Order Code IB95117
CRS Issue Brief for Congress
Received through the CRS Web
Sugar Policy Issues
Updated May 16, 2005
Remy Jurenas
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
History of and Background on the Sugar Program
Main Features of U.S. Sugar Policy
Price Support
Loan Rates
Effective Support Levels
Import Quotas
Marketing Allotments
Other 2002 Farm Bill Provisions
Program Implementation
Sugar Program in the 2002 Farm Bill
Background and Debate on Program
House Debate
Senate Amendments
Sugar Trade Issues
Sugar in Trade Agreement Negotiations
Sugar in Dominican Republic-Central American Free Trade Agreement
FTA Negotiations with Australia
Sugar in WTO Negotiations
Sweetener Disputes with Mexico
Mexico’s Access to the U.S. Sugar Market
Mexico’s Tax and Trade Policies on Corn Syrup Imports from the United States
Status of Negotiations
Circumvention of Sugar Import Quotas

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Sugar Policy Issues
SUMMARY
The sugar program is designed to protect
The U.S. sugar production sector argues
incomes of growers of sugarcane and sugar
that liberalizing trade in sugar should be
beets, and of firms that process each crop into
addressed in multilateral World Trade Organi-
sugar. To accomplish this, the U.S. Depart-
zation (WTO) negotiations, but excluded from
ment of Agriculture (USDA) supports domes-
hemispheric and bilateral free trade agree-
tic sugar prices by making available loans at
ments (FTAs). Its concern is that additional
minimum price levels to processors, restrict-
market access provided to FTA candidates,
ing imports, and limiting the amount of sugar
which are major sugar exporters with weaker
that processors can sell domestically — the
labor and environmental rules, would under-
last intended to meet U.S. import commit-
mine the U.S. sugar program and threaten the
ments under two trade agreements.
sector’s viability. Sugar users advocate in-
cluding sugar in all trade negotiations, eyeing
Debate in 2001-2002 on future U.S.
the prospect over time of lower-priced sugar
sugar policy occurred against the backdrop of
they have not been able to secure through
a sugar oversupply situation, which resulted in
congressional initiatives. U.S. trade negotia-
historically low prices and processors’ subse-
tors did include sugar in the Dominican
quent forfeiture of sugar pledged as collateral
Republic-Central American Free Trade Agree-
for price support loans to USDA. Sugar crop
ment (DR-CAFTA) but excluded sugar in the
growers and processors stressed the industry’s
FTA with Australia. The U.S. sugar industry
importance in providing jobs and income in
strongly opposes DR-CAFTA, and is working
rural areas. They called for resolving trade
to defeat it when submitted to Congress soon.
disputes, retaining current loan rate levels, and
relying on domestic marketing controls to
Efforts to resolve longstanding sweetener
control supplies. Sugar users, some cane
trade disputes with Mexico — involving
refiners, and their allies argued that U.S. sugar
Mexican sugar exports to the U.S. market and
policy costs consumers and results in lost jobs
sales of U.S. high fructose corn syrup (HFCS)
at food firms in urban areas. Three amend-
to Mexico — have shifted to the private sector
ments to reduce the level of price support
after substantive government-to-government
and/or phase out the program were offered and
talks stalled. In late 2003, U.S. and Mexican
rejected during floor debate in the 107th
sweetener industry representatives reached
Congress.
agreement on “broad principles” to settle these
disputes, but have not yet agreed upon details
The sugar program enacted as part of the
to present to each government. The WTO is
2002 farm bill increases the effective support
expected to rule in June 2005 on a trade dis-
level by 5%-6%, gives USDA tools to operate
pute case filed by the United States challeng-
the program at no cost, and reactivates “mar-
ing Mexico’s imposition of a sales tax on soft
keting allotments” to limit the amount of
drinks and beverages sweetened with HFCS.
domestically produced sugar that processors
can sell in the U.S. market. Sugar producers
The Trade Act of 2002 requires USDA
and users continue to scrutinize USDA deci-
and U.S. Customs to monitor imports of sugar
sions on the level at which USDA sets the
and sugar-containing products to ensure that
national sugar allotment quantity, because of
their entry does not circumvent the import
its impact on sugar prices.
quota and undermine the sugar program.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
Bush Administration officials have stated there are no plans to renegotiate the DR-
CAFTA (Dominican Republic-Central American Free Trade Agreement) to address sugar
industry and other concerns, according to reports published in Inside U.S. Trade and by
Reuters on May 13, 2005. The possibility of a compromise on sugar that would clarify or
detail how the sugar compensation provision might work was raised in a press conference
held on May 10 by the Chairman of the Finance Committee that will consider the agreement.
Sugar industry spokesmen continue to stress that their objective is to effectively exclude the
sugar provisions from the agreement.
The U.S. Department of Agriculture’s (USDA) first projection for FY2006 sugar
supply, issued May 12, 2005, shows very low ending stocks by September 2006. This
prospect points toward USDA likely announcing this summer an import quota above the
minimum level of sugar the United States must allow to enter from some 40 countries.
BACKGROUND AND ANALYSIS
History of and Background on the Sugar Program
Governments of every sugar-producing nation intervene to protect their domestic
industry from fluctuating world market prices. Such intervention is necessary, it is argued,
because both sugar cane and sugar beets must be processed soon after harvest using costly
processing machinery. When farmers significantly reduce production because of low prices,
a cane or beet processing plant typically shuts down, usually never to reopen. This close link
between production and capital-intensive processing makes price stability important to
industry survival.
The United States has a long history of protection and support for its sugar industry.
The Sugar Acts of 1934, 1937, and 1948 required the U.S. Department of Agriculture
(USDA) to estimate domestic consumption and to divide this market for sugar by assigning
quotas to U.S. growers and foreign countries, authorized payments to growers when needed
as an incentive to limit production, and levied excise taxes on sugar processed and refined
in the United States. This type of sugar program expired in 1974. Following a seven-year
period of markets relatively open to foreign sugar imports, mandatory price support only in
1977 and 1978, and discretionary support in 1979, Congress included mandatory price
support for sugar in the Agriculture and Food Act of 1981 and the Food Security Act of
1985. Subsequently, the 1990 farm program, 1993 budget reconciliation, and 1996 and 2002
farm program laws extended sugar program authority through the 2007 crop year. Even with
price protection available to producers, the United States historically has not produced
enough sugar to satisfy domestic demand and thus continues to be a net sugar importer.
Prior to the early 1980s, domestic sugar growers supplied roughly 55% of the U.S. sugar
market. This share grew over the last 15 years, reflecting the price protection provided by
a sugar program. In FY2004, domestic production filled 87% of U.S. sugar demand for food
and beverage use. As high-fructose corn syrup (HFCS) displaced sugar in the United States
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during the early 1980s, and domestic sugar production increased in the late 1980s, foreign
suppliers absorbed the entire adjustment and saw their share of the U.S. market decline. The
import share of U.S. sugar food use in FY2004 was 13%.
Current U.S. sugar policy maintains domestic sugar prices considerably above the world
market price, and is structured primarily to protect the domestic sugar producing sector
(sugar beet and sugarcane producers, and the processors of their crops) and to ensure a
sufficient supply. As a result of the price differential, U.S. consumers and food product
manufacturers pay more for sugar and manufactured food products when sugar is an
ingredient than they would if imports entered without any restriction.
The sugar program differs from most of the other commodity programs in that USDA
makes no direct payments to growers and processors. Structured this way, taxpayers do not
directly support the program through federal government expenditures. This fact is
highlighted as a positive feature by the sugar production sector and its supporters. The
program’s support level and import protection, though, keep the U.S. sugar price above the
price of sugar traded internationally, and constitute an indirect subsidy to the production
sector by way of higher costs paid by U.S. sugar users and consumers. Program opponents
frequently refer to this subsidy component to argue for changes to U.S. sugar policy.
Those with a direct financial stake in the debate on U.S. sugar policy include sugarcane
and sugar beet farmers, processors (raw sugar mills and beet sugar refineries), cane sugar
refineries, industrial sugar users (including food and beverage product manufacturers),
foreign countries that export sugar to the U.S. market, corn producers and manufacturers of
high-fructose corn syrup (HFCS), and the federal government.
Congressional debate over sugar policy leading up to the 2002 farm bill changes took
place against the backdrop of structural changes in the industry, historically low domestic
sugar prices caused by oversupply, and the inability of policymakers working within the
1996-enacted U.S. sugar program framework to reconcile the two objectives of protecting
the domestic sugar price (under the sugar program) and meeting trade agreement obligations
that allow foreign sugar to enter the U.S. market (under the import quota).
Main Features of U.S. Sugar Policy
To support U.S. sugar prices, the USDA extends short-term loans to processors at
statutorily set price levels, restricts imports of foreign sugar, and limits the amount of
domestically produced sugar that can be sold. The sugar program, though, differs from the
grains, rice, and cotton programs in that USDA makes no income transfers or payments to
beet and cane growers. In practice, overall U.S. sugar policy operates to indirectly support
the incomes of domestic growers and sugar processors primarily using two tools. An import
quota limits the amount of foreign sugar allowed to enter the domestic market. Though this
mechanism is not an integral part of the sugar program’s statutory authority, this quota
operates as an integral part (but increasingly less so than in the past) to ensure that market
prices stay above effective support levels. “Marketing allotments” (reactivated under the
2002 farm bill) prescribe the amount of domestic sugar that can be sold when imports are
expected to be below a specified level. Accordingly, USDA’s decisions on the size of the
import quota, and on how it will administer sugar marketing allotments, affect market price
levels (see below). USDA administers these policy instruments to ensure that growers and
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processors realize the benefits of price support the law provides, whether or not loans are
actually taken out. One 2002 farm bill objective is for USDA to exercise available authorities
to operate the program on a “no-cost” basis (i.e., result in no federal government outlays).
Price Support
USDA extends price support loans to processors of sugarcane and sugar beets rather
than directly to the farmers who harvest these crops. Growers receive USDA-set minimum
payment levels (a requirement changed slightly by the 2002 farm bill) for deliveries made
to processors who actually take out such loans during the marketing year — a legal
requirement. With those processors that do not take out loans, growers negotiate contracts
that detail delivery prices and other terms. USDA loans at times are attractive to sugar
processors as a source of short-term credit at below-prime interest rates.
Loan Rates. The 2002 farm bill freezes loan rates — 18¢ per pound for raw cane
sugar and 22.9¢ per lb. for refined beet sugar — at levels first set in 1995 for anothersix years
(through the 2007 crop year). The loan support for beet sugar is set higher than for raw
sugar, largely reflecting its availability after processing as a product ready for immediate
industrial food and beverage use or for human consumption (unlike raw cane sugar). By
contrast, raw cane sugar must go through a second stage of processing at a cane refinery to
be converted into white refined sugar that is equivalent to refined beet sugar in terms of end
use. Any beet or cane processor that meets statutory requirements can take out a non-recourse
loan at these rates (adjusted by region and other factors). The loan’s “non-recourse” feature
means a processor can exercise the legal right to hand over sugar it initially offered USDA
as collateral to fully repay the loan, if the market price is below the support level when the
loan comes due.
Effective Support Levels. The above loan rates, though, do not serve as the price
floor for each type of sugar. In practice, under the 2002 farm bill, USDA’s aim is to support
the raw cane sugar price (depending upon the region) at not less than 19.9¢ to 21.0¢ per lb.
(i.e., the price support level in a region plus an amount that covers a processor’s cost of
shipping raw cane sugar to a cane refinery plus the interest paid on any price support loan
taken out plus location discounts ). Similarly, USDA seeks to support the refined beet sugar
price at not less than 22.9¢ to 25.2¢ per lb. (i.e., the regional loan rate plus specified
marketing costs plus the interest paid on a price support loan), depending on the region.
USDA has available various authorities to ensure that market prices do not fall below these
“loan forfeiture,” or higher “effective” price support, levels. These include (1) limiting the
amount of foreign raw sugar imports allowed into the United States for human consumption,
(2) limiting the amount of domestically-produced sugar permitted to be sold under the new
marketing allotment mechanism, and (3) offering sugar in its inventory to processors (and
growers) who agree to reduce production. A loan forfeiture (turning over sugar pledged as
loan collateral to USDA) occurs if a processor concludes, also weighing other factors, that
the domestic market price at the end of the loan term is lower than the “effective” sugar price
support level. These support levels essentially provide a processor with a price guarantee.
Import Quotas
USDA restricts the quantity of foreign sugar allowed to enter the United States for
refining and sale for domestic food and beverage consumption. By controlling the amount
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of sugar allowed to enter, USDA seeks to ensure that market prices do not fall below
effective price support levels and that it does not acquire sugar due to any loan forfeitures.
Tariff-rate quotas (TRQs) are used as the policy instrument to restrict sugar imports to
the extent needed to meet U.S. sugar program objectives. In practice, the U.S. market access
commitment made under World Trade Organization (WTO) rules means that a minimum of
1.256 million short tons (ST) of foreign sugar must be allowed to enter the domestic market
each year. Although the WTO commitment sets a minimum import level, policymakers may
allow additional amounts of sugar to enter if needed to meet domestic demand. In addition,
the United States committed to allow sugar to enter from Mexico under North American Free
Trade Agreement (NAFTA) provisions. The complex terms are detailed in a schedule and
a separate side letter, which lay out rules and a formula for calculating how much Mexico
can sell to the U.S. market. Under the WTO and NAFTA agreements, foreign sugar enters
under two TRQs — one for raw cane, another for a small quantity of refined sugar.
The Office of the U.S. Trade Representative (USTR) allocates these TRQs among 41
eligible countries, including Mexico and Canada. The amount entering under each quota (the
“in-quota” portion) is subject to a zero or low duty. Sugar that enters in amounts above the
WTO quota is subject to a prohibitive tariff, which serves to protect the U.S. sugar-producing
sector from the entry of additional foreign sugar. The tariff on above-quota sugar entering
from Mexico under NAFTA continues to decline, which is viewed as a growing threat by the
domestic production sector. In addition, other TRQs limit the import of three categories of
sugar-containing products (SCPs — products containing more than 10% sugar, other articles
containing more than 65% sugar, and blended syrups). Quota and tariff provisions differ
depending on whether these imports enter from Mexico, from Canada, from other countries
with which the United States has a free trade agreement, or from any other country.
USDA on July 16, 2004, set the FY2005 tariff-rate quotas for sugar imports (raw and
refined) at 1.279 million ST. This amount is slightly higher than the U.S. commitment made
under WTO rules. The outcome of private sector negotiations between the U.S. and Mexican
sweetener industries could signal whether or not USTR announces an FY2005 sugar quota
for Mexico (see “Sugar Trade Issues — Sweetener Disputes with Mexico”).
Marketing Allotments
Adding this new tool to the other authorities available to USDA to support prices
reflected the sugar production sector’s willingness to accept reduced sales in return for the
assurance of price protection on the quantity of sugar sold. By regulating the amount of
sugar processors can sell, USDA can ensure that market prices do not fall below effective
price support levels and that it does not acquire sugar as a result of any loan forfeitures.
The 2002 farm bill-authorized sugar program requires marketing allotments when
imports are projected below 1.531 million ST. By limiting the amount of domestically-
produced sugar that raw cane mills and beet refiners can sell, this mechanism ensures that
the United States meets its annual market access commitments for sugar imports under the
WTO agreement (1,255,747 ST) and under NAFTA’s sugar side letter in effect through
FY2007 (up to a maximum 275,578 ST). Complex provisions detail the formula that USDA
must follow to calculate the amount of domestic sugar that can be sold (i.e., the “overall
allotment quantity,” or OAQ), specify the factors to apply in making this determination, and
split the allotment between the beet and cane sectors at 54.35% and 45.65%, respectively.
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Additional rules specify how the raw cane allotment is to be distributed among sugarcane
producing states, and then among the mills in each state. Separate rules stipulate how the
beet sugar allotment is to be allocated among processing companies (many of which operate
across state lines). Once the detailed calculations are made, each firm can sell only as much
sugar as stated in its allotment notification received from USDA.
USDA on July 16, 2004, set the FY2005 OAQ at 8.1 million ST, stating that this is
required “to meet the statutory [sugar] program objectives of an orderly market and program
operation at no cost to the taxpayer to the maximum extent practicable.” Sugar producers
reportedly sought an OAQ of about 7.7 million ST, a level they felt would strengthen prices;
sugar users wanted an OAQ set at 8.25 million ST — the same as set for FY2004 —
anticipating that this would dampen any price rise. The FY2005 OAQ represents 99.8% of
projected 2004-2005 production. Because of hurricane-related losses, reduced output of raw
cane sugar means that the cane sector cannot fully utilize its allotment. The beet sector,
though, will need to hold off from selling refined beet sugar in excess of its allotment (with
“blocked” stocks equal to 6% of beet sugar output, or 291,000 ST).
Other 2002 Farm Bill Provisions
Another significant change explicitly authorizes a sugar payment-in-kind (PIK)
mechanism that allows sugar processors (acting in concert with producers of cane and beets)
to submit bids to obtain sugar in USDA’s inventory in exchange for reducing production.
This provision supplements 1985 farm bill authority that USDA tapped to implement the
2000 and 2001 sugar PIK programs, and could again be used to meet the explicit program
requirement that the sugar program operate on a no-cost basis.
Other changes (1) reauthorized the program for six years (through the 2007 crop year);
(2) increased the effective price support level by 5%-6% by repealing the approximate 1¢/lb.
loan forfeiture penalty, (3) broadened the coverage of the loan program to allow non-recourse
loans to be made also for in-process sugars and syrups at 80% of the raw cane or refined beet
loan rate, (4) repealed the sugar marketing assessment retroactively to October 1, 2001
(saving the production sector about $40 million annually), (5) authorized a new storage loan
facility program to provide financing to processors for constructing or upgrading facilities
to store and handle raw cane and refined beet sugar, and (6) reduced the interest rate USDA
charges on price support loans extended to sugar processors by 100 basis points (1%). Final
program regulations, though, reflect USDA’s decision to apply the same interest rate on
sugar non-recourse loans as it applies to loans extended to other commodities (4.0% for loans
taken out in March 2005). The production sector views this as contrary to the enacted
provision. USDA’s stance is the farm bill did not establish a specific sugar loan interest rate.
Program Implementation
To implement the new sugar program for the 2002 and subsequent year sugar crops,
USDA issued revised regulations (published in the August 26, 2002 Federal Register) to
reflect farm bill changes. USDA’s determinations and subsequent adjustments of the overall
allotment quantity (OAQ) have been the most significant decisions made in implementing
the program. At a public hearing held September 4, 2002 on the initial OAQ announcement
for FY2003, the sugar production sector commented favorably on USDA’s decision to set
the allotment quantity at 7.7 million ST. Sugar users (primarily food manufacturing firms)
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disagreed, stating USDA set the allotments much lower than called for, when viewed against
historical ending stock indicators. Users were pleased with USDA’s January 10, 2003
decision to increase the allotment quantity by 500,000 ST to 8.2 million ST, viewing it as
more in line with the way the sugar program has been administered in the past. At a meeting
held on March 12, industrial sugar users and one cane refiner asked USDA to increase the
OAQ by up to 300,000 ST to offset the amount the beet sector did not have to sell due to
lower production. Sugar growers and processors opposed such action, recommending that
USDA act cautiously so as not to flood the market. USDA responded on May 13,
announcing a 463,000 ST increase in the OAQ to 8.663 ST.
For the FY2004 program, USDA on August 13, 2003, announced the 2003/04 OAQ
(8.555 million ST) and the breakdown of marketing allotments between cane and beet sugar.
At an August 27 hearing held to receive comments on this OAQ announcement, a spokesman
for the Florida, Texas, and Hawaii sugar cane sectors stated that USDA had set the allotment
quantity too high, and argued that it “will provide overly generous benefits to sugar users at
the expense of farmers.” He further expressed concerns about the effects this action will have
on the domestic sugar price, the profitability of producers and processors, and the
effectiveness of U.S. sugar policy. USDA took this view and also changing market
conditions into account in announcing it would hold 300,000 ST of the FY2004 OAQ in
reserve, a move that initially bolstered domestic sugar prices. Subsequent administrative
announcements provided details on USDA’s decision to allocate only 96.5% of the OAQ
(8.25 million ST, holding 300,000 ST of the FY2004 OAQ in reserve) to reflect changes in
market conditions — higher beginning stocks and lower total use — and to distribute the
revised allotments among five cane producing states, all cane processors, and all beet refiners
(September 30); and on regional loan rates (September 30). On April 9, 2004, USDA
announced an official reduction in the OAQ to 8.25 million ST, eliminating the 300,000 ST
initially retained, in order to bolster prices. USDA also adjusted sugarcane marketing
allotments to reflect updated production forecasts and accordingly revised sugarcane
processor marketing allocations. On July 22, USDA reassigned unused cane sugar allocations
from Hawaii to three other cane-producing states, and announced a limit on the amount of
Louisiana cane acreage that can be harvested for sugar or seed.
For the FY2005 program, USDA on July 16, 2004, set the initial 2004/05 OAQ at 8.1
million ST. On September 28, USDA reaffirmed this level in announcing cane and beet
marketing allotments and allocations for each sugar beet and sugarcane processor, eliminated
Puerto Rico’s cane allotment because sugar production and processing there had ceased,
permanently reassigned the island’s allotment to three cane sugar states, and announced the
2004-crop sugar loan rates. On April 29, 2005, USDA reassigned unused cane sugar
allocations from processors in Hawaii and Louisiana to processors in Florida and Texas.
Sugar Program in the 2002 Farm Bill
The enacted program (authorized by Sections 1401-1403 of P.L. 107-171) is designed
to maintain a balance between supply and demand in the U.S. sugar market, ensure that sugar
producers and processors receive enhanced price support and other program benefits that
offset some of the revenue lost to reduced sales under the new allotment mechanism, and
remove most of the federal government’s budgetary exposure. The sugar production sector’s
objective, expecting little growth in domestic sugar demand and accepting U.S. trade
commitments that allow other countries access for a minimum quantity of their sugar, is to
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maintain the status quo for as long as possible, until U.S. market demand for sugar increases
and/or trade negotiations conclude in a way that favors their interests.
During floor debate in each chamber, program opponents failed in efforts to reduce the
level of price support, and/or to phase out the current program. The Bush Administration did
not present any proposals with respect to the sugar program, but earlier questioned the
practice of compensating growers for not harvesting a portion of their crop. Conferees easily
resolved the few differences between the House and Senate sugar program provisions. The
most important was an agreement to repeal the 1996-enacted approximate one-cent penalty
imposed on a processor that decides to forfeit any price support loan taken out (i.e., hand
over sugar to the government as payment).
Background and Debate on Program. The 2002 farm bill’s sugar provisions
reflect the recommendations offered by the American Sugar Alliance (ASA) — representing
sugar farmers and processors — in testimony presented to the House and Senate Agriculture
Committees in the spring and early summer of 2001. The ASA further commended the
subsequent committee and floor actions taken that reinstated a U.S. sugar policy that “will
ensure stable prices for farmers and consumers and operate at no cost to taxpayers.” It views
the “domestic inventory management tool” included in the farm bill as “restoring balance to
the U.S. sugar market” when there is a surplus. Its spokesmen have acknowledged that the
industry “is reluctant to face the prospect of limited marketings in some years,” but that trade
commitments under the WTO and NAFTA agreements require the United States to import
as much as 1.5 million ST of sugar each year (about 15% of consumption), “whether we need
that sugar or not.” They added that growers and processors under marketing allotments will
have the flexibility to plant as much crops and produce as much sugar, respectively, as they
wish, but noted that processors who increase sugar output faster than the growth in U.S.
demand “may have to postpone the sale of some sugar, and store that sugar at their expense
until the market requires it.”
House Debate. The nearly identical sugar programs reported by the House and
Senate Agriculture Committees were challenged by program opponents during floor debate.
In the House, Representatives Dan Miller and George Miller offered an amendment on
October 4, 2001, to replace the Committee’s proposed sugar program with an approach they
argued would result in a sugar policy more oriented to market forces. They had earlier
expressed disappointment that the Agriculture Committee “decided to ignore the failure of
the U.S. sugar program,” noting that the measure approved contains “no meaningful reform”
and turns “the clock back on consumers, workers, taxpayers and the environment.” Their
amendment proposed to retain the current program’s non-recourse loan feature, reduce the
current level of sugar price support by almost 6%, increase financial penalties on processors
that hand over sugar to the CCC rather than repay any non-recourse loans taken out, and
designate $300 million from the amendment’s savings for conservation and stewardship
programs (with a priority for efforts in the Everglades). Price support would be reduced by
1¢ per pound for raw cane sugar, and 1.2¢ per pound for refined beet sugar (to 17¢ / lb. and
21.6¢ / lb., respectively). Penalties that processors would pay to the CCC would double if
they forfeit on their price support loans (increasing to 2¢ / lb. for raw cane sugar, and 2.14¢
for refined beet sugar). The House rejected this amendment on a 177 to 239 vote.
The Coalition for Sugar Reform (an association of food manufacturers, consumer and
taxpayer advocacy groups, environmental organizations, and publicly-traded cane refiners)
favored this amendment offered during House debate. The Coalition has long claimed that
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the current sugar program “is an economic disaster for producers, consumers, workers in
urban centers who are losing their jobs and the food manufacturing industry” and should be
reformed. Its spokesmen have testified “reform” would do this by (1) securing adequate
supplies for consumers, industrial users, and cane refiners, (2) accommodating present and
future U.S. international trade obligations by providing market access for imports, (3)
removing “the current economic incentives for overproduction,” and (4) allowing sugar to
trade at market prices “below support levels when market forces dictate.”
Senate Amendments. Two amendments offered during floor debate proposed more
sweeping changes to the sugar program. Both mandated recourse (i.e., removing processors’
access to price protection) rather than non-recourse loans and the program’s phase out by mid
decade. Senator Lugar’s amendment, offered on December 12, 2001, would have completely
phased out the sugar and other commodity programs after the 2005 crops. Until then, USDA
could only make recourse loans to sugar processors. The level of price support would have
been “progressively and uniformly” lowered starting with the 2003 crops in order to reach
zero in 2006. Price support would have been replaced with vouchers of up to $30,000 made
available annually through 2006 to any sugar producer who signed a “risk management
contract,” and undertook specified risk management activities such as buying whole farm
revenue insurance and/or contributing to a whole farm stabilization account. This voucher
system would have applied to all (and not just sugar crop) producers. His proposal was
defeated on a 70-30 vote. Senator Gregg’s amendment (offered December 12) similarly
proposed a recourse loan program to be phased out by 2006, but differed in requiring that the
budget savings be used to increase benefits for the food stamp program’s shelter expense
deduction. His proposal was tabled 71-29 during floor debate.
Sugar Trade Issues
The United States must import sugar to cover the balance of its domestic food needs
(13% in FY2004) that the domestic sugar production sector cannot supply. Accordingly,
provisions in trade agreements approved by the United States that apply to imports and
exports of sugar, sugar-containing products, and other sweeteners such as corn syrup affect
the economic interests of the U.S. sugar production sector, domestic cane refiners, U.S. sugar
users, sugar exporting countries, U.S. corn producers and U.S. corn sweetener manufacturers.
Sugar imports contribute to the domestic sugar supply, and in turn, to the level of U.S.
sugar market prices. Sugar imported under market access commitments made by the United
States in the NAFTA and WTO trade agreements, or under prospective free trade agreements
(FTAs), together with some sugar products that were not subject to import restrictions until
recently, have added to, or may under certain conditions contribute to, a U.S. sugar surplus
that pushes prices downward. Of outstanding trade issues, attention is now focused on the
political and economic implications of including sugar in the U.S.-Dominican Republic-
Central American Free Trade Agreement (DR-CAFTA), which Congress will consider this
summer. The agreement’s sugar, along with textile and labor, provisions will be the most
contentious issues debated by Members.
Sugar in Trade Agreement Negotiations
Whether, and on what terms, to liberalize trade in sugar and sugar-containing products
in prospective trade agreements is a difficult issue facing U.S. negotiators. Exporting
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countries have signaled they want these agreements to provide increased access for their
sugar to the higher-priced U.S. market. The U.S. sugar production sector opposes any
additional entry of sugar and products under bilateral and regional trade agreements,
concerned that such a scenario would undermine its market share, threaten the viability of
the domestic sugar program, and result in significant loan forfeitures. U.S. manufacturers
that use sugar in food products and beverages favor opening up the U.S. market to additional
imports, anticipating that they would benefit from lower sugar prices over time.
Sugar trade has been, and is, more of an issue in negotiating bilateral free trade
agreements (FTAs) with five Central American countries, the Dominican Republic, four
southern African countries, Australia, the Andean countries, Panama, and Thailand and the
hemispheric Free Trade Area of the Americas (FTAA), than in multilateral efforts under the
WTO to reach an agreement on the pace and terms of liberalizing agricultural trade. With
Brazil, Guatemala, South Africa, Australia, and Colombia viewed as major low-cost sugar
producing and exporting countries, trade agreements that the United States enters, or might
enter, into with them could allow for additional sales of sugar to the U.S. market above those
now permitted under their allocated shares of the U.S. sugar TRQ. Brazil’s negotiators
frequently mention that increased market access for its sugar in the U.S. market is one of
their key agricultural priorities in the FTAA. Since the inherent objective of any free trade
agreement is to eliminate all border protection on all imports (including agricultural
commodities) within some specified time period, the scenario of removing current U.S. quota
provisions and tariffs on imports of sugar and sugar-containing products from countries that
are signatories to these agreements would in time result in additional U.S. sugar imports and
likely begin to undermine the operation of the domestic sugar program as now structured.
This scenario assumes the U.S. raw sugar domestic futures price (21.3¢/lb. in April
2005) remains significantly higher than the world raw sugar futures price (8.4¢/lb. also in
April), with this difference (or price premium) serving as the incentive for exporters to seek
to sell to the U.S. market rather than to the lower-priced world market. By contrast, any
multilateral agreement that emerges from the WTO’s Doha Development Round could
reduce to some extent those trade-distorting policies countries use to support their sugar and
other commodity sectors. The extent, though, to which a WTO agriculture agreement might
affect the current U.S. sugar program will depend upon parameters yet to be negotiated in the
“framework agreement” (see “Sugar in WTO Negotiations”).
The American Sugar Alliance (ASA) representing sugar crop farmers and processors
argues that the Bush Administration’s efforts should be to “reform the world sugar market
through comprehensive, sector-specific WTO negotiations” and not through regional or
bilateral trade agreements. ASA supports the goal of global free trade (including for sugar)
through the WTO, which it views as the best venue for addressing “the complex array of
government policies that distort the world sugar market” on a multilateral and comprehensive
basis. Spokesmen frequently mention subsidies that various countries use to “encourage the
dumping of sugar at a fraction of what it costs to produce it.” To support its position, ASA
released in January 2003 a commissioned report it says documents the non-transparent and
indirect subsidies that major sugar producing and exporting countries use to assist their sugar
sectors. For this reason, ASA opposes negotiating sugar trade provisions in bilateral
agreements, claiming that the most damaging government policies (citing Brazil’s sugarcane-
ethanol subsidies, the Mexican government’s ownership of sugar mills, and the European
Union’s (EU) sugar export subsidy regime) will not be addressed by bilateral or regional
negotiations. It further argues that U.S. consumers would not benefit in the form of lower
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prices from increased imports. ASA opposes CAFTA (see “Sugar in DR-CAFTA,” below)
and has argued against including sugar in other prospective FTAs in hearings before USTR
and ITC.
The Sweetener Users Association (SUA) (composed of industrial users of sugar and
other caloric sweeteners and the trade associations that represent them) and the Coalition for
Sugar Reform (CSR) (trade associations for food and beverage manufacturers, some cane
refiners, taxpayer advocacy organizations, environmental groups and consumer organizations
that advocate reform of U.S. sugar policies) supported the Bush Administration’s July 2003
proposal tabled at the WTO to further liberalize agricultural trade. The U.S. proposal called
for countries to eliminate export subsidies, reduce tariffs on any agricultural product to not
more than 25%, and expand the in-quota amount of current tariff-rate quotas (TRQs) by 20%.
SUA expects that under this proposal “world sweetener markets will operate more efficiently
and fairly,” as EU’s export subsidies are phased out and U.S. sugar import quotas become
more market oriented. Both groups argue that liberalizing trade in sugar would benefit the
U.S. economy through lower prices, encourage product innovation and stimulate demand,
keep food manufacturing jobs in the United States rather than see them move overseas, help
maintain a viable cane refining industry with its well-paid union jobs, and stimulate
competition and thus thwart excessive industry concentration. The SUA supports the DR-
CAFTA’s sugar provisions and the Administration’s negotiating objectives in the other
bilateral FTAs and in the FTAA.
Sugar in Dominican Republic-Central American Free Trade Agreement.
Most observers viewed sugar as the most sensitive U.S. agricultural commodity in these
negotiations. Until the talks ended on December 17, 2003, with four Central American
countries, on January 25, 2004, with Costa Rica, and on March 15, 2004, with the Dominican
Republic, U.S. negotiators repeatedly stated that CAFTA will cover all agricultural products,
including sugar, and that their objective was to arrive at a trade agreement which reduces
tariffs to zero (and by implication, eliminates quotas) within agreed-upon transition periods
for all traded goods. Domestic sugar producers, processors, and most cane refiners, though,
continued to advocate that sugar be excluded from CAFTA, arguing that to include it “would
destroy the U.S. sugar industry.” They pointed out that if sugar were included, the five
Central American countries would have the incentive to sell their entire exportable sugar
surplus of 2 million metric tons (MT) to the U.S. market. This, in turn, they claimed, would
depress domestic sugar prices, make it impossible to operate the U.S. sugar program on a no-
cost basis as mandated by the 2002 farm bill, increase government costs as processors forfeit
on their price support loans, and “drive efficient American producers out of business.” The
domestic sugar production sector maintained that tariffs on sugar imports and other trade-
distorting policies, instead, should be negotiated in the WTO. Further, the sugar industry
feared that including sugar in CAFTA would set a precedent for including sugar in the other
FTAs the United States is negotiating, or plans to, with several sugar exporting countries.
It pointed out total sugar export availability of these actual and potential FTA candidates is
27 million MT, compared with U.S. sugar output of 8 million MT. Sugar beet and sugarcane
grower associations in North Dakota, Minnesota, Michigan, Colorado, and Louisiana by mid-
November 2004 had collected almost 70,000 signatures on petitions in opposition to DR-
CAFTA. These will be presented to congressional delegations ahead of floor debate in 2005.
The Sweetener Users Association, though, supports the DR-CAFTA, stating this agreement
will enhance competition in the U.S. sugar market, increase export opportunities for other
U.S. food and commodity sectors in the six countries, and result in increased employment
in U.S. confectionery and other sugar-using industries.
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The DR-CAFTA countries (Costa Rica, Dominican Republic, El Salvador,
Guatemala, Honduras, and Nicaragua) are currently allowed to sell to the U.S. market
under a quota each year a minimum of 311,700 MT of sugar. This amount represents 28%
share of the entire U.S. raw sugar TRQ (1.12 million MT), and enters on a duty-free basis.
Under DR-CAFTA, these six countries combined secured access in year 1 to sell to the U.S.
market an additional 109,000 MT of sugar, a 35% increase over their current quota level,
under a separate preferential quota. Increasing on average about 3% per year, by year 15,
these countries altogether would be eligible to sell duty-free an additional 153,140 MT of
sugar. Thereafter, the quota would increase by almost 2% (2,640 MT) annually in perpetuity.
The over-quota tariff would stay at the current high level (78% in 2003) indefinitely, and not
decline. The text includes a provision which the United States can exercise at its sole
discretion in order to manage U.S. sugar supplies. This mechanism, if activated, would
compensate the six countries for sugar not shipped under CAFTA’s terms.
USTR points out that the additional access granted all six countries will equal about
1.3% of U.S. sugar production in year 1, increasing to 1.9% in year 15. Its lead agricultural
negotiator further has stated that the import increase would not interfere with the functioning
of the current sugar program. Secretary of Agriculture Veneman assured producers of
import-sensitive products such as sugar that CAFTA’s provisions will provide additional
protection during the transition period. A spokeswoman for the U.S. sugar industry on
December 18, 2003, though, asserted that the additional sugar imports proposed under
CAFTA and “those contemplated in additional bilateral trade agreements will destroy” the
sector and “overwhelm an abundantly supplied market.” With such an outlook, she
announced that the sugar sector “will have no choice but to oppose CAFTA.” While
acknowledging that the Administration understood the consequences of reducing the over-
quota tariff, the spokesperson pointed out that under the current sugar program, additional
imports would act to displace domestic sugar output. She also claimed that comparable
increases in market access for other FTA candidate countries, many of whom are sugar
exporters, “would result in a near doubling of U.S. imports.” The entire industry again wrote
to President Bush (January 15, 2004), and the lead U.S. agricultural trade negotiator (March
23), to restate its opposition and to request that the Administration reconsider and withdraw
the sugar access commitments offered the Central American countries and the Dominican
Republic, respectively.
The U.S. International Trade Commission (ITC), in an August 2004 analysis of the DR-
CAFTA, stated that its sugar provisions are likely to result in a “small increase” in U.S. sugar
and sugar-containing product (SCP) imports from the region. Lower prices due to increased
imports “likely would have an adverse impact on production and employment for U.S. sugar
producers, and a beneficial impact for U.S. producers of certain SCPs,” according to the ITC.
The American Sugar Alliance (ASA) stated on September 9 that the ITC analysis “seriously
underestimates the danger of the [DR-]CAFTA for our industry.” The ITC report, according
to the ASA, did not take into account the U.S. commitment under NAFTA to allow free
access to sugar imports from Mexico starting in 2008 and potential obligations to open the
U.S. sugar market to imports from other sugar-exporting countries with which the United
States is negotiating free trade agreements. Sugar import obligations in addition to those in
CAFTA, ASA suggests, would cause lower prices, more bankruptcies, and lost jobs. The
Sweetener Users Association responded that the ITC’s projections “appear to be overstated”
— by not considering the additional demand for sugar created by U.S. population growth
over time and USDA’s authority to limit the amount of domestic sugar that can be marketed
to ensure that no change in domestic prices occurs.
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Some Members of Congress from sugar-producing regions and states have announced
they will vote against DR-CAFTA when debated on the floor in 2005. H.Res. 98 calls upon
the President to drop CAFTA’s sugar provisions and exclude sugar in all FTAs.
FTA Negotiations with Australia. U.S. trade negotiators excluded sugar from the
agreement concluded with Australia on February 8, 2004, an objective that the U.S. sugar
industry had sought. The industry “applauded the Administration’s decision to exclude
market access commitments on sugar,” pointing out a FTA can be negotiated without
including sugar and can “serve as a template for all future FTA negotiations.” The National
Confectioners Association which represents candy manufacturers “condemned” the
negotiating results, stating that limiting access to Australian-produced sugar is “damaging”
to U.S. candy firms and jobs. Other major commodity groups reacted that excluding sugar
harms their export interests as USTR negotiates additional FTAs with other countries.1
Sugar in WTO Negotiations. The objectives of multilateral agricultural trade
liberalization laid out in the 2001 declaration that launched the Doha Development Round
call for (1) substantial reductions in trade-distorting domestic support, (2) the phase-out, with
a view to total elimination, of all export subsidies, and (3) substantial improvements in
market access. The August 2004 “framework agreement” now serves as a guide to establish
specific formulas, schedules, end dates, and other parameters to meet these negotiating
objectives and conclude overall talks in 2006-2007.2 The agreement provides for a “tiered”
approach to accomplish reductions in trade-distorting domestic support (i.e., countries with
higher levels of support will make greater overall reductions). It calls for an overall 20%
reduction from the maximum permitted levels of support to occur in the first year of
implementation, with separate reduction commitments to be made among three specified
components of trade-distorting support. With the U.S. sugar program classified as falling in
the amber box category (benefitting from the most trade-distorting type of support), U.S.
sugar price support levels face the prospect of being capped at average levels using a
methodology yet to be negotiated. Whether this means a reduction in loan rates, and by how
much, depends on details still to be agreed upon by trade negotiators and on future decisions
by U.S. policymakers (e.g., in the 2007 farm bill) on how to distribute reductions between
the sugar and dairy sectors and/or how to restructure current features of other U.S.
commodity programs (e.g., loan deficiency, marketing loan, and counter-cyclical payments).
The framework stipulates that by an “end date” to be negotiated, WTO members will
eliminate agricultural export subsidies, export credits and guarantees that fall outside of
permitted disciplines, and the trade-distorting practices of exporting state trading enterprises
(STE), among others. U.S. sugar policy does not use any of these components of trade-
distorting export competition. Since U.S. sugar firms export minor amounts of domestically
produced sugar, how they might be affected under such a change is unclear. However, the
EU’s use of subsidies for its sugar exports and the operations of the Queensland (Australia)
Sugar Corporation (an STE) could be expected to disappear over time and be made subject
to greater transparency, respectively.
1 Letter to President Bush from 26 Commodity Groups and Trade Associations, February 5, 2004.
2 For additional information, see CRS Report RS21905, The Agricultural Framework Agreement in
the WTO Doha Round.
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The U.S. sugar import quota could face pressure from the agreement’s call for most
countries to increase market access by reducing agricultural import tariffs using a tiered
formula. The degree of any change will depend on compromises that negotiators reach in
this next negotiating phase. Bound tariff levels will be “harmonized” through deeper cuts
made to higher tariffs, but some flexibility would be allowed for “import-sensitive” products.
Left to be addressed by negotiators are decisions on the number of tiers to establish, what
each tier’s tariff reduction schedule should be, and the number of products permitted to be
designated as sensitive. For sensitive products, the framework stipulates that “substantial
improvement” in market access must be achieved through a combination of quota expansion
and tariff reductions, but provides no details. Though imports as a share of U.S. sugar
consumption (13%) are higher than the minimum required 5% level under WTO rules, the
U.S. over-quota tariff is high (78% in 2003, according to the ITC), and effectively keeps out
additional imports. If the United States decides to designate sugar as sensitive (in effect
providing some cover for not having to open its market as much), the U.S. sugar sector may
not face tariff cuts and quota increases as severe compared to sugar being made subject to
the regular tiered formula rules still to be developed.3
Sweetener Disputes with Mexico
Efforts continue to resolve longstanding U.S.-Mexican disputes involving sugar and
high-fructose corn syrup (HFCS) access to each other country’s market. The importance of
this matter is reflected in the fact that sweetener issues have been frequently discussed at
meetings held by both countries’ presidents since the late 1990s. Since the most recent round
of U.S. and Mexican government talks on these disputes stalled in late 2002, some Members
of Congress have called for some resolution. Currently, the U.S. and Mexican private
sweetener sectors are working on details of an agreement to settle these.
Mexico’s Access to the U.S. Sugar Market. Starting October 1, 2000, Mexico
under NAFTA became eligible to ship much more sugar duty free to the U.S. market than
the 25,000 MT allowed to enter in earlier years. Until summer 2002, U.S. and Mexican
negotiators disagreed, however, over just how much sugar Mexico actually could export to
the United States. Their disagreement centered on which version of the NAFTA agreement
governed this issue. U.S. negotiators based their position on the sugar side letter (dated
November 3, 1993) to the NAFTA agreement agreed to in last minute talks between the U.S.
Trade Representative and his Mexican counterpart. The side letter was included along with
other NAFTA documents that President Clinton submitted to Congress together with the
implementing legislation. Mexican negotiators instead based their position on the sugar
provisions found in the August 1992 NAFTA agreement and signed by each country’s
president in December 1992.
The side letter effectively placed a lower cap on duty-free imports of Mexican sugar
allowed to enter the U.S. market than the ceiling would have been under the original NAFTA
agreement. The side letter accomplished this by (1) redefining the original formula for “net
production surplus” — the amount of sugar that one country could ship to the other duty free
— to also add consumption of HFCS, and (2) raising, but keeping level, the maximum
amount that could enter duty free during FY2001-FY2007 period. Using FY2002 to
3 American Sugar Alliance, “U.S. Official Tells International Sweetener Symposium: U.S. Very
Likely to Designate Sugar as Sensitive Product in WTO,” August 10, 2004.
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illustrate, Mexico under the side letter’s terms was eligible to export its “net surplus” but not
more than 250,000 MT of sugar duty free. USDA announced on September 18, 2001, that
Mexico under the side letter’s formula could sell 137,788 MT of sugar to the United States
in FY2002. Under the original NAFTA agreement, Mexico (if determined to be a net surplus
producer under the original agreement’s formula for two consecutive years) would have been
able to ship its entire net sugar surplus (projected by Mexican officials to be 550,000 MT).
Reflecting the lack of agreement in efforts to resolve these differences and Mexico’s inability
to show a sugar “surplus,” the U.S. government did not announce a NAFTA sugar quota in
FY2003, FY2004, and to date, for FY2005.
The U.S. sugar production sector has been concerned that a decision not to abide by the
side letter would result in a flood of additional Mexican sugar into an already well-supplied
U.S. market. U.S. cane refiners have held firm to their position that Mexican shipments be
in the form of raw rather than refined cane sugar, so as not to undercut U.S. refining capacity.
U.S. manufacturers of HFCS have signaled they want their concern about access to the
Mexican market addressed. Looking forward, the U.S. sugar industry is most apprehensive
about the impact of other NAFTA provisions scheduled to take effect, such as the continued
decline in the over-quota tariff on sugar imported from Mexico (e.g., over-quota imports
would be price competitive in the U.S. market when world sugar prices range between 5 and
6¢/lb.), and unlimited duty-free imports starting in FY2008.
Mexico’s Tax and Trade Policies on Corn Syrup Imports from the United
States. Legislation passed by the Mexican Congress on January 1, 2002, to impose a 20%
tax on soft drinks containing corn syrup but not sugar essentially has eliminated the market
for U.S. HFCS and corn for processing into sweeteners in Mexico and jeopardized the
viability of two U.S. companies that manufacture HFCS there. The U.S. corn and HFCS
sectors viewed this as a step back in negotiating a resolution to a long-standing HFCS dispute
and have since pressed Bush Administration officials to persuade Mexican authorities to
remove this tax. Observers viewed the soft drinks tax as an effort by the Mexican sugar
industry to capture back their home market and apply pressure on the United States to
negotiate a comprehensive solution on all sweetener disputes. Though Mexico’s President
Fox has sought to reverse this tax, the Mexican Congress renewed this tax for 2003, 2004,
and 2005 — a move that has clouded prospects for a sweetener deal.
The imposition of this tax was related to earlier WTO and NAFTA panel rulings that
found Mexico’s 1998 decision to impose anti-dumping duties on imports of U.S.-produced
HFCS to prevent further damage to its domestic sugar sector was inconsistent with its trade
commitments. To comply with them, Mexico on April 22, 2002, established a new tariff rate
quota for HFCS imports from the United States, and in mid-May completely lifted its high
anti-dumping duties on such imports. Imports above the 148,000 metric tons (MT) quota are
subject to a 210% duty. Observers note that this quota equalled the amount of Mexican sugar
the U.S. government allowed to enter in FY2002 under NAFTA and WTO provisions.
Status of Negotiations. U.S. and Mexican negotiators in mid-2002 laid aside the
issue of whether or not NAFTA’s sugar side letter applies, in favor of pursuing negotiations
to arrive at a comprehensive sweetener agreement acceptable to both sides and their
respective domestic interests. On July 15, 2002, USTR presented a proposal to the Mexican
Government that effectively would double the level of FY2002 access for Mexican sugar to
the U.S. market if Mexico reciprocated to allow imports of an equal amount of U.S-produced
HFCS. The U.S. proposal contained a number of other features to address other issues of
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concern to both the U.S. corn refining and sugar sectors. Though the Mexican government
responded with counter proposals, subsequent negotiations stalled, as the prospect of a deal
was reportedly caught up in Louisiana’s December 2002 senatorial race. With signs that the
Mexican sugar sector could live with the status quo (having regained its predominant share
of the Mexican sweetener market relative to HFCS, and thus not having a sugar surplus to
export to the U.S.), combined with U.S. corn producers’ and corn refiners’ concerns about
the growing economic fallout of the lack of an agreement, some U.S. lawmakers in
December 2002 called on both the Bush Administration and the Mexican government to
work towards resolving both disputes. Senator Grassley held a Finance Committee hearing
in September 2003 on Mexico’s soft drink tax and Mexican trade barriers to U.S. farm
products, stating he would consider introducing legislation to authorize punitive retaliatory
tariffs on imports of Mexican agriculture products if the soft drinks tax is not lifted. The
increased attention may have contributed to a decision by Mexico’s President in mid-
September 2003 to introduce a bill in the Mexican Congress to repeal the soft drinks tax.
Some of his opponents, though, signaled they would accept this step only if accompanied by
concrete measures that open up access for Mexican sugar in the U.S. market. In followup,
Senator Grassley on November 25, 2003, introduced a “tequila tariffs” bill, intended to
increase pressure on Mexico to repeal this tax. S. 1952 would impose retaliatory tariffs on
tequila and other farm products imported from Mexico equal to the amount U.S. HFCS
refiners have lost on sales to Mexico, unless this tax is eliminated. With the Mexican
Congress retaining the tax for 2004, pressure grew for the Administration to take a firmer
stance on the issue of HFCS access to the Mexican market. In the latest effort to apply
pressure for a resolution, USTR on March 16, 2004, announced the United States had filed
a case with the WTO challenging Mexico’s “discriminatory” imposition of this 20% sales
tax and a distribution tax on soft drinks and other beverages not sweetened with cane sugar.
It argues these taxes are “inconsistent with Mexico’s obligations in the WTO to apply taxes
on comparable domestic and imported products in a non-discriminatory manner.” The Corn
Refiners Association, representing firms that have seen HFCS sales plummet, applauded this
action. The WTO on July 6, 2004, formed a dispute settlement panel; its initial ruling will
be made in mid-June 2005, and will likely be followed by an appeal by the losing party.
On a parallel track, the U.S.-Mexican sugar and sweetener private sectors announced
a deal on “principles” of a resolution in late October 2003. Observers have been watching
since then to see how these principles are translated into an agreement that both governments
could accept. The American Sugar Alliance, Corn Refiners Association, and National Corn
Growers since late 2003 have met frequently with the Mexican Sugar Chamber to continue
working on resolving reported differences in the details of a prospective agreement.
Prospects for a deal remain uncertain, in light of apparent differences in positions.
Circumvention of Sugar Import Quotas
The sugar production and cane refining sectors in the 107th Congress pursued a
legislative remedy to prevent U.S. firms from taking advantage of tariff “loopholes” to
import sugar outside of (to “circumvent”) the existing sugar and sugar-containing product
(SCP) TRQs. This initiative was one of the three “pillars” the production sector had sought
to achieve a sugar policy that accomplished their objective of achieving a supply-demand
balance that protects their interests. Sugar producers, processors, and refiners, citing the
“stuffed molasses” case as a prime example, argued that imports of some sugar mixtures and
products undermined the domestic sugar industry by adding to the sugar surplus.
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During Senate Finance Committee markup of trade adjustment assistance legislation (S.
1209) on December 4, 2001, Members approved an amendment offered by Senator Breaux
to authorize USDA to identify imports that are circumventing the TRQs on sugars, syrups,
or sugar-containing products, and to require the President to include such-identified products
in proclaiming revisions to these quota provisions. This provision was included in the trade
promotion authority and adjustment assistance legislative package (Section 1002 of H.R.
3009) the Senate passed on May 23, 2002. There was no comparable provision in the trade
bill package agreed to by the House. House and Senate conferees subsequently reached
agreement on July 26 on a compromise to the Senate provision. The conference report
clarified that certain products containing molasses were to be made subject to a specific sugar
TRQ, but pared back the scope of the Senate language to also include U.S. Customs in
monitoring such imports and to retain flexibility for the executive branch and Congress on
how any identified circumvention is to be handled (Section 5203 of P.L. 107-210). The
compromise language, depending on how implemented, initially may serve to stop the flow
of easily identifiable “stuffed molasses”-like products. Most observers, though, do not view
it as sweeping in scope compared to the language initially introduced.
The conference-adopted language requires U.S. Customs and USDA to submit a report
to Congress every six months to report their findings on whether there are any indications
that imports are causing any circumvention of the sugar and SCP TRQs. In their first report
to Congress (February 2003), they found no evidence to suspect any significant level of
fraudulent imports in FY2002, nor any cause to suspect legal imports were impeding
USDA’s ability to manage the program. In the second report (August 2003), USDA
identified that imports of sweetened cocoa powder entering from Mexico were circumventing
the U.S. sugar TRQ. Its analysis described how Mexican manufacturers of high sugar
content products were using world low-priced sugar accessed under the U.S. and Mexican
sugar re-export programs, to export sweetened cocoa powder to the U.S. market. USDA
listed three steps taken to address this issue, but had no recommendations for congressional
action. In the third report (February 2004), USDA reported that imports of bulk SCPs from
Mexico continued. Main products imported during FY2003 were sweetened cocoa powder
and tea preparations. Its report also reviewed developments in monitoring entries of cane
molasses and one blended syrup from Mexico, but offered no recommendations for Congress
to deal with these. In its August 2004 report, USDA noted that imports of beet sugar juice
from Canada had risen in the first half of FY2004 (to 6,495 MT, from 28 MT the year
before). U.S. Customs ruled in October 2003 that this product is not subject to a quota.
Imports of cocoa powder from Mexico dropped substantially, while shipments of powdered
beverage and tea mixes rose “more gradually.” In its February 2005 report, USDA noted that
cocoa powder imports from Mexico had dropped substantially, but that imports of powdered
beverage and tea mixes from Mexico, and of beet sugar syrup from Canada, had increased
during FY2004. USDA now includes the sugar content of the beet sugar syrup imports in
its monthly import estimates. No recommendations were offered in the last two reports.
Other USDA analysis shows that the sugar content in SCPs (with some products
entering under quota) has increased over time. Beginning in 1996, SCP imports started
rising at a faster rate than SCP exports. USDA has calculated that the net increase in the
sugar content in imported products (after accounting for sugar in exported products) grew
from 83,000 tons in 1996 to 535,000 tons in 2003. For context, the sugar in the imported
SCPs represented about 5% of the U.S. sugar supply consumed for food use if added to 2003
domestic sugar production and pertinent imports (compared to a 1% share in 1996).
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