Basic economic reasoning says we'd be better off somewhere else," said Juris Jonaitis, head of a supervisory council for the two companies.
Laima and Staburadze have separate ownership but have merged production facilities and management teams.
Together the two employ 860 workers and accounted for 35 percent of the Latvian sweets market in the first half of 2002.
Baltic-wide, Laima and Kalev are knotted at 6 percent of the market. Staburadze has 5 percent.
Turnover as of September was 10.58 million lats for Laima and 3.32 million lats for Staburadze.
Earlier this month the Agriculture Ministry refused to issue import licenses to the two companies and ketchup maker Spilva, prompting them to challenge the decision in the courts.
"The solution is to open up the borders and let local sugar factories compete," Jonaitis said.
Aivars Lapins, deputy state secretary at the Agriculture Ministry, said that without state support Latvia's sugar industry would collapse.
"From a purely market point of view I understand what the confectioners are saying, but if we let imported sugar into the local market, even with a tariff set at 120 lats, that would be the end of the industry," he said.
Latvia's two sugar mills, both supporters of the government's tariff scheme, are also concerned. Speaking to Dienas Bizness in December, Valija Zabe, general manager of Liepajas Cukurfabrika, warned that Latvia's WTO obligations will make it difficult to raise its sugar import tariff, thus ensuring that the price of imported sugar will continue to undercut that of local.
Lapins said he expected the costs associated with moving production facilities to dissuade the Latvian firms from following through on their threat, but he conceded that some kind of solution needs to be found.
So far Latvia's center-right government has appeared uncertain about how to address the situation. Both producers and confectioners have reacted coolly to a proposal by Finance Minister Valdis Dombro-vskis to set a lower price ceiling for local sugar.
A budget crunch, meanwhile, has made the Cabinet reluctant to re-introduce a 2 million lat scheme that compensated companies that produced goods with sugar contents of more than 20 percent.
The issue is likely to become moot next year when Latvia, Estonia and up to eight other countries are expected to join the European Union, another protectionist market that slaps similar tariffs on imported sugar to protect EU producers.
But from the confectioners' point of view, the debate is about recouping losses in time to be strong competitors in the common EU market.
Confectioner Jonaitis said that Latvia's sugar mills were strong enough to withstand 16 months of competition that open borders would bring before the country joins the EU by mid-2004.
"If we open the borders now we can make enough to invest in new technologies and production before joining," he said. "After we join, the rules will be the same for everyone. Then we'll all be competing against Brazil and Cuba."