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GTAP Resource #1280

"The U.S. Sugar Program versus Bilateral and Multilateral Trade Liberalization"
by Tsigas, Marinos and Devry Boughner

This paper aims to explore tensions between maintaining the U.S. sugar program and liberalizing the U.S. sugar market in trade agreements such as the NAFTA, the FTAA, the U.S.-Central American Free Trade Agreement, the U.S.-Australia Free Trade Agreement, and the WTO’s Doha Development Agenda.

The U.S. sugar program fared extremely well in the 2002 farm bill. The loan rates for raw and refined sugar were maintained at the 1996 farm bill (i.e., the FAIR Act) levels; marketing assessments and forfeiture penalties were eliminated; Commodity Credit Corporation (CCC) interest rates on price support loans were reduced; the no-net-cost to the U.S. government feature was reestablished; domestic marketing allotments were re-instituted when imports are at or below 1.532 million short tons (1.36 million metric tons); and the Payment-in-Kind program for sugar beets was included as a U.S. supply-limiting option in addition to marketing allotments.

The United States allows access to the U.S. sugar market to Mexico under the NAFTA and to 41 members of WTO, including Mexico, under the Uruguay Round Agreement on Agriculture (URAA). Access is granted via the use of TRQs.

In the past, the U.S. sugar TRQ maintained the domestic price above the loan rate. If the market price threatened to fall below the loan rate, the USDA was able to reduce the level of the TRQ to guard against forfeitures. From 1996 to 2000, the USDA incrementally reduced the level of the TRQ on sugar (raw plus refined) from approximately 2.2 million metric tons to 1.25 million metric tons, successfully preventing forfeitures of domestically produced sugar. However, in the two years preceding the passage of the 2002 farm bill, the United States was having difficulties in balancing the U.S. loan-rate-purchase program with its market access commitments. Once the TRQ reached the URAA market access commitment level of 1.25 million metric tons, the USDA’s ability to preclude forfeitures was constrained. In addition, owing to the no-net cost provision restriction in the 1996 FAIR Act, USDA was further restricted to reducing the level of access below 1.36 million metric tons (raw and refined), if non-recourse loans to producers were to remain available.

In 2001, the domestic and trade policies were at odds, which led to large forfeitures of excess sugar to the CCC. The U.S. sugar industry viewed the forfeitures as a sign that the U.S. negotiated overly ambitious trade agreements, while the users of sugar viewed the forfeitures as a sign that the domestic policy needed reform to accommodate the U.S. international commitments.

While the 2002 program affords the USDA flexibility in maintaining support for U.S. sugar producers and in meeting its current international obligations on sugar, the United States may find itself hard pressed to reach agreements in future trade negotiations without placing sugar on the bargaining table. Some countries may refuse to discuss opening their markets to U.S. exports without the United States opening its market for sugar. To further complicate matters, backlash may result in the U.S. Congress if the U.S. negotiators attempt to further open the U.S. sugar market to imports. Thus, if the United States is asked to liberalize its market for sugar by increasing the TRQs and lowering over-quota tariffs, tensions, both economic and political, between the U.S. domestic and trade policies for sugar may surface.

In this paper, we consider the implications of free entry of sugar in the United States from Australia, Mexico, or the Americas. The discussion serves to provide a clear example of the predicament in which the United States finds itself between maintaining protection on import sensitive commodities all-the-while negotiating for removal of protection on export oriented commodities.

The Global Trade Analysis Project (GTAP) model is employed to show the effects of trade liberalization under regional and multilateral liberalization scenarios for sugar. In a TRQ system, the gap between world and domestic prices is endogenous. Thus, in this work, it is necessary to recognize that as the United States liberalizes sugar imports from a certain country, Australia for example, the price gaps for sugar imports from all other countries would decline.

Revised equilibrium data have been constructed by replacing the 1997 GTAP data for U.S. sugar imports and policies with data for 2001. The liberalization scenarios are conducted from the 2001 levels.

We focus on impacts on sugar in the United States; other regions include Canada, Mexico, Brazil, Australia, Thailand, the European Union and three aggregate regions representing Central America and the Caribbean, the rest of South America, and a rest-of-the-world. There are three agricultural sectors (sugar crops, other crops, and livestock) and three processed foods sectors (sugar, molasses, and all other processed food products). The rest of the economy is represented with two sectors (services and other manufacturing). The original GTAP product group “sugar” was modified and divided into two groups: sugar (i.e., refined sugar) and molasses and other products. Refined sugar is the product to which the TRQ is applied.

Anticipated findings
It is expected that the welfare impacts of the simulations would suggest that the U.S. economy is better off due to free sugar imports. In the general equilibrium model, welfare gains arise mainly owing to improvements in allocative efficiency and improvements in terms-of-trade. It is expected that gains from improvements in allocative efficiency are positive for the U.S. economy. In a second set of simulations we examine the implications of trade liberalization coupled with insulation of the U.S. producer price at the farm level. It is expected that gains from improvements in allocative efficiency would be substantially smaller than those in the earlier experiments.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2003 Conference Paper
Status: Published
By/In: Presented at the 6th Annual Conference on Global Economic Analysis, The Hague, The Netherlands
Date: 2003
Created: Tsigas, M. (4/30/2003)
Updated: Bacou, M. (9/27/2003)
Visits: 3,393
- Preferential trading arrangements
- Agricultural policies
- North America
- South America

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