From a recent paper by Hugo Perezcano:
Even though the United States committed to — and indeed required — eliminating tariffs and other barriers so that there would be free trade in all goods, it has also failed to live up to its obligations as regards trade in sugar. This breach of NAFTA has had far-reaching consequences, because in practice it has meant the cancellation of the general dispute settlement mechanism between states.
First, the sweeteners dispute. The United States has long maintained a supply management program for sugar that artificially increases domestic prices: domestic production is controlled through a system of production quotas, and imports are also restricted through tariff-rate quotas with high import duties. Mexico and the United States agreed to liberalize trade in sweeteners (sugar and high-fructose corn syrup [HFCS]) in different stages. Import duties on HFCS, a lower-cost substitute for sugar in many industrial uses, such as soft-drink production, would be phased out over a 10-year period. Tariffs on sugar would phase out in 15 years, but the United States would grant Mexico increasing yearly duty-free quotas beginning roughly around the middle of the phase-out period,10 if Mexico became a net surplus producer of sugar.11 Mexico also agreed to tie its most-favoured-nation tariffs for sugar to those of the United States, thereby imposing a common external tariff that would maintain high prices for sugar in the region.
After NAFTA was signed — but before it obtained legislative approval in the United States — US producers argued that HFCS (imported from the United States) would displace sugar from the Mexican market and generate an artificial surplus (i.e., a surplus resulting not from excess production of sugar but rather from sugar displacement by HFCS) that Mexico could then export to the United States duty-free under NAFTA. They threatened to oppose approval of the agreement in the US Congress if certain adjustments were not made to account for such sugar displacement. In order to secure legislative passage of NAFTA, both countries reached an agreement that was formalized through an exchange of letters between trade ministers (referred to as the “sugar side letters” in policy circles). However, the agreement reflected by each party in its respective letter differed in how the surplus would be calculated and, thus, on the amount of sugar that Mexico could export duty free to the United States beginning in year seven of the phase-out period. The United States’ letter provided for a lower quota. Mexico and the United States held consultations over this issue throughout the phase-out period, but did not reach a solution. In 2000, Mexico initiated a dispute resolution proceeding. However, the United States blocked the establishment of a panel and refused to submit to the dispute settlement process.12 Rather, it imposed its understanding of the 1993 side letters until the transition period was over. In the meantime, Mexico attempted to retaliate at different times by raising tariffs on imports of HFCS, imposing anti-dumping duties and adopting taxes on soft drinks sweetened with HFCS.
Fn. 12 NAFTA provides that in every dispute each party shall appoint two panellists and agree on the fifth one, who shall act as chair. If a party does not make any of its required appointments or if they do not agree on the appointment of the chair within a specified time, the remaining panellists are selected by lot from a roster. The parties were required to establish a roster of up to 30 individuals willing and able to serve as panelists by the date of entry into force of NAFTA. However, the roster members had to be appointed by consensus and their terms lasted only three years (although they could be reappointed by consensus as well). Either disputing party may exercise a peremptory challenge against any individual proposed as a panellist who is not on the roster. The parties did establish a roster in 1995 but, by the time Mexico initiated dispute settlement proceedings, it had already expired. (Indeed, it had expired even before Mexico initiated the proceedings on transportation; in that case, however, the United States agreed to appoint panellists.) The United States refused thereafter to renew the roster or to appoint panellists in the sugar dispute.
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But the more serious consequence of the sugar dispute is the practical elimination of the NAFTA state-to-state dispute settlement mechanism, as if the chapter had been ripped out of the agreement. There were four dispute settlement proceedings under NAFTA Chapter 20: one concerning Canada’s ability to carry over the WTO tariffication of its import quotas on dairy, poultry and egg products to NAFTA; a second one regarding a safeguard action of the United States against Mexican broomcorn brooms; the third one was the transportation case; and the fourth was the sugar dispute. After that, there have been no further cases submitted to dispute settlement under NAFTA Chapter 20, not because there haven’t been any disputes, but rather because of the futility of bringing a claim, in light of a party’s ability to block the process.
Are the flaws in NAFTA Chapter 20 something that the TPP will fix? How will the TPP deal with market access issues for Mexican sugar?
