Managed Trade for Sugar from Mexico?

Mexican Economy Secretary Ildefonso Guajardo was in Washington this week arguing on behalf of an agreement to suspend the U.S. antidumping/countervailing duty (AD/CVD) investigation against imports of sugar from Mexico.  The case will soon enter its final phase, with the U.S. International Trade Commission (ITC) expected to determine early next year whether the U.S. sugar industry has been injured by imports from Mexico. 

In the context of North American sugar politics, an agreement to suspend the AD/CVD process and implement a managed-trade arrangement makes some sense.  Both U.S. and Mexican sugar industries already are more or less wards of the state, or at least are very heavily guided and controlled by their respective governments.  Both governments have given indications that they are interested in settling this dispute.  The history of bilateral sugar trade has been dominated by government intervention rather than by free-market economics.  It seems almost natural to take the next obvious step by allowing Mexican sugar to enter the United States only under terms of a suspension agreement (i.e., with the quantity limited or the price set high).

It’s worth mentioning that Mexican sugar growers are the only ones in the world currently allowed to sell as much sugar as they wish in the U.S. marketplace.  Even U.S. growers are not permitted to do so.  Years ago they gave up that right in exchange for retaining an almost embarrassingly high level of price support.  That strong price incentive was inducing them to grow more sugar than the market could absorb.  Under the provisions of the U.S. sugar program, that excess sugar could end up being owned by the U.S. Department of Agriculture at considerable expense to taxpayers.  So U.S. sugar growers made the decision to sell less sugar, but keep the price high.

Mexican growers, on the other hand, obtained unfettered access to the U.S. market in 2008. That followed a contentious period of bilateral trade in sugar and high-fructose corn syrup (HFCS) dating to 1994, which was when the North American Free-Trade Agreement (NAFTA) began to be implemented.  In a nutshell, the United States adopted a much more restrictive approach to imports of Mexican sugar than Mexico thought had been negotiated, and the Mexicans reciprocated regarding imports of HFCS. 

Given that historic context, the open access to the U.S. market enjoyed by the Mexicans since 2008 seems to be rather an anomaly.  Why not go back to the good old days of closely managed trade? 

Two reasons occur to me.  One is that Mexico negotiated its access to the U.S. sugar market in good faith during the NAFTA talks.  The two countries each made concessions to the other and received benefits in return.  The fact that the U.S. industry subsequently lobbied Congress for an excessively generous sugar program does nothing to change the commitment to keep imports from Mexico unrestricted.  Within the construct of current U.S. sugar policy, the way for the United States to honor its international trade obligation would be to add further restrictions to sales of U.S. sugar in the U.S. market.  (Or, of course, the U.S. sugar price support could be reduced or eliminated, which could obviate the need both for restrictions on sales of U.S. sugar and imports of Mexican sugar.  That approach is far too market oriented for this industry, though.)

The other reason not to skip blithely back toward managed trade is that it’s not at all clear that the U.S. sugar industry will prevail in its AD/CVD case.  I could explain that I served as an ITC commissioner for ten years and voted on several hundred AD/CVD cases.  I have not discussed this investigation with current commissioners. (That wouldn’t be appropriate, and they wouldn’t tell me anything, anyway.)  However, I have read the public version of key materials from the preliminary phase of the ITC investigation in some detail.  The Commission voted 6-0 affirmative in favor of going forward to the final phase.  This was not at all surprising; I would have voted with the majority.  To vote in the negative would have required meeting a high standard:  finding that there was no “reasonable indication that a domestic industry is materially injured or threatened with material injury.”  There was not sufficient information on the preliminary record to make such a determination, which is the general rule in a complicated investigation such as this one. 

However, there was enough information to make me think that a negative vote in the final phase was entirely plausible.  The legal standard is different in a final than in a preliminary.  Instead of finding only a “reasonable indication” of material injury, the Commission actually has to determine that the domestic industry has been materially injured or is threatened with material injury.  There also needs to be a clear causal link between imports from Mexico and any injury that the U.S. industry might have been experiencing.  Yes, U.S. sugar prices fell during a portion of the period of investigation (POI), but world sugar prices also were falling.  Did sugar imports from Mexico actually cause U.S. sugar prices to slide, or was the domestic market being driven down by the declining global price?  (For more on these issues, see my previous post.)

There’s no doubt that there would be considerable risk for the Mexican government if it was to abandon efforts toward a suspension agreement and to focus solely on obtaining a negative vote from the ITC.  If Mexico loses at the Commission, it would then be too late to negotiate a settlement.  Rather, the U.S. industry would be in a relatively stronger position, with AD/CVD duties in place for the next five years.  On the other hand, perhaps one or more Mexican producers would succeed in obtaining low or zero AD/CVD duties from the Department of Commerce.  Such companies could continue to sell sugar profitably into the United States, potentially leaving the quantity of imports from Mexico unchanged from what it would have been otherwise.  The larger the gap between the world price and the U.S. domestic price, the more likely this would be the case.  If the next best alternative is to sell at a low price on the world market, paying a duty to sell into the United States might make good sense.

The upside to Mexico from achieving a negative vote at the ITC is really quite substantial.  Not only would it retain the market access it paid for in the NAFTA, but its sugar industry also would be better positioned to grow and prosper.

From the standpoint of free traders, there could be another benefit.  Knowing that imports from Mexico would continue to be present in the marketplace might help prompt the U.S. sugar industry to reconsider its protectionist policy instincts.  Lowering the U.S. price support level would go a long way toward eliminating the artificial incentive that now draws Mexican sugar into the United States.