A showdown over sugar

When it comes to the debate between free trade and protectionism, I generally side with free trade. When it comes to NAFTA, I’m not persuaded that the agreement has been the “disaster” President Trump labels it.

But whatever one’s stance on trade agreements, it’s important to call out and punish those who abuse them. In fact, it’s imperative that free-traders do so. Otherwise, opponents of future agreements will have a near unassailable argument against entering into such deals.

This brings me to Mexican sugar. In 2015, the U.S. International Trade Commission found Mexico to be in violation of anti-dumping rules with regard to that commodity. Based on its investigation of a three year period, the ITC concluded that “an industry in the United States is materially injured by reason of imports of sugar from Mexico that Commerce has found to be sold in the United States at less than fair value and subsidized.”

Robert Romano, writing in Investors Business Daily, provides the facts underlying this conclusion:

For fiscal years 2012 to 2014, Mexican shipments of sugar almost doubled to 2 million short tons, according to the commission report, while the price per unit dropped from $801 to $469, or about $0.40 per pound to $0.234 per pound.

Those prices are lower than market prices in both Mexico and the United States over the same period, according to U.S. Department of Agriculture figures, and are likely below Mexico’s cost of production. That is a clear violation of anti-dumping rules.

As a result, Mexico’s market share in U.S. sugar markets more than doubled from 8% in 2012 to 21% in 2014. Quite a feat in just three years, except it was not the outcome of free markets or even free trade, it was a government-subsidized flooding of U.S. markets by Mexico, all designed to increase market share and drive U.S. producers out of business.

Naturally, U.S. sugar producers complained to the federal government. This resulted in the suspension agreements on tariffs collection with Mexico starting in 2014. The Commerce Department admits that this regime is failing.

Accordingly, Commerce Secretary Wilbur Ross has set a June 5 deadline (i.e., tomorrow) for reaching a deal that will end the illegal dumping. If that deadline isn’t met, Ross says he will impose tariffs of 80 percent or more on Mexican sugar imports.

Such a tariff would be perfectly legal. Under Nafta, the U.S. reserved its power to enforce our anti-dumping laws and institute countervailing tariffs if necessary, in the event one of the partner countries attempted to use the agreement to engage in dumping. As Romano says, without that reservation, Nafta would not have passed Congress.

The dispute Ross is trying to resolve isn’t just about Mexico’s access to U.S. sugar markets. The future of Nafta may be at stake. For if Mexico behaves in bad faith under Nafta and the U.S. looks the other way, it will undermine public confidence in the agreement, and in free trade agreements generally, and this will push the U.S. out of Nafta. As Rick Manning of Americans for Limited Government puts it in his column for The Hill, Secretary Ross now has the opportunity to set the tone for one of the most important economic renegotiations in our nation’s history.

That is why Romano concludes that even if you support free trade agreements like Nafta, you should be wishing Ross success in combating Mexican sugar dumping. Indeed, you should be rooting especially hard for his success.

The Financial Times, on the other hand, suggests that Secretary Ross is a tool of the U.S. sugar industry. It notes that Ross and his wife were once guests at the luxury resort of José “Pepe” Fanjul, a Florida sugar baron, and that Ross and Fanjul, though they have never done business together, are long-time acquaintances. The Financial Times thinks Fanjul is using his influence to induce Ross to drive too hard of a bargain with the Mexican sugar industry.

I don’t know the ins-and-outs of the sugar negotiations; nor does the Financial Times have much to say about the specifics. However, I would make two observations. First, had the Mexicans not violated our anti-dumping laws, they would not be in this predicament. Second, as a general matter it’s a good thing when the U.S. Secretary of Commerce drives a hard bargain on behalf of American businesses.

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