TRADE-LATAM: Brazil Hopes Argentine Crisis Benefits Sugar Exports

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Feb 14 2002 (IPS) - The devaluation of the Argentine peso and the new climate of dialogue between Buenos Aires and Brasilia could pave the way for sugar to be included in free trade within Mercosur (Southern Common Market), say experts from Brazil’s sugar industry.

The reason for the barriers that Argentina imposed on Brazilian sugar began to dissipate with the correction of the asymmetry between the two Mercosur giants’ currency exchange regimes, Eduardo Pereira de Carvalho, president of the Sugarcane Agro- Industry Union (UNICA) in Sao Paulo state, told IPS.

Argentina scrapped its decade-old regime of one-to-one parity with the dollar, officially floating the local currency, the peso, on Monday, Feb 11.

Argentina protects its sugar production with a fixed 18-percent import tariff and an additional tariff for “price comparison”, which varies with international prices – and boosts the cost of the Brazilian commodity, said Pereira de Carvalho.

The trade barriers are aimed at protecting the sugar economy of provinces in northern Argentina, where open competition from Brazil could cause bankruptcies and sugar mill closures, exacerbating unemployment and social problems in the area.

The protectionist measures were approved by the Argentine parliament with the argument that Brazil subsidises its sugar production as part of its fuel alcohol programme. In operation since the 1970s, it is part of the country’s attempts to lessen its dependence on gasoline.

Nearly 55 percent of Brazilian sugarcane is destined for alcohol production. It is mixed with gasoline at a proportion of 22 to 24 percent, creating a more environmentally friendly fuel because it cuts down on toxic emissions. The programme, intended to reduce Brazil’s petroleum imports, was heavily subsidised in the beginning.

However, government incentives for fuel alcohol production dried up in the early 1990s, and later the price and market controls for the sector were lifted.

Pereira de Carvalho maintains that since Brazilian sugar and alcohol are no longer subsidised their competitiveness is due to the scale of production, technology and organisation, which have cut costs.

But the sugar question was not taken up in the negotiations between delegates from the two countries last week, nor is it on the agenda for talks this week in Buenos Aires, as more pressing matters have the spotlight.

Among the central issues are the revision of the agreement on bilateral automotive trade, which involves much greater volumes of exchange and investment, and the adjustment of trade rules to reflect the new regional economic reality.

The Brazilian negotiators are not pressing the sugar issue because they believe Argentina’s current crisis would stand in the way of constructive debate, said Angelo Bressan, director of the Ministry of Agriculture’s Department of Sugar and Alcohol.

“We don’t want to leave the issue off the agenda, but negotiations will only be possible when Argentina achieves some stability,” Bressan told IPS, adding that a special team had failed last year to set conditions for a sugar agreement, and had not achieved even a nod toward long-term tariff reductions.

Protection for the domestic sugar industry is a common practice worldwide, largely because the sector employs many people in both the rural and industrial spheres, Bressan said.

He added that consumers exert limited pressure on prices, because increases generally pass by unnoticed as most sugar use not directly consumed but is used in the production of value-added items like soft drinks and candies.

Brazil is the world’s leading sugar producer, churning out an average of 18 million tons a year.

The country’s sugar exports last year surpassed 11.2 million tons, bringing in 2.28 billion dollars in revenues, 90 percent more than in 2000 as a result of the price recovery on the international market.

Brazil has the lowest production costs in the world, says Pereira de Carvalho, though he complains that sugar and alcohol are among the most protected commodities in global trade.

Brazil even faces barriers in Chile, which is an associate member of Mercosur (whose four full members are Argentina, Brazil, Paraguay and Uruguay), and is considered to have a relatively open market.

Santiago hiked its sugar tariff last year from 31.5 percent to 98 percent.

The Brazilian government rejected Chile’s offer to compensate the change with a tariff-free quota of 8,750 tons – equivalent to one-sixth of the bilateral sales in 2000 – and turned to the World Trade Organisation seeking the application of retaliatory measures for losses estimated at 15.8 million dollars.

But Chile is a small market for Brazil compared with the trade it conducts with wealthier nations.

In Argentina, a more important market for Brazil, the simple adoption of a floating currency exchange regime will not resolve the dispute within Mercosur because, as Pereira de Carvalho says, the sugar production cost is three times higher than Brazil’s, and a devaluation to that degree is not in the forecast.

As such, UNICA, which represents the sugar mills and distilleries of Sao Paulo state, home to 60 percent of Brazil’s sugar output, has proposed an adjustment period, with a gradual reduction of tariffs over the next three years.

Brazil, furthermore, is willing to support Argentina in restructuring its sugarcane industry, with the latest technology for producing alcohol as a long-term alternative for preventing the economic decline of the sugar-producing provinces.

Creating an international fuel alcohol market is an objective of the Brazilian government and of UNICA because it would provide stability for the sugar trade and boost Brazilian exports.

Advocates point to the environmental benefits, which would be global because fuel alcohol reduces emissions of so-called greenhouse gases, which cause climate change, if it is used instead of petroleum-derived fuels.