Battle over Australian access to the U.S. sugar market could sink TPP’s potential.
By Eric Johnson
In the past few years, the United States has consumed around 11 million tons of sugar annually, or roughly 70 pounds per person.
But the United States only produces about 8 million tons of sugar a year, meaning there’s a shortfall of some 3 million tons, a gap that has to be bridged through imports.
On the other side of the Pacific Ocean is Australia, which produces nearly 4 million tons of sugar annually, but only has demand for about 1.3 million tons. So it exports about 2.8 million tons each year.
The juxtaposition is quite poignant since the United States and Australia are cornerstone members of the fledgling Trans-Pacific Partnership, a sweeping trade agreement currently being negotiated between 11 nations.
Access to the U.S. market for Australian sugar exporters is but one of a litany of issues TPP members need to hammer out to get the agreement signed. But it’s symptomatic of the barriers that could prevent the countries from unlocking the trade potential of such an all-encompassing agreement.
If the United States doesn’t grant greater access to Australian sugar exporters, trade experts worry the TPP parties will engage in tit-for-tat retaliatory battles that could quickly erode the efficacy of the agreement.
|Source: U.S. Department of Agriculture.
While U.S. trade officials are pressing other TPP nations to increase intellectual property rights protection, and for greater regulation of state-owned enterprises, it will be hard to win those fights if the United States closes markets to its prospective trade partners.
To understand where the current divide over sugar access stands, it’s helpful to go back a few years, to the U.S.-Australia free trade agreement that came into force in 2005.
The FTA covers half a dozen agricultural commodities, eliminating tariffs and export subsidies, but it does not include sugar. The powerful U.S. sugar growing lobby successfully fought to keep sugar out of the FTA, much to the chagrin of Australia’s sugar producers.
With TPP talks now underway (the 14th and latest round of negotiations took place near Washington in September) another group is pushing for the sugar debate to be reopened.
The Sweetener Users Association (SUA), a lobbying body that represents some of the country’s largest food and beverage companies, has long argued the United States needs to break down trade barriers that prevent sugar exporters from tapping into U.S. demand.
SUA said during a briefing at the National Foreign Trade Council (NFTC) offices in mid-September that granting unfettered market access to Australian sugar won’t hurt U.S. producers since domestic production can’t keep pace with U.S. demand in any case.
“The game is the refined sugar market,” said Tom Earley, vice president of Agralytica Consulting and an economist for SUA. “Growers own almost all the refining capacity. So whether it’s domestic or imported raw sugar, they’re making their money on the refining margin.”
U.S. production capacity has been hindered, he argued, by a need for new sugar mills. But without any impetus to battle import competition, the U.S. sugar growing industry has not invested in that capacity, content to profit on the refined side of the process.
In a June editorial, the Wall Street Journal
reported that the nation’s roughly 5,000 sugar growers get annual subsidies of $1.4 billion, but that U.S. consumers pay twice that amount through higher food prices.
The American Sugar Alliance, which represents domestic growers, said U.S. legislation protects the industry from rising input costs and subsidized sugar from other markets, at no cost to taxpayers.
But the bookended programs of domestic subsidies and import quotas have long been a sticking point for sweetener users, one that they are pressing for TPP negotiators to resolve.
“We want to see TPP negotiations be a solution with respect to agricultural products so there aren’t commodities excluded,” Earley said.
He said once the United States takes something off the negotiating table (as in the case of sugar with Australia), the other negotiating party or parties tend to do likewise.
“We don’t want to see that pattern repeated,” he said.
The U.S. trade representative has reportedly thus far been reluctant to broach the subject, taking the position that the sugar issue should not be included in TPP talks because it was excluded in the U.S.-Australia FTA.
“We hope that U.S. trade negotiators learned a valuable lesson from the U.S.-Australia FTA, where the previous administration yielded to demands by the U.S. sugar growers and processors and denied Australia access to the U.S. market despite warnings that this would lead other countries to seek exclusions in future FTAs,” SUA wrote in a brief to the U.S. International Trade Commission in August. “Subsequently, South Korea succeeded in denying U.S. rice producers access to the Korean market in the U.S.-Korea FTA.”
If the subject does eventually make it to the TPP table, SUA has laid out several points it wants addressed, including regional cumulation with regard to sugar rules of origin.
“Otherwise you end up with a bunch of different bilaterals that won’t result in a comprehensive trade agreement,” Earley said.
Including regional cumulation in the TPP would allow for different aspects of a sugar product supply chain to be handled in different TPP nations without any tariff or duty impacts — to, in essence, be treated as if the whole process occurred in one country. So, raw sugar from one TPP member could be sent to another TPP country for refining, and then marketed and sold to a third TPP country.
“That’s legitimate trade,” Earley said.
As the rules of origin stand now, duties or quotas would apply to each nation where the raw sugar was sent.
Earley said SUA is also urging U.S. negotiators to relax net trade surplus rules, which caps the extent to which it can import from Australia.
“Imposing arbitrary net exporter criteria on market access commitment is simply a bad idea promoted by domestic interests that want special protections against import competition,” Earley said in testimony to the ITC in mid-September.
He expounded on the issue at the NFTC briefing.
“It’s a real perversion of trade policy negotiation,” he said. “Most countries will import and export commodities at different levels, especially big countries. Looking at net trade is not a legitimate application.”
Earley said the net export issue is one that could become a bugaboo during wider TPP talks.
“It’s an argument where if you make it on one product, other countries will come back and make it against us.”
NFTC President Bill Reinsch agreed.
“Australia is not agreeing to the things we want (in TPP talks) to send a message,” he said. “If these things are at risk because we don’t let Australian sugar in, it’s not just a peripheral issue. It has a ripple effect.”
Aside from the explicit net surplus rules, SUA is also encouraging the U.S. trade representative to reallocate sugar import quotas.
“We have import quotas with 40 countries under the WTO,” he said. “Some are not shipping anything to us, so we need to do some reallocation. There’s space to reallocate to Australia.”
Australia’s current quota to the United States is around 90,000 tons per day, about 3 percent of its total exports, and less than 3 percent of what the United States imports each year.
After the latest round of talks, chief U.S. negotiator Barbara Weisel and Australian negotiator Hamish McCormick declined to comment when asked what had been discussed between the two nations with regards to sugar. The next talks, set for December in Auckland, will include Canada and Mexico for the first time, with hope that Japan will join in future rounds.
There is momentum to make substantive progress in 2013, negotiators maintained, but no timetable has been established to conclude the process, which began in 2010. Other TPP members include Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.
Half of the 3-million-ton demand gap between U.S. sugar production and consumption is being filled by Mexico, a partner in the North American Free Trade Agreement, Earley said, adding that in another eight years, demand will increase by another 1 million tons per year.
“Production is not increasing, so over time we’re going to have an increasing volume of imports,” he said. “There is room in TPP discussions to build in higher sugar quotas. Most TPP members are net importers of sugar.”
Earley suggested a system could be agreed where tariffs could decline and quotas increase over time. Either way, SUA is not asking for the United States to grant totally free access to Australia’s nearly 3 million tons of exports.
“The objective in sugar reform is pretty modest,” Earley said. “There are a lot of people in Congress that think it’s really reasonable. The sugar industry can withstand reform.”
Reinsch suggested that service providers, intellectual property interests, and financial institutions will likely be happy with TPP, but it will be more complex in farming-heavy U.S. states. Pressure from sugar growers is especially intense in Florida, potentially a swing-state in the November presidential election.
“It’s a guarantee that in every trade negotiation, not everyone is going to be happy,” he said.
Meanwhile, there are pressures building on sugar prices worldwide. Earley said outside factors, like Brazil converting farms from sugar production to corn production to feed its ethanol industry, could easily strain supply for the U.S. market.
As TPP talks progress, Earley said the European Union has suffered from the same protectionist practices as the United States, with record sugar prices as a result. But, he noted, the EU is discussing a process to eliminate quotas by 2015-2016.
“Twenty cents a pound is our protection level, but that might soon be the global price,” he said. “We’re reaching a point where we don’t need to be protected anymore.”