The United States and Mexico have averted a major trade crisis after reaching a preliminary agreement on Tuesday that staves off steep tariffs on imports of Mexican sugar.
“The Mexican side has agreed to nearly every request by the U.S. industry to address flaws in the current system and to ensure fair treatment of American sugar growers,” Commerce Secretary Wilbur Ross said at a news conference Tuesday.
However, the U.S. sugar industry "is saying it is unable to accept the new agreement in its present form, but we remain hopeful that further progress can be made in the drafting process," Ross added.
The deal "in principle" could clear away at least one contentious issue between the two governments standing in the way of upcoming NAFTA talks. It also provides some confidence that both sides can find compromise when the trade talks begin in earnest.
When pressed on how long it might take to get the U.S. industry on board with the new agreement, Ross said he was hopeful it would happen as the deal was drafted into its final form. "It should be days, not weeks or months," he said.
Ross had set a deadline of June 5 for talks on a new agreement to be completed. Mexican companies could have been subject to anti-dumping and countervailing duties, totaling a combined rate of more than 80 percent, if a new accord had not been reached.
“This two-months-and-half of dialogue in terms of trying to get an agreement to keep on exporting sugar to the U.S. market and avoiding tariffs above 40 percent on Mexican sugar has given us the opportunity to know each other better and really get to trust and develop a strong relationship," Mexican Economy Secretary Ildefonso Guajardo Villarreal said at the joint press conference. "That definitely will be one of the best assets for the coming negotiations.”
Before NAFTA went into effect in 1994, U.S. sugar producers were protected from Mexican imports through small yearly quotas. It wasn’t until 2006 that the two countries signed a memorandum of understanding that would establish free trade on sweeteners by 2008. However, after two years of record harvests on both sides of the border, the U.S. sugar industry in 2014 petitioned for anti-dumping and anti-subsidy tariffs on Mexican imports. By December 2014, the two sides reached agreements suspending the investigations in exchange for new trade restrictions on Mexican sugar imports.
The U.S. sugar industry contended that Mexican producers were circumventing the terms of the deal. Mexico had agreed that refined sugar shipments wouldn’t exceed 53 percent of total exports and raw sugar would be limited to 47 percent of total exports. The agreements also set minimum prices at which Mexican sugar could be sold in the U.S.: 26 cents per pound for refined sugar and 22.5 cents per pound for raw sugar.
Refiners in the United States argued that Mexican producers were getting around quantitative restrictions that forced them to send nearly half of their exports to U.S. refineries by exporting sugar that was technically raw but could be used directly in beverage and food production with minimal processing.
The U.S. industry complained that the 2014 agreements were hurting U.S. refineries. Refiners said they were paying higher prices for raw sugar as a result of a decline in supply and were getting less money on the sugar they were refining because of competition from Mexican product that could go directly to end use.
The new agreements would address the alleged circumvention by tightening the ratio on refined sugar by requiring 70 percent of Mexican imports to be raw and only 30 percent to be refined. The minimum prices will be increased to 23 cents per pound for raw sugar and 28 cents per pound for refined sugar.
Guajardo said the price increases would not affect the volume of sugar Mexico will be permitted to send to the U.S. He added that the prices would allow small growers and workers in Mexico to better profit from sales.
The new deal would further address U.S. industry complaints by redefining the purity level, also known as polarity, for refined sugar. Any sugar with a polarity level of 99.2 or below would be considered raw sugar. The previous deal set a threshold of 99.5 on raw sugar, which allowed Mexican producers to export product that could bypass U.S. refineries and easily be turned into liquid sugar for use in beverage and food products.
New shipment requirements will force Mexican raw exports to be shipped in bulk on ocean-going vessels into U.S. ports, where it is more likely the product will pass through U.S. refineries.
The deal would also put in place new enforcement measures that would allow the U.S. to deny entry to at least two times the amount of Mexican imports that are found to be in violation of the agreement. Commerce will have the discretion to increase that to a factor of three if it sees fit.
Mexico won new concessions in becoming the supplier of "first refusal" for any extra U.S. sugar demand that exceeds supply from domestic producers and quota holders from other sugar exporting countries after April 1.
As a result of the deals, U.S. corn growers and processors dodged the possibility of major retaliation from their neighbors. The Mexican sugar industry was already pressing its government to look into slapping retaliatory duties on imports of U.S. high-fructose corn syrup if their sugar exports faced new tariffs at the U.S. border.
"This is a great day for American jobs," Corn Refiners Association president John Bode said in a statement. "In this administration’s first major negotiation with Mexico, Secretary Ross succeeded in protecting against unfair trade practices and maintained vulnerable export markets."
The settlement holds off a tit-for-tat trade war that would have likely poisoned any efforts to renegotiate NAFTA in the short time frame the U.S. is looking to complete the deal. Ross has said he would like to wrap up the talks by January to stay clear of the charge political atmosphere in the lead-up to the Mexican presidential elections in June.
But whether the new sugar agreement stands the test of time is an open question. The arrangement could be undone by future violations or dramatic shifts in America’s highly regulated sugar market.
"The problem is this is not a permanent solution," said Carlos Vejar, a former senior Mexican trade official who served as general counsel for the trade for Mexico’s Economy Ministry.
However positive the sugar deal may be in the short term, Vejar, who now practices trade law in the Mexico City office of law firm Holland & Knight, said the issue would continue to be a source of friction between the two countries.
"I don’t know if we can see this as a prelude or omen of what we can expect to see in NAFTA negotiations," he said, but added that it’s "obviously an issue that is so controversial it is a good example that agreements can be reached."