IATP Congressional Testimony on DR-CAFTA And Sugar

Testimony of R. Dennis Olson, Director of the Trade & Agriculture Project, On Behalf the Institute for Agriculture & Trade Policy Against the Dominican Republic-Central American Free Trade Agreement, Before Congressional Field Hearing Held by U.S. Congressman Collin Peterson (D-MN) Atwood Memorial Center, Little Theater St. Cloud State University St. Cloud, MN 1:30pm Saturday, March 5, 2005

Thank you, Representative Peterson, for holding this field hearing here today on the Dominican Republic-Central American Free Trade Agreement.

My name is Dennis Olson, and I am the Director of the Trade and Agriculture Project, and I'm speaking today on behalf of the Institute for Agriculture and Trade Policy. We commend your leadership gathering information on the impacts of the pending DR-CAFTA.

DR-CAFTA: Regional Versus Multilateral Trade Negotiations

As the world becomes increasingly interdependent, the challenges inherent to economic integration become more acute. Substantial differences in various countries' domestic situations-different resource endowments, geography, and degrees of political integration-mean that each country may be affected differently by sudden shifts in foreign direct investment, currency values or other factors beyond their control. Ideally, developing countries should be able to forge trade policies that support sustainable development for the benefit of a majority of their populations; yet the complexity of pursuing this goal in the context of global integration remains truly daunting.

The debate over regional integration initiatives like DR-CAFTA-versus comprehensive, multilateral trade liberalization like the World Trade Organization-is particularly relevant for countries that have historically been plagued by underdevelopment and slow growth. Although some economists assert that the multilateral pursuit of free trade can benefit small countries through comparative advantage, developed countries are exerting strong pressure on many developing nations, both politically and economically, to sign regional integration trade agreements like DR-CAFTA.

This trend toward regionalism could reflect a resignation among some developing nations that such a course may be the best of the limited options available to insulate themselves temporarily from the continuing adverse economic effects of trade liberalization. For decades now, unapologetic advocates for further liberalization have dogmatically argued that the best way for developing countries to overcome poverty is to open their domestic markets to the unfettered imports of multinational companies in exchange for better access to developed countries' markets. However, these promises of lifting the poorest countries up out of poverty through expanded free trade continue to ring hollow. In 1974, the World Food Conference set a goal of eliminating hunger in ten years, but 30 years later 800 million people still live in hunger.

Bilateral and regional agreements also clearly represent the efforts of developed countries, like the U.S. and EU, to stop smaller countries from working together to create greater leverage from which to negotiate for more balanced trade reform. The potential power of such collaboration could be seen in September of 2003 when developing countries banded together under the banner of the G-20's common negotiating demands for agricultural trade reforms during the World Trade Organization Ministerial Conference in Cancun, Mexico. Whether politically or economically motivated, the compartmentalization of the global trading system into regional blocs is increasing, and it has significant implications for developing economies and the future of international trade.

Supachai Panitchpakdi, current Director-General of the World Trade Organization (WTO), recently cited a new report indicating that 21 bilateral and regional trade agreements have been noticed to the WTO between January and August 2004 alone, which put the total number of such agreements at over 200 worldwide. The report warned that this trend towards such agreements expands preferential and discriminatory trade relations to the point of becoming, "an ever more established and perhaps irreversible feature of the international trading system." Panitchpakdi expressed alarm that this trend represents a "significant challenge" to the multilateral trading system.

Agricultural Subsidies Versus Dumping

One significant component of the current international trade debate involves criticism of U.S. and European agricultural trade policies because of the inherent hypocritical contradictions reflected in their negotiating positions. While calling on vulnerable developing countries to dismantle unilaterally their already weak border protections, these developed nations nevertheless continue to protect their own domestic agricultural industries through various mechanisms, including border controls, income support payments, export subsidies and price floors.

Many critics of U.S. and EU agricultural trade policies point to various subsidy programs for their agricultural sectors as the root cause of low international commodity prices. They argue that if developed countries would just eliminate their agricultural subsidies, the invisible hand of the free market would then automatically level the playing field for international agricultural trade. This in turn would help raise developing country farmers out of poverty by providing them with greater export market shares in world agricultural commodity markets because they are the low-cost producers with a comparative advantage on the world market for certain key commodities like cotton.

However, researchers at the University of Tennessee's Agricultural Policy Analysis Center and others have repeatedly pointed out that overproduction, lack of adequate supply management, and dumping of agricultural commodities onto world markets at below the cost of production are more significant factors in depressing agricultural commodity prices than subsidies. IATP has now twice updated a paper first released in February of 2003 that documents an alarming increase in the levels of dumping for major commodities from the United States since passage of NAFTA and the 1996 Farm Bill. If dumping by multinational agribusiness cartels continues unabated, agricultural commodity prices will continue to be forced downward-both domestically and internationally-and will continue to threaten farmers everywhere whether northern subsidies are eliminated or not. Subsidies are a symptom of overproduction and low prices, not the root cause.

Additionally, the much touted comparative advantage by no means guarantees that the poorest countries will be able to expand their market shares against rising economic powerhouses like Brazil, India and China, let alone that expanded market shares at lower prices-even if realized-will guarantee better incomes to the poorest farmers. On the other hand, implementing effective supply and inventory management systems, both domestically and internationally, could raise world agricultural prices to the benefit of both subsistence peasant farmers in the South, and small and medium sized family farmers in the North.

Historical Moment

Current trade negotiations over the Central American Free Trade Agreement (CAFTA), the Free Trade Area of the Americas (FTAA) and at the World Trade Organization (WTO) are stalled in large part because of impasses over agriculture. This pivotal moment provides an opportune time for fair trade and progressive agriculture advocates to forge a consensus around coherent alternative agriculture and trade policies both domestically and internationally. Other favorable timing considerations include:

1. The current U.S. budget crisis is forcing President Bush and lawmakers to make cuts in U.S. agriculture programs. There is an opportunity to reform these programs to provide better prices for farmers, lower government payments, and fair trade practices.
2. Brazil's successful challenges at the WTO to U.S. cotton subsidies, and EU sugar subsidies, both of which have substantially increased the political pressure to reduce or reform government agricultural subsidies in the North.
   
3. Early interest by a broad spectrum of diverse U.S. constituencies in identifying and forging consensus around alternative commodity policy goals in the 2007 Farm Bill.

DR-CAFTA Jeopardizes Beneficial Sugar Policy

Sugar is the last remaining comprehensive supply and inventory management program still in place after the 1996 "Freedom to Farm" Bill finished deregulating all other major farm program crops. As such, the Sugar Program is the only major U.S. commodity program that prevents dumping on the world market at below the cost of production. It is also the only major farm commodity program that operates with virtually no direct government subsidy payments.

If DR-CAFTA is passed, and Mexico utilizes its unused 250,000 metric ton (mt) North American Free Trade Agreement (NAFTA) quota to the fullest extent, or other Free Trade Agreement (FTAs) include at least 114,000 mt of sugar quota, then the U.S. Sugar Program will have been sacrificed on the alter of trade liberalization. It is therefore important to take stock of the full ramifications of such an outcome. Several benefits of the Sugar Program will have been lost:

I. No Dumping

Unlike the other major commodity programs, the U.S. Sugar Program actually prevents dumping on the world market at below the cost of production-a predatory practice by US-based multinational agribusiness cartels that devastates farmers and rural economies around the world dependent on commodities covered in the U.S. Farm Bill. Dumping is especially harmful for developing country farmers whose governments are being pressured by the WTO to dismantle their border protections, and cannot afford to pay massive subsidies to make up the difference between predatorily dumped market prices and the cost of production.

II. No Taxpayer Subsidies

The U.S. Sugar Program currently operates at no cost to taxpayers. This is in stark contrast to failed policies epitomized by the other budget-busting U.S. commodity programs, which are becoming increasingly indefensible from either a fiscal, or an environmental or a social perspective. Critics of the Sugar Program claim that the sugar price support represents a hidden subsidy, because consumers have to pay higher prices. But this assumes that retailers will pass the savings from such lower prices through to consumers. Given the concentration and market power of retailers, experience tells us this is not a credible argument. For example, while prices paid to sugar producers fell from 8-12% between 1990 and 2003, retail prices for various sugar containing products climbed anywhere from 28 to 47 percent.

III. Dismantling the U.S. Sugar Program: Impacts on Developing Countries

Through the U.S. Sugar Program's tariff rate quota (TRQ) allocations, 40 countries from around the world now receive over double the world market price of 10 cents per pound for sugar when they sell in the U.S. domestic market at the supported price of 23 cents per pound. Their current allocation of 1.39 million metric tons represents about 14% of U.S. domestic consumption. If DR-CAFTA and other pending trade agreements result in dismantling the U.S. price support system for sugar, then a North Dakota State University (NDSU) study estimates that importers would get 80% of the domestic market when the resulting lower prices completely wipe out beet production and a majority of cane production in the U.S..

On the surface, this may seem like good news to importing countries. However, the spoils would not be divided equitably among the 40 countries exporting sugar to the U.S.. Although a few of the world's lowest cost sugar exporters, e.g., Brazil, Australia, New Zealand and Thailand, may or may not make up in volume what they lose in price by gaining a greater share of the U.S. domestic market, clearly other countries would lose much of the value of their existing quota as U.S. domestic sugar prices fall to the world dump market price. For example, Haiti, one of the poorest countries in the world, currently holds a TRQ of 7,258 metric tons. At the current U.S. support price of 23 cents per pound, the value of Haiti's TRQ is $3,680,227. However, if the U.S. price were to fall to the world dump market price of 10 cents per ton under the dismantlement of the U.S. Sugar Program, then the value of Haiti's TRQ would fall to $1,600,987-a net loss of $2,079,240-more than half its current TRQ value under the U.S. Sugar Program.

Worse, if the destruction of the U.S. Sugar Program leads to a phase out of all quotas, i.e., total market liberalization as advocated by critics of the sugar industry, there is absolutely no guarantee that poor countries like Haiti would still be guaranteed any access to the U.S. market, because most are likely to lose out to other lower cost exporting countries. For example, Brazil is currently exporting sugar at 8 cents per ton-2 cents fewer per pound than even the world dump market price of 10 cents per pound. Brazil would likely end up with a substantially greater share of the U.S. market than other countries in a total liberalization scenario, and is already the second largest exporter of sugar to the U.S. at 152,691 metric tons.

What about other countries like Columbia, whose export price is currently 21 cents per ton? Would it lose its entire 25,000mt TRQ under complete liberalization? Would it be fair if developed countries like Australia, the European Union and New Zealand gain market share at the expense of some of the poorest developing countries like Honduras, Haiti or Fiji, whose opportunities for export revenues are disproportionately dependent on sugar exports? These are all questions that need to be answered before we blindly scrap a program that is by far the fairest in terms of market access for developing countries among all the other U.S. commodity programs. Given the worldwide animosity against U.S. dumping and subsidies, the time is right to contrast the Sugar Program with the other failed commodity programs that have generated such animosity both at home and abroad.

For decades now, the U.S. Sugar Program represents a sound policy model that has created market stability and fostered fiscal sanity at home, while providing fairness (no dumping) in its approach to international trade. Before we abandon this sane policy, we should ask ourselves whether we in the United States, or sugar producers around the world, would be better off if we mutate it into the failed policies of the other U.S. commodities that are becoming less defensible by the day.

Policy Recommendations

1) Fair Prices for Farmers. DR-CAFTA should be defeated because it would jeopardize the current Congressional mandates to ensure that farmers participating in the sugar program receive a fair price from the market place at no cost to taxpayers. This at a time when a growing budget crisis makes an increase in farm subsidies increasingly under attack both domestically and internationally.

2) No Dumping. DR-CAFTA should be defeated because it will dismantle the one remaining U.S. commodity program that does not predatorily dump excess production on the world market at below the cost of production. Dumping of sugar and all other commodities should be banned simultaneously worldwide, and mechanisms need to be created to enforce such bans.

3) U.S. Sugar Program as a Domestic and International Model.

Interested parties should explore the possibility of putting a reformed U.S. Sugar Program forth as an alternative model for other commodities as pressure builds domestically to cut subsidies. As the debate heats up over the 2007 U.S. Farm Bill, consideration should be given to using the U.S. Sugar Program as a potential viable international model for ending dumping and providing equitable market access to developing countries.

4) Multilateral Negotiations. Neither sugar nor any other agricultural commodity should be negotiated in a piece-meal fashion in regional trade pacts like DR-CAFTA. Ideally, all agricultural commodities should be negotiated simultaneously, comprehensively and multilaterally worldwide, so that adequate consideration can be given to all the complicated and often subtle interrelationships among commodities, e.g., the relationship between sugar and high fructose corn syrup, or the relationship between the cost of feed grains and price livestock. However, at a minimum, no agricultural commodity should be negotiated in any trade agreement without the inclusion of all countries that are major exporters of a particular commodity. Additionally, interested parties should explore the possibility of establishing an international commodity agreement for sugar that could be modeled on previous commodity agreements like coffee, and that could provide a model for other commodities in the future.

5) Right to Self-Defense Against Dumping. Until dumping is effectively eliminated worldwide, all countries should maintain their right to block at their borders any commodity being dumped into their domestic agricultural markets at below the cost of production, through tariff-rate quotas or other border controls.

6) Making Development a Priority Through Equitable Market Access.

Interested parties should review the current decision-making process for establishing TRQs for the U.S. Sugar Program. Such an effort could identify and develop new criteria for prioritizing TRQs to maximize development opportunities based on the greatest need, e.g., the per capita income of the country, or whether sugar is the sole commodity that is economically viable to export. Interested parties should consult with fair trade partners in both the U.S. and the Global South to explore ways to improve labor, environmental and human rights in the sugar industry in all countries-including the United States. These consultations should explore the feasibility of adding additional criteria for obtaining U.S. sugar TRQs that would support legitimate reform efforts in sugar producing counties.

Thank you for the opportunity to testify here today.