The U.S. sugar industry’s ongoing opposition to the Dominican Republic – Central American Free Trade Agreement (DR-CAFTA) and the recent announcement by the European Union (EU) Commission of proposed changes in the EU sugar program have called attention to how the U.S. sugar program works and its relationship to trade policy. While government intervention in sugar production, consumption and trade is widespread throughout the world, the sugar programs in the U.S. and the EU are often pointed to as the programs most in need of change. While the programs have some similarities, they also have significant differences that have made the U.S. program open to less criticism than its EU counterpart.
Both the U.S. and EU sugar programs are based on government supply management to keep market prices near a government determined level that minimizes the cost to taxpayers and avoids government accumulation of sugar stocks. Both programs limit the amount of sugar imported to protect domestic producers, and, yet, allow preferential imports from certain developing countries. Consumers in both countries pay higher prices for sugar than they would in a more open market system.
The U.S. and the EU sugar programs are out of step with other farm program policies in each country. Most U.S. farm policies have been slowly evolving away from supply management programs for the past 30 years. Peanuts in the 2002 farm bill and tobacco last year were the most recent commodities to change. The EU transition began in the early 1990s and made a major step in January 1, 2005 with all commodities except sugar moving to a Single Farm Payment method of farm income support. The recently proposed changes for EU sugar would align sugar with the other commodities.
There is currently no effort in the U.S. government to propose changes that would more closely align U.S. sugar policy with other farm programs or with trade policies. Talk about the 2007 farm bill will begin with a USDA hearing in Nashville, Tennessee in early July, but sugar is not likely to receive much attention. As long as the sugar program costs the federal government little or no money there is no budget pressure to change the U.S. sugar program. This is the opposite of the EU where sugar program costs were an issue and the recent purchase of intervention stocks simply highlighted it. Consumers in the U.S. have little political impact on sugar policy.
The largest difference between the U.S. and EU sugar programs is that the EU subsidizes the export of 3 million metric tons (MMT) of sugar on a raw equivalent basis. About half of those exports are from raw sugar that was imported from developing countries. Under a case brought by Brazil and other countries at the World Trade Organization (WTO), the EU’s export subsidy programs have been ruled at odds with its obligations to the WTO.
The U.S. has not had a similar case brought against it at the WTO. U.S. exports in recent years have been only about 200,000 tons per year. The U.S. is currently obligated under trade agreements to import 1.256 million tons of raw sugar per year. DR-CAFTA would increase imports by 120,000 tons per year. The maximum amount of sugar allowed to be imported under the current farm bill is 1.532 million tons per year. The U.S. is a net sugar importer while the EU is a net sugar exporter.
Both programs are under pressure from trade policies that encourage the freer flow of good across international borders. The EU has an Everything But Arms (EBA) initiative that will allow more developing countries to import sugar tariff free beginning in 2009. Under NAFTA, Mexico will have additional access to the U.S. sugar market beginning in 2008.
The Administration has said that all products will be part of future trade agreements. This is a switch from the U.S.-Australian Free Trade Agreement that excluded sugar. Talks have been ongoing for a Free Trade Area of the Americas that includes Brazil, the world’s leading sugar exporter, and other Central and South American sugar producers. The Andean Free Trade Agreement (with Colombia, Peru and Ecuador) and a Thailand free trade agreement are also not likely to move forward without sugar provisions.
Some change in the U.S. sugar program could happen as a result of the current Doha Round trade negotiations. The U.S. sugar program has not had attention like the U.S. cotton program has received in recent months. Sugar is grown in many developing countries where growers can be competitive with U.S. costs. Access to developed country markets is one of the key points in the overall negotiations. Some type of increased access may be necessary to reach agreement in the current negotiations.
Imports of sugar from Mexico could cause a change in U.S. sugar policy in the next few years. Sugar trade has a 15 year transition period under NAFTA. That transition ends on January 1, 2008 when the over quota tariff for sugar from Mexico is reduced to zero. The current tariff is 4.5 percent and will be lowered to 3.0 percent in 2006. At some point between now and 2008, the price spread between U.S. and Mexican sugar may allow a U.S. company to pay the tariff and import sugar. Some analysts believe that Mexico has more than the 276,000 tons of sugar needed to fill the gap between the maximum allowed imports of 1.532 million tons under the farm bill and the obligated minimum imports of 1.256 million tons.
While the EU Commission has decided to propose fundamental changes in the current sugar policy, U.S. sugar policy changes have not been proposed. That may change in the months ahead as domestic farm policies and trade policies become increasingly intertwined.