The three countries had complained to the WTO that the EU was subsidising exports of sugar above the levels agreed in the Uruguay Round agreement.
But European trade commissioner Pascal Lamy said the WTO decision calls into question the texts and commitments 'unanimously agreed upon by all WTO Members during the Uruguay Round'.
He warned that although the EU would abide by its 'international obligations', it would also defend the 'legitimate interests of EU sugar producers and the preferential access enjoyed by developing countries into the EU'.
Although a key player on world sugar markets, the EU is lagging far behind Brazil, which now dominates exports. The EU-15's share of the world market amounts to 13 per cent for production, 12 per cent for consumption, 15 per cent for exports and 5 per cent for imports.
Its share in world production, consumption and exports has declined, whereas Southern Hemisphere countries have steadily gained importance. Australia, for instance, exports 85 per cent of its crop.
Europe's sugar regime has come under fierce criticism for distorting sugar prices- currently trading at three times the world price in Europe - but is on the way to reform rooted in a plan from Brussels proposed in July this year.
Under the new plans sugar users would no longer be obliged to buy from within national borders and between EU members - as is currently the case - allowing them to source from competitive markets and ultimately buy cheaper sugar. A move welcomed by the food industry that sees the changes as leading to a much more liberal sugar trading structure.
In extreme cases, companies using sugar have only one source for their sweet ingredient. In the UK, for example, British Sugar is the key supplier of sugar from beet and Tate & Lyle the equivalent for cane sugar. UK food manufacturers buy the majority of their sugar - 70 per cent - from these two companies. A situation that, critics claim, leaves them vulnerable to pricing from the two sugar giants.
"Competition in the market must be the underpinning principle for reform of the EU sugar market," commented Alain Beaumont, secretary general of the European Sugar Users group CIUS, which has a combined annual turnover of €70 million.
The EU member states have to approve proposals, but the plan from Agriculture Commissioner Franz Fischler tabled in July to the Parliament is for a one-third cut in the institutional sugar price rolled over three years and starting from the 2005-6 campaign.
The plan will also see a gradual reduction of overall volumes by 2.8 million tonnes from the current 17.4 million tonnes over the next four years. Food makers hope the member states will stick with the proposed Commission rules and avoid making any changes to the proposal.
But although welcomed by the industry that uses this primary ingredient in a raft of everyday foodstuffs, the international development agency Oxfam, which has heavily criticised the EU sugar regime, slammed the proposal.
"The proposal shows that the EU has shut its ears to the needs of developing countries and placed the interests of big farmers and processing companies ahead of everything else," said Jo Leadbeater, head of Oxfam International's Brussels office.
Commenting on the WTO ruling, the EU said this week that it has always 'drawn attention to inconsistencies between the complainants' claims and the structure of their own past and present sugar regimes.'
In the dispute, Australia, Brazil and Thailand are challenging two types of EU exports of sugar as being allegedly subsidised contrary to the WTO Agreement. The first claim relates to the export of so-called "C sugar". The complainants allege that these exports benefit from export subsidies by being cross-subsidised with revenues from production under A and B quotas.
The second point relates to export refunds on 1.6 million tonnes of sugar which are equivalent to preferential EU imports from ACP (African, Caribbean, and Pacific) countries and India. The complainants allege that as a result, the EU exceeds its export subsidy reduction commitments and is in breach of the WTO agreement.
"The EU's position has been that exports of "C sugar" do not benefit from export subsidies, among other things because this claim is based on an erroneous interpretation of the WTO provisions on agricultural export subsidies and inconsistent with the obligation of good faith," clarified Brussels.
The EU also insists that exports of ACP/India equivalent sugar are in full conformity with the EU's schedule of commitments and WTO provisions regarding agricultural export subsidies, the Commission added.
Global sugar prices are currently pretty flat due to a surplus on the market and according to a recent report from British Sugar, the prices are low mainly because of the ten-fold increase in exports from Brazil (to over 10 million tons) in the last 10 years.
"Brazil has been able to expand its exports of sugar to the world market only because of repeated massive devaluations of its currency which have artificially reduced its production costs. The Brazilian sugar industry has also been supported by cross subsidy from their heavily government-supported bioethanol industry," said the leading UK sugar company.