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 February 21, 2003 Remarks by J. Patrick Mohan Chairman, Corn Refiners Association, Inc. and President of Support Services, Tate & Lyle North America, Inc. International Trade Agreements and U.S. Sugar Policy Panel Agricultural Outlook Forum 2003 Introduction I wish I could say that it is a pleasure to be here today to talk about what has become - over the past 6 years - the corn refining industry's "favorite" topic - the Mexico situation. It will, however, be a pleasure to come back when a satisfactory resolution is actually achieved. But, I do want to start by thanking our colleagues at USDA for inviting the Corn Refiners and arranging this panel. Suffice it to say, we believe this topic is of critical importance to the sweetener industry. I think it is fair to say - in introducing this topic - that the Mexico situation is a classic case study in agricultural trade politics. It also includes an element of what one can call "perception economics" as well as a dose of domestic farm programs and the related politics both in the U.S. and in Mexico. The Politics of Agricultural Trade and Mexico In our view, this is an excellent example of import sensitive industries playing an inordinately large role in determining the contours and context of a possible agreement. Sugar politics in both countries have played the biggest role in shaping how our governments - the U.S. and Mexico - have respectively approached and negotiated on this matter. This has not been a "no cost" scenario or approach as some would have us believe. We are acutely aware of the costs. The corn refining industry has taken it "on the chin" for a number of years, and in the last 14 months has been shut down almost completely in its exports to Mexico. This has meant real financial consequences for our industry. There is no other major U.S. agricultural exporting industry that has had its number one - not to mention strategically critical - export market shut down virtually entirely for this period of time. In addition, consuming industries for sweeteners have been harmed as well, as there has been a loss of price competition in the marketplace that would benefit them. Also, our suppliers have been harmed. As an example, if the Mexican HFCS market had been open even to the limited extent of 300,000 metric tons of HFCS, approximately an additional 20 million bushels of corn would have been processed by our industry in the U.S. annually. This equals the corn production from approximately 142,000 acres. For those real insiders on this issue with Mexico, the lack of any official acknowledgement from the beginning that a deal was never formally consummated on sweeteners in the NAFTA is a powerful indicator of the political influence of the sugar politics in both the U.S. and Mexico. "Perception" Economics It was really only when "perception" economics began to kick in due to the rising tide of more competition in Mexico that the pressure for a deal began to build, particularly in the U.S. when our industry - the corn refining industry - was slammed with unjustified dumping duties and other market access barriers. I say "perception" economics because it was the perception of the Mexican sugar producers that HFCS was starting to make some meaningful inroads that instigated the dumping cases and it was the "perception" of the U.S. sugar producers that Mexican sugar "displaced" by HFCS was potentially going to wind up in the U.S. marketplace. That circle of competition was never allowed to close, at the expense of our industry and consumers. For Mexico, the fact that US sugar prices are high has resulted in a negotiating strategy on what Mexico considers to be meaningful market access for its sugar in the U.S. Years ago, Mexican negotiators demanded 600,000 metric tons of access into the U.S. market, but that has changed. In any case, that also drove Mexico to push for - and eventually achieve - a "one for one" ratio on HFCS and sugar access in Mexico and the U.S, respectively. Since NAFTA provided unfettered access for HFCS sales into Mexico, agreeing to this principal represented a major concession on the part of the U.S. corn refining industry. Price competition is an overriding concern as well in both markets, as HFCS is far lower priced than sugar in both markets. But, as we all know, the transition to HFCS in the beverage sector - a normal user of corn sweeteners - has not occurred in Mexico. The U.S. sugar industry, furthermore, is not of the view that more economic actors in the U.S. marketplace - in this instance Mexican producers - will mean more meaningful price competition. The two governments are currently talking in the context of an "interim" agreement about volumes of sugar and HFCS trade that are not highly threatening to the bulk of either sugar industry. They are certainly not talking about volumes that will breathe significant new competition into either market. Furthermore, much of what is being discussed in the way of negotiating variables is designed to circumscribe how the trade in sugar can occur. Domestic Sugar Programs and the Politics In the "interim" agreement, both domestic government intervention programs in the sugar sector have not really been on the table. But, their "overhang" is immense in shaping the parameters of both the process and the contours of any potential deal. Mexico's program has included many forms of intervention, including a price support element and a combination of government ownership and financial support. It has been largely driven by the fact that hundreds of thousands of workers and too many refineries have demanded and gotten help from the government through sheer political power rather than a logical, economically consistent set of policies designed to make Mexico's sugar capable of global competitiveness. The U.S. program also includes price support, market allotments, and like Mexico, trade protection through high tariffs. One can argue that the U.S. sugar program has been the product of a lot of politically motivated decision making in government. Both programs are designed to yield a high price for sugar, and both have succeeded. It seems that in spite of the fact that both governments fully recognize the enormous role these programs and the related politics play in the shaping of a "deal" between Mexico and the U.S., both governments have not found it within their capacities to begin the discussion on how - if at all - these domestic programs and realities really need to be changed to accommodate a fully integrated and free sweeteners market in North America. Some Key Issues A key question is whether any such deal fundamentally rewrites the duration of the NAFTA phase-in, or makes it more - not less - likely that the elimination of tariffs by 2008 occurs. This is an issue with immense implications in both Mexico and the U.S., and arguably more broadly as we - collectively - continue with the WTO and FTAA agenda. Another key question is whether an "interim" deal really begins to move us towards what the NAFTA calls for - a free and integrated marketplace. Again, the structure of any interim deal must be looked at with this in mind. We must get the trade going again, but we do not want to put a "nail in our own coffin" as an industry that will have to operate under flat line growth or managed trade for the foreseeable future - particularly considering that Mexico had been our number one HFCS export market and a market that has implications for all our U.S. operations. Yet another key issue is how this sweetener dispute plays in the U.S. - Mexico bilateral trade relationship, and how it implicates other variables. Neither country can deal in a vacuum whether they want to hermetically seal each trade issue off from others or not. The real world does not work that way, and decision makers must look at the whole picture. So, there is no question that this sweetener issue has implications for the overall trade relationship with Mexico. Finally, perhaps the key question in the resolution of this situation is will both governments be driven primarily by industries seeking to limit import competition, or by the premise of the NAFTA and each government's stated objective of open and competitive markets. A lot rests in the balance. Thank you. For more information on the corn refining industry, visit the Corn Capsules newsletter page. 
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