What Sugar Tells Us About Trade

new puzzle

The renegotiation of NAFTA is set to begin in August.  Ahead of it, US Commerce Secretary Ross threatened an 80% tariff on sugar from Mexico if the three-year conflict was not resolved here in early June.    Last year, the US imported about one million tons of sugar from Mexico valued at around $600 mln.  This is small beer.  The US imports from Mexico were about $295 bln in 2016.    Nevertheless, the issue offers important insight into US trade and trade in general.  

The US sugar market is far from free and open.  Domestic US sugar prices are around 80% above world levels.  While supporting sugar producers, it is an important disadvantage to companies that use sugar as an input and to US consumers, which incidentally have the highest per capita consumption of sugar in the world.

US producers and refiners argue Mexico is unfairly subsidizing its sugar producers, who then can sell their product below cost in the in the US.  The US has mechanisms to address dumping, but in 2014 abandoned them for Mexico.  The agreement that the US Ross and Mexico’s Guajardo worked out was rejected by US producers and refiners for not going far enough.  They seem to want the anti-dumping defenses back.    

US industry is divided.   Early last month, nearly 40 members of Congress representing sugar-industry districts wrote to Ross seeking protection from Mexico’s imports.  A couple of weeks later, around 50 Representatives wrote to Ross urging him to remember that US food and beverage producers are large consumers of sugar.  Reports suggest some farm groups from Iowa cautioned against a hard line against Mexico, who had threatened to retaliate against US high-fructose corn syrup.  Mexico is the largest market for the US produced high-fructose corn syrup.

In addition to reinstating anti-dumping and anti-subsidy authority, the rub is not so much for US producers as refiners.  Under the tentative agreement, which some US businesses say is not sufficient, Mexico would limit its refined sugar exports to 30% from 53% currently of the total sugar exports.   For this to be effective, however, US refining industry want less sweet sugar from Mexico.  Specifically, the high quality of current raw sugar from Mexico (99.5% sucrose) is sufficient for human consumption and doesn’t need refining.  The tentative agreement lowers this to 99.2%, which may not sound like much, but would then require refining.   

The US has long protected its sugar producers, which are largely concentrated in Florida and Louisiana.   The first protections data back to late 18th century.  These days, the Department of Agriculture loans money to sugar cane and sugar beet growers than can be repaid in sugar.    A minimum price is guaranteed.

The issue here is not free trade or even fair trade.  US policy is aimed to help producers and refiners.  As a consequence, consumers of sugar as disadvantaged.    The tentative deal raises the price paid for Mexican sugar from 22 1/4 cents a pound to 23 cents.  Mexico will get 28 cents a pound for refined sugar rather than 26 cents currently.

In some ways, the dispute over sugar is a dress rehearsal for the NAFTA negotiations that are to begin in a couple of months.    Mexico reportedly capitulated on many issues.  Perhaps this is a tell on its strategy for dealing with the US.  Demonstrate good will.  Make small concessions when necessary.  Stay off President Trump’s radar screen.

More broadly, as countries develop, they want to move up the value-added chain.  In some ways, that is what development entails. Raw commodity exporting is understood to be a very low level of development.     Economic development abroad and doing more value-added activities cause tensions with already established producers.  That competitive pressure, in turn, forces the established producer to also move up the value-added chain.  The economic development also creates markets for other goods and services.  It can improve lives and dampen the attractiveness of more radical economic paths.

There is a rough agreement that free trade means free from direct government interference and low if any tariffs and subsidies, and non-tariff barriers, like quotas.  It may be one of those goals that can be approached but rarely achieved.   Fair trade seems to mean whatever one says.  Trade rules must allow countries to develop and add more value.  In a world of where goods and services move freely, there will still be trade imbalances.  The terms of trade (value of exports to the value of imports) is an important but too often under-appreciated aspect of the trade.  A trade regime that locks countries into a set terms of trade, as in forcing them to stay in raw commodity export stage is asking for trouble and perhaps delivered in unexpected ways.