With the full implementation of NAFTA between the U.S. and Mexico on January 1, 2008 it took only a couple weeks for an issue to challenge the new free trade environment. U.S. and Mexican sugar industries have proposed a bilateral commission to manage sugar trade between the two countries. This could cause other groups in Mexico to propose managed trade for commodities opened to free trade in January such as dry beans, corn and nonfat dried milk, or those freed earlier such as pork and poultry. Working through this issue correctly will help avoid more problems in coming months.

“”Some people in the U.S. sugar industry have argued that the bilateral sugar agreement will ÒhelpÓ NAFTA be implemented. NAFTA doesnÕt need help. It began in 1994 with some commodities like sugar given a 15-year managed trade transition. Tariffs were gradually lowered and access expanded to provide time for industries and government policies to adjust to free trade. Now products can move north and south across the border without tariffs or trade volume restrictions. There is no need for more managed trade.

The fundamental issue is that government programs in both countries hold the domestic price of sugar above world market prices through import restraints. The U.S. produces about 7.7 million metric tons raw value (MTRV) per year of sugar and limits imports to 1.9 million MTRV most years. Mexico produces about 5.6 million MTRV per year and limits imports to 200,000-400,000 MTRV. These programs predate the creation of NAFTA and, in theory at least, should have been reformed in the 15-year transition period to fit within the NAFTA framework. The resulting high domestic prices have led to the use of substitutes such as high fructose corn syrup (HFCS) and increased imports of sugar containing products like candies and cereals. Sugar in sugar containing products imported to the U.S. increased from 354,000 short tons raw value (STRV) in 1995 to 1.3 million tons in 2007.

Support for a managed trade agreement on sugar is partly driven by concerns that HFCS from U.S. grown yellow corn will replace substantial amounts of Mexican sugar in that market and result in sugar exported to the U.S. The U.S. and Mexican governments have clashed in the last 10 years over HFCS use in Mexico, first when Mexico put an antidumping duty on HFCS in 1998 and again in 2002 when Mexico placed a 20 percent tax on soft drinks containing HFCS. The U.S. brought a case against the tax at the WTO which ruled in favor of the U.S. A bilateral agreement in the summer of 2006 provided for a transition to January 2008.

HFCS is a major component of the U.S. sweetener market and will likely become a larger part of the Mexican market. According to estimates from USDA, in year 2006 HFCS on a dry weight basis delivered for food and beverage use in the U.S. was 8.7 million tons compared to 9.3 million tons of refined sugar on a dry weight basis. All corn sweeteners delivered were 11.2 million tons. All U.S. sweetener use, including non-caloric sweeteners on a sucrose equivalent basis, was estimated at 26.1 million tons. Corn sweeteners had about 43 percent of the U.S. sweetener market in 2006.

For the 2006/07 marketing year USDA estimates Mexican food consumption of sugar at 5.4 million metric tons (MMT) and HFCS consumption at 700,000 metric tons, with most of that used in the beverage industry. USDA estimates that 40 percent of MexicoÕs beverage sweetener is currently HFCS. If HFCS use increased to 75 percent of Mexican beverage sweeteners by 2012, USDA estimates that would increase HFCS use to 1.5 MMT.

Use of HFCS and other corn sweeteners in the U.S. and Mexico will be partially driven by their relative prices compared to sugar. According to the Bureau of Labor Statistics, the U.S. producer price index for corn sweeteners increased by 80 percent from calendar year 2000 to 2007, while the refined U.S. cane sugar producer price index increased only 12 percent. In the 2007-08 U.S. corn marketing year corn sweetener output is expected to account for 735 million bushels, 5.6 percent of the 13.1 billion bushel crop.

Under the managed trade agreement HFCS would be freely traded with Mexico and Mexican sugar exports to the U.S. would increase by 70 percent of any increase in HFCS use in Mexico for the 2008 and 2009 marketing years and 60 percent for the following years. Given past trade disputes over HFCS trade, that approach will likely lead to more disagreements. Any bilateral effort to manage sugar trade to hold prices above market levels will encourage the use of close substitutes in the U.S. and Mexico.

NAFTA is not unique in its impact on running the U.S. and/or Mexican sugar programs. The EU tried to run a multi-country sugar program with high internal market prices while importing and exporting sugar. They eventually lost a WTO trade case in sugar that forced reforms. The EU is now trying to reduce production by over 25 percent, reduce the sugar support price by 36 percent over four yeas and drastically decrease exports. Continued managed trade in sugar between Mexico and the U.S. and using excess sugar for ethanol production will likely leave both countries looking for another solution in the years ahead.

This approach to managed trade leaves consumers out of the policy equation. Growth in the use of HFCS and imports of sugar containing products indicate that consumers want a range of alternative sources of products. NAFTA and other free trade agreements were created to increase opportunities for consumers to make choices and for producers to respond to consumer demands. Continued managed trade in sugar under NAFTA will deny consumers the opportunity to choose which products to buy and encourage other producer groups to seek similar managed trade programs.