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Montezuma’s Death May Have US Corn Farmers Looking For Work

by Sean Joyce

The Aztec empire may have been on the verge of internal collapse, but other than that Montezuma had things running very smoothly in Mexico until Spanish explorer Hernando Cortez showed up. Cortez conquered the Aztecs before reorganizing Mexico in order to send riches back to Spain. When the Spanish weren’t searching for gold they were helping to bring the knowledge of sugarcane cultivation to the area from Africa. Cortez set up the country’s first small sugar refinery and in the century following him sugar farming spread throughout the heart of Mexico. The cultivation of sugarcane became a way of life in many parts of Mexico, but changes in the market for sweeteners have put the industry’s survival in jeopardy. Today the troubled Mexican sugar industry provides jobs for 3.5 million people making it the country’s second largest employer.2

The real troubles in the Mexican sugar industry began with the introduction of NAFTA in 1994. As NAFTA broke down trade barriers the Mexican sugar industry became vulnerable to foreign competition. The biggest threat came in the form of corn syrup, which can be substituted for sugar in certain products, made by companies in the US from US grown corn.

With the Mexican sugar industry facing decreasing demand the government increased subsidies to avoid the hardships that would come with a failing sugar industry. The government help allowed the industry to continue to increase the supply of a product with a shrinking demand—not a good combination. The aid continued to until the election of Vicente Fox in 2000. Fox, entering office as a businessman, drastically changed the government’s attitude toward subsidizing the sugar industry. Forcing the industry to face the problem of inefficient production. Not to worry though, after a brief period as a politician Fox got the hang of things and led the government takeover of almost half of the country’s sugar mills.

The failing mills, now expropriated, are saved for the time being, but the Mexican government will only be able to keep them running for so long. The problem remains that the country continues to produce more and more sugar while the mountains of unwanted sugar are piling ever higher. If Mexico could just find a trading partner that promotes free trade, is nearby, and loves to consume? Anyone? The US, of course that makes perfect sense. Unfortunately for Mexico the US, weary of Mexico’s massive supply of sugar, slyly slipped in a side letter to NAFTA putting an import quota on Mexican sugar.

The side letter is meant to protect the US sugar industry, which cultivates its sugar in the form of sugarbeets, from Mexico’s overproduction of sugar that the US feels is due to Mexican government subsidies. The US government controls the price of sugar in the US through loans, tariffs, and quotas. And they do a good job, keeping the domestic price of sugar during 2001 at about 21 cents per pound while sugar on the world market was priced at 9 cents.3

According to conventional economic wisdom this artificially sweetened market (I couldn’t help myself) should be inefficient and bad for the US—it is. Beyond keeping people farming when they could be producing something that has an actual demand, the strict regulations are beginning to affect related industries. The candy manufacturer Life Savers announced that it plans to move its operations to Canada next year. The company feels that it can no longer afford to pay the extraordinarily high cost of sugar in the US. Now a successful—successful in the sense that it operates with out the need for government protection—company is being forced to leave the US as a result of shielding the US sugar industry from reality.

Unfortunately, problems from the US’s sugar policy are not limited to the domestic front. Back in Mexico, as the sugar surplus increased, anger over the US’s protectionist addition to NAFTA had also grown. There was enough anger to persuade Mexico’s congress to pass a 20% tax on soft drinks made with corn syrup last year. The tax, which was implemented on the first of the year, was intended to entice Mexican bottlers to switch from US produced corn syrup to sugar of Mexican decent. As a result the country has seen a decrease in its sugar surplus. But US corn syrup producing companies, which had begun expanding operations south of the border, have halted investment in Mexico. After the first couple of months of the tax the economic consequences of protectionist action could be seen. The ailing, inefficient sugar industry was being kept alive while the beginnings of a growing Mexican corn syrup industry were stifled.

Fearing deteriorating relations with the US, the businessman in Vicente Fox came out again on March 5 when he suspended the tax for seven months. Fox hopes the suspension of the tax will allow time for working out a deal with the US to ease the pain in the sugar industry. The move came two months after the tax halted use of corn syrup in Mexico. As the producer of 475,000 tons of corn syrup annually used by the soft drink industry in Mexico, the US corn producers have felt the impact of the tax.2 Mexican bottlers emptied inventories of corn syrup in anticipation of the law change. With the threat of the reinstatement of the tax it remains unclear if Mexican bottlers will switch back to the cheaper corn syrup and risk the conversion costs they will face if a deal is not reached.

The loss of a large market for US corn syrup has raised talks of possible job cuts within the corn industry. The repercussions of US protectionism have traveled all the way to Mexico before ending up right back in the American Midwest where they began.

In the end you can blame the government all you want, but I know who is really at fault. If Montezuma would have just been able to hold off the Spanish and their sugarcane, there wouldn’t be any sugar in Mexico and the US could sell Mexican bottlers all of corn syrup they can use.

Now, someone get those corn farmers some protection!

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