Commerce Department’s Sugar Deal May Avert A Full-Fledged Trade War

Ike Brannon President, Capital Policy Analytics
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Against all odds, the Commerce Department recently reached an agreement with the Mexican government and Mexico’s sugar producers to end two investigations – one claiming subsidies, the other claiming dumping – that threatened to provoke a full-fledged trade war. The U.S. government agreed not to place duties on Mexican exports in return for restrictions on the price and quantity of Mexican sugar brought to the United States.

While supporters of free trade are right to lament that such a sound economic precept will apparently never apply to sugar, the agreement makes the best of a bad situation. Certainly, this bit of managed trade betrays the principle behind North American Free Trade Agreement: unlimited commerce among the U.S., Mexico, and Canada, with no tariffs. Unfortunately, the massive loophole in that 20-year-old agreement is that it is subject to U.S. antidumping laws, which, to put it mildly, favor U.S. producers over foreign competitors.

The reality is that the settlement between Mexico, the world’s seventh-largest sugar producer, and the U.S., number six, will preserve access for Mexican sugar producers in the U.S. and will provide some measure of downward pressure on domestic sugar prices. A final agreement is expected to be signed as early as November 26.

Not everyone is happy with the agreement. Sugar users, such as candy makers, are unhappy that the deal will maintain most of the gap that has long existed between the world price (currently 16 cents for raw sugar) and the U.S. price (currently 26 cents). That gap is a function of the “sugar program” that has made the crop the most protected in the United States.

The U.S. sugar industry managed to keep Mexican competitors at bay for 14 years after the enactment of NAFTA through an exemption. Since then, raw sugar imports into the U.S. from Mexico have varied from about 600 metric tons to 1.9 million metric tons. Under the new agreement, imports are estimated at about 1.4 million tons for the 2014-15 marketing year.

That’s not perfect, but it is better than the alternative. The Commerce Department had recommended anti-subsidy duties of up to 17 percent and dumping margins of 40 to 47 percent.  Had those tariffs been enacted, they could have completely priced Mexican sugar out of the U.S. market, jeopardizing up to a half-million jobs.

Mexico’s economics minister had made it clear that such duties would have meant an all-out trade war, the first step of which would have been retaliatory duties against U.S. exports of high fructose corn syrup to Mexico. Shipments of corn syrup have increased tenfold since NAFTA went into effect, and the Mexican response would have been highly problematic politically: Corn farmers may be the only farm group with as much political juice as sugar farmers.

Managed trade represents nothing so much as putting a few politically connected businesses ahead of what’s best for the vast populace that actually consumes the goods and services being imported, and nowhere is that as true as with our incipient return to sugar tariffs on Mexico – a country with which we ostensibly have a free trade agreement.

Unfortunately, the road to free trade is more meandering than many of us would like. The agreement between the U.S. and Mexico, however flawed it may be, at least represents a step down that road and is a markedly superior outcome to the most likely alternative.

Ike Brannon, former chief economist at the House Energy and Commerce Committee, is a Senior Fellow at the George W. Bush Institute.