Submission of the AMERICAN SUGAR ALLIANCE. United States International Trade Commission Hearing: Investigation No. TA

Transcription

1 Submission of the AMERICAN SUGAR ALLIANCE United States International Trade Commission Hearing: Investigation No. TA Proposed U.S. Free Trade Agreement with Central America and the Dominican Republic (DR): Potential Economy-wide and Selected Sectoral Effects Washington, D.C. April 27, 2004 INTRODUCTION The American Alliance (ASA) is pleased to have the opportunity to submit its views on the USITC s investigation concerning the likely impact of the proposed FTA with Central America and the Dominican Republic (DR) on the U.S. economy as a whole and on specific industry sectors and the interests of U.S. consumers. The ASA is the national coalition of growers, processors, and refiners of sugarbeets and sugarcane. Our concerns relate to the tariff lines within Chapter 17 (sugar and sugar confectionary) of the HTSUS that affect the administration of U.S. sugar policy and to those sugarcontaining products in other Chapters particularly, those identified in the headnotes to Chapter 17 which have been, or could be used, to circumvent the sugar import program. Nearly all of these products are on the list of sensitive products provided to the Commission by USTR. Combined, the countries covered by the proposed FTA (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, El Salvador and the DR) constitute one of the world s largest exporters of sugar; over the 2001/ /04 period, their exports of sugar totaled nearly 2.2 million metric tons (mmt) (Table 1). These countries are also major beneficiaries of the duty-free access provided by the U.S. tariff-rate quota (TRQ) for sugar; in recent years, TRQ allocations to these countries have totaled over 311,000 mt, about 27 percent of the total TRQ allocation. For all of these exports, they receive U.S. market prices well in excess of the world dump market price. The proposed FTA would establish additional TRQs for these countries totaling 109,000 mt in the first year after entry into force of the agreement, rising to 153,140 mt in year 15 and thereafter increasing each year by 2,640 mt in perpetuity. Again, this increased access would be in addition to the minimum access of 311,700 mt already provided under the WTO-bound TRQ. Countries can benefit from this additional access only to the extent they are calculated to be net exporters of sugar (according to a formula set forth in the Agreement); however, this provision will have an impact only in case of the DR. A

2 Page 2 similar provision will prevent the U.S. from exporting any sugar to Central America or the DR at preferential tariff rates. Contrary to the negotiating position originally outlined by the Administration, the tariffs for sugar imports from these countries outside the TRQ would remain intact. We presume that the decision to leave the tariff intact reflects recognition of the disastrous impact of reducing or eliminating the second-tier tariff and the flagrant inconsistency of such an action with the broad Administration policy that domestic support programs will not be negotiated in FTAs. Unfortunately, however, the Administration s decision to grant increased TRQ access in the proposed FTA would still inflict unacceptable, though less dramatic, damage on the U.S. sugar industry. In conducting its assessment of the probable impact of the proposed FTA, it is important that the Commission carefully consider the following: The U.S. sugar market is already badly over-supplied. In accordance with the program introduced by the 2003 Farm Bill, U.S. producers are currently holding nearly 700,000 short tons (st) of blocked stocks. Moreover, there has been a troubling decline in consumption over the past three years. Thus, each additional ton of sugar imported will come at the expense of U.S. sugar producers either in the form of reduced production or increased stocks. Any assessment must address the likelihood that the increased access for sugar provided under the proposed FTA would trigger off the marketing allotment program, resulting in massive disruption of the U.S. sugar market and large government budgetary costs. Such an outcome is clearly inconsistent with the Congress intent that the sugar program be operated at no-cost. The impact of the proposed FTA with Central America and the DR cannot be accurately assessed in isolation from other bilateral and regional FTA initiatives being pursued by the Administration, which encompass most of the world s major sugar exporters. FTA negotiations are well underway with SACU (South African Customs Union) and within the FTAA. New FTA initiatives with the Andean countries, Panama, and Thailand have recently been launched. These countries will be seeking concessions on sugar comparable to, or greater than, those granted to CAFTA and the Administration has made clear that sugar is on the table in all of these negotiations. The assessment should focus on the very real damage that would be done to the U.S. sugar industry, and the many communities that rely heavily or entirely on this industry in terms of lost jobs, reduced income, and diminished ability to service debt or obtain needed capital. The assessment should not focus on hypothetical job creation, which is highly unlikely to materialize. Lower producer prices for sugar will neither result in lower retail prices, nor increased consumer demand, for sugar and sweetened products.

3 Page 3 All available evidence indicates that there will be no passthrough of reduced sugar prices from food processing companies to the ultimate consumer. Benefits from lower producer prices for sugar would be limited to the food manufacturing and retailing sector. Nor is there any realistic reason to believe that any such price reduction would staunch the flow of manufacturing jobs in the confectionary industry to locations outside the U.S. other economic factors are far important than sugar prices in food manufacturers decisions on where to locate. The proposed FTA with Central America and the DR (as well as the many other FTAs being pursued) will do nothing to address the pervasive government policies that have grossly distorted the world sugar market. These policies can only be addressed in global WTO negotiations. In light of the above factors, we believe that the Commission must find that that the proposed FTA will do unacceptable damage to the U.S. sugar industry and the communities that depend on it. These and other relevant factors are discussed in more detail below. INCREASED ACCESS FOR CENTRAL AMERICA AND THE DR TO THE U.S. MARKET COMES AT THE EXPENSE OF U.S. SUGAR PRODUCERS Although described as modest by the Administration, the additional access to the U.S. sugar market provided in the proposed FTA through the establishment of additional TRQs for the Central American countries and the DR will have a highly disruptive effect on the U.S. sugar market. As noted previously, the U.S. market is already badly oversupplied, with U.S. producers, at their own expense, holding nearly 700,000 st of blocked stocks in accordance with provisions of the marketing allocation program put in place by the 2002 Farm Bill. Despite the imposition of restrictions on domestic marketing of sugar through this program, sugar prices have fallen into the forfeiture range, raising concerns as to whether the program s mandate that it be operated at no-cost to the government will be fulfilled. It is very likely that marketing allocations will need to be further tightened next year. In fact, after surveying the market situation and outlook, the U.S. industry has already requested an early announcement of a sharply reduced marketing quantity for 2004/05 -- to minimize the difficulty of managing the market, and avoiding forfeitures, next year (Attachment A Letter to USDA Under Secretary Penn, March 2, 2004). The prospects for managing the U.S. sugar market are also clouded by the very troublesome decline in U.S. sugar consumption that has occurred in recent years. After 14 years of growth, averaging 151,000 st annually, consumption has declined by an average of 136,000 st over the current 4-year period. The reasons for this decline, and whether they will continue to hold sway, are not yet entirely clear. While the recession appears to have been partly responsible, new dietary trends and the continuing shift of food industry manufacturing jobs abroad may be more important and longer-lasting factors. If the decline continues, the difficulty of managing the domestic program, and the burden placed on it by CAFTA, will increase substantially.

4 Page 4 In these circumstances, every additional ton of sugar imported means an equivalent decrease in U.S. production or an increase in U.S. stockholdings. MARKETING ALLOTMENTS WILL LIKELY BE TRIGGERED OFF, THWARTING CONGRESSIONAL INTENT, AND MASSIVELY DISRUPTING THE MARKET The increased import commitment to CAFTA poses a very specific and real threat to the operation of the domestic program in that it is quite likely at some point to trigger off the marketing allocation program. In the 2002 Farm Bill, Congress re-established the Secretary of Agriculture s authority to impose domestic sugar marketing allotments. In establishing this program, Congress directed that marketing allotments be in place, unless triggered off by imports in excess of million short tons (mst). Congress arrived at this figure by adding the Uruguay Round-imposed minimum of mst to the NAFTA-imposed commitment to import up to 276,000 st of Mexican net surplus production. Congress view, essentially, was that these import commitments, amounting to more than 15 percent of U.S. sugar consumption, were sufficient and that it would be unfair to impose marketing restrictions on American producers if imports exceed these committed levels. Additional imports would be appropriate only in the event of U.S. market growth and/or production shortfalls. Congress did not intend for additional access granted in FTAs to further shrink American sugar producers share of their own market. Actual imports this year and last have been at the WTO minimum because Mexico has not had any surplus sugar to send to the United States. This left a gap of about 276,000 st tons between actual imports and the marketing-allotment trigger. But if Mexico has a large crop and returns to surplus-producer status, as is expected this year, much, or all, of that 276,000 st could again be allocated to Mexico. Only the balance, if any, would be available for additional FTA access, and only in the short run. Furthermore, U.S. and Mexican sugar and corn sweetener industry leaders have made significant progress toward a framework settlement of U.S.-Mexican sweetener trade issues, and may soon present that framework to the U.S. and Mexican governments and urge prompt government-to-government negotiation. These representatives have assumed that all of the access promised to Mexico in the NAFTA is still available to Mexico. The Administration has argued that there is leeway of about 300,000 tons between existing import levels and the trigger set in the Farm Bill. However, this cushion ignores the commitments already made to Mexico and is illusory. If Mexico fills its quota of 276,000 st, or even a significant part of it, the additional access proposed for Central American countries and the DR (120,150 st in the first year) will quickly breach the mst trigger. We have little confidence that the vaguely-worded sugar stocks management provision of the FTA, which is supposed to enable the United States to avoid the physical import of the additional sugar from Central America and the DR, would be effective in fending off this result. With substantial Mexican participation in the U.S. market, this provision would

5 Page 5 probably have to be employed for the entire amount of import obligations from Central America and the DR as well as any additional amounts granted in subsequent FTAs, making the stocks management option unsustainable. CONSEQUENCES OF TRIGGERING OFF ALLOTMENTS The consequences of triggering off the market allotment program for sugar would be grave for both the U.S. industry and for the government. Much of the 700,000 st currently held in blocked stocks would come onto the market or be forfeited to the CCC. The additional imports resulting from the FTA with Central America and the DR, from Mexico, and from any subsequent FTA concessions on sugar, would further exacerbate these price-depressing effects. As a result of the forfeiture of substantial quantities of sugar stocks to USDA s Commodity Credit Corporation (CCC), the U.S. government would incur substantial costs in direct violation of the Congress clear intent that the sugar program be operated at no-cost. In rendering the domestic sugar program inoperable, the Administration s commitments under the FTA with Central America and the DR would also be in conflict with the United States basic position that domestic support programs must not be negotiated in FTAs, but only in the WTO. From an industry perspective, the triggering off of marketing allotments would result in sharply reduced prices and income, diminished ability to service debt and obtain needed capital, and, in a somewhat longer term, lost jobs, the closure of sugar processing facilities, and the exit of some producing areas from the sugar business. Past experience strongly suggests that, under the circumstances described above, market prices would drop well below the loan rate, the supposed price floor for sugar. During the period, before the marketing allotment program was re-introduced, U.S. prices for raw and refined dropped percent, to 22-year lows, and for most of this period remained consistently below forfeiture levels. This occurred despite the CCC holding nearly 1 million tons of purchased or forfeited sugar during that period and was the result of an annual oversupply of the market estimated at only ,000 st. The downward pressure on the market resulting from the release of blocked stocks, NAFTA commitments to Mexico, and new commitments to Central America and the DR (and any subsequent FTA commitments) would surely be much greater. (Attachment B describes in detail the sensitivity of the U.S. sugar market to oversupply.) The damage from the triggering off of marketing allotments would not be limited to the sugar industry alone, however, but would spillover to those providing supplies and financial and other services to sugar producers and to local businesses in the many communities throughout the U.S. that are heavily dependent on the sugar industry. It would be particularly severe in Louisiana, the Northern Plains and Hawaii, where the economic viability of many communities is almost entirely dependent on a healthy sugar industry.

6 Page 6 FTA WITH CENTRAL AMERICA/DR CANNOT BE LOOKED AT IN ISOLATION: NEW FTAs IN THE WORKS While we believe the arguments put forward above convincingly demonstrate the unacceptable damage that would be done to the industry by the CAFTA sugar provisions, CAFTA cannot be looked at in isolation from the broader FTA initiatives of the Administration. The countries with which the U.S. is pursuing FTAs export in total over 27 million metric tons (23 mmt excluding Australia), nearly three times U.S. consumption (Table 1). While it is true that the Administration has excluded sugar from market access negotiations in the proposed FTA with Australia (and we applaud that decision), they have given no assurances that they will take the same position in other FTA negotiations. On the contrary, the Administration has made clear that sugar remains on the table in all these negotiations and that each negotiation will have to be evaluated individually. The distinction between developed and developing countries made by Ambassador Zoellick in explaining the decision to exclude sugar from the Australian talks strongly suggests that further commitments on sugar market access are likely all other prospective FTA countries are developing countries! This impression was further bolstered by recent statements by Ambassador Zoellick before a House Appropriations Subcommittee, where he made reference to his leeway to provide new FTA partners with a total of about 300,000 tons of additional sugar market access. From the perspective of the U.S. sugar industry, the CAFTA agreement sets a terrible precedent. All of the other sugar-exporting FTA countries the South Africa Customs Union, Thailand, Panama, the Andean countries, along with Brazil and the remaining countries of the FTAA will seek to equal or better the concessions given in the CAFTA. Additional access granted in any of these negotiations will greatly exacerbate the disruptive effects described above. We urge the Commission to include in its findings on the FTA with Central America and the DR an analysis of the combined impact on the U.S. sugar industry of the commitments made in that FTA, plus comparable commitments on market access for sugar in these outstanding FTAs. LOWER SUGAR PRICES WOULD NOT PASS THROUGH TO CONSUMERS NOR SAVE U.S. MANUFACTURING JOBS A look at past pricing patterns makes it abundantly clear that the sharp reduction in sugar prices that would result from the concessions made in the proposed FTA with Central America and being contemplated in other FTAs would not be passed through to the final consumer. ASA has presented convincing evidence to the Commission on this point on numerous occasions. Charts 1 and 2 review the historical record on sugar and related consumer products over the and periods. While producer prices for sugar plummeted over this period, consumer prices for all the major sugar-containing consumer products rose substantially; even retail refined sugar prices increased. The argument is often made that high sugar prices are causing manufacturers of candy and other producers of sugar-containing products to move offshore; thus, lower sugar prices

7 Page 7 would serve to save or even restore Americans jobs. This argument does not hold up under scrutiny: First, it is clear that lower sugar prices would not result in an increase in U.S. consumption of candy or other sugar-containing products. As indicated above, no pass through of lower costs can be expected. But, even if there were, the low share of sugar in end product costs and the very low price elasticity of demand for sugar and other sweetened products would nullify any consumption effect. More importantly, a close look at the cost structure of corporations which have moved candy manufacturing facilities to Mexico or Canada strongly suggests that factors other than sugar have dictated their decisions. A comparison of costs for candy companies in Chicago versus the maquiladoro candy operations in Mexico shows that American wages are 25 times higher; energy costs 5 times higher; tax burdens at least 7 times higher. In addition, Chicago manufacturers face much higher standards for workers and the environment than do those in Mexico. These costs differences dwarf the differences in sugar prices between the U.S. and the maquiladoro areas. Even compared with Canada, wages and health costs are much higher in the U.S. and much more significant than differences in sugar prices. To sum up, the movement of candy manufacturing offshore must be viewed in the context of the broader movement of U.S. manufacturing to non-u.s. facilities in search of lower wages and lower health, environmental and other costs. Lower sugar prices would only result in a loss of jobs in the sugar industry with no offsetting job gains in the food processing industry (Table 2). FTAs DO NOTHING TO ADDRESS THE GROSSLY DISTORTED WORLD SUGAR MARKET As ASA has repeatedly pointed out, the widespread governmental policies that have resulted in pervasive dumping and a grossly distorted world sugar market cannot be effectively addressed in bilateral and regional FTAs. Piecemeal negotiations on sugar in these fora only undercut the operation of the domestic support program for sugar and increasingly expose U.S. sugar producers to unfair competition of the subsidized producers who dominate the world dump market. It is instructive that all of the countries covered by the FTA now being evaluated by the Commission impose tariff and other barriers to maintain their own domestic prices well above world prices and that none of them have allowed increased imports from each other in the CAFTA or the other FTAs which they have concluded. Negotiations on sugar market access should be reserved for WTO negotiations, where all of the policies which have so badly skewed the world sugar market will be on the table. PREVIOUS ITC ANALYSES The ASA submissions to the USITC of May 1 and September 19, 2002, presented more detailed ASA views and analysis on the benefits to the U.S. economy provided by U.S.

8 Page 8 sugar policy and the costs to the industry and the economy if that program were lost or severely damaged. These submissions also outlined our serious concerns with previous ITC analyses, which seriously underestimated the damage to U.S. industry from increased imports and the resulting job losses, and overestimated the benefits to society as a whole. In fact, losses to the U.S. economy would far outweigh any hypothetical benefits to the final consumer benefits that, as noted above, seem entirely illusory, given the well-documented lack of passthrough of lower producer prices to consumers. Although these previous submissions concerned investigations dealing with the FTAA and the WTO, we believe they are quite relevant to the subject investigations. While the magnitude of potential imports is considerably greater under the policy scenarios on which those ITC analyses were predicated, similarly ruinous effects on the U.S. sugar industry would, as demonstrated in previous sections, result from the increased sugar imports provided for by the proposed FTA with Central America and the DR and the additional concessions apparently envisaged in other FTA negotiations. CONCLUSION The additional market access for sugar provided in the proposed FTA with Central America and the DR cannot be looked upon in isolation. Along with the further concessions on sugar market access being contemplated in other FTA negotiations, this additional access would make it impossible to operate the U.S. domestic program for sugar in the manner intended by Congress and would result in major disruption of the U.S. sugar market, sharply reduced producer prices and income, great loss of jobs, and major budgetary outlays by the U.S. government. These costs would far outweigh any overall gains to the economy resulting from any lowering of sugar prices; in particular, it is highly unlikely that consumers would see any benefit in the form of reduced retail prices for sugar or sugar-containing consumer products. The Administration should not increase market access for sugar within the framework of an FTA with Central America and the DR or any other FTA, but should rather focus its efforts on achieving a drastic reform of the world sugar market through comprehensive, sector-specific WTO negotiations to eliminate all significant trade-distorting government practices affecting the world sugar market.

9 Table 1 Potential U.S. Free Trade Agreement (FTA) Countries/Regions: Production and Exports, 2001/ /04 Average, and Share of U.S. Raw Import Quota, 2003/04 Country Production Exports U.S. TRQ Allocation -Metric Tons- North America Mexico 5,135, ,000 7,258 Canada 50,000 14, Caribbean 1 Barbados 47,000 41,000 7,371 Dominican Republic 465, , ,335 Haiti 10, ,258 Jamaica 175, ,000 11,583 St.Kitts & Nevis 24,000 18,000 7,258 Trinidad & Tobago 102,000 68,000 7,371 Central America Costa Rica 385, ,000 15,796 El Salvador 476, ,000 27,379 Guatemala 1,821,000 1,327,000 50,546 Honduras 332,000 78,000 10,530 Nicaragua 361, ,000 22,114 CAFTA Total 3,375,000 1,994, ,365 Belize 120, ,000 11,583 Panama 165,000 55,000 30,538 North America Total 2 9,668,000 2,797, ,920 South America Bolivia 368, ,000 8,424 Colombia 2,458,000 1,103,000 25,273 Ecuador 492,000 52,000 11,583 Peru 960,000 41,000 43,175 Andean Total 4,278,000 1,312,000 88,455 Argentina 1,633, ,000 45,281 Brazil 22,187,000 12,750, ,691 Guyana 294, ,000 12,636 Paraguay 110,000 21,000 7,258 Uruguay 140,000 21,000 7,258 South America Total 28,642,000 14,571, ,579 FTAA Total 2 38,310,000 17,368, ,499 % of U.S. TRQ 64.0% South Africa 2,709,000 1,395,000 24,221 Swaziland 542, ,000 16,850 SACU Total 3,251,000 1,911,000 41,071 Australia 4,971,000 3,913,000 87,402 Thailand 6,030,000 4,085,000 14,743 FTA Total 52,562,000 27,277, ,715 % of U.S. TRQ 76.9% 1/ Excludes Cuba. 2/ North and South America, excluding United States and Cuba. Data Source: USDA/FAS, May 2003.

10 Page 10 Table 2 Cost Comparisons for Confectionery Industry: March 2003 Cost United States Mexico Canada Item Unit 1 Chicago, IL, Holland, Mi. Juarez Montreal Labor: Wages $ / hr Health Care Insurance $/worker/yr 2,400 2, Taxes: Federal & State % 42% 40% 9% 31% Electricity: 2 Demand $/kw/mo Use $/kw/hr Land: Construction $/sq/ft Rental $/sq/ft Refined 3 Cent/Lb $ Pesos 9.48 to U.S. $ 1.00; $ Canadian 63.8 to U.S. $ KWh is a measure of use of 1,000 watts of electricity for one hour; KW is a measure of demand during a specific time period, such as a month. 3 Maquiladora and re-export program price; actual Mexican domestic price about 28 cents/lb. Source: Various Sources Researched by Peter Buzzanell & Associates, Inc.

11 Page 11 Chart 1 From 1990 to 2003: Farmer Prices for Plummet, Consumer Prices for & Products Steady or Higher* Consumer Prices Rise 38.4% 42.1% 47.1% Farmer Prices Plummet 28.8% 30.2% Raw Cane Wholesale Refined -7.9% -12.5% -0.2% Retail Refined Cereal Candy Cookies, Ice Cakes Cream Other Bakery Products * Change in annual average prices from 1990 to Raw cane: duty-fee paid, New York. Wholesale refined beet sugar: Midwest markets. Retail prices: Bureau of Labor Statistics consumer price indices. Data source: USDA. Chart 2 From 1996 through 2003: Farmer Prices for Fall, Consumer Prices for and Sweetened Products Rise* 21.4% 16.5% 17.5% Farmer Prices Fall 7.5% 11.9% Raw Cane Wholesale Refined 2.1% -4.4% Retail Refined Cereal Candy Cookies, Cakes Other Bakery Products Ice Cream -10.2% Consumer Prices Rise *2003 annual average price compared with Raw cane: Duty-fee paid, New York. Wholesale refined beet: Midwest markets. Retail prices: BLS indices. Data source: USDA.