A Not So Sweet Deal For Anyone
Often eclipsed by its illegal look-a-like, another white powdery substance has become an issue of US policy both domestically and in Latin America. For centuries, sugar has had a torrid yet bittersweet relationship with Americans. Sugar both astounds us with its confectionery wonders and frustrates us with its ability to cause obesity. Most recently, sugar has further complicated this relationship by entering the green energy realm in the form of an efficient ethanol fuel. The only constant in sugar’s evolving role in the American lifestyle is that we pay too much for it.
America’s sugar farming industry is currently one of the most protected industries in the United States. Two centuries ago, the U.S. government embarked on this protectionist trend in order to gain the loyalty of the sugarcane farmers in the Louisiana Territory. Today, the original program has evolved into a series of complicated import tariff-rate quotas (TRQs) that heavily distort the sugar market. These TRQs are combinations of quotas, limits on the amount of the good that can be imported, and tariffs, taxes on these imported goods. The TRQ used to protect the American sugar industry allows a certain amount of sugar to be imported at lower tariffs, but for all sugar exceeding this amount, tariffs rise to around 150% of the sugar’s cost. On average, Americans pay 3 times the world price for sugar. This huge price distortion is one of the largest in the U.S. and has had far-reaching negative consequences, both at home and abroad.
The reasoning behind this complex tariff regime is simple yet faulty. The tariffs are meant to raise U.S. sugar market prices to a point where normally uncompetitive sugar farms will be able to compete with foreign producers. Politically, the oft-stated case for this type of protectionism is that it preserves jobs. This is true for the US sugar industry, but the tariffs involved negatively affect the majority of the population. In fact, despite “saving” a few low-wage jobs in the uncompetitive sugar farm industry, these tariffs bring the US a net economic cost. In his book Free Trade Under Fire, Dr. Douglas Irwin, a professor of International Trade in Dartmouth’s Economics department, states that artificially high sugar prices due to tariffs cost the American economy $1.9 billion of deadweight loss a year, on average. Since there would be an estimated 3,600 jobs at risk due to international competition if the industry was liberalized, this means that it costs around $600,000 to preserve a single at-risk job through the tariffs. Considering that the mean wage of the industry is $37,000, the implication is that the opportunity cost to our economy of saving one job in the sugar industry is $563,000. This is about 3.5 times the average CEO salary!
This interesting mathematical fact is obtained assuming that the price benefits of the TRQs are equitably distributed among sugar farms, meaning that the assumption is the tariff rents are being used to only save jobs across all sugar farms. In practice, however, quite the opposite is true due to the incredible concentration of firms in the industry. According to Irwin, an astounding 42% of the benefits from the tariffs go to just 0.02% of the farms, most of which are under the control of just one family, the Fanjul family. This is further complicated by the problem that these firms receiving the most benefit are the ones that would be least affected by international competition. Not only are the tariffs not helping those they are intended to support but they are also simultaneously destroying jobs in downstream industries, which are forced to bear the tariff’s costs. These unfortunate industries include America’s far more efficient sugar refining and confectionery industries. While these industries pass a lot of the cost onto consumers, the tariff-inflated price of their input lowers employment and output. As a result, US sugar protectionism results in both significant economic costs and also punishes more efficient industries.
In addition to making absolutely no economic sense, American sugar protectionism has inadvertently exacerbated many prevalent current problems. Two areas of concern in which sugar trade policy has hampered progress are obesity and alternative energy. Compounded by the government’s subsidies for corn, the distorted sugar prices leads to a relative price of sugar when compared to corn that is many multiples higher than those in other countries. As a result, a substitution effect occurs in which firms in the American food industry switch from using sugar to high-fructose corn syrup, which is unhealthier and cheaper. A prominent example of this is Coca-Cola, which is made with corn syrup in the US and sugar in Mexico, as a result of sugar prices being too high here. The US’ excessive use of high-fructose corn syrup is one of the major causes of obesity, and its widespread use has been fueled by the sugar tariffs.
Of even greater concern is how the sugar price distortions are affecting the alternative energy sector. Part of the protectionist regime is extended to include tariffs on sugar ethanol, which is an alternative vehicle fuel that can be refined from sugar. The political explanation for this tariff is to protect the corn ethanol industry from much more efficient foreign sugar ethanol, a perfect substitute. But this political reasoning makes no sense from an economic or environmental perspective. By using sugar ethanol in place of, or even in conjunction with, corn ethanol, vehicle fuel efficiency can be further boosted. In fact, sugar ethanol is up to five times more efficient than corn ethanol and nearly as cheap on the world market. However, as a result of draconian tariffs, sugar ethanol has become so costly in the US that it is rarely used. In Brazil, the largest producer country of sugar and sugar ethanol in the world, near 40% of cars are capable of using sugar ethanol enhanced fuels and enjoy higher fuel efficiency as a result. Sugar tariffs are not just hurting American pocketbooks—they’re also hurting our environment.
Another major area where American sugar protectionism hurts the US is foreign policy, especially in Latin America. Latin America produces most of the world’s sugar. By making the American market nearly inaccessible, the sugar tariffs have kept many sugarcane growers at artificially lower levels of development, which has directly contributed to the region’s poverty issues. This has lead to increased crime, especially as growers switch to drug production or trafficking as an alternative. For the US, curbing drug violence in neighboring Mexico has become a priority as the drug cartels’ crime spills over across the border.
Another byproduct of the sugar tariffs is their negative effect on American soft power. By contributing to drug problems and harming a very important industry in Latin America, the United States’ sugar protectionism has led to frosty relations with many countries in the region, especially Brazil. During President Obama’s trip to the country, one of the main points of discussion was sugar protectionism. At the most recent round of World Trade Organization negotiations, American sugar protectionism, along with the European Union’s agricultural subsidies, became such a point of contention that talks were suspended indefinitely and to date, no progress has been made. American sugar protectionism has become the US’ greatest foreign policy challenge in Latin America, while simultaneously weakening our relationships with possible allies and international organizations.
With so many detriments and only minuscule benefits, it’s a wonder that sugar protectionism has survived for so long. The logic for abolishing the entire sugar protection regime is overwhelming and would go a long way towards addressing issues that are much dearer to American interests than preserving an insignificant amount of jobs in an inefficient industry. For Americans, the only sweet deal is to liberalize trade in the sugar industry.