World Trade Organization Panel Issues Final Decision Declaring Mexican Tax on High-Fructose Corn Syrup Illegal

SourceMex Economic News & Analysis on Mexico, March 29, 2006 | Go to article overview

World Trade Organization Panel Issues Final Decision Declaring Mexican Tax on High-Fructose Corn Syrup Illegal


In early March, a World Trade Organization (WTO) panel issued a final decision declaring that Mexico was in violation of fair-trade rules by imposing a tax on soft drinks sweetened with high-fructose corn syrup (HFCS). The decision leaves Mexico without any more appeals, meaning that the tax will have to be removed.

The ruling does not, however, impose or recommend a specific timetable for Mexico to eliminate the 20% special tax (Impuesto Especial sobre Produccion y Servicios, IEPS). The tax must be removed by an act of Congress, which means that no action will be taken this year, said Economy Secretary Sergio Garcia de Alba.

"It will be very difficult to implement the decision in the short term," de Alba told reporters before meeting with US and Canadian counterparts in Acapulco in late March. "It's most likely that it won't happen until the next legislative period." The three countries called the Acapulco meeting to review the impact of the North American Free Trade Agreement (NAFTA) since its inception 12 years ago.

The Congress imposed the IEPS in 2001 as part of a limited tax-reform package (see SourceMex, 2002-01-09 and 2002-01-16). Under pressure from the US, President Vicente Fox suspended the tax later that year, prompting Congress to file a complaint with the supreme court (Suprema Corte de Justicia de la Nacion, SCJN). In filing the complaint, legislators argued that the executive branch had violated the Constitution by reversing a decision reserved for the legislative branch (see SourceMex, 2002-04-10). The SCJN ruled in favor of the Congress (see SourceMex, 2002-07-17).

At that point, the Fox administration restored the tax, pledging to maintain the restrictions on imports of HFCS. The US attempted through negotiations to convince Mexico to remove the restrictions, but the Mexican government did not budge. The Office of the US Trade Representative (USTR), at the request of legislators from US midwestern states, filed a formal complaint before the WTO (see SourceMex, 2004-07-14). In 2005, a WTO panel issued a preliminary ruling declaring the tax illegal, a decision that the Fox government immediately appealed (see SourceMex, 2005-08-31 and 2005-12-07). The appeal was denied, exhausting Mexico's options in the case.

US officials said the WTO ruling justified the complaints of US producers, who said that the tax was arbitrary and inhibited competition. "It is clear that Mexico must eliminate this tax and restore fairness for our US corn growers and refiners," said USTR Rob Portman. "This is a good result for our farmers and producers, who seek a level playing field."

The WTO ruling is not likely to end the US-Mexico dispute over HFCS. Three US companies--Archer Daniels Midland (ADM), Corn Products International (CPI), and Cargill--have filed legal action through a NAFTA tribunal demanding compensation of US$1 billion from the Mexican government for damages caused by the HFCS tax.

Hugo Perezcano, who heads the office at the Secretaria de Economia (SE) that handles legal affairs related to international trade, said the WTO ruling does not require Mexico to respond to the lawsuits filed by the three companies. But he noted that the resolution could be entered into evidence when the tribunal considers the merits of the case.

Mexico could replace tax with tariffs

Perezcano raised the possibility that Mexico would replace the tax with tariffs as high as 210%, which would be applied to any imports of HFCS above a quota of 250,000 MT established for the current fiscal year.

Perezcano said the Mexican government was willing to adopt a more flexible position if the US agreed to comply with NAFTA's original sugar-import provision, which allowed Mexico to export all its excess sugar to the US. The provision raised strong concerns among US sugar producers, which led the US government to negotiate a letter of understanding with Mexico to change the terms of the accord and impose limits on duty-free imports of Mexican sugar. …

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