Last week the Department of Commerce assessed preliminary import duties of up to 17.01 percent on sugar entering from Mexico after the department found the Mexican government had provided subsidies that can be countervailed under U.S. Llei. Under NAFTA, Mexico can export unlimited amounts of sugar to the U.S. tariff free. While this case was brought by private interests, the long-term U.S. public policy goal should be to encourage the Mexican government to remove itself from direct ownership of sugar mills and restrain its use of sugar production subsidies.

The countervailing duties (CVD) were no great surprise because the largest sugar exporter to the U.S. is FEESA, a Mexican government-owned trust controlling nine previously failing sugar mills. They received the 17.01 percent duty. The GAM Group was given a much lower rate of 2.99 percent. All other Mexican sugar producers/exporters were assigned a rate of 14.87 percent. The Commerce Department will make a decision on the final CVD on January 7, 2015.

The Mexican government is like many other national governments that politically cannot refuse to provide assistance to the sugar industry when prices are low and sugar processors face bankruptcy. Pressure also comes from the thousands of small-scale cane growers that do not have other crops they can grow profitably.

When world sugar crops are large, the support price for U.S. sugar is substantially above world market prices and encourages Mexican sugar to flow into the U.S. Imports from other producing countries are constrained by tariff rate quotas. Mexican sugar exports are quite variable according to estimates by the Foreign Agricultural Service of USDA. Exports were 0.75 milions de tones mètriques (MMT) raw value in 2009/10, 1.6 MMT in 2010/11, 1.0 MMT in 2011/12, 2.1 MMT in 2012/13 i 2.5 MMT in 2013/14.

The outcome in the CVD investigation will not end challenges in managing the U.S. sugar program. Any price support program like the sugar one requires by its nature a managed trade program to keep the U.S. market price above the loan rate when global prices are low to avoid or minimize forfeitures. USDA has already worked out an arrangement with Mexico to direct 1.1 MMT of sugar to the world market rather than sell it in the U.S. this marketing year. USDA’s monthlyWorld Agricultural Supply and Demand Estimates Report(WASDE) released Aug. 12 showed that Mexico will also export 0.575 MMT to countries other than the U.S. in the 2014-15 crop marketing year.

Since March when the countervailing duty petition was filed by the American Sugar Coalition, Mexicos projected cane sugar production has been reduced to 6.14 MMT (actual weight), just up slightly from last year. Supplies are tight and many market analysts expect Mexico will need to import sugar later in the year. U.S. sugar production for the 2014-15 year was projected by USDA in the August WASDE to be down slightly from the 2013-14 year and down 640,000 short tons raw value from the large 2012/13 crop. Mexican shipments to the U.S. are expected to have dropped sharply in the last quarter (July-Sept.) of the 2013-14 marketing year.

On the basis of the Mexican export contracts USDA confirmed for the 2014-15 marketing year and expectations for a smaller than earlier expected sugar cane crop in Mexico this year, the WASDE report also predicted a stocks-to-use ratio of 6.9 percent for the U.S. for the coming crop year. This would be a relatively tight market, and a drop from the 11.9 percent it forecast a month earlier. USDA considers a stocks-to-use ratio of 13.5-15.5 percent to be an adequate supply of sugar. The August forecast will change depending on whether the contracts mentioned earlier are honored and the size of next year’s sugar crop in both the U.S. and Mexico.

USDA used the low 6.9 percent stocks-to-use ratio in announcing that sugar loan collateral forfeitures are unlikely and the Feedstock Flexibility Program is not expected to purchase sugar in 2014/15 sugar marketing year. If sugar was purchased, it would be sold to ethanol producers under provisions in the 2014 farm bill.

The global sugar market may be more balanced in 2014-15 than in recent years. Jose Orive, Executive Director of the International Sugar Organization (ISO), said early last month that lower production in some countries and increasing consumption in 2014-15 will result in a near balance of sugar output and demand, after four years of excess supply. That follows the current year when production was 181.1 MMT and consumption was 176.7 MMT. Both will be about 181 MMT in 2014-15. On the negative side, the global stocks-to-consumption ratio will remain high at above 40%.

Sugar for world delivery is now trading at about $0.16 pound. Some traders believe the market will move lower because of the large stocks, while others are convinced that Mr. Orive of the ISO is right and the market is ready to move modestly higher. A move higher would lessen incentives for Mexican processors to sell into the U.S. market.

The Mexican government and sugar industrymay proposesuspending the Commerce investigation in return for restraining the quantity of Mexican sugar exported to the U.S. The CVD law allows for a suspension agreement to be negotiated on the basis of a quantitative restriction. Any arrangement would protect Mexico’s preferential access to the U.S. sugar market under NAFTA. This may include a base quota plus any additional demand that may be in the market.

If a suspension agreement is not reached, the Commerce Department and the U.S. International Trade Commission (ITC) will complete their work. If Commerce makes an affirmative final determination on CVD, and the ITC makes an affirmative final determination that imports cause material injury, or threaten material injury, Commerce will issue a CVD order. If either Commerces or the ITCs final determination is negative, no CVD order will be issued. The ITC is scheduled to make its final injury determination approximately 45 days after Commerce issues its final determination.

Els EUA. and Mexican governments continue to struggle to shape their sugar supply management programs to fit into a free trade framework. This current exercise should move them closer to that goal.

Ross Korves és analista de política comercial i econòmica amb veritat sobre Comerç &tecnologia (http://www.truthabouttrade.org).Follow us: @TruthAboutTrade onrefilo|Veritat sobre el Comerç & Technology onFacebook.