WTO’s Sugar Ruling Leaves Mexico Bitter

The World Trade Organization has ruled that a Mexican tax designed to protect sugar producers against imports of cheap U.S. corn sweeteners violates trade laws, a decision that could cost Mexico jobs and spark political turmoil.

Although the decision has not been formally announced, Mexico’s Economy Ministry confirmed Tuesday that the global trade body sided with the United States in its claim against the tax Mexico has imposed since 2002 on soft-drink bottlers who use U.S. corn sweetener.

The 20% tax made high-fructose corn sweeteners produced by U.S. companies too expensive for use in Mexico’s huge soft-drink bottling industry and enhanced the domestic market for home-produced sugar.

The tax was the latest protective measure taken by Mexico in recent decades to shield its large sugar industry from low-cost imports. Although they have kept a troubled industry afloat, the tax and other government protections have encouraged inefficiency. Mexican raw sugar costs about 25 cents a pound wholesale -- more than twice the global benchmark.

Unless it can win on appeal, Mexico must repeal the tax and pay penalties that could exceed $300 million, say free-trade experts here. Otherwise, it could face trade sanctions. In that case, the U.S. would most likely ask the WTO to approve punitive tariffs on Mexican goods equal to the damage allegedly suffered by U.S. firms.

The ruling could threaten the livelihoods of some of the 2.4 million people in Mexico who depend on the sugar industry. More than a quarter of the sugar produced in Mexico is sold to soft-drink bottlers, who may in the future buy imported corn syrup.

The ruling comes as Mexico is expecting a record sugar harvest estimated at 5.8 million tons, according to Rabobank, a Dutch institution that specializes in agricultural finance.

“This means hundreds of thousands of tons of possible surplus sugar thrown back on the market,” said Ken Shwedel, a Rabobank economist.

A surplus could lead to job losses and refinery closings, costing President Fox and his National Action Party support. But few here expect the cane growers and sugar refinery workers to accept the WTO verdict quietly. Many workers are organized in unions and in the past have mobilized quickly to protest threats to their privileged status.

The most recent show of strength occurred this month when thousands of cane growers descended on Mexico City to protest Fox’s proposal to repeal some government supports for sugar growers. He was forced to retreat.

Congressman Victor Suarez Carrera, a member of the Democratic Revolution Party who sits on the lower house’s agriculture committee, was defiant Tuesday.

“The Supreme Court already upheld the tax, so which is more important: a mistake by the WTO, or the constitution and Supreme Court of Mexico?” he said.

In 2001, Fox’s administration confiscated most of the nation’s 56 sugar mills and instituted a pricing plan that established minimum values for annual harvests.

A year later, in the face of a rising tide of sweetener imports, the 20% tax was rammed through Mexico’s lower house of Congress by the Institutional Revolutionary Party, which has a strong following among the sugar workers unions. Fox opposed the tax, taking it to the Mexican Supreme Court, but justices upheld the surcharge as legal.

The U.S. cried foul, saying the tax ran counter to the letter and spirit of the 1994 North American Free Trade Agreement signed by Mexico, Canada and the United States.

Sidney Weintraub, political economist with the Center for Strategic and International Studies in Washington, said the tax was bound to be struck down by the WTO. Although he believes Mexico got the short end of the stick in NAFTA provisions covering sugar and sweeteners, Weintraub said Mexico was legally outflanked by U.S. farm interests on the tax dispute.

“The Mexicans never had a chance. Their argument was based on fair play; the U.S. position was based on the law,” Weintraub said.

Times staff writers Cecilia Sanchez in Mexico City and Evelyn Iritani in Los Angeles contributed to this report.