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TED Case Study 657, January 2001 |
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TED Case Study 657, January 2001 |
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I. Identification 1. The Issue
Sugar is the first and most important harvest in Mexico. Its harvest location doubles that of the tomato, corn, carrot, and potatoe. According to the Sugar and Alcohol National Bureau (Camara Nacional de la INdustry Azucarera y Alcoholera) the sugar cane harvest extends on 611 ha, employing 2.5 million people. There are 61 sugar cane mills along 12 Mexican states: Tabasco, San Luis, Oaxaca, Morelos, Nayarit, Michoacan, Sinaloa, Jalisco, Quintana Roo, Campeche, Tamaulipas and Veracruz. With the 1910 Mexican Revolution, the industry started to changed dramatically, and today's situation is a reflection of its metamorphosis and the political and social interests that lay behind it.
Today's crisis has come to a reached unprecedented levels and the government had to step in before the entire national sugar production was at risk. On September 3rd, 2001 the Mexican government was forced to expropriate 27 mills, which account for about 50 per cent of domestic sugar production, as the first step towards reorganization and restructuration of the sugar industry. The mills themselves would not have been able to repay their government loans or pay for past and future harvests. The measure came after weeks of sugarcane growers' protests demanding payment for their harvests. An additional element in the industry's crisis is the mills' infrastructure that has become obsolete and does not help to maximize production.
With the North American Free Trade Agreement, NAFTA, the industry hoped to export their sugar excess to the United States, and thus acquire additional revenue that would be used to pay for the harvest, repay part of the loans, and invest in modernizing the existing infrastructure. Unfortunately, the US has not fulfilled NAFTA's agreement on sugar and thus, the mills are left with tons of sugar in their warehouses without buyer: they cannot sell them at home, because of the saturization of the domestic market nor in the US. The loss is unquantifiable and the industry will need more than a restructurization to bring it out of 90-year crisis. The government has been left with a great challenge: restructure the industry while providing for those 2.5 million people that depend on the industry for their monthly income.
2. Description
Sugar, once known as "White Gold" has been a precious commodity for many centuries. Sugar cane is originally from New Guinea, but started to moved westwards into Indian and Chinese territories. It was until the forth century BC that it came to Europe thanks to Alexander Magne conquests. Later on, the Greeks left it as heritage to the Romans, who called it "Indian Salt." They spread it thoughtout continental Europe all the way to Spain. It was the Spanish who brought sugar cane to the New World. The Spaniards took advantage of the favorable conditions that the Americas offered to cultivate and profit from trading this precious commodity. Large sugar plantations were established in the Caribbean and Brazil. These plantations modify not only the living conditions but the constitution of each one of these societies. Because of the dramatic decrease in native population, the Spanish had to bring slaves from Africa to work on the plantations, modifying the social strata. A similar phenomenon occurred in Mexico were sugar was introduced 450 years ago. Yet, society's change was not as drastic because of the larger native population and the Spaniards' interest in other commodities such as minerals and other agricultural products.
Sugar remained a precious commodity during the colonial period and the haciendas flourished as Spaniards, were able to accumulate great fortunes and power in both the Old and the New World. As Mexico became an independent country, the haciendas passed from Spanish to Creole hands, but still most of the population was excluded from any benefit.
With the Mexican Revolution of 1910, things started to change. The revolution brought with it land reform and the break of the hacienda system, giving peasants the right to own land. Sugar production was then divided in 2, sugarcane growers and sugarcane mills. Since their creation, these sugar mills had many economic problems. Not even with Mexico's rapid industrialization the mills came out of their financial problems. As time went by, the industry's infrastructure became updated and the administration was full of corruption. A bank was created in order to provide government loans to be used on infrastructure and to increase sugar production. But the money was deviated to private accounts and no benefit was reflected on the mills. As time went by, the industry slowly sunk into a deeper economic crisis: old and sometimes obsolete infrastructure, no money to repay loans that had only benefited private individuals, and the country falling in the worst economic crisis since the 1920's. It was in 1982 when the government decided to nationalize the existing mills as an attempt to clean up their finances. The government privatized the mills and left on the private sector hands the job to revive the industry.
From the beginning, the privatization of the mills in 1982 was done in a dubious way. Private companies bought mills with government loans. The government hoped that in the long run, after modernizing the mills' infrastructure, the companies would be able to repay those loans. But things did not work out exactly how it was planned. The overall economy was not doing to well. Sexenial economic crisis contributed to the financial problems the industry started to face. The conditions of the mills infrastructure, machinery, mills, warehouses, etc., made it impossible to maximize production, pollution problems started to increase and large amounts of money were destined to pay for water used in the sugar production that ended up being wasted. Therefore, industry was then forced to pay large fines for polluting the environment.
An additional financial problem was the saturization of the domestic market. Although the industry's infrastructure was in bad conditions, the mills managed to increased sugar production, increasing supply and pushing down domestic prices. The government then placed a quota on sugar mills on how much sugar they could sell in the domestic market and provided incentives for those mills who would export their excess. With this measure the government was aiming to stabilize domestic sugar prices and help the industry to get the resources the needed to modernize the industry.
The situation of the international market was not very appealing. Although prices in the US market were not as low as world prices, they were still approximately 4 cents below Mexican prices, in addition to the prevailing trade restrictions. With the implementation of NAFTA, the US market became a good option for Mexican sugar and many mills looked at it as a possible solution to their problems. Under NAFTA, Mexican sugar was to have preferential treatment and greater amounts of sugar would be admitted duty free. An exogenous factor of the crisis is increase in high fructose corn syrup used by industries that used to rely on sugar as their major inputs. Because of the nature of HFCS and its lower cost, industries have turned to it as a mean to decrease production costs and maximize output.
The rejection of Mexican sugar from the US market is now reflected on full warehouses where sugar remains until it goes bad, for producers would rather let it sit until it rottens to sell it at world prices. As one can see, there is no easy way out of it for many problems have to be addressed. The government and the private sector have to work together to restructure the industry, protecting millions of jobs and national sugar prodution as a whole.
3. Related Cases
4. Author and Date: Brenda Martinez Vergara, December 19, 2001
II. Legal Clusters5. Discourse and Status: Disagreement and in progress
6. Forum and Scope: NAFTA and Regional
7. Decision Breadth: Mexico and the USA , with possible repercussions in Canada
8. Legal Standing: Treaty
III. Geographic Clusters9. Geographic Locations
a. Geographic Domain: North America
b. Geographic Site: Southern North America
c. Geographic Impact: Mexico
10. Sub-National Factors: YES
In addition to the bilateral dispute, there are some important issues to be resolved within the domestic industry, especially the debt in which most mills are. They owe big amounts of money not only to the federal government but also to local sugar cane growers, which complicate the matter. National sugar production has been threaten by angry peasants who demand a pay for their cane and have threaten to cut cane supply to the mills until they receive a payment for their harvest.
11. Type of Habitat: Tropical
IV. Trade Clusters12. Type of Measure: Tariff-rate quota (TRQ)
USTR Allocation of the
Raw Cane Sugar
Refined Sugar and Sugar Containing Products
Tariff-Rate Quotas for 2001/2002
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This is the USTR Allocation of raw cane sugar, refined sugar and sugar containing products tariff-rate quotas for 2001/2002 period.
The chart indicates that Mexico is able to export 7,285 metric sugar tons to the US, which flfills the WTO's minimun requirement of cane sugar as of 2002. Mexico is able to export an additional 137,778 tons in 2002, up from 105,788 tons in 2001, under the NAFTA allocation for raw and refined sugar. Therefore, the combined figures make a total of 148,000 tons that can be exported to the US. This figure is still low considering Mexico's total excedent is 443,000 tons. Under the NAFTA agreement, during the first 6 years of the treat and given that Mexico and the US reach net surplus status (total production exceeds consumption), both countries would be granted duty free access to 25,000 sugar tons. Starting on year 7, and for the remaining 8, Mexico would be allowed duty free access to its net surplus up to 250,000 tons. However, article 16 of chapter 7, refering to sugar and syrup trade, stipulates that if Mexico reaches net surplus status for 3 years in a row, the previous clause would be eliminated and duty free access to the entire Mexican net surplus would be granted.
13. Direct v. Indirect Impacts: DIRECT
14. Relation of Trade Measure to Environmental Impact
a. Directly Related to Product: NO
b. Indirectly Related to Product: NO
c. Not Related to Product: NO
d. Related to Process: YES, pollution and water waste
In addition to the serious economic problems and the bilateral dispute, the sugar issue affects the environment in a very direct way. Because of the lack of resources, the mills' infrastructure has become a major source of air and water pollution. With increasing corcerns about the environment, people are demanding that these issues are taken care of in order to preserve rivers and lakes and to stop air pollution that affects the surrounding of the mills.
15. Trade Product Identification: Sugar
16. Economic Data
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PRODUCTION 2001
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EXPORT
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CONSUMPTION
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PRODUCTION 2002****
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| MEXICO |
4.925 million MTRV*
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428,000 MTVR*
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4.482 million MTV*
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5.050 million MTRV*
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PRODUCTION 2001
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EXPORT
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NON-TRQ** IMPORTS
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TRQ IMPORTS
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PRODUCTION 2002 **** |
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| USA |
4.079 milllion STRV***
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125,000 STRV***
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423,000 STRV***
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1,500,227 STRV***
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4.185 million STRV***
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The data shows that in 2001 Mexico produced 4.925 million metric tons of sugar and consumed 4.482 million tons, leaving an addition 443, 000 tons of sugar. The excedent is exportable and could be sold in the international market. In 2001, the US produced an estimate 4.079 million short tons raw value (STRV) in 2001, out of which it exported 125,000 STRV under the refined sugar re-export program. There are two ways in which imports to the US are made, non-tariff imports and tariff-rate quota imports (TQR). Non-tariff imports account for 453,000 STRV and TRQ imports account for 1,500,227 STRV.
17. Impact of Trade Restriction: DIRECT
The violation of the agreement and the barriers still in placed by the US government preventing Mexican sugar to come duty free into the US has contributed to worsen the economic crisis in which the Mexican sugar industry is sunk. When sugar mills' are unable to sell sugar within the domestic market the mills have to turn to the international arena to look for another market. The US market, although sugar prices are lower than Mexican prices (17.18 vs 21.18 cents per pound of raw sugar,) is their major target because of the location and the advantages that NAFTA was given to Mexican goods. Together with an export incentive from the government, Mexican producers hoped to get the resources needed to keep themselves from falling into bankruptcy. If Mexican sugar is rejected from the US market, then producers have to turn to the world market looking for buyers. This would mean great losses in economic terms, for world sugar prices are almost 9 cents lower than US prices (9 cents per pound of raw sugar). If we want to quantify the losses we could calculate it using the following variables. In 2001, Mexico's sugar net surplus was 443, 000 tons. If Mexico was able to export 113, 073 tons to the US duty free (7, 285 tons under WTO regulation, and 137,778 tons under NAFTA allocation for raw and refined sugar,) there was still an additional 329,927 tons. If this amount of sugar had been sold as raw sugar in the US market, the revenue would had been $124, 699, 209 USD (Mexico's excedent*US price.) But because the US denied entrance to those 329,927 tons, Mexican producers could only turn to the world market for possible buyers. The revenue here would have been of $65, 325, 546 USD. The implicated loss for the Mexican industry would have been of $59, 373, 663 USD, that could have been invested or used to pay for the next harvest or repay loans.
MEXICO'S SUGAR SURPLUS
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Mexican Market |
US Market
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World Market
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| Price (raw sugar) |
$465.95 USD per ton
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$377.69 USD per ton
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$198 USD per ton
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| Revenue |
$ 130,462,272 USD
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$105, 825,776 USD
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$55, 438, 360 USD
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Source: FORMA, CSCE.
18. Industry Sector: Agricultural
19. Exporters and Importers: Mexico and the United States
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*Includes Mexico and the United States for analytical purpose
These are the 10 largest producers of centrifugal sugar in the world. Centrifugated sugar is a measure used in order to quantify the trade of both raw and refined sugar in a single digit. The data was taken from the Sugar and Sweetener Situation and Outlook Yearbook, May 2001. The data indicates that both Mexico and the US are amongst the 10 largest centrifugal sugar producers. When talking about importing sugar, Mexico doesn not appear as a major sugar importer due to the many interests that surround the sugar industry, in addition to a large tariff placed in sugar imports (a tariff of .3958 cents per kilogram that discourages any possible sugar import into Mexican territory.) The US figure was not diclosed preventing any possible analysis. When talking about exporting sugar, Brazil is the country that exports the most, exporting 8, 400, 000 metric tons. Mexico only exports 510, 000 metric tons, and the US 113, 000 tons. Hence, it can be concluded that the sugar industry plays a key role in both economies because of its large economic implications.
V. Environment Clusters 20. Environmental Problem Type:
The sugar
industry in Mexico is the 5th most important industry for the Mexican economy
in both economic and social terms. Sugar cane harvest cover 611 ha of Mexican
territory and emplys 2.5 million people, mostly in rural areas of the country.
But the industry does not only provide income for many Mexican families and
plays a key role in the national economy, it also contributes to the degradation
of the environment through air and water pollution. The environmental problems
the industry has been facing focus on air and water pollution and waste of resources.
The sugar production process involves the use of large amounts of water, but
because of the machinery's conditions, much of this water is misused and wasted.
Furthermore, there are only a few recycling and treatment programs. Nowadays,
some of the water is treated and used for irrigation purposes but most of it
is wasted. As the water problem worsens in Mexico, people demand a more conscious
behavior and the protection of the country's natural resources. Moreover, other
products, such as chaff, cachaza, and ashes, in both solid and liquid state,
are produced along the sugar production process. Most of these products are
wasted because the mills do not know what to do with them or do not have the
technology to reuse them. A small amount is used as fertilizer and in the irrigation
process, but there is an urgent need for a method that reuses all these side
products in large quantities. As the 21st century continues, the industry will
have to rethink its strategies gearing towards a more environmentally friendly
strategy for the good of the nationa and of future generations.
21. Name, Type, and Diversity of Species
Name: Sugarcane
Type: Sugarcane (genus Saccharum) is a tropical grass native to Asia
Diversity: sugarcane and sugar beet
22. Resource Impact and Effect:
Because of greater environmental concerns, the indurty cannot afford to keep wasting water and polluting the environment as it has done it up until today. The modernization of its infrstructure and the introduction of new technology is urgent in order to save lakes and rivers near the mills. Moreover, treatment plants should be placed within the mills so that the water used in the sugar production process can be reused either by the sugarcane growers or other farmers in the area and prevent the drop of contaminated water on lakes and rivers.
Furthermore,
new technology is needed to make sure that the solid and liquid side products
produced along the sugar production process do not end up as waste polluting
the surrounding areas. Because the industry treats these products as waste,
they end up polluting the land near the mills preventing its use on farming
or cattle growing.
23. Urgency and Lifetime: URGENT
Mexico cannot afford to waste its natural resources any longer. Industries have to take responsibility for their acts and be aware of the damage they are causing to the environment. Industries and government should work together to preserve Mexico's heritage to its future generations.
24. Substitutes: High Fructose Corn Syrup (HFCS)
High Fructose Corn Syrup is faster to grow and cheaper to produce. Therefore, many companies have swicth to HFCS in order to lower production costs. HFCS plays a key role in the sugar dispute for the US is a major producer and it claims that Mexico is placing trade restrictions agains it, preveting its free duty entrance into Mexican territory.
VI. Other Factors25. Culture: YES
Sugar has been produced in Mexico for the past 450 years. Today, it is one of the most important industries of the Mexican economy because of its economic, political, and social impacts. The industry provides jobs for 2.5 million people in the countryside. Each pound of sugar takes 5 people to make. This makes the social component of the sugar dispute very sensitive and important not only for the economy but also for the social development of the nation. Because of the nature of the industry and its location on the countryside, to hamper the sugar industry would endanger the only income source of millions of the poorest families across the nation and force them to change what they have been doing for centuries and migrate to the cities looking for better opportunities. The social repercussions of the sugar issues can be as high as its economic consequences, affecting those who are least protected and more vulnerable and worsening the conditions in the cities, increasing their population and complicating their social problems. These people come to the cities looking for opportunities but without education, their chances of getting a decent job are minimal, and in most cases they change their farming tools for factory tools where they are exploited and badly paid.
Furthermore, the sugar industry, in good conditions, could be a source of development,
and could help people to fulfill their basic needs while providing for a better
future for their children. Because it is located in the countryside, it could
be use as a development tool and improve living standards in the Mexican countryside.
But the industry as it is right now, is more a curse than a cure, for it makes
people poorer and leave them more marginalized than ever. If mills are not able
to pay for cane, many people loose their only income source and farmers and
peasants are not rewarded for their work, making life miserable for many Mexican
families.
26. Trans-Boundary Issues:NO
27. Rights:
In Mexico, sugarcane is grown by individual farmers and peasants who sell their harvests to large mills. With the industry's crisis, some of the most affected have been those small farmers who depend on their harvest income to feed their family. The mills' lack of resources have left them indebted not only with the government but also with their sugarcane supplies. If there are not resources to pay for the harvest, growers are left with nothing after all their work in the fields. This complicates things, for social frustration and recentment start to grow among these people. The are the ones that need protection against abuses, and the government should be giving them loans instead of spending millions in the sugar mills.
28. Relevant Literature
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