A Review of NAFTA Disputes:Sugar and Agricultural-Based

Sweeteners

P. Lynn Kennedy

and

Daniel Petrolia

OUTLINE

Overview of NAFTA as it relates to sugar and HFCS

Discussion of the current environment with respect to various factors related to production and consumption

Various disputes stemming from the Agreement will be outlined. In particular Net Surplus Production Status and issues related to HFCS dumping

Implications of the Agreement and current disputes

THE AGREEMENT

Fifteen year transition period

Role of HFCS

Rules of Origin

THE TRANSITION

Mexico will align its tariff regime with that of the United States by the end of year six of the agreement, implementing a TRQ with rates equal to those of the United States

During years 7-15, the remaining United States and Mexican tariffs on bilateral sugar trade will be reduced to zero

At the end of year 15 of the agreement, free trade in sugar between Mexico and the United States is scheduled to exist

THE TRANSITION

By year seven, Mexico will adopt the United States second-tier tariff as a common border protection to non-NAFTA sugar

Mexico’s maximum access to the United States will increase to 250,000 tons. With respect to Mexico, the United States second-tier tariff (13.6 cents in year 7) will be eliminated by year 15

In the fifteenth year, sugar trade between the United States and Mexico is unrestricted and duty-free

NET SURPLUS PRODUCER STATUS

Between years one and fifteen, Mexico’s allowable duty-free sugar exports to the United States, and United States duty-free exports to Mexico, will be the greater of: - 7,258 metric tons- The quantity currently allocated by the U.S.

under the sugar program to “other specified countries and areas”

- The quantity allowed under the definition of “net surplus producer.”

EXECUTIVE AGREEMENT and TWO-YEAR UNLIMITED ACCESS CLAUSE

Originally negotiated prior to modifications executed by the Executive Agreement, Mexican access in year seven would have been increased to 150,000 tons, with 10 percent increases annually over the remainder of the 15-year transition

NAFTA would have granted Mexico unlimited access for its exportable surplus sugar in years 7-15 whenever Mexico reached net exporter status during two consecutive years

THE SIDE-LETTER

The Executive Agreement eliminates the two-year unlimited access clause

The 250,000 ton access conceded in year seven is an absolute ceiling

Beginning in year seven, and for the remainder of the transition period for sugar, Mexico will be allowed to ship its net production surplus to the United States duty-free, up to a maximum of 250,000 tons

THE SIDE-LETTER

United States duty-free access to the Mexican market will, in turn, be determined by the United States net production surplus, also with a cap of 250,000 tons

The calculation of net production surplus for both countries will be carried out annually

Consumption of high fructose corn syrup is included with consumption of sugar for both countries

Duty-free Sugar Access Provisions of NAFTA

NAFTA SUGAR PROVISIONS WITH SIDE LETTER

Mexican Access to U.S.Market

Provisions

Years 1-6 (1994-1999)

Mexico not surplusproducer

Greater of 7,258 MT or“other country” share ofimport quota.

Mexico surplus producer 25,000 MT

Years 7-14 (2000-2007)

Mexico not surplusproducer

Greater of 7,258 MT or“other country” share ofimport quota

Mexico surplus producer 250,000 MT

Duty-free Sugar Access Provisions of NAFTA

NAFTA SUGAR PROVISIONS WITHOUT SIDE LETTER

Mexican Access toU.S. Market

Provisions

Years 1-6 (1994-1999)

Mexico not surplusproducer

Greater of 7,258 MT or“other country” shareof import quota.

Mexico surplusproducer

25,000 MT

Years 7-14 (2000-2007)

Mexico not surplusproducer

Greater of 7,258 MT or“other country” shareof import quota

Mexico surplusproducer

Initially 150,000 MT,increasing 10% peryear

THE ENVIRONMENT

Increased capacity in the Mexican sugar industry

Expanded U.S. HFCS production capability

NAFTA SUGAR PROVISIONS DISPUTE

Interpretation of the content and validity of the side-letter agreement

Net Surplus Production Status

Under the amended agreement the net surplus is calculated as the sum of sugar and HFCS consumption minus the production of sugar

Mexican Net Surplus Production and Duty-Free Sugar Exportable

0

200

400

600

800

1000 T

housand M

etr

ic T

ons

1998/99 1999/00Year

Net Surplus Excluding HFCS Consumption

Net Surplus Including HFCS Consumption

Duty-Free Access with Side-Letter

Duty-Free Access without Side-Letter

Duty-Free Mexican Sugar Exportable to the U.S., Alternate Policy Regimes

0

50,000

100,000

150,000

200,000

250,000

300,000 M

etr

ic T

on

s,

Ra

w V

alu

e

1994 1996 1998 2000 2002 2004 2006

with side letter without side letter

HFCS ISSUES

HFCS Import Duties: The Broomcorn Dispute

HFCS Import Duties: U.S. Dumping Allegations

IMPLICATIONS FOR THE FUTURE

One objective of a transition period was to gradually ease the Mexican and U.S. sugar industries into a state of free trade in sugar

IMPLICATIONS FOR THE FUTURE

One objective of a transition period was to gradually ease the Mexican and U.S. sugar industries into a state of free trade in sugar

While this objective is being achieved to some extent, the number of disputes and protests associated with the transition indicate that it is certainly not painless

IMPLICATIONS FOR THE FUTURE

One objective of a transition period was to gradually ease the Mexican and U.S. sugar industries into a state of free trade in sugar

While this objective is being achieved to some extent, the number of disputes and protests associated with the transition indicate that it is certainly not painless

Observers should not be surprised if these and other disputes related to sugar and agricultural-based sweeteners continue well past the transition period