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US-Mexico Trade Relations Not as Sweet Due To Potential Trade War on Sugar and High Fructose Corn Syrup

March 12, 2014
US-Mexico Trade Relations Not as Sweet Due To Potential Trade War on Sugar and High Fructose Corn Syrup

A recent case under the antidumping and countervailing duty law against imported Mexican sugar is only thelatest chapter in the complicated saga of the relationship between the United States and Mexico when it comes to sugar. Sugar has been an impediment to the economic integration of the two countries that was originallyforeseen at the signing of the North American Free Trade Agreement (NAFTA). Indeed, due to a dispute betweenthe countries involving the importation of U.S. high fructose corn syrup (HFCS) into Mexico, Mexico did notgain full access to the U.S. market for sugar exports through NAFTA until 2008.In their petition for the imposition of antidumping and countervailing duties on imports of sugar from Mexico,the complainants, the American Sugar Coalition and its members (domestic processors, millers, and refiners ofsugar and growers of sugar cane and sugar beets) argue that Mexico’s unfair trade practices—subsidizing thesugar production and exports (in violation of the countervailing duty law and also importing sugar in the UnitedStates at less than fair market value in violation of the antidumping law)—cost the American sugar industry $1billion this past year. The petition was submitted in late March, and in early May the U.S. International TradeCommission (USITC) voted to continue the investigation into raw and refined cane and beet sugar, in dry andliquid forms, including colored sugar, flavored sugar, and blends with other sweeteners, due to a "reasonableindication that a U.S. industry is materially injured or threatened with material injury by these importations". This affirmative USITC preliminary finding meant that the U.S. Department of Commerce would continue its part ofthe investigation into imported Mexican sugar, looking at potential less than fair value sales and potential use ofillegal subsidies that would violate the U.S. countervailing duty statute. The Mexican government has deniedallegations that it subsidizes its sugar industry or dumps sugar in U.S. markets. While the industry awaits furtherdeterminations regarding the antidumping and countervailing duty investigations into imported Mexican sugar,the importers and consumers of Mexican sugar are facing uncertainty and in many case seeking alternativesources. Since most sugar exporting countries have quotas on their U.S. imports, shortages and higher prices arelikely due to NAFTA. Mexico was exempted from quotas.The Commerce Department’s preliminary determination for the antidumping investigation was due September 4but was extended until October 24, 2014. The countervailing duty investigation is due August 25 (which is thenew extended deadline). After these dates, importers will have to pay provisional duties. The petition seeksduties of 62.44 percent for raw sugar and 44.88 percent for refined sugar.The highly protected U.S. sugar industry in the U.S. revolves around a sugar price-support program administeredthrough the U.S. Department of Agriculture (USDA). The program, designed to support sugar prices, providesloans to U.S. sugar processors with very few restrictions and even the ability to borrow again after defaulting,without any consequence. The USDA has an interest in keeping sugar prices high, as the risk of sugar processors’defaulting is lower when sugar prices stay above certain levels.U.S. sugar processors can take unlimited loans from the USDA, as long as they are secured with sugaras collateral. The sugar posted as collateral typically is worth less than the processor’s unpaid loan. The USDAtries to sell excess sugar to ethanol producers. By the end of 2013, the sugar industry was looking at $280 millionowed to the USDA that it could not repay. In 2013, processors defaulted on $171.5 million after the USDA spent$106.7 million to buy sugar in an effort to boost prices.The U.S. sugar industry does, however, account for 142,000 American jobs. This gives the U.S. sugar industry agreat deal of political power. While sugar production only makes up 4 percent of U.S. agriculture, the sugarindustry reportedly accounts for one-third of political contributions.The Mexican sugar industry provides 500,000 Mexican jobs among the 54 sugar mills in the country. While theAmerican Sugar Coalition argues that nine of these mills are government-owned in their petition, Mexico hasbeen seeking ways to privatize these companies. In 2001, the Mexican government took over 27 sugar mills tosave the national sugar supply and thousands of jobs. Since 2006, Mexico has been re-privatizing the mills. Thenine remaining mills currently owned by the government belonged to one sugar industry group, Grupo CAZE.Mexico denies that it subsidizes its sugar industry. Rather, the Mexican government has argued that itdeliberately diverts sugar exports away from the U.S. in an attempt to relieve over-supply, and the Mexicangovernment states that it has been doing so in cooperation with U.S. authorities—leaving the Mexicangovernment feeling confused by the Commerce Department's institution of these investigations. Imports of sugarinto the U.S. fell in 2012-2013 due to a large U.S. domestic crop.While exporting sugar to the U.S., there has been a historical hesitance to integrate high fructose corn syrup(HFCS) into food and beverage products made in Mexico, and reluctance to import U.S. HFCS products intoMexico. It is important to note that beverages containing HFCS were taxed at 20 percent by the Mexicangovernment in 2002 as part of a disagreement over the U.S.’s NAFTA commitments. Mexico argued thatNAFTA allowed them to sell surplus sugar duty-free in the U.S., but that the U.S. had not respected thisagreement. Ultimately, the Mexican government paid $58.4 million to the U.S. in restitution for the HFCS tax, anamount decided by a NAFTA Chapter 11 tribunal in 2008.The U.S. Agriculture department has called the filing of the sugar case “ill-timed” due to ongoing sensitivenegotiations regarding access to Mexican markets for U.S. potatoes and discussions of country-of-origin labelingrequirements for meat contained in the farm bill. U.S. government officials are worrying about how Mexicoperceives the current investigation into imported sugar, and what repercussions it could have in the futureMexico may have the ability to bring the U.S.’s sugar price-support program before the World TradeOrganization (WTO) with the argument that it doesn't comply with specific WTO standards.Another cost that comes as a result of the current investigation is the potential for retaliation from Mexico in theform of the imposition of renewed duties on U.S. exports of HFCS to Mexico. Concerns such as this havecaused the U.S. corn and HFCS industry to become involved in the case on the side of the Mexican sugarproducers in arguing that the imposition of antidumping and countervailing duties would be unfair, if only to saveits own stake in the Mexican market.There are rumors that Mexico might also delay the finalization of the Trans-Pacific Partnership (TPP), whichincludes the three NAFTA countries and a number of Asian countries, which the U.S. hoped to conclude by theend of 2014.Author’s Note: "On August 25, 2014, the U.S. Commerce Department announced a preliminary countervailingduty average rate of 14.87%. For more information contact lglick@porterwright.com."

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