Collision Course: The Looming Contradictions of U.S. Sugar Policy - Farm Bill 02 Choices - Statistical Data Included

Choices: The Magazine of Food, Farm and Resource Issues, Fall, 2001 by Erick Knepper, David B. Schweikhardt, Kelley Cormier, Juan Estrada-Valle

United States domestic sugar policy is on a collision course with international trade obligations negotiated under the North American Free Trade Agreement (NAFTA) and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade (GATT). As sugar imports increase under the terms of these agreements, the contradictions of high price supports and trade liberalization commitments make existing domestic policy inoperable and leave policy makers with few palatable alternatives.

These contradictions are surfacing as the U.S. provides greater access to sugar imports from Mexico and Canada. The domestic price support program that has long supported the industry faces increased pressure, and policy makers must resolve the conflicting policy objectives that are becoming evident. Recent government purchases of stocks and limits on domestic production are merely a prelude to the looming collision of domestic and trade policies.

U.S. sugar policy is a combination of a domestic loan rate program and a Tariff Rate Quota (TRQ) designed to support domestic price at a level near the loan rate. The Federal Agricultural Improvement and Reform Act (FAIR) provides recourse or nonrecourse loans, depending on the level of imports, at a rate of 18 cents per pound for raw cane sugar and 22.9 cents per pound for refined beet sugar for crop years 1996-2002.

U.S. sugar production has increased from 7.9 million tons in 1994 to 8.5 million tons in 2000, while U.S. consumption increased from 9.3 million tons to 10.3 million ons annually during that same period (Figure 1). The viability of the nonrecourse loan program relies on the import protection provided by the TRQ. Recent events and long-term trade obligations are requiring the U.S. to open its borders to more sugar imports, causing the industry's domestic and trade policies to become increasingly contradictory.

Northern Exposure

The contradictions in U.S. sugar policy begin at the U.S.-Canadian border. In 1995, Heartland By-Products Company received a ruling from the U.S. Customs Service (USCS) regarding the import of sugar syrup under subheading 1702.90.40 of the Harmonized Tariff Schedule of the United States. Heartland intended to mix raw granular sugar with molasses and water in Canada and ship the resulting sugar syrup to Michigan under that subheading. The sugar syrup would then be processed to extract a liquid sucrose for sale to U.S. food processors for use in breakfast cereal, ice cream, and candy. This ruling permitted the syrup to be imported at a lower tariff outside the TRQ.

In 1998, shipments of sugar syrup from Canada to the U.S. reached 100,000 tons (Figure 2). The USCS then reversed its earlier ruling and held that Heartland's process was an act of "disguise or artifice" intended to evade the sugar import quota. The USCS declared that the product must enter the U.S. under the TRQ, which would have increased the tariff on the syrup to prohibitive levels.

In February 2000, the U.S. Court of International Trade ruled that the reversal of the original USCS ruling was an "arbitrary, capricious... abuse of discretion" that violated the "plain meaning" of the tariff schedule. Citing the longstanding principle that "a manufacturer has the right to fashion goods to avoid the burden of high duties," the court restored the original ruling allowing Heartland to import syrup outside the TRQ (U.S. Court of International Trade).

This decision leaves the U.S. border open to further increases in sugar syrup imports. In 1999 nearly 140,000 tons of sugar were imported as sugar syrup, making Canada a larger source of sugar imports than all but three countries that ship sugar to the United States under the TRQ. Though the Court's ruling could be appealed, Congressional action may be required to amend the tariff schedule and limit such sugar imports. Such action might be incompatible with U.S. obligations negotiated under the Uruguay Round.

Southern Discomfort

The contradictions in U.S. sugar policy also arise at the U.S.-Mexico border. The liberalization of trade negotiated in NAFTA, combined with the modernization of the Mexican sugar and food processing industries, is causing a transformation of the sugar and sweetener sectors in Mexico. As the implementation of NAFTA nears completion, this transformation will result in greater export capacity for the Mexican sugar industry.

Mexican sugar production reached 5.4 million tons in 2000 (Figure 3). This growth in production has resulted from increased yields, favorable weather conditions, and the addition of 10,000 hectares to sugar cane production. Mexico's sugar consumption hit 4.5 million tons in 2000.

As production of cane sugar increases, Mexico's food processing industry is converting to the use of high fructose corn syrup (HFCS), much as U.S. processors did in the 1970s. The liberalization of corn trade between the United States and Mexico under NAFTA, leading to lower corn prices for Mexican processors, has contributed to the growth in Mexico's use of HFCS. In 1999/2000, Mexico's production of HFCS reached 330,000 tons, while U.S. exports of HFCS reached 210,000 tons (Figure 4). The increased production and use of corn sweeteners in Mexico requires Mexican sugar producers to compete with HFCS processors, particularly in the soft drink market (USDA).