Why Is Sugar a Sticky Topic in Mercosur?    

"Sugar Cane" by John Austin Hanna          

Katharine H. Sheaff 26 April 1999 MGMT 665  

Table of Contents

I.   Introduction
II.  History of the Treaties
III. Industry Overview
A. Cane Sugar and the Brazilian Proalcool Program
B. Refined Sugar and the Confectionery Industry
IV. Industry Position
V.  Effects of Mercosur (or Bickering Among Nations)
VI.  What Happens Next?
A.  Proalcool Program
B.  Consumption
C.  Efficiency
VII. Conclusion
VIII. Works Cited

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I. Introduction

Sugar is a commodity that is produced around the world, and each producing nation has its own sugar policy to protect its industry, whether nascent or mature. Because of this multiplicity of sugar policies, and because of recent world trends toward preferential trade agreements, members of these agreements find themselves at odds over their sugar industries. These nations are hesitant to remove the protections they have established for their individual sugar industry, yet at the same time they wish to move ahead with free trade and gain the benefits accorded trade without barriers. In Latin America, the nations of Argentina, Brazil, Paraguay, and Uruguay joined together to form the preferential free trade agreement called Mercosur. Under this agreement, the nations were to work together to eliminate tariffs and non-tariff barriers to trade. In many areas this has occurred, but in the sugar industry there is still dissension. Argentina and Brazil, the major sugar producers of the agreement, are playing a "game" of trying to retain protection for their own industries, yet convince the other country to abandon its protective measures. In my paper, I examine this "game" through the framework of regime theory and the Prisoners' Dilemma, looking briefly at the history of the treaties leading to and extending from Mercosur, the sugar industries in Argentina and Brazil, the industry position regarding Mercosur, the effects of Mercosur, and the question of what will happen next.

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II. History of the Treaties

Regime theory, according to Mayer, states that "international institutions matter - that internationally held rules, norms and organizations affect the choices nations make," and that "the primary role of international institutions is to facilitate mutually advantageous cooperation in circumstances where it might not otherwise occur," (55). In creating Mercosur, the nations of Argentina, Brazil, Paraguay and Uruguay were creating a new regime that would contain rules to govern commerce among the nations. This new regime was prompted by the Montevideo Treaty, the transition to democracy occurring in Latin America, and the hope to join a Free Trade Area of the Americas. In this chain from the Montevideo Treaty to a possible FTAA, we see an explanation from regime theory as to why the nations of Mercosur joined together. Under the existing international regime, a free trade agreement was the most promoted form of advancement in trade. The general form of a free trade agreement was defined by GATT, and other nations in the hemisphere were joining in their own preferential trade agreements, so it was a desirable choice for the involved nations at the time.

The Montevideo Treaty of 1980 encouraged integration of Latin America. This treaty was promulgated at a time of change in Latin America. During the 1980s, many of the countries of Latin America were in the midst of a transition to democracy and the redesign of corporatist patterns of government intervention, especially in the realm of trade policy (Fritsch and Tombini, 82). With the changes in government came an acceptance of free trade, and the idea that, joined together, the nations of Latin America would leave behind some of their geo-political rivalries and be stronger in the face of the rest of the world. The first efforts at free trade, however, were based on sectorally managed preferences, backed by industrial promotion efforts to bring about negotiated regional specialization patterns through "complementarity" deals (Fritsch and Tombini, 83). While a first step, in the coming years there would be a change in the direction of trade.

On the 26^th of March 1991, Mercosur was established with the Treaty of Asuncion. Mercosur was designed to link Argentina, Brazil, Paraguay, and Uruguay in a common market. Under Mercosur, instead of opening markets on a product by product basis, there would be an across-the-board automatic tariff reduction, aimed at reducing tariffs to zero over the decade. This treaty also established a program for the elimination of non-tariff barriers, the establishment of a common external tariff, and the definition of a common trade policy. During this initial time, the auto and sugar industries remained outside of the automatic tariff reduction. The Treaty of Asuncion was created as a temporary treaty, to last during a time of transition, which would end in December of 1994. On 17 December 1994, the Protocol of Ouro Preto was signed, which signaled the end of the transition period and the implementation of the main results negotiated during the past four years. On 1 January 1995, the unrestricted trade introduced would apply to approximately 85% of all tariffs ("Mercosur:  Free Trade...").  Under the Protocol of Ouro Preto the automotive and the sugar sectors would be subject to special agreements, with a common policy to be adopted by the year 2000 for Brazil and Argentina, and 2001 for Paraguay and Uruguay (Pereira, 12). These special agreements were created to take into account the differences in the industries of the various nations.

With time, it was hoped that other countries would be added to the common market, and that as a group, they would have the power to negotiate with the countries of North America, and perhaps at some point join NAFTA in a Free Trade Area of the Americas, creating a new regime that would govern commerce across the entire hemisphere. As a step towards that hoped-for regime, Chile joined Mercosur as an associate member 25 June 1996, and Bolivia followed in December 1996, with a more comprehensive free trade agreement on 28 February 1997 (O'Keefe).  The joining of these nations "broadened" Mercosur.  The agreements that were signed, such as the one with Chile, state that any favorable concession that Chile may grant to third parties must also be extended to the Mercosur countries (US House of Representatives, 9), and so try to "deepen" Mercosur with the inclusion of more elements under the agreement. This practice was established by the Treaty of Asuncion, Chapter 1, Article 8, and may encourage Mercosur to integrate with other groups, as a concession granted to a member of a group must often be granted to the entire group. So we see that after Bolivia's joining with Mercosur, there is a proposed integration with the Andean Community (of which Bolivia is a part) in the year 2000.  With the coming together of Mercosur and the Andean Community, Latin America is on its way to attaining the goal of the Montevideo Treaty, and in turn the FTAA.

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III. Industry Overview

Regime theory "allows state behavior to be channeled and moderated by international institutions," such as the aforementioned preferential trade agreements, but also "concedes an ontologically primary role to self-interested actors." It is this dichotomy of self-interested state versus international institution which encourages the Prisoners' Dilemma. Brazil subsidizes its sugar industry indirectly through the Proalcool program and is the world's largest sugar producer, exporting sugar to all the countries of Mercosur. As this large sugar producer, it wants to export sugar to Argentina and so wants Argentina to eliminate their import tariff, which should be done in accordance with the Mercosur treaty.  The import tariff in question is in place in Argentina so that sugar importers pay specific duties to compensate for the high production costs of domestic producers (Bouzas 75).   With this tariff, Argentina has created a barrier to free trade in an attempt to protect its sugar market from being flooded with cheaper Brazilian sugar. Argentina claims, in turn, that Brazil has created its own barrier to free trade in that Brazil subsidizes its sugar production.  Argentina has stated that it will not eliminate the import tariff until Brazil eliminates the subsidies. In this we see that the nations are eschewing the common good of eliminating their barriers to trade and are "defecting" from zero tariffs to support their own industries by clinging to these barriers.  An overview of the sugar industry in the past twenty-five years is helpful to see the support each nation gives its industry.

In the world sugar industry, less than thirty percent of the refined sugar produced is traded on the international market (Osava, 24 Aug 1998). Most refined sugar is used within the producing nation. So it is the uses of sugar cane and sugar in the countries of Argentina and Brazil (their production greatly overrides that of Paraguay and Uruguay) which drives our question of why the sugar industry is controversial within Mercosur. The principal use of sugar cane in Brazil is fuel alcohol: anhydrous and hydrated alcohol which are used to power vehicles in place of, or in conjunction with, gasoline. This use is limited at this time to Brazil through their Proalcool program. In the other nations of Mercosur, the sugar cane is used to produce refined sugar. Of the refined sugar milled in these nations and milled from the remaining sugar cane in Brazil, 45% is used for industrial purposes, primarily in the production of sweets and soft-drinks, while the rest is sold to individual households.  In order to regulate the sugar industry, and reduce the tariffs within Mercosur, a technical group is in charge of defining a convergence scheme, so that in 2001 the sugar industry will be duty free. However, member countries are authorized to maintain national tariff policies for intra- and extra-regional sugar industry trade (Bouzas, 75).  This shows clearly the regime theory dichotomy - Argentina may maintain a national tariff policy for intra-regional sugar industry trade, yet is expected to work with Brazil to eliminate tariffs for Mercosur.  With the addition of associate members such as Chile and Bolivia, the date for convergence has become flexible for the new members. For example, the tariff reduction schedule for sugar cane for Bolivia begins on 1 January 2005 and should be reduced to zero tariffs 1 January 2011 (refined sugar should conclude 1 January 2014) (O'Keefe).  During this time the dichotomy will be in full force as the various nations try to reconcile what they want for their domestic industry with what they should want for the regional industry.

Argentina's import tariff is based on the assumption that sugar producers in Argentina face higher costs than those in Brazil.  Today, in parts of Brazil, production costs of sugar can be as low as US $220 per ton. In Argentina, costs can be up to US $360 per ton ("Sweet Nothings?"). One reason for the higher cost of production is that one ton of sugar cane in Argentina provides 85 kilograms of sugar, while in Brazil a ton of cane provides 140 kilograms of sugar. Weather also plays a factor - Argentina's humid, temperate climate with frequent frosts and scarce sunlight does not favor production, and so drives up costs (Osava, 4 June 1997).  Economies of scale contribute to the cost, and in Brazil economies are based on size. In 1997, the estimated harvest of sugar cane in Argentina was 13.7 million metric tons. The subsequent sugar output was 12.6 million metric tons. Of this, only 200,000 metric tons were exported. Brazil on the other hand, produced approximately 280 million metric tons of sugar cane and 14.6 million metric tons of sugar. Of the sugar, 5.39 million metric tons was exported ("El azucar..."), less than 10,000 metric tons to Argentina (Osava, 8 Sept 1997). Brazil is the world's largest exporter of sugar (Osava, 24 Aug 1998), selling most of its sugar outside of Mercosur to east European countries and the Middle East.
 

Cane Sugar and the Proalcool Program

In the 1975, in the midst of the energy crisis, Brazil began a program called Proalcool to produce a fuel alcohol based on sugarcane (Valente). This program was to provide energy and utilize a crop that grew well in Brazil.  The government subsidized the production of fuel alcohol with money and with regulations providing that all government vehicles should use fuel alcohol (Osava, 24 Aug 1998). The funds from Proalcool then found their way to the sugarcane growers. Brazil's sugar cane production grew from 68 million tons to 300 million tons a year (Valente).

Sixty-three percent of Brazil's sugar cane crop is used to produce fuel alcohol under the Proalcool program. Although it would be laudable if this program's major effect on the world was to promote other countries to build lower-pollution fuel alcohol utilizing cars, this is not the case. Instead, the main impact of the Proalcool program on the world is its effect on the world sugar market. According to Argentine economist Jose Antonio Cerro, if Brazil were to stop producing fuel alcohol, the supply of sugar on the world market would increase by 15 million tons, and prices would drop ("O Pais..."). Over the past two decades, there have been periods when more or less sugar cane was used to make fuel alcohol. These periods have corresponded to the success of the Proalcool program. When oil prices were high, cars were produced that utilized only fuel alcohol, and so a great deal of fuel alcohol was needed. In the late 1980s, production moved away from fuel-alcohol only cars and toward cars that used a mixture of gasoline and fuel alcohol. In recent years (since the mid-1990s) there has been talk of a return to the full Proalcool program as pollution rates in Brazil's cities rise. If there is a return to the full program, sugar cane growers will lose some of the incentive to produce refined sugar from their cane and instead use the cane for fuel alcohol. With less refined sugar being produced, some of the sugar stockpiled in recent years will hopefully be used, and prices of sugar should rise from their current low point.

Following is refined cane sugar data that shows the trade patterns over the first part of this decade from the countries of Mercosur. Brazil, as the world's largest exporter, does not significantly import sugar. Note: The data in the following charts was taken from the Inter-American Developmental Bank's database. .. signifies that the data for that particular cell was not available.

Refined Cane Sugar Data:
 
 

Refined Sugar and the Confectionery Industry

Brazil's barrier to free trade lies with the subsidies it provides the sugar cane industry through the Proalcool program.  Argentina's barrier to free trade lies with the refined sugar industry.  Argentina's sugar market was deregulated in 1991, so producers do not enjoy the subsidies that they feel the Brazilian producers enjoy. In Argentina, there is not only the fear that Brazilian sugar production will put Argentinean producers out of their jobs, but there is also a sense that this is "not fair," ("El azucar..."). Argentina's sugar production, while an important industry within Argentina, pales beside that of Brazil. Argentinean producers see Brazil's Proalcool Program and want some of the security that program gives producers in Brazil.  So Argentinean producers fight for the import tariff to gain their own security.   Why does Argentina want to protect its sugar industry so badly? Brazil gave up the majority of its domestic production of wheat in favor of integration with the nations of Mercosur, why can't Argentina give up the sugar industry? The main reason is that sugar is the principal provider of jobs in two northern provinces of Argentina: Tucuman and Jujuy. In these areas in 1997 there was large social unrest. After the closing of a large sugar refinery led to the dismissal of thousands of workers, there were violent protests, roadblocks and looting (Osava, 17 Sept 1997).  Argentina is motivated to lessen this social unrest in any way it can, including the use of an import tariff to protect the sugar industry that provides jobs to these workers.

In the town of El Tabacal, in the northern province of Salta, Argentina, the problem is more complicated, and not as easily solved with tariffs.  Part of the problem with the sugar industry in El Tabacal stems from a centuries old dispute between the local native people, and the European immigrants who appropriated their land. To the Kolla Indians, this has always been their land, and they are fighting to get it back, and causing more social unrest in the process. They thought they might have a chance to regain their land under Peron's populist revolution in the 1940s, but they were not successful. Recently they had more success and were granted 54,000 acres which President Menem expropriated for them. The Kolla believe that the actions of the current sugar plantation head are destroying their land and so are protesting, (Friedland). In expropriating the land, Menem must navigate carefully between the constituencies of the sugar plantation owners and the native people.

Once the sugar cane has been produced and refined, 45% of it is used for industrial purposes, much of it for the confectionery industry (Barros, September 1998, 10). Based in Argentina, Arcor is the world's largest hard sweets producer, with a daily output of 160,000 kg. Arcor believes in vertical integration and grows and refines all of its own sugar cane ("Arcor enjoys..."). As part of this chain, the fifth largest sugar mill in the world, La Providencia in Tucuman Argentina, sells 100% of its sugar to Arcor ("Argentina"). Brazil is the third biggest producer of sugar confectionery and the fifth biggest producer of chocolate confectionery in the world. Brazil's three major domestic manufacturers are Nestle, Garoto and Lacta (a division of Kraft General Foods) (Tiffany). While Brazil was only 16^th in the world in per capita consumption of sugar confectionery in 1996 (Tiffany), annual per capita spending on confectionery products has risen tenfold since 1992 ("Sweet Profits...").  As such a large industry, the industry leaders form a powerful lobbying group.  Since many of these companies have plants in the various nations of Mercosur, it is to their advantage to work for the lowest possible sugar prices across Mercosur, prices that would result if the barriers to trade decrease.

Sugar Confectionery Data (does not include chocolate or gum)
 
 

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IV. Industry Position

In The Evaluation of Cooperation, Robert Axelrod discusses "payoffs" to the Prisoners' Dilemma. The industry position to Mercosur is about payoff. Who gets to keep their jobs? Who gets to expand their market? As the different groups lobby the governments in Argentina and Brazil, the groups are fighting for payoff. This makes the industry position understandably complicated. In Argentina, sugar companies have lobbied Congress to prevent the easing of import protections unless Brazil abolishes its Proalcool program. These producers are worried about competition from Brazilian sugar. Their worry however, has encouraged some Argentinean producers to invest in new technology to increase yields and reduce costs. Brazil producers, in contrast, want the open market that would exist if Argentina's import tariff on their sugar was eliminated as it should be under Mercosur. Brazil has proposed a 23 % import tariff on all Argentine products containing sugar to combat the continued 23% import tariff on their sugar in Argentina ("Argentina"). Both sides are worried by falling world sugar prices that are not an effect of Mercosur, but rather of a large world oversupply of sugar.

As to the confectionery industry, Arcor has continuously pushed for expansion within Mercosur and is currently the largest exporter of hard candies in Mercosur. Arcor has followed news of Mercosur, and established factories where the expansion of Mercosur was likely. In anticipation of a merger between Mercosur and the Andean Pact, Arcor built a factory in Peru in 1996 ("Sweet Success"). In Brazil, the three main confectionery firms are investing heavily in new factories to take advantage of the base that has been made available to them in Mercosur, from which Nestle and Lacta hope to expand (Tiffany). So we see that the confectionery industry is pro-Mercosur, although presumably Arcor is campaigning against the proposed 23% import tariff by Brazil on all products containing sugar.

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V. Effects of Mercosur (or Bickering Between Nations)

When the Protocol of Ouro Preto was signed, it was agreed that sugar and the automotive industry would be excluded, to be discussed at a later date. The discussions, which were to talk place and establish a plan in 1995, dragged on. Today, in a look at the discussions and their repercussions, we can see various rounds of the Prisoners' Dilemma game. The premise of the Prisoners' Dilemma game is that in any single-stage or nonrepeated game, each player has a dominant strategy:  to cheat (defect from the agreement).  If player A cheats and B cooperates, A (5) gains more than B (0).  This gain by A is greater than if both cooperate (A and B each gain 3), which is greater in turn than if both defect (A and B each gain 1).  If both players defect, they each gain a reward greater than that which would be gained by the one defecting player in the first case.  Argentina and Brazil both want to gain a reward, but they are not willing to sacrifice their domestic industries for the good of the regional industry, so they both cheat and defect.

In 1997, sugar producers in Argentina lobbied Congress to approve a law imposing a 23% average tariff on sugar imports from Brazil, in order to essentially defect from the zero tariffs of the free trade agreement. President Menem vetoed this bill in a desire to cooperate, but because it was so strongly supported in Congress, it went into effect (Valente). This was an attempt by the Argentinean Congress to keep sugar outside of Mercosur's zero-tariff free trade agreement, but all Congress succeeded in doing was angering Brazil. In reaction to the 23% tariff, Brazil's parliament suggested a suspension of wheat imports, as wheat is the crop in Argentina that enjoys similar status to sugar in Brazil (Osava, 8 Sept 1997). In doing this, Brazil settled on a "tit for tat" strategy, in which country B responds to country A's last move by repeating that move. Argentina decided to defect by putting up a tariff, so Brazil defected by threatening to suspend wheat imports.

Another move came in the fall of 1998, when a free trade agreement was established between Argentina and Mexico. Under this agreement of preferential terms of trade, Argentina has promised not to include Brazilian sugar in candy and chocolate to be sold to Mexico, (Osava, 4 Nov 1998). In retaliation, and in an attempt to even out a four year trade deficit to Argentina, Brazil placed restrictions on imports of agricultural products and medicine, demanding that companies wishing to export certain products to Brazil first apply for a license. Argentina responded by not allowing Brazilian companies to participate in the International Footwear Fair in Buenos Aires (Osava, 4 Nov 1998). This series of retaliations emphasizes the "tit for tat" strategy of the nations, and the spiral of continuing defects that a Prisoners' Dilemma game can easily become.

In December of 1998, during the Mercosur summit in Rio de Janeiro, the foreign ministers of Brazil and Argentina agreed to try to reduce that 23% tariff to 13%. The ministers were trying to cooperate, and gain the reward for cooperation. This memorandum of understanding gave Brazil a preference by allowing it a reduction of Argentina's tariff, which was not given to Paraguay and Uruguay because these nations were not part of this understanding (Valente). Unfortunately for the sugar industry in Brazil, and fortunately for that in Argentina, the tariff was not reduced. In reprisal in February 1999, Brazil threatened a 23% import tariff on all Argentine products containing sugar. However, as of 13 April 1999, Argentina still had not reduced this tariff rate. The executive branch of Argentina under Menem has only few options of how to respond to Brazil. It can seek to amend the law in Congress stating the 23% tariff, issue an emergency decree ordering a reduction of the tariff, or seek a Supreme Court decision declaring the law unconstitutional (Valente). Here we see the problem with the Prisoners' Dilemma game: how do you escape the cycle of defection once in the game?

Brazil hopes that the trading block's common foreign tariff on sugar will decrease to zero by 2001 (Valente). In other words, Brazil wants to end the cycle of defection and cooperate in 2001. Knowing this, Argentina can plan to defect and receive the payment for temptation to defect, which exceeds the payment for the reward of cooperation. Based on the fact that they will defect in the future, Argentina's best plan is to defect each round until that point. To do this, Argentina announces that tariffs will drop to zero only when Brazil can demonstrate that it no longer protects its sugar cane industry, either directly or indirectly, through subsidies of the Proalcool program.

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VI  What happens next?

If both countries are motivated to defect, the countries forfeit the gains for the sugar industry (and the other industries used in reprisals) that would exist if they cooperated. As more countries join Mercosur, the date for zero tariffs has the potential to get pushed further and further into the future, and so the Prisoners' Dilemma game has no foreseeable end. Traditionally, there exist three ways to achieve and maintain cooperation. The first is a combination of good information, infinite or uncertain repetition and low discount rates. The threat of loss of the future benefits from cooperation on free trade can discourage defection (Yarbrough and Yarbrough). The second approach relies on third parties to provide information or enforcement. The third approach is reputation - defectors may suffer a loss of reputation in addition to a specific penalty. At present, Paraguay and Uruguay are not strong enough to enforce their wishes on Argentina and Brazil, so third party intervention would have to come from the WTO or another large institution as opposed to from within Mercosur (remember that regime theory allows state behavior to be moderated by international institutions). The other two possibilities must be regarded in the light of the trends in the sugar industry.

What are the trends of the future?

Proalcool program

In the fall of 1997, President Cardoso of Brazil stated in a speech, "The government is not disposed to subsidize anything, nothing, zero," (Moffett).  On May 1, 1997, the price of anhydrous alcohol and the marketing of the product were deregulated. On May 1, 1998, the price of hydrated alcohol was deregulated. These price deregulations (Barros, April 1998, 24) prompted drops in the price of these commodities. Brazil also has large carry-over stocks of these types of fuel alcohol. These two elements together are encouraging many millers, in spite of the low world market price of sugar, to shift from alcohol to sugar production (Barros, September 1998, 5).

On June 15, 1998, the percentage of anhydrous alcohol blended with gasoline for "gasoline" powered vehicles was increased from 22 to 24 percent (Barros, September 1998, 2). This will increase consumption of anhydrous alcohol. For an increase in hydrated alcohol, the Brazilian government continues to discuss the possibility of adding the aforementioned to diesel fuel. Studies have shown that a 3% mixture of hydrated alcohol will pose no risk to engine performance, no significant loss in fuel efficiency and will result in less pollution (Barros, September 1998, 17). A third possibility to lower the excess fuel alcohol stocks is for Brazil to export what it does not use domestically. In 1998, there were discussions between Brazilian and US fuel alcohol producers about marketing Brazilian fuel alcohol in the US until their reserve stocks were depleted and the US industry was able to produce what it needed domestically. Government fleets and niche markets in California and other states would be targeted (Barros, April 1998, 23).

Consumption

Consumption of sugar in the Mercosur nations is increasing as the people of Latin America are drinking more soft drinks and eating more ice cream and candy, and as the population of these nations is growing. While this consumption in Brazil was stimulated in part by the stabilization provided by the "Plano Real" of 1994 (Barros, April 1998, 17), we can hope that the current financial crisis does not undermine this advance in consumption. According to the president of the Brazilian Chocolate, Cocoa & Confectionery Manufacturers Association, "People in Brazil don't have preoccupations with fat, cholesterol, and tooth decay," (Tiffany). The industrial use of sugar for these products exceeds 45% (Barros, September 1998, 10). Unlike in the US, this industrial use is not threatened by high fructose corn sweeteners (HFCS) as long as sugar prices remain free. However, some sugar mills are expanding their offerings by producing liquid sugar to sell to food and beverage companies. One sugar mill, Companhia Albertina is also selling a "diet" crystal sugar which has 50% fewer calories than the traditional crystal sugar (Barros, April 1998, 18).

Efficiency

Brazil is more competitive in producing sugar today because of advances in transportation. At Brazil's largest port, the Port of Santos in the state of Sao Paulo, private companies which invested in the remodeling of the old sugar terminals and the construction of new ones were given 20-year-use concessions. These improvements significantly reduced export costs (Barros, September 1998, 10). In Ribeirao Preto, also in Sao Paulo, sugar mills have been coordinating their logistical systems in order to reduce the distance between sugarcane fields and sugar mills. Some millers have even exchanged sugarcane lands in order to reduce the distance between the fields and mills, and so reduce freight costs (Barros, April 1998, 16).

Argentina is increasing the use of fertilizers and ag chemicals and so gaining efficiency. New irrigation systems which involve center pivots and frontal advance are being installed and utilized. The use of "maturators" which allow the early harvest of the plantations that run risks of early frosts is growing (Joseph 4). Increasing concentration of mills (six companies have practical control of 80% of the country's total sugar output) facilitates the management of supply and demand in a more efficient way, allowing greater stability in prices (Joseph 6).
 

All of these improvements in efficiency mean that more and more sugar is being produced.  This spring, in the commodity market, fears existed that consuming countries would default on shipments because of the considerable drop in prices since the beginning of the year (Whitman).  This in turn helped fuel the market's drop.  The market for Brazilian sugar is further influenced by the fact that much of Brazil's sugar is sold to Eastern European and Middle Eastern nations.  Sugar is Brazil's leading export to Russia, and with the financial crisis there, sales of sugar in the future are in question (Osava, Aug 24 1998). So, we see increasing sugar production due to efficiency/modernization and the questionable future of the Proalcool program. In a world with low sugar prices, Brazil and Argentina's sugar producers must sell as much as possible to make a profit. To do this, the bickering must stop. With a Prisoners' Dilemma game of indeterminate length, Argentina and Brazil have motivation to cooperate, based on the fact that with an indeterminate length game Argentina and Brazil never know when they will need to work together again.  Now, especially in this time of financial crisis, they need to ensure that Mercosur is a strong regional block, and that they can work together. The motivation of reputation might work if Mercosur truly wants to join an FTAA. To do this, Mercosur would need to have their own agreement in good shape, with all tariffs either at zero, or on their way to zero, and a plan to eliminate non-tariff barriers to trade. With a poor reputation for enforcing its own policy, Mercosur would have difficult time gaining admittance to a larger preferential trade agreement.

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VI. Conclusion

So we see that sugar, which seemed like such a simple commodity, is not very simple after all, and it is wrecking havoc on Mercosur.  With the Prisoners' Dilemma that comprises the sugar industry, the nations of Mercosur are being forced to choose repeatedly whether they wish to continue to protect their domestic industries or seek the greater benefits that would come with free trade.  At present, Argentina and Brazil are trapped in a cycle of "tit for tat" in which each country is defecting to protect its own industry.  It is only with the breaking of this cycle that the nations will be able to move forward and "deepen" the Mercosur agreement to include sugar.  The potential for this occurring is greatest if Argentina and Brazil realize that they are part of an indeterminate length game, and so must work together in the future.  Cooperating today will facilitate working together in the future.  The possibility of breaking the cycle also exists if Argentina and Brazil recognize that the reputation of Mercosur is under question because of their bickering, and that if they wish to join a larger free trade agreement, they must have their own agreement in order.  This Prisoners' Dilemma quandary shows clearly the dichotomy of regime theory of the international institution (the preferential trade agreement) versus the autonomous state.  Taking together this dichotomy of the regime theory and the Prisoners' Dilemma game that Argentina and Brazil are playing, we can see why sugar is indeed a sticky topic in Mercosur.

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 VII. Works Cited

"Arcor Enjoys Sweet Taste of Success." Financial Times London Edition. 19 August 1998.

"Argentina." South America Report. February 1999.

Axelrod, Robert. The Evolution of Cooperation. New York: Basic Books, Inc., 1984.

Barros, Sergio. "Sugar Market Country Report - Brazil." Public distribution date: 3 April 1998. www.sugarinfo.co.uk

---. "Sugar Market Country Report - Brazil." Public distribution date: 30 September 1998. www.sugarinfo.co.uk

Bouzas, Roberto. "Mercosur and Preferential Trade Liberalization in South America: Record, Issues and Prospects." Western Hemisphere Trade Integration: A Canadian-Latin American Dialogue. Eds. Richard Lipsey and Patricion Meller. New York: St. Martin's Press, 1997. 58-89.

"El azucar, otro punto de discordia en el Mercosur." La Nacion. 21 April 1997.

Friedland, Jonathan. "Seeds of Discontent in Argentine Fields..." Wall Street Journal. 14 November 1997.

Fritsch, Winston, and Alexandre A. Tombini. "Mercosul: An Overview." Economic Integration in the Western Hemisphere. Eds. Roberto Bouzas and Jaime Ros. Notre Dame, Indiana: University of Notre Dame Press, 1994. 81-99.

Joseph, Ken. "Sugar Market Country Report - Argentina." Public distribution date: 7 April 1998. www.sugarinfo.co.uk

Mayer, Frederick W. Interpreting NAFTA: The Science and Art of Political Analysis. New York: Columbia University Press, 1998. 51-57.

"Mercosur:  Free Trade to Exclude Sugar, Auto Sector."  Interpress Service.  15 December 1994.

Moffett, Matt. "Brazil Is Revving Up Drive for Ethanol-Powered Cars." Wall Street Journal. 6 Oct 1997.

O'Keefe, Thomas Andrew. "Bolivia: Bolivia's New Free Trade Agreement with Mercosur: Another Building Block in the Creation of a South American Free Trade Area." Latin American Law and Business Report. 31 August 1997.

"O Pais aceita negociar subsidio do acucar." Gazeta Mercantil. 18 June 1997.

Osava, Mario. "Bittersweet Free Trade." Interpress Service. 4 June 1997. RDS Business and Industry Database.

---. "Brazil's Sugar Faces Hugh Barriers on Global Market." Interpress Service. 24 August 1998. RDS Business and Industry Database.

---. "Free Trade Suffers from Sugar Blues." Interpress Service. 8 September 1997. RDS Business and Industry Database.

---. "Slashing of Export Duties Will Impact Trade with Mercosur." Interpress Service. 17 September 1997. RDS Business and Industry Database.

 ---. "New Trade Pact Between Argentina and Mexico Threatens Mercosur Tariff Agreement, According to Brazil."
Interpress Service. 4 November 1998. RDS Business and Industry Database.

Pereira, Lia Valls. "Toward the Common Market of the South: Mercosur's Origins, Evolution, and Challenges." Mercosur: Regional Integration, World Markets. Ed. Riordan Roett. Boulder, Colorado: Lynne Rienner Publishers, 1999. 7-23.

"Sweet Nothings?" The Economist. 20 September 1997.

"Sweet Profits in South America." Market Latin America. November 1997.

"Sweet Success." Latin Trade. February 1998.

Tiffany, Susan. "Offering Hope for the Present and Future." Candy Industry. February 1997.

United States. House of Representatives. Subcommittee on International Economic Policy and Trade of the Committee on International Relations. Hearing on "Fast Track, NAFTA, Mercosur, and Beyond: Does the Road Lead to a Future Free Trade Area of the Americas?" 105^th Cong., 1^st session. Washington: GPO, 9 July 1997.

Valente, Marcela. "Argentine Sugar Producers Defend Tariffs." Interpress Service. 15 December 1998. RDS Business and Industry Database.

Whitman, Janet.  "Raw-Sugar Prices Continue Slide on Oversupply."  Wall Street Journal.  5 March 1999.

Yarbrough, Beth and Robert Yarbrough. The Political Economy of Regionalism. Eds. Edward D. Mansfield and Helen V. Milner. New York: Columbia University Press, 1997. 134-163.

Web Sites Used

Inter-American Developmental Bank:
http://database.iadb.org/intalWEB/scripts/INTAL.exe

Country Reports:
http://www.sugarinfo.co.uk

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