U.S. Sugar Policy Options and Their Consequences under NAFTA and Doha

We analyze the potential impact of continuing the existing U.S. sugar program, replacing it with a standard program, and implementing the standard program with multilateral trade liberalization. Under the North American Free Trade Agreement (NAFTA), duty-free sugar imports from Mexico will undermine the programs ability to operate on a "no-cost" basis to U.S. taxpayers. As the Mexican beverage industry is likely to expand considerably its high-fructose corn syrup use, the sugar thereby displaced will seek a market in the United States. Under these conditions, marketing allotments could not be utilized under current legislation and prices would likely fall to the loan rate. The government would accumulate significant sugar stocks. The replacement of the current sugar program by one similar to other major U.S. crop programs would solve the problem of stock accumulation and accommodate further trade liberalization under a new World Trade Organization (WTO) agreement or future bilateral trade agreements. Our analysis of recent WTO proposals suggests that a WTO agreement is unlikely to impose significant adjustment pressures on the U.S. sugar market beyond those created by NAFTA. The adoption of a standard program would make it easier for the United States to meet its commitments under a new WTO agreement in terms of reductions in trade-distorting amber-box support. Moving to a standard program would increase the costs of the program for taxpayers but would lower costs for sugar users. Given reasonable assumptions about program parameters, the principal program cost would likely be through direct payments rather than through countercyclical or loan-deficiency payments. These costs could be lower than the maximum estimated here, because of limitations on payments to individual producers.