How much Australian sugar should be allowed to enter the U.S. market? That’s a key question the U.S. government must answer prior to concluding the Trans-Pacific Partnership (TPP) negotiations. The United States is the largest sugar market in the TPP, consuming about 11 million metric tons (MMT) per year. It also is the largest producer (7-8 MMT) and importer (3 MMT) in the group. Australia generally is believed to be the most cost-competitive sugar producer among the12 TPP nations. It also is the largest exporter, annually shipping 3-4 MMT to other countries.
To complicate matters further, sugar liberalization was explicitly excluded from the 2004 Australia-United States Free Trade Agreement (AUSFTA) due to U.S. political sensitivities. Australian sugar producers understandably want to redress that omission. Failure to obtain commercially meaningful access to the U.S. sugar market could lead to rejection of the pact by the Australian parliament.
The U.S. sugar program includes a price-support level for raw cane sugar of 22.25 cents per pound ($490/MT), with refined sugar supported at 26 cents. Those levels effectively have been raised more than 10 percent to around 24.7 cents ($545/MT) and 30-32 cents, respectively, under the trade-restricting terms of the recent settlement agreement in the antidumping/countervailing-duty (AD/CVD) dispute involving imports from Mexico. (For more on U.S.-Mexico sugar issues, see here and here.) Mexico is the largest supplier of U.S. sugar imports, generally providing between 1.0-1.5 MMT per year. Suffice it to say that the agreement between the U.S. and Mexican governments will limit the amount of sugar Mexican producers can export to the United States, and also force that sugar to be sold at higher prices.
With global raw sugar prices currently at relatively low levels of around 12 cents, Australian cane growers find the possibility of selling more sugar to the United States at high prices to be quite intriguing. However, those sales currently are limited to the amount allocated to Australia under the U.S. tariff-rate quota (TRQ) regime — a modest quantity of only 87,000 MT. Australia is asking that the TRQ be boosted by 750,000 MT, an increase of more than nine times. The United States apparently has offered an additional 65,000 MT (official figure not disclosed), which would not even double Australia’s current access.
Frankly, the Australians have the better side of this argument. For the United States to insist on only a small increase in sugar access would be tantamount to accepting a very low level of ambition for agricultural market access in the TPP.
But, you ask, aren’t the Aussies being too greedy? Wouldn’t an additional 750,000 MT of imports cause the U.S. sugar program to collapse? Close analysis reveals that the request actually is quite reasonable and that such an increase in sugar imports — handled appropriately — would not cause the program to collapse.
Even U.S. sugar growers would acknowledge that a lot more Australian sugar imports could be accommodated, but they would want imports from Mexico to be reduced to make room in the marketplace. (An increase in imports from Australia would equal a decrease from Mexico.) Since Mexico is an active participant in the TPP negotiations, it probably isn’t feasible to reach agreement on a pact that simply robs Peter to pay Paul. Plus, Mexico’s open access to the U.S. sugar market was negotiated over 20 years ago as part of the balance of concessions that went into NAFTA. Mexican negotiators likely would not be amused at an attempt in the TPP to reduce the value of that access.
The proper approach would be to reduce the quantity of sugar that U.S. growers are allowed to sell in the U.S. market by 750,000 MT. This actually is a lot simpler to do than one might think. Several years ago the U.S. sugar industry gave up the right to market as much as they could grow in order to maintain attractive price support levels. They made a conscious decision that they would be better off selling somewhat less sugar than they would prefer, but at artificially high prices. As if it was regulating a public utility, the U.S. Department of Agriculture (USDA) each year sets the overall allotment quantity (OAQ) that sugar growers are allowed to market domestically, roughly 10 MMT. If the law was changed under the TPP implementing legislation to reduce the OAQ by 750,000 MT, U.S. growers would be able to sell about 9.25 MMT.
There’s little doubt that the U.S. sugar industry would oppose such a change. However, their protests should not be heeded. Recall the earlier comment that the agreement settling the Mexican AD/CVD case had the effect of boosting U.S. price support levels by more than 10 percent? That price increase would more than offset the smaller quantity growers would be allowed to sell. Let’s do the math, using the conservative assumption that all sugar is valued at the effective support level for raw cane:
Income prior to the Mexican agreement:
10 MMT x $490/MT = $4.9 billion
Income following the Mexican agreement, and incorporating a 750,000 MT reduction in the OAQ:
9.25 MMT x $545/MT = $5.04 billion
In other words, the increase in price that will accrue to U.S. sugar growers in response to the agreement with Mexico is more than large enough to offset revenues they would lose from a 750,000 MT reduction in the OAQ. Since overall U.S. sugar policy would lead to a slight increase in the incomes of sugar growers, they have no legitimate basis for complaining about giving Australia the market access it is seeking. The regulated sugar industry would remain comfortably cossetted.
What about commitments U.S. officials have made to the sugar industry regarding the TPP? It’s important to understand what USTR Michael Froman has said. When speaking about sugar on July 1 he stated, “Whatever we do in that area won’t undermine the sugar program.” Frankly, granting Australia increased access of 750,000 MT while reducing the OAQ by a like amount would not undermine the sugar program. Growers would earn more money than before, courtesy of the AD/CVD settlement agreement. The structure of the U.S. sugar program would remain the same — a high price for sugar, coupled with limitations on how much domestic and imported sugar can be marketed. There would be no fundamental reform of the sugar program to make it more market oriented.
It would be nice to think that the Obama administration might have sought a reduction in the U.S. sugar support price as part of the TPP process. Meaningful liberalization of sugar policy would require reforms that strengthen competition, improve economic efficiency, and reduce costs for consumers. (A paper on sugar policy reform can be found here.). Such an outcome seems beyond reach at this point in the TPP negotiations, and would clearly be incompatible with Amb. Froman’s commitment not to undermine the sugar program.
Instead, the administration’s trade policy has focused on “expanding economic opportunity for American workers, farmers, ranchers and businesses” by increasing “made-in-America exports.” U.S. sugar growers generally do not export. The U.S. sugar price is higher than in most other countries, and the large and affluent U.S. market provides ample opportunities to sell their sugar at home. The sugar industry simply isn’t in a position to help the administration achieve its goal of increasing exports.
On the other hand, U.S. farmers that raise the vast majority of other crops and livestock are globally competitive. They easily could expand their exports, if more overseas markets are open to them. The U.S. government is using the TPP as a forum in which to push Japan and Canada to make truly meaningful policy changes that would expand access for food and agricultural imports into those countries. Trade negotiations are a poor time for practicing hypocrisy. If the United States hopes to be successful in its legitimate pursuit of market opening in other countries, it needs to be willing to address its own previously sacrosanct programs. The admittedly protectionist U.S. sugar program is at the top of the list. Providing 750,000 MT of additional sugar access to Australia could be the key that would unlock the door to boosting exports of made-in-America grains, oilseeds, meats, and dairy products, along with a wide array of horticultural and specialty items.
The best hope for a truly trade-expanding conclusion to the TPP is for the United States to provide a very substantial increase in sugar market access to Australia, coupled with equally significant efforts by the Japanese and Canadian governments to open their agricultural markets. Genuine liberalization of the U.S. sugar market will have to wait for another day.
This article first appeared on Cato at Liberty.