Sugar from Mexico: Who’s Being Injured?

On March 28, 2014, the U.S. sugar industry filed antidumping and countervailing duty (AD/CVD) petitions against imports of sugar from Mexico.  From the time that NAFTA’s sugar provisions were fully implemented in 2008, Mexico has been the only country in the world with unfettered access to the U.S. sugar market.  Sugar interests now are hoping to clamp the fetters back on.  It is not at all clear whether that effort will succeed.

Both the Commerce Department and the U.S. International Trade Commission (ITC) play important roles in this process.  Commerce must determine the extent of any dumping margin (selling at “less than fair value” due to pricing practices of individual firms) and any countervailing duty margin (benefit received by Mexican exporters from subsidies provided by their government).  The estimated dumping margins for the preliminary phase of the investigation range from 30 to 64 percent; they are likely to be adjusted based on additional information gained in the final phase of the investigation.  Commerce has not yet had an opportunity to establish CVD margins.  Given the degree of government involvement in Mexico’s sugar business, a CVD margin at some level seems likely.

The job of the ITC is to determine whether the domestic sugar industry has been “injured” by the imported sugar.  In its preliminary determination, the commission voted unanimously in the affirmative, which means that the investigation will go forward into its final phase.  This vote was not at all a surprise.  The legal standard for a negative vote in a preliminary determination is quite high.  To have voted in the negative, the ITC would have had to conclude that there was no “reasonable indication that a domestic industry is materially injured or threatened with material injury.”  That is a very difficult standard to meet on the basis of the somewhat limited preliminary record – often with inconclusive evidence – that must be compiled not more than 45 days after the case has been filed. 

So Commerce can be expected to impose temporary AD/CVD duties this fall at a level equal to their preliminary margins. The ITC is likely to hold its hearing as part of the final-phase investigation sometime early in 2015, with the vote taking place about a month later. 

What issues will the commission deal with as it makes a final determination on injury?  The statute requires that findings be made on three key issues:  (1) Volume.  Was the absolute volume of sugar imports from Mexico, or the increase in volume, significant?  (2)  Price.  Have there been significant price effects – underselling of U.S. prices by imported sugar, or price depression or suppression in the U.S. market?  (3) Impact.  Has the U.S. sugar industry experienced negative impact, such as declines in output, sales, market share, profitability, employment, etc? 

The public (non-confidential) version of the ITC’s opinion (Investigation Nos. 701-TA-513 and 731-TA-1249 can be accessed for free on the ITC website by registering here) makes clear that the commissioners found evidence of volume and price effects, as well as some impact on the domestic industry.  However, a similar outcome in the final investigation is far from preordained.  One of the reasons is that the legal standard is different in the final.  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 such injury. 

Another difference is that the three-year “period of investigation” (POI) will change.  Instead of beginning Oct. 1, 2010, the POI in the final will begin a year later.  In other words, marketplace trends are likely to be different.  A three-year downtrend in world sugar prices appears to have bottomed out in December 2013, with prices higher since then.  United States’ sugar prices also have been stronger.  So, in its final determination, the ITC will be working with an updated record and a more rigorous legal standard.

Another important issue is the question of “causation.”  Was any injury experienced by the domestic sugar industry actually caused by imports of sugar from Mexico?  The record shows that the market share of U.S. producers rose 4.2 percentage points over the POI. Were U.S. producers injured by a smaller 2.4-percentage-point increase in the share of imports from Mexico–especially when the big losers appear to have been producers in other countries, who lost 6.6 percentage points? 

There also are doubts as to whether any price effects were caused by imports from Mexico.  The preliminary record shows underselling of U.S. sugar by Mexican imports in 65.8 percent of measured transactions.  However, making those price comparisons no doubt was difficult because most of the imports from Mexico are of a grade called “estandar” (“standard,” in English), which has an intermediate purity range not produced in the United States. Comparing prices of products that are not identical can be tricky. Parties are actively contesting this issue.  How it is resolved could have a big influence on the case. 

A final uncertainty is the possibility that the sugar industries on both sides of the Rio Grande could enter into a “suspension agreement,” which would suspend the AD/CVD investigation.  In this scenario, Mexican and U.S. producers would consent to some form of managed trade in sugar, agreeing to restrictions on the volume of trade or the price at which imports could be sold. This approach would need to be blessed by Commerce, which tends to listen closely to the preferences of U.S. industries.  There are a number of precedents for such an arrangement, including one regulating shipments of Mexican tomatoes into the United States. 

What to say about such a suspension agreement?  Managed trade always will limit the gains that can be achieved by open and competitive markets, thus causing deadweight losses to consumers and the broader economy.  However, an agreement that allows some imports from Mexico clearly is preferable to large AD/CVD levies that allow none. 

Those who support economic growth and opportunity should hope that no suspension agreement is reached, and that the ITC ends the threat of AD/CVD duties by concluding that Mexican sugar has not injured the U.S. sugar industry.  The real injury in this marketplace is caused by the barrier between producers and consumers created by the U.S. sugar program.  It’s time to end that injury by taking those fetters off.