(U.S./Mexico Trade in Sweeteners)

NAFTA was designed to eliminate most of the trade barriers among the United States, Canada, and Mexico within a 15-year time period. The original Agreement did not include sugar trade between the United States and Canada, since this matter was covered by the U.S.-Canada Free Trade Agreement of 1989.

Timetable/Milestones

• Entered into force: Jan. 1, 1994
• Senate vote to implement agreement (60-38) December 8, 1993
• Ratified by Mexican Senate (56-2): November, 1993
• House vote to implement agreement (234-200) November 17, 1993
• Agreement signed by governments (Clinton administration): December 17, 1992
• Negotiations ended: August 12, 1992
• Negotiations began: February 5, 1991

Mexico Sugar Facts

• Production (Avg. 2005-2007): 5,807,333 metric tons
• Consumption (Avg. 2005-2007): 5,387,333 metric tons
• Imports (Avg. 2005-2007): 149,333 metric tons
• Exports: (Avg. 2005-2007): 435,667 metric tons

In addition to access granted under the NAFTA provisions, Mexico’s minimum access under the WTO tariff-rate quota is 7,258, or .65% of the total TRQ shared by 41 countries.

The NAFTA allocation may be shipped either raw or refined.

Provisions and Additional Access Granted to U.S. Market

PRE-NAFTA HISTORY

[Source: EDIS document SC 035, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. First published July 1992; revised June 2002.]

Mexico’s U.S. Sugar Quota: Mexico’s annual U.S. sugar quota prior to NAFTA was approximately 8,000 tons, raw value. This quota reflected Mexico’s status as a net importer of sugar. While Mexico’s sugar production was roughly 3.2 million tons, sugar consumption growth outstripped sugar production growth, leaving Mexico with the requirement of a relatively large sugar import demand.

In the initial deliberations of the North American Free Trade discussions, Mexico requested a 1.65 million ton quota allocation in the U.S. market. Mexico’s quota request of 1.65 million tons, raw value, exceeded the 1.52 million ton quota allocated by the United States to all foreign quota recipients (40 nations) for the 1991-92 quota year. Such a large Mexican quota would have required zero quota allocations to all other foreign nations under the provisions of the 1990 Farm Bill, which required a minimum of 1.25 million tons of U.S. sugar quota to friendly foreign nations. It was unlikely that Congress would ever endorse a NAFTA proposal to concentrate our foreign sugar quotas into the hands of one nation, irrespective of our friendly status with Mexico.

Such a large quota was unreasonable for countries that have a net import status. In 1991, Mexico imported 1.5 million metric tons of sugar, raw value, while exporting only 30,000 tons. Domestic sugar producers contended that the real beneficiaries of a large U.S. quota for Mexico would be a few Mexican sugar traders and operators, not Mexican sugar producers. Mexican sugar producers were already supported and protected at prices above U.S. support levels.

Mexican government representatives contended that Mexico could expand sugar output through privatization of the raw milling sector and other strategies that improve grower efficiency and productivity (e.g., freer domestic market mechanisms such as lower interest rates on farm credit and decreased price supports). From the Mexican perspective, a large U.S. sugar quota would provide a key market stimulus for expanded sugar output with reduced Mexican government subsidies.

Imports of Sugar-Containing Products: Without proper monitoring and controls, Mexico could establish candy and sugar intensive food processing operations (e.g., maquiladoras) on the U.S.-Mexican border, using highly subsidized, dumped refined sugar from other countries. If such a procedure were permitted, the integrity of the U.S. sugar program would be undermined, and sugar exporters from other countries would find other dumping grounds for their surplus refined sugar.

The U.S. Re-Export Program: The United States was Mexico’s largest source for sugar imports in 1991 at 322,000 metric tons, raw value, followed in order by Cuba with 310,000 tons and Brazil with 224,000 tons. Most of the sugar the United States exported to Mexico came under the auspices of the U.S. re-export program, which permits refineries the opportunity of refining foreign raw sugar for re-export to Mexico without having to come under the domestic price environment. This program has saved jobs in the U.S. sugar refining industry and has assisted Mexico with filling a large void in sugar supplies since Mexico’s sugar demand has increased significantly in recent years. U.S. sugar refiners contended that any NAFTA agreement should permit the re-export program to function as long as the need for sugar imports exists in Mexico.

Development of the NAFTA Sugar Provisions

NAFTA’s Early Discussions: American, Mexican, and Canadian negotiators first met in Toronto, Canada, in June 1991. Despite numerous meetings at the ministerial level, participants remained divided over a number of issues (e.g., how the proposed agreement should address trade issues concerning agriculture, the automobile industry, energy, financial services, foreign investment, rules of origin, and trade dispute settlement mechanisms). Meetings in 1992 in Washington, D.C., during March, and in Montreal, Canada, during April 6-8, were unable to break the deadlock in the talks.

NAFTA’s Final Agreement: In November 1993, the U.S. Congress passed legislation authorizing the North American Free Trade Agreement (NAFTA). NAFTA became effective January 1, 1994, following favorable votes in the U.S. House of Representatives (234 to 200), the U.S. Senate (61 to 38), and the Mexican Senate (56 to 2). The Canadian Parliament previously approved the Agreement in May 1993.
Original Sugar Provisions: The original draft of the Agreement between Mexico and the United States regarding sugar permitted Mexico to increase duty-free exports of sugar to the United States from its level of 7,258 metric tons of raw sugar to a maximum of 25,000 metric tons. However, duty-free shipments in excess of the original 7,258 metric ton level was limited to Mexico’s net sugar production surplus (domestic sugar production minus domestic sugar consumption).

In the seventh year of the Agreement (2001), Mexico’s maximum duty-free access level for sugar exports to the United States would increase to 150,000 metric tons under the same net sugar production surplus provisions specified for the first six years. Moreover, Mexico was permitted to have unlimited access to the U.S. sugar market if Mexico became a net exporter for two successive years following the sixth year of the Agreement.

These NAFTA sugar provisions created considerable debate. Three of the major issues debated involved the following:

1. If Mexico did in fact achieve unlimited duty-free access to the U.S. sugar market, would there be any access to the U.S. sugar market for the other 39 foreign countries with U.S. sugar quotas?
2. What would be the status and effectiveness of the U.S. sugar program if Mexico dumped huge quantities of sugar onto the U.S. market?
3. How much high fructose corn syrup (HFCS) would be substituted for sugar in Mexico’s soft drink industry to permit Mexico to achieve net exporter status in sugar?

During the 1999 NAFTA debates in the United States, these issues were sufficiently reinforced with congressional opposition to the Agreement. With NAFTA in serious trouble i
n the U.S. Congress in August 1993, the U.S. Trade Representative agreed to U.S. sugar producers’ arguments that Mexico’s access to the U.S. sugar market should be diminished. Initially, both Mexican sugar producers and the Mexican government balked at concessions to the original agreement. However, at the last minute, the Mexican sugar industry agreed to “watering down” the original sugar agreement via a “side” agreement.

The sugar industry concerns regarding substitution of HFCS for sugar in Mexico’s soft drink industry were corroborated by a Congressional Budget Office (CBO) study in July 1993 (“A Budgetary and Economic Analysis of NAFTA”). According to the CBO study, the promise of access to the U.S. market could encourage investment and expansion in Mexico and change Mexico’s demand for imports. Mexico could, for example, shift to HFCS in its soft drink industry. Based on 1990 marketing year data, shifting to HFCS sweeteners in Mexico could free up as much as 1.3 million metric tons of sugar for other uses and would account for nearly all of Mexico’s imports. This likely scenario was a major factor in the development of the side agreement for sugar.
The Side Agreement on Sugar: Since the text of the original agreement could not be altered, the “side” agreement on sugar involved exchanges of correspondence between the United States and Mexico committing each respective government to certain “clarifications.”

In the original agreement, the formula for defining Mexico’s net surplus production was simply projected production minus projected domestic consumption. If this formula yielded a positive number, Mexico would be defined as a net surplus producer.

In the “side” agreement, the formula for determining Mexico’s net surplus production was amended to include HFCS on the consumption side only. Thus, Mexican sugar production would have to exceed Mexican consumption of both sugar and HFCS for Mexico to be considered a net surplus producer. It was believed that this aspect of the “side” agreement would severely diminish Mexico’s chances for becoming a major sugar supplier to the United States.

For phase one (years 1 through 6, or 1994-99), Mexico would have duty-free access for sugar exports to the United States for the amount of its net surplus production, up to a maximum of 25,000 metric tons, raw value. If Mexico was not a net surplus producer, it would still have duty-free access for 7,258 tons, or the minimum “boat-load” amount authorized under the U.S. tariff rate quota. For comparison purposes, Mexico exported an average of 12,667 metric tons in the four years prior to NAFTA.

In phase two (years 7 through 14, or 2000-09), Mexico would have duty-free sugar access to the U.S. sugar market for the amount of its surplus as measured by the formula, up to a maximum of 250,000 metric tons, with minimum duty-free access still at the minimum “boat-load” amount.

The “side” agreement eliminated the unlimited sugar access provision that was contained in the original NAFTA language. That original provision would have allowed Mexico, after the seventh year (2001), to have duty-free access for its total net production surplus, without limit, provided that it had previously achieved a net production surplus for two successive years.

Sugar Tariffs: The United States has a two-tiered tariff system that permitted Mexican sugar to enter the U.S. duty free within their sugar quotas. However, Mexico could export sugar to the United States beyond its quota by paying the second-tier tariff of approximately 17 cents per pound, raw value. Under NAFTA, this second-tier tariff was scheduled to decline 15 percent (total) over the first six years and then to zero by year 15 (2008). By the end of the sixth year of the Agreement (2000), Mexico would also install a tariff rate quota system, with a second-tier tariff applicable to other countries that is equal to the U.S. second-tariff. In effect, both countries would have reduced their second-tier tariffs between themselves to zero by the fifteenth year of the Agreement.

The Mexican tariff on HFCS from the United States was 15 percent. It was expected to decline to zero over the next 10 years under NAFTA. Mexican barriers to sugar-containing products would be converted to tariffs and then decline to zero over the 10-year period.

U.S. Sugar Re-Export Program: The U.S. refiners shipping sugar to Mexico under the U.S. refined sugar re-export program would be guaranteed “Most Favored Nation” treatment, without NAFTA providing any special benefit for re-export sugar because it was not considered U.S. in origin. NAFTA did, however, allow for reciprocal duty-free access between the United States and Mexico for refined sugar that is refined from raw sugar produced in Mexico or the United States.

Implications: The primary result of the sugar “side” agreement is that NAFTA would not become a source for domestic market disruption via a dramatically altered sugar price support program or modified tariff rate quota system. NAFTA reinforced the status quo. That is, Mexico was not expected to export vast quantities of sugar to the United States, thereby undermining prices and the integrity of the sugar price support program. Moreover, the United States would not have to dramatically reduce or eliminate sugar quotas to 39 countries holding U.S. sugar quotas.

Further Developments

[Source: Congressional Research Service Report for Congress, “Sugar Policy Issues,” updated September 6, 2006, by Remy Jurenas, Specialist in Agricultural Policy, Resources, Science, and Industry Division.]

A few years after the signing of the treaty, Mexico did achieve net-surplus-producer status, which was threatened by the increasing Mexican use of imported HFCS. Mexico contended that in the years following the signing of the “side” agreement, the United States had been dumping HFCS. Since 1998, Mexico has also been complaining about its U.S. tariff rate quota, and Mexican officials (who feel that the U.S. sugar market has not opened fast enough) have demanded greater access. Domestic producers in the United States oppose Mexico’s claims. Some Mexican officials have denied ever signing the famous “side” agreement of NAFTA; others have not. At the 1998 International Sweetener Symposium, the head of Mexico’s NAFTA office in Washington, D.C. called for renegotiation of the provisions set by the “side” agreement after 2000. According to him, Mexico should be allowed to send its entire future surplus production to the United States and not the 250,000 tons agreed upon in the treaty.

On January 1, 2002, the Mexican government imposed a 20 percent “soda tax” on all beverages sold in Mexico that were not sweetened with its own cane sugar. This effectively eliminated the use of U.S. HFCS in the Mexican beverage industry.

The U.S. registered strong complaints over the tax, which hurt sales of HFCS to Mexico, lowered corn exports used to produce HFCS, and threatened U.S. beverage exports to Mexico. The U.S. filed a case against the tax through the WTO dispute settlement process. Following the WTO ruling on August 8, 2005, that Mexico’s “soda tax” was illegal, Mexico filed an appeal. The WTO Appellate Body overturned the appeal in March, 2006, and a bilateral agreement was reached and submitted to the WTO that Mexico would eliminate the tax no later than January 31, 2007.

Longstanding differences over the level of market access for Mexican sugar to the U.S. market and over Mexican barriers on imports of U.S. HFCS were resolved in a bilateral agreement reached by both governments in late July 2006. The terms of this agreement will apply until January 1, 2008, when bilateral free trade in sweeteners takes effect under NAFTA’s original terms.

In the July 27 exchange of letters between U.S. and Mexican agriculture trade negotiators, both governments agreed on a number of measures “intended to promote an orderly transition to” free trade in sweeteners on January 1, 2008. In brief, the agreement provides for Mexican sugar access to the U.S. market equal
to the amount of access that U.S. HFCS will have to Mexico’s market during this period. Specific provisions call for:

• The U.S. to provide duty-free access for Mexican sugar as follows: 250,000 MT in FY2007, and from 175,000 to 250,000 MT in the first quarter of FY2008.
• Mexico to allow duty-free entry for an equivalent amount of U.S.-produced HFCS in FY2007 (250,000 MT), with the FY2008 quantity determined in the same way that the sugar TRQ amount is determined.
• The U.S. to allow not less than 21,774 MT of Mexican refined sugar to enter duty-free by September 30, 2006.
• Mexico to meet its NAFTA commitment to allow duty-free entry of not less than 7,258 MT of sugar or syrup goods from the U.S. in each of FY2005, FY2006, and the first quarter of FY2008 (totaling 21,774 MT).
• The U.S. to eliminate its over-quota tariffs on imports from Mexico, and Mexico to eliminate its over-quota tariffs on imports of HFCS from the U.S., effective January 1, 2008.
• Only through December 31, 2007, Mexico to apply import licensing procedures on permitted in-quota amounts of HFCS imports, and to develop and apply “bilaterally agreed” import licensing procedures on the specified amount of in-quota sugar imports, from the U.S.
• Each country not to take any discriminatory action (e.g., imposing a tax or any other internal measure) to limit imports of the sensitive sweetener product from the other.
• Both countries to continue to consult and work to resolve other ongoing disputes involving trade in sweeteners, in order to facilitate the transition to free trade on January 1, 2008.
• Both countries to establish a joint industry/government task force to (1) help both governments prepare for the elimination of tariffs on sweeteners in January 2008 and (2) periodically review product shipments against this agreement’s TRQs to ensure that they are promptly and fully utilized.