Mexico & Nafta - August 2006 (ISSN 1741-444X)

The US and Mexico appear to have agreed a deal, on 27 July, that will eliminate duties on trade in sweeteners between the two countries. Ever since Nafta was implemented in 1994, Mexico has chaffed at the restrictions the US has imposed on exports of Mexican sugar to the US. The US, for its part, has become increasingly irritated with Mexican measures to prevent high-fructose corn syrup, produced in the US, being exported to Mexico.

The deal is a compromise. For the next sugar year, which starts on 1 October 2006, Mexico will be able to ship 250,000t of sugar to the US free of any tariffs. It will be able to do the same for the following sugar year. In return Mexico will allow the tariff-free importation of high-fructose corn syrup from the US. The Secretarí­a de Economí­a, which handles international trade negotiations, pointed out that Mexico would be able to export more sugar to the US by paying a tariff. Currently, under Nafta, the US can levy a tariff of US$0.032 per pound on Mexican sugar exports. From 1 January 2007 this tariff falls to US$0.016 and to zero from 1 January 2008. The Secretarí­a de Economí­a pointed out that Mexico's tariffs are considerably lower than the standard US tariff for sugar. This stands at US$0.15 per pound. Given that the international price of sugar is around US$0.15 per pound, the US tariff is prohibitive. So far this sugar year Mexico has exported 500,000t of sugar to the US. It expects to export at least 600,000t by the end of September.  

The Secretarí­a de Economí­a has played what was a weak hand pretty well. The Mexican government has known that it would have to end the 20% tax on soft drinks sweetened with anything other than sugar. This followed a final ruling, in March this year, from a World Trade Organization disputes settlement panel. The panel ruled that the tax, introduced in 2002, was designed to distort trade and protect Mexico's domestic sugar industry. Mexico said that it only introduced the 20% tax because the US refused to abide by the terms of the Nafta treaty and to allow Mexico to increase its exports of sugar to the US.  

Under the terms of the 1994 Nafta treaty, Mexico was allowed to export surplus sugar to the US. The US claimed that Nafta was talking about a "net surplus" (i.e. after imports of high-fructose corn syrup and other sweeteners had been included). Mexico argued that the Nafta agreement only referred to sugar and therefore any sugar that was not used domestically could be exported to the US. The US refused to accept this argument and set (tariff-free) quotas for Mexican sugar exports. Coincidentally, these have been 250,000t in recent years.

What the Secretarí­a de Economí­a has done well is play on US fears that it would come up with some new way of preventing US companies exporting high-fructose corn syrup to Mexico. In late June the US Department of Agriculture (USDA) had become concerned that Mexico would slap an import tariff on high-fructose corn syrup even though Mexico agreed that it would drop the tax on non-sugar sweetened soft drinks from 1 January 2007. Mexico spooked US corn syrup producers by hinting that it was considering a 210% duty on corn syrup. The corn syrup lobby is powerful in Washington and appears to have overridden the equally-vocal sugar lobby to ensure that Mexico was offered an acceptable deal. The sugar lobby's position was also weakened by the damage caused by Hurricane Katrina to southern (cane) sugar production.  

US cane sugar production in the current sugar year (2005 - 2006) is likely to be 2.8m t, down from 3m t in the previous season. In 2006 - 2007, the USDA is forecasting that cane sugar production will increase to 3.2m t as production recovers in Louisiana and Florida, two states which were badly affected by Hurricane Katrina. Beet sugar, grown in more northerly states of the US, accounts for the bulk of US sugar production. This year the USDA is forecasting 4.3m t of beet sugar production and next year (2006 - 2007) it is forecasting 4.7m t. Charles Grassley, (Rep, Iowa), the president of the US Senate Finance Committee, said that the deal reached on 28 July was a good one for both countries and would help the corn syrup industry. Iowa has four corn syrup plants and is responsible for a quarter of the US's output of high-fructose corn syrup.  

WTO: The decision by Pascal Lamy, the director general of the World Trade Organization, to suspend the Doha round of trade talks means that industrialised countries, especially the European Union and the US, but also Japan, are likely to maintain their discriminatory and protectionist agricultural policies for at least the next five years. Even pro-US economic commentators in Mexico claim that the decision by the US Trade Representative Susan Schwab to dismiss the concessions Asian and European trade representatives had made in an effort to restart the talks after the G8 summit in St Petersburg at the end of July, was short-sighted. These commentators claim that the US now has no defence when it is accused of being mercantilist: they say that the US is prepared to push for free trade when other countries have to open up their markets, but when the US itself has to confront strong protectionist lobbies its enthusiasm for the principles and virtues of free trade wilts very quickly.  

This US attitude means that enthusiasts for free trade and freer markets in developing economies no longer have a champion they can respect, economic commentators such as Enrique Quintana, who writes in Reforma, argue. The WTO round, which started in Doha, Qatar in 2001, set the priority of reducing agricultural subsidies in industrialised countries. In return, emerging economies would open up their service sectors more.  

The US cancelled the talks after officials calculated that the EU's offer would have enraged the farm lobby in the US since it would have reduced US government payments to farmers. The US farm lobby is particularly vocal given that mid-term elections are imminent. Under a deal negotiated between the White House and congress, congress gave the administration fast-track approval to negotiate the WTO round. Fast track approval means that congress surrenders the right to interfere with the proposal the administration sends to congress, agreeing only to vote to approve it or reject it. This authority expires on 30 June 2007.