As trade discussions between the United States and China break down, Brazilian government representatives believe they’re seeing progress in their talks with the world’s second largest economic power. Earlier this month, Brazil’s Agriculture Trade Secretary announced that bilateral conversations at the World Trade Organization (WTO) over high Chinese tariffs on sugar imports were progressing well. The Secretary said that the Brazilian government’s expectation was that China’s 95% tariff on sugar imports would roll down to 50% early next year. Reduced tariffs would lead to a major shake up in China’s domestic sugar market and could provide an outlet for rising sugar stockpiles in Brazil.
China announced “emergency” actions in May 2017, placing an additional 45% tariff on sugar imports into the country. This was on top of an existing 50% tariff on sugar imports in excess of the 1.94 million metric ton quota established at the WTO. The combined 95% tax rate was aimed at protecting China’s domestic sugar mills and farmers. The China Sugar Association explained it as an anti-dumping measure implemented to prevent foreign sugar from “damaging the supply-demand relationship in the country.” With the additional tariffs in place, Chinese sugar imports dropped by 25% that year, and domestic sugar stocks fell by 19% according to USDA data.
However, the tariff has not provided universal benefit to the Chinese sugar industry. Reduced sugar imports have driven domestic prices of raw sugar and cane higher. That’s meant sugar mills have to pay higher prices for their inputs, squeezing margins to the point that many millers are running at a loss. Higher raw sugar and cane prices have also further incentivized smugglers bringing untaxed sugar across the border from Vietnam and Myanmar. This combination of poor milling margins and smuggling has eroded demand for domestically-grown sugarcane.
Now, there is increasing confidence among market players that the additional tariff may be allowed to expire. The emergency measure lapses after three years in early 2020. If not renewed, out-of-quota raw sugar import taxes would fall to 50%. With that, market participants expect sugar refining margins in China to regain profitability. The reduced tariff would also shift some of the prolific smuggling of sugar into the country to legitimate imports.
Brazil, the world’s largest sugar producer, also stands to benefit. Between 2011 and 2016, Chinese demand accounted for 10% of Brazilian sugar exports. In 2017, they had dropped to just 1% of Brazil’s sugar export demand. With sugar stocks in Brazil at their highest levels since 1989, the additional demand will be mightily welcome.
The chart on the left below shows the sharp drop in China’s sugar imports (green) since peaking in 2016 while sugar production (blue) has recovered. The chart on the right shows Brazil’s sugar exports to China (green) and the rest of the world (blue). Shipments to China have collapsed since tariffs were increased.