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Sugar, Lumber, Dairy: Common NAFTA Trade Irritants

By Hunter Hallman, Theresa Cardinal Brown

Thursday, August 10, 2017

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As NAFTA negotiations get started this month, we examine three areas of trade among the North American partners that were not included in NAFTA – sugar, softwood lumber, and dairy. These three areas – sometimes referred to as “trade irritants” – have been the subject of ongoing disputes and negotiations among the partners since before NAFTA. And, although they have not so far affected the overall trade relationship among Canada, Mexico, and the United States, how they are resolved could influence the upcoming negotiations.

Sugar (United States and Mexico)

Sugar trade between the United States and Mexico has been a significant point of contention over the last four years, but the origin of the conflict over sugar goes back much further. At its base, the dispute is about how much cane sugar Mexico can export to the United States. The United States has fewer cane sugar producers than Mexico, but they are politically powerful.1 Other than the sugar producers, the U.S. producers of beet sugar, and manufacturers of high fructose corn syrup, a non-sugar sweetener, are very involved in this issue. At the signing of NAFTA in 1993, a side agreement on sugar that applied only to the United States and Mexico was included after last-minute negotiations between the two countries. That side agreement said that Mexico could export sugar to the United States if Mexico had a “net production surplus,” i.e., it produced more sugar than it consumed. The side agreement added Mexico’s consumption of high fructose corn syrup to the “net production surplus” definition, which made it much harder for Mexico to become a net surplus producer and therefore lowered the amount of sugar that Mexico could sell to the U.S. market. The side letter expired 2008, at which time Mexico would be allowed to export sugar to the United States without quotas or tariffs.

Between 2008 and 2014, Mexican exports of sugar to the United States grew roughly 316 percent. In 2014, the U.S. sugar industry sought to stem the soaring levels of Mexican sugar imports, which had doubled in 2013 after a bumper crop. This led to a review by the Obama administration on policies surrounding Mexico’s sugar imports and accusations of subsidized “dumping” into the market. The Commerce Department ended up imposing punitive duties as high as 80 percent as a result.

A deal was reached in 2014 by the U.S. government and Mexico in which Mexico accepted the limited price and volume on its sugar exports and the Commerce Department dropped the duties. By 2017, U.S. sugar producers wanted a new deal, claiming the 2014 agreement failed to rein in Mexico’s flooding of the sugar market. This fit well into then-candidate Donald Trump’s promises on the campaign trail to “fix” U.S. trade agreements to protect American producers.

U.S. Commerce Secretary Wilbur Ross announced in May 2017 that if the United States and Mexico could not reach “a fair agreement” by June 5 the high antidumping and antisubsidy duties on Mexican sugar would be reinstated. A deal was reached on Tuesday, June 6, which according to Reuters, “averts imposition of large duties on U.S. imports of Mexican sugar while also addressing U.S. industry demands for protection from cheap, subsidized sugar from its top foreign supplier.” After initially opposing the deal for not going far enough, the U.S. sugar industry eventually indicated its support for the deal (without specifically pointing to what had changed their minds).  The final amendments were signed on July 3.

Softwood Lumber (U.S.-Canada)

The root of the issue in the U.S.-Canada dispute over softwood lumber (such as cedar and pine) lies in the fact that the fee to harvest timber (or the “stumpage fee”) in Canada is administratively set by the Canadian government, since most lumber is harvested from government lands, while the stumpage fee in the United States is market-determined and the land is privately held. This led the U.S lumber industry to call for countervailing duties on Canadian softwood as early as the 1980s, and the conflict is still very much alive and well today.

In 1996, after a series of disputes in reaction to the duties imposed after a 1992 investigation by the Department of Commerce, the United States and Canada signed a five-year deal which limited U.S.-bound lumber exports from various regions of Canada, and the United States agreed not to issue a trade case for the duration. However, infighting continued. According to the Peterson Institute, “Since the early 1980s, the United States has started five different countervailing duty investigations — 1982, 1986, 1991, 2001 and 2016 — into whether Canadian lumber imports were damaging the U.S. lumber industry.”

A resolution reached in 2006, written to last between seven and nine years, agreed that the United States would lift countervailing and antidumping duties if Canada guaranteed lumber prices would stay above a certain range (antidumping provisions, in other words). Canada agreed to enforce regulations such as taxes on lumber exports to the United States. The resolution extended until 2015.

In April 2017, President Trump announced a 20 percent tariff on Canadian softwood lumber, and the Commerce Department stated that Canada was improperly subsidizing its lumber exports, reigniting the old debates. This move, like the sugar renegotiation, aligned with Trump’s “America First” agenda on trade. The president stated at the time, “We can’t let Canada or anybody else take advantage and do what they did to our workers and to our farmers.” In fact, the Obama administration had begun a review of softwood lumber trade in 2016, out of the same concerns of unfair practices. Long-ranging consequences of failure to solve this dispute could include higher housing costs in the United States, as construction is a main consumer of softwood lumber. The United States and Canada continue to negotiate this issue.

Dairy (U.S. – Canada)

The dairy dispute has also plagued the United States and Canada for many years, and was rekindled this year when Canada dropped its domestic milk prices, driving down demand for milk imported from the United States. As with lumber, a protected domestic market in Canada is the source of the tension. Canada has a regulated supply system for dairy which restricts the amount of supply, guarantees prices for domestic producers and keeps tariffs on imports high. The United States views this practice as unfair to American dairy farmers preventing them from exporting to Canada. Various Canadian regulations over dairy products allowed to be marketed in Canada also irritate U.S. producers. Until recently, Canada did not place tariffs on certain milk products used to produce cheese, yogurt, and other products.  However, when it recently included “ultra-filtered milk” products on its dairy tariff list, U.S. milk producers cried foul. Canada, for its part, resists charges of unfairness to the United States, and alleges that the bigger issue is dairy oversupply in the U.S. market.

Lobbying groups for both U.S. dairy and lumber producers may have a better shot at getting their demands for renegotiation met than they have in previous administrations, if Trump’s recent speeches on the subject are any indication. However, for Canada, these are also powerful domestic constituencies and it is very likely Canada will want to take these issues off the table before NAFTA renegotiations begin.

1According to John W. Bode, president of the Corn Refiners Association, “The political influence of the U.S. sugar industry is legendary… They may be only 4 percent of U.S. agriculture but when you look at political contributions, they account for a third.”