Trade and Other Barriers of the US and EU Governments - Essay Example

 Trade and Other Barriers of the US and EU Governments 1. Trade barriers imposed by the United States The trade barriers imposed on Brazilian sugar exporters is a rather duplicitous activity, some of which are influenced by trade agreements with Canada and Mexico under the North American Free Trade Agreement (NAFTA). NAFTA outlined that import tariffs on sugar imports from Mexico would, over a 15 year period, eventually be phased out, thereby allowing duty free imports to enter the country (USDA 2005). Since NAFTA’s inception in 1994, Mexico now enjoys a more liberal volume of sugar to enter the United States under this agreement whereby tariffs have been excised. As such, under this agreement, the United States is obligated to remove quotas on sugar imports into the country, giving Mexico a considerable export advantage. NAFTA is a trade agreement between Canada and Mexico that is unlike other trade agreements between other countries that import and export raw sugar and processed sugar-containing products. Obligations under NAFTA allow member nations to deliver fluctuating volumes of raw and processed sugar products when Canada and Mexico have achieved a surplus. This is regardless of the volume of sugar produced domestically in the United States. Brazil, being one of the largest sugar producers in the world, is impacted by NAFTA in terms of the quotas established on sugar imports to the United States. The United States must abide by agreements that have been established with trading partners, whilst also attempting to protect its own domestic sugar-producing industry. The U.S. also signed an agreement in conjunction with the World Trade Organization referred to as the Uruguay Round Agreement that guarantees the country will accept a minimum of 152,691 metric tonnes of raw cane sugar from Brazil annually (Federal Register 2011). Hence, the United States has over-extended its obligations for delivery of in-quota raw sugar imports from Mexico and the United States. Brazil, unlike Mexico, is subject to very high tariff rates on sugar products in an effort to deter Brazilian exports from entering the country, which are imposed above the in-quota volume from Brazil at 152,691 metric tonnes. The out-of-quota tariff rate (on quantities over the specified in-quota volume) is 78 percent (Hornbeck 2006), whilst in-quote amounts guaranteed under the Uruguay Round Agreement are subject to very low import duties. If Brazil and other trading countries are willing to pay the exuberant 78 percent tariff on sugar, there are no restrictions for exporters in terms of the volume allowed into the United States. However, Brazil is also a nation that consumes a great deal of its total production output of sugar, thus when Brazil achieves surplus, it is far more advantageous to export the surplus into neighbouring nations or other international buyers that do not have the internal sugar production capacity as in Brazil or the agricultural prowess in raising sugar beets and sugar cane. This 78 percent tariff is the United States’ methodology of ensuring that domestic production of sugar and sugar-related products is not negatively impacted by export volumes entering the nation. Outside of the in-quota volume guaranteed for allowance into the United States, Brazil is subject to varying tariffs depending on the type of sugar or sugar-containing product produced in the country. Cane sugar in solid and unprocessed form is subject to a rate of 33.87 cents per kilogram (USITC 2011). Cane sugar that is infused with colouring or added flavours is subject to a rate between six percent and 20 percent dependent upon the volume of the shipment containing a majority of raw cane sugar by dry weight of the delivery (USITC 2011). It should be recognised that it is not just raw cane sugar that Brazil exports into the United States, thus the country is subject to a wide variation of duty-related costs for each type of delivery. It is the raw cane sugar product, over the guaranteed allotment of 152,691 metric tonnes, subject to the significantly high 78 percent tariff imposition. It was in 1982 that the United States established its rigorous import quotas on sugar imports and Brazil reported that between 1982 and 1988, the country witnessed a drop in export volume of sugar from one million tonnes to only 15,300 tonnes annually (SICE 2013). However, the introduction of NAFTA in 1994 and changes in domestic American usage of sugar cane for alternative products (e.g. biofuels) have provided a more liberal import allowance, supported with further legislation of the Uruguay Round Agreement. On October 12, 2012, the United States established an agreement that would allow specialty sugars to enter the country on a first-come, first-serve basis, not to exceed 1,825 short tonnes (USDA 2012). Though not a significant volume, Brazil maintains opportunities to be a first mover in specialty sugars without experiencing significantly high tariffs if the specialty sugars achieve time-to-export-market above that of other specialty sugar producers with trade agreements in commodities with the United States. Hence, it should be recognised that continuously evolving legislature and trade agreement development routinely changes the quota restrictions imposed by the United States. As yet another example, in 2004, the United States signed the CAFTA-DR agreement with five Central American countries, inclusive of El Salvador, Guatemala, Honduras, Costa Rica and Nicaragua, a new free trade agreement. The CAFTA-DR, the Dominican Republic-Central America-United States Free Trade Agreement was designed to eliminate tariffs and assist in facilitating more effective and mutually-productive trade with involved nations. This agreement now allows El Salvador to export a maximum of 27,379 tonnes of sugar, Costa Rica to provide a guaranteed minimum allotment of 15,796 tonnes, 50,546 tonnes from Guatemala, and 10,530 tonnes from Honduras (Federal Register 2011). Hence, from partnered nations under CAFTA-DR, a total of 104,431 tonnes are subject to reduced tariff rates and guaranteed import acceptance by the United States. This recent development in free trade with the United States and Central American nations greatly impacts the feasibility of sugar imports into the U.S. by Brazil above and beyond the restrictions established for Brazil at 152,691 metric tonnes. Regardless of whether the United States maintains a deficiency, equilibrium or surplus of domestically-produced sugar, the U.S. now maintains substantial international obligations for allotment of imported sugar if countries partnered in CAFTA-DR believe that the United States represents an ideal market for reducing its domestic surplus of the product. It is, therefore, fiscally advantageous for the United States to establish the 78 percent tariff for Brazil in an effort to prevent the country from dumping its products into the United States and impacting its domestic GDP in sugar production. Because the United States, under CAFTA-DR, cannot impose substantial tariffs along this agreement with partnered traders up to a certain tonnage, it greatly reduces the profit potential for Brazil to attempt to flood the U.S. market with its domestically-produced sugar. The aforementioned represent the only trade barriers imposed on Brazil for sugar exportation, which are, as illustrated, greatly impacted by recent developments with Central American nations and North American nations to impact more productive and cost-effective trade relationships. If the United States had not ensured a guaranteed allotment of sugar volume allowed into the country under a reduced or completely eradicated tariff structure, the country would be more dependent on Brazilian imports especially during periods of domestic supply problems. However, between domestic production volumes and the very recent availability of low-cost market exports for over seven different countries in geographic proximity to the United States, there are very few advantages economically in raising in-quota sugar volumes from Brazil without seriously impacting the domestic sugar production industry and the national economy. 1.1 Barriers leading to ethanol production Because Brazil is now restricted in the volume of sugar that will be accepted into the United States market and is subject to the aforementioned 78 percent tariff, Brazil is forced to look for other high-consuming markets to ensure adequate removal of their rapidly growing surplus of sugar cane. These would be representative of countries that do not impose such substantial import tariffs. Concurrently, the inability to successfully profit from exceeding the U.S.-established in-quota volumes is forcing Brazil to focus on more ethanol production in an effort to build national revenues and avoid paying exorbitant tariff rates. Brazil has become productively efficient in transforming sugar cane into this new bio-fuel. The United States, in an effort to bolster consumption and integration of cleaner and more efficient ethanol fuels, completely eradicated tariffs for ethanol exported from Brazil (Cowie 2011). It is now more advantageous for Brazil to engage in increasing ethanol production since there are no supplementary cost enhancements imposed by the United States for Brazilian ethanol exports into the country. However, due to recent shortages in crop production caused by climate change and lingering impact of the 2008 global recession in which sugar cane farmers fell into bankruptcy, Brazil has yet to take advantage of this explosive market that could radically transform its sugar producing industry. 2. Trade barriers imposed by the European Union The European Union is currently considered the second largest sugar consumer in the world and, concurrently, the third largest producer of sugar across the globe (Sugarcane.org 2013). Being a significant producer of sugar, the EU must protect its domestic sugar producing industry, thus it imposes substantially high tariffs to Brazil in order to protect its competitive standing economically. The European Union maintains what is referred to as Most-Favoured Nations tariffs designed to prohibit mass quantities of sugar from entering the member nation states. The EU has established that Brazil can export 334,054 tonnes of sugar at a low rate of only €98 per tonne (Sugarcane.org 2013). This is more than double the amount that is allowed at lower duty rates imposed by the United States, thus making exportation to the European Union more profitable and viable for Brazil. Fortunately for Brazil, if no other countries provide substantial sugar available for importation into the EU, Brazil can take the lead by exporting another 253,977 tonnes at the same reduced tariff rate (Sugarcane.org 2013). This is yet another first-come, first-serve example that maintains opportunities for Brazilian producers. It is largely due to the fact that the European Union recently experienced a significant reduction in available sugar supply due to rising prices in the world market, coupled with reduced available export sugar products from trade partners in the Pacific region and Africa. Hence, scarcity is providing opportunities for allowing countries such as Brazil to expand their export volumes whilst also enjoying lowered duty and tariff rates. The EU, therefore, provides allotments for an additional 400,000 tonnes of sugar to be exported by any available trading partner that is absolutely duty-free as a response to this shortage, however this is only a temporary allowance whilst the EU attempts to build equilibrium or surplus during this period of shortage that has run from 2010 to 2012. Furthermore, as the EU began to expand with more member nations, consumption volumes of sugar increased which outperformed the available supply produced domestically or delivered by historical trade partners. What is interesting is that the EU actually created incentives, domestically, in an effort to curb domestic production of sugar. There were surpluses of sugar being produced in some member nations without an adequate market for delivery and in an environment where European sugar prices were being inflated by market conditions. The rising costs of sugar along member nations in this region made it more economical to infuse the country’s supply with foreign exporters of the sugar product (Sugarcane.org 2013). Hence, taking out of the equation the costs of transportation, Brazil found a new opportunity to expand its export activities in sugar delivery in a market that was providing significant advantages for the country’s sugar producers. Depending on the rapidity by which Brazil wants to flood the European Union with sugar, opportunities for very reduced cost exports abound in the current EU trade environment. The European Union also recently offering consumers price reductions on sugar as a means of stabilizing the industry, however the EU believed that these price cuts will not change the current domestic consumption levels of the product (USDA 2004). The European Union is also involved in the ACP agreement (African, Caribbean and Pacific) which provides free trade obligations with a variety of trade partners from the regions. The EU’s efforts to reduce the strongly rising prices of sugar has also impacted its reduced tariff rates for sugar imports, making it difficult for ACP trade agreement nations to effectively compete against larger producers such as Brazil. Coupled with state-level efforts to reduce EU domestic production of sugar in order to stabilise rising prices, Brazil is now in a very prominent position to expand its current volume of exported sugar delivered to the EU, as now 3.5 million tonnes of sugar are being curbed in an effort to control inflation. At the same time, many developing Mid-Eastern nations have invested capital to improve the infrastructure for domestic sugar production in their countries. The UAE, Saudi Arabia and Algeria have made significant financial investments to improve their refinement capabilities (USDA 2004). This has made Mid-Eastern countries more viable and profitable for sugar producers to export raw product that can be refined within the UAE and other Mid-Eastern nations that had, historically, been accomplished with EU capacities within states with refinement capacity. This could, in the long-term, lead to a reduction in available sugar for importation in the European Union of 3 million tonnes as other international exporters look toward this market to boost their export profitability. This makes it even more prudent for the EU to incentivize sugar exports by major producers such as Brazil that have the volume of output and agricultural capacity to ensure adequate supply in the face of developing nation prowess in refinement and re-exporting for profit. Concurrently, the EU has begun subsidising many of its domestic sugar farmers and is being criticised by Oxfam for these efforts (BBC News 2004). This practice of subsidisation, according to Oxfam, allows large producers of sugar to gain significant profit advantages over smaller farmers that produce domestic sugar within the EU. Poorer producers unable to compete effectively against these advantaged, subsidised exporters are creating barriers for small domestic farmers (and those in poorer developing nations) from having access to the European market for sugar exports. Domestic production in the EU is also being criticised for being dumped along nations in the world market as a means of reducing surplus, which is driving out fair competition (BBC News 2004). The EU, however, argues that it is the high cost of production and refinement within the EU that is forcing subsidisation and dumping of surplus products at much lower costs as a means of stabilising sugar costs in the region. All of these aforementioned policy development and changes in export/import policies in the European Union are provided substantial opportunities for Brazil to increase its sugar exports exponentially whilst the EU attempts to develop more fair and internationally-inclusive sugar importation strategy aligned with domestic production and cost controls. Furthermore, developing nations such as India, Cuba and Thailand are also becoming highly dependent, economically, on sugar exports produced domestically. These countries, however, have more trade restrictions in place in terms of tariff imposition and other associated barriers, which limits their ability to flood the EU with their domestically produced sugar. Between 2006 and 2009, the tariff rates, in order to provide more fair importation policy to international exporters, have moved near or close to zero (Quotesugar.com 2012). A more inclusive set of import restrictions that allow better profitability and opportunities for countries such as India and Thailand serve, in the contemporary trade environment, less opportunities for Brazil to corner the EU market in sugar exports. Taking into consideration all of the developments associated with subsidisation, reducing tariffs with many international suppliers, cost controls by curbing domestic supply, and new market entrants from the Pacific and Asian regions, Brazil will see its opportunities for substantial dominance reduced in the next few years. By loosening tariff restrictions for developing nations as part of recent policy development, producers other than Brazil can now ensure that the EU maintains adequate supply of sugar products without concentrated reliance on Brazil. Though Brazil still maintains cost-effective production and substantial capacity for recurring exportation of domestic sugar products, now there is a new competitive environment in this portion of the 21st Century that was not a truism of trade relationships in Europe historically. Though Brazil, if it was the first to market, could theoretically deliver nearly one million tonnes of product at very reduced tariff rates, now the Mid-East refiners who re-export finished product along with developing nations limit the ability of the country to take advantage of some of the first-come, first-serve advantages provided by the current EU sugar import policy environment. In 2011, the EU approved an out-of-quota increase on total sugar importation allotment by 65 percent as a means of incentivising more importation during a period of shortage domestically. This angered Brazilian nationals and sugar producers. Offered Geraldine Kutas, the head of international affairs at the Brazilian Sugarcane Industry Association, “it’s totally illegal to do this” (Iqbal 2011, p.1). This change in policy included opportunities for chosen suppliers, other than Brazil, to export their sugar surpluses at nearly 600 percent reduced tax levy rate during periods where domestic production is limited by seasonal impact, this being between December and February and June through July (Iqbal 2011). This has led to ongoing allegations from Brazilian producers that this is a type of discrimination without taking into consideration certain WTO-mandated obligations signed between the EU and Brazil. As such, this temporarily limits the available import volumes that could be achieved by Brazil under the first-come, first-serve import policy that had driven higher export volumes for Brazil. Brazil, still under the imposed tariff rate of €339 per tonne, is now witnessing smaller producer competition able to export their products at the reduced rate of only 85 Euros per tonne, seizing first-to-market advantages and cost advantages that could be achieved by Brazilian exporters. 3. Reasons for Brazilian exporter discrimination In the United States, it is nothing short of securing the integrity and profitability of the domestic production environment that has imposed discriminations against Brazilian exporters of sugar. In an effort to locate other export markets for American-made products and commodities, the country has locked itself into very long-standing agreements with Canada, Mexico, five different Central American countries, and other trading partners that guarantee a minimum amount of sugar product to enter the country at reduced or zero tariff costs. The United States produces approximately 7.2 million metric tonnes of sugar each year in an environment where the average consumer consumes 150 pounds of sugar annually. Hence, there are ample growing, production and refinement capabilities within the United States. By limiting the volume of sugar that is allowed into the country from Brazil, it ensures economic profitability by growers concentrated in Florida and Texas (as well as other states) as a means of fostering economic growth in-line with GDP expectations. If the United States did not impose a 78 percent out-of-quota tariff rate for Brazil, the country would attempt to flood the market with less-expensive sugar products that would put domestic producers out of business. This is especially true now that minimum and guaranteed acceptance of certain quantities with at least seven other trading partners has increased competition for Brazil, which poses risks to the domestic economy in relation to sugar production and distribution domestically. Between 2009 and 2012, domestic sugar production in the United States increased from 6.8 million metric tonnes to 8.0 million metric tonnes, thus running the risks of having a surplus with the inclusion of high volume Brazilian sugar exports that could impact pricing along the supply and demand model. The European Union, on the other hand, justifies its recent higher tariff rates imposed on Brazilian exports due to pressure from agencies such as Oxfam and other special interest groups (as well as WTO membership) to provide a more fair and balanced import/export policy to assist developing nations improve their national economies. Because Brazil is able to effectively compete and control costs in production, Brazil would be able to essentially dump Brazilian sugar products into the EU which would drive smaller producers (such as India and Thailand) out of business. By giving these smaller producers more advantages in tariff cost reductions, without offering similar discounts to Brazil, the EU is performing their own conception of social responsibility by creating incentives for other producers to maintain influence in the import market for sugar. It has also been identified that the European Union is concerned about cost controls of sugar, which has led to member nations curbing production to avoid surpluses of the product. Against the law of supply and demand, when supply decreases, demand rises which has significant impact on pricing. The EU is already impacted by rising prices and, if Brazil were to be always the first-to-market with sugar exports to take advantage of out-of-quota tariff reductions, it would again influence pricing of domestically-produced products which would endanger the domestic EU economy. The EU feels it is responsible for ensuring liberal trade policies that impact trading partners (who also provide more than simply sugar to an import-centric EU economy) which could strain relationships with trade partners other than Brazil. Hence, in this case, it is cost control by using relevant models of demand versus market-driven costs that provide Brazilian exporters with this type of discrimination that is not endured by other sugar exporting trading partners. Yet another difficult of the European Union is the nature of its membership nations, each maintaining a unique, legislatively-mandated voice in policy development that is representative of all member nations. Therefore, countries within the EU that are able to provide supply of exported sugar product, such as Greece, have much to lose competitively if Brazil is given recurring opportunities to corner the import market for this product. The EU must, primarily, be concerned with the economic integrity of its member nations (something illustrated during the 2008-2010 global recession), hence it is a form of self-protectionism related to economic stability that imposes discrimination on Brazil in this fashion. Brazil could easily drive out less efficient producers of sugar such as Greece and Italy due to their production efficiency and ability to produce cheaper sugar products. Hence, even though the EU member nations might theoretically pay more for Grecian and Italian imports, it is advantageous for securing the holistic value of the Euro by sustaining the GDP needs of its member nations. It does not make financial sense for the EU to deny its member nations opportunities to service the union’s markets by further incentivising Brazilian imports even if the short-term costs of this activity are more advantageous. As illustrated, there are significantly different reasons as to why the United States and the European Union provide discrimination against Brazilian sugar exporters. The United States is a singular entity consisting of one unified government that must be responsive to the needs of its member states. Decision-making is centralised in this country whereas it is more liberal, dispersed, and influenced by disparate views on economic growth that requires more consultation between disparate government leadership. Hence, it would be easier for the U.S. to simply change policies to be more liberal in order to protect the nation economically whilst in the EU such policy developments require significant consultation and time. If the U.S. achieves a sudden and unexpected depletion of available, domestically-produced sugar, it has many options for import to balance out this shortage. The EU, on the other hand, is geographically distant from Brazil and it makes more practical sense to incentivise localised delivery than be reliant on disparate suppliers halfway across the globe. In this case, EU discrimination against Brazil is based largely on practical, long-term supply strategy to benefit the needs of consumers (in relation to price of the product) and to provide opportunities to expand trading infrastructures with developing nations. References BBC News. (2004). Oxfam slams European sugar tariff. [online] Available at: http://news.bbc.co.uk/2/hi/europe/3624237.stm (accessed 28 May 2013). Cowie, S. (2011). US opens market for Brazilian ethanol, The Rio Times. [online] Available at: http://riotimesonline.com/brazil-news/rio-business/us-opens-market-for-brazilian-ethanol/# (accessed 28 May 2013). Federal Register. (2011). Fiscal Year 2011 Tariff-Rate Quota Allocations for Raw Cane Sugar, Refined and Specialty Sugar, and Sugar-Containing Products [online] Available at: https://www.federalregister.gov/articles/2010/08/17/2010-20234/fiscal-year-2011-tariff-rate-quota-allocations-for-raw-cane-sugar-refined-and-specialty-sugar-and (accessed 27 May 2013). 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