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In the midst of every political domain, all sectors in the country thrive to be on the political agenda of
lawmakers. When it comes to that, sugar producers are among the top sectors that influence lawmakers in the United States. It has been a tradition for the United States to protect the sugar producers since the times of the great Depression.
In his article, Virata, an economist who have looked closely at sugar protection stated that, “when the great depression occurred in the 1930s, there was greater surplus of sugar and this would have caused lower sugar prices; to protect the sugar growers, the Congress acted to put some sort of price floor on sugar prices.” Since then, the article claimed that sugar producers have remained hooked and dependent on government support. Debate over whether to protect United States sugar producers or to allow free trade are rare; most trade agreements exclude sugar or have special arrangements for sugar as evidenced by NAFTA. Sugar lobbyists make sure that potential debates to eliminate sugar protection do not even reach the floor for debate most of the times.
Representatives with constituents that grow sugar as their primary means of living can easily kiss their jobs goodbye if they do not protect the interest of their constituents. Simply put, politicians from areas like Florida, Texas, Louisiana, and the Mid-West, where most of sugar is produced are keen on what they say or do in Washington about sugar. When it comes to protecting this crying baby industry, U.S government has used different methods. The methods of choice are usually subsidies, quotas, and tariffs. This research will explain U.S sugar policies and the implications of such actions. The research focuses on subsidies or price support loan programs and tariff-rate quotas, and how the uses of such determine sugar prices in the U.S. sugar market. Part II. Theory development |
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There are number of market related issues that are of concern to the U.S government which prompt them to interfere with the market systems in the sugar industry and any other market sector. Among these issues is the lack of balance between producers and consumers needs. This issue simply state that, if consumers were solely allowed to set prices, they would act in a self-centered way. If that was the case, then producers would not make enough profit and could potentially result in them stopping production. On the other hand, if producers were allowed to solely decide on how much sugar would cost, they would act in their on self-interest. If that was the case, then consumers will be overcharged and exploited. So, the United State government acts as the mediator of trade activities to set a fair playing field for both consumers and the producers in industries such as the sugar.
The primary reason why the government subsidizes domestic producers, taxes imports, or puts quotas on incoming products from other countries is to be able to influence supply and demand of a particular product. Having influenced supply and demand, there will either be an inward or outward shift in the supply or the demand curves of a particular product. There are universal economic laws that deal with supply and demand; these are referred to as the law of supply or the law of demand. The law of supply is the positive relationship between price and quantity supplied, when all other factors that influence supply are held constant. The law of demand states that, there is an inverse relationship between the price of a good and the quantity demanded, when all other factors that influence demand are held constant. Since there is an inverse relationship between price and quantity demanded, it will be a good policy for a government if it intends to help domestic producers, to make goods coming into the country more expensive than the domestic goods. This will make buyers prefer domestic goods over the imported goods. Subsidizing producers to lower their burden in costs of production is one way domestic governments work to bring domestic producers’ costs down and encourage them to even increase production levels which in returns will lower domestic prices due to higher supplies; it is a vicious cycle that never ends. Likewise, since there is a positive relationship between price and quantity supplied, producers will not produce more of a product if the prices are below expectation. To keep prices up and thus make producers continue with production, the government must support a price floor. This price floor comes in many forms, which subsidies and quotas are among them. Having seen that analysis, it is much easier to see whom the subsidies help and whom they hurt in an economy. Subsidies and quotas in the sugar industry were designed to help producers in general. These quotas and subsidies or support programs as they are often referred to in the sugar industry, increase producer’s surplus. Those who are left out of the loop are the domestic consumers; quotas and the implementation of the sugar programs reduce their surplus, these programs only leave consumers with the limited choice of buying from domestic producers. Consumers suffer in terms of paying higher prices when there is no competition in the market. When government wants to help consumers over the producers, it will institute a price ceiling instead of a price floor. There is another group that suffers because of subsidies and quotas; this group is made up of the producers in other countries who are not subsidized by their governments. Most often, it is the third world countries that do not have preferential treatment from developed nations such as the United States, European Union, Japan and many others. Underdeveloped nations such as Sudan, Mauritania and many other sub-Sahara countries of Africa, and poor countries of Asia suffer the consequences of subsidization and other form of trade barriers instituted by the wealthy nations the most. The next question that ought to be asked is why does a government want to influence supply and demand for a particular product? Or in other words, why does a particular government support trade barriers, in this case the U.S government even though it is aware of the consequences of such action? Below are some of the reasons as to why governments take such actions. The reasons provided above are serious issues, which need to be addressed with carefulness by the U.S government or else risk getting into many other problems related to market economy. To reiterate the seriousness of failing to do something about regulating the inflow and outflow of goods within United States, consider this example, “cuts in U.S. sugar import quotas, as predicted, were about to force the closing of a local sugar mill, which in turn would cause newly unemployed workers to grow marijuana,” claimed Alas in his article. Although this is an extreme prediction, there is no doubt that those who have lost jobs because of lower profitability of sugar after reduction in quotas must do something. The scenario highlighted above threatens United States’ security by encouraging and opening up drugs market, which could potentially lead to increase in crime rates. As seen above, there are positive results to be reaped by domestic producers and citizens in general in terms of public interest/ national defense. However, let us not lose sight over the damages caused by such actions. Imposing quotas or restricting imports from allies in order to protect domestic producers can leads to loosing those allies to an enemy such as the former Soviet Union during cold war or currently it will lead to retaliations. The conventional argument has been that, protecting domestic producers in the sugar industry was to protect American jobs. However, careful research have found otherwise; in the article by Dorning, it is reported that an “artificially high sugar price caused by limits on imports was “a major factor” in the loss of 10,000 jobs as U.S. candy makers shift production overseas to take advantage of lower sugar prices”. The Commerce Department concluded as Dorning claimed, “For every job protected in sugar cultivation, three jobs were lost in food production.” Since the market for sugar and in most cases all agricultural products is very competitive, domestic governments must act accordingly to save their own producers from this competition by regulating trade. In the article by Swerling, the market structure of the sugar industry is explained to be a competitive one between the developed and the less-developed nations. H wever, there is one area where the less-developed nations cannot compete: and this is subsidizing sugar or any other agricultural product growers or other domestic producers. The wealthy nations can afford to subsidize their farmers and even their suppliers from abroad through preferential trade arrangements. United States uses many aspects of trade barriers such as quotas, direct subsidies, and tariffs to support its domestic sugar producers. Heavy lobbying from sugar growers and cane sugar factories has help to shape legislation favoring sugar subsidies (Swerling pg. 351). The lobbying has survived because of the power it has gather by putting their strengths together and fund the lobbying efforts to influence law makers in order to implement policies that help sugar farmers and prevent potential harm that could come their way if prices were artificially lower than anticipated. It is without doubt that United States acts to stabilize prices here at home by giving subsidies and imposing tariff-rate quotas on incoming sugar from other countries such as Brazil. In doing so, the United States’ sugar farmers avoid competition from the outside world. Many under-developed nations have complained that this avoidance of competition by wealthy or developed nations hurts their economies. Underdeveloped countries’ comparative advantage is in the cheap labor that goes into the production of goods such as sugar. If a nation like United States subsidizes and impose tariff-rate quotas on their sugar, then the under-developed countries’ abundant and cheap labor will not mean much in the world market. Although Economic analysis has shown over and over again that there is a gain to be made when countries trade, many governments decide to protect some of their industry such as the sugar industry in United States despite the fundamental believe that free trade is good. Sugar domestic farmers in the United States or producers in general would want to make the public and the lawmakers believe that trade globalization is a threat to local economy. In this regard, domestic farmers are acting in a self-interest manner. Governments claim to correct market failures when they act in these protective ways, when in economic reality they are not. A market failure occurs when inefficiency is perceived to be particularly dramatic, or when it is suggested that non-market institutions such as the government would be more efficient and wealth producing than their private alternatives. In the section that will follow, I will discuss the structure of United State sugar policy and give some of the implications that arise when such policies are implemented. Part III. Analyzing the policy |
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For the analysis of this paper, sugar shall refer to all processed sugar regardless of the source since sugar is a very broad term used to capture all processed sugar whether it was processed from sugar beets, cane, or other sources. I will use the term sugar to refer to all processed sugar that is in the final state. Sugar is first processed before it is traded in most cases because it is highly perishable.
The United States is the largest consumer of sweeteners, including high fructose corn syrup, and is one of the largest global sugar importers. The United States ranks among the top sugar producers, and is one of the few countries with significant production of both sugar beets and sugarcane (USDA). Subsidization or support of sugar is not only administered in the U.S alone, but rather are administered all across the board for most industrialized nations. Subsidies supporting agriculture producers are significant and widespread. WTO members report subsidies totaling more than $221 billion per year on average. For the interest of time and resources, I will only look at United States’ sugar industry and how their policies are implemented. The analysis will often touch on how the implementation of such policies affected other countries and what can be their potential reaction. The main focus of the U.S sugar policy has been to regulate supply of sugar in the country, so as to keep the prices up enough for sugar farmers and still maintain sugar demand. Sugar industry has remained a protected infant industry for many, many years as stated earlier and also because of its dynamic market. There are number of things that have kept this industry highly protected in the United States: national security, protecting producers ensuring that jobs are kept in the U.S, high lobbying effort by sugar growers, and preventing dumping from other countries. Although all of the reasons provided above have help to keep the industry protected, the driving force behind the protection wheel is the sugar growers’ ability to control powerful politicians in the country. To analyze the structure of the U.S sugar policy, there are number of aspects that will be discussed. Supply and demand of sugar in the United States, sugar price levels in the United States and the world, and comparative advantage of U.S sugar growers in the world sugar market. Supply and demand is such a central issue at the heart of U.S sugar policy. Taking one at a time, let’s analyze supply. Determinants of supply in general are: availability of resources, technology, and the number of sellers, and governments’ actions such as subsidization, taxing imports or imposing quotas. On the suppliers’ side, government’s action such as price support programs and tariff-rate quotas help sugar producers. Those actions guarantee a certain price and the U.S government acts as the insurance to such price floor using indirect subsidies. Economic theory tells us that since the prices are guaranteed, all else equal, suppliers will produce more therefore leading to a production surplus. However, since the price is guaranteed, sugar growers’ surplus will not be allowed by the government to hit the market, as this will tend to reduce prices. To keep the surplus out of the market, the U.S government must come up with ways to get rid of the entire surplus at the prevailing price. One way of doing that is to make sugar processors pay their loan with sugar instead of money if the prices are low. United States sugar farmers will repay their debt to the government using sugar if their sugar happens not to sell at the guaranteed price. Traditionally, subsidization would result in lowering price, but since surplus is not allowed to go to the market, prices would remain the same, giving suppliers’ unequivocal advantage over consumers. The form of subsidy used in the sugar industry is very different from the one use in other agricultural products. This is very precisely described in the farm bill of 2002 referred to as the (2002 Farm Act). The USDA is very careful in implementing the sugar support programs because it is well outlined in the farm act that failure of the system will allow farmers to repay their |
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before the subsidy, B represents suppliers’ surplus before the subsidy. After the subsidy, if the price was not controlled, the price would fall to P2 and the consumers’ surplus would include A, B, C, D and the supplier Area A represents the consumers’ surplus before the subsidy, B represents suppliers’ surplus before the subsidy. After the subsidy, if the price was not controlled, the price would fall to P2 and the consumers’ surplus would include A, B, C, D and the supplier surplus will be the area covered by E and F. To ensure that the prices of sugar do not fall to P2, the government must do something with surplus captured by area C and D. The sugar support program would make it possible for the processors to give this surplus to the government in return for the loan. The forfeiture of the processed sugar that would have acted as the surplus eliminates any possibility and hope of price falling. Below is the theoretical analysis that shows graphically how the tariff-rate quota system operates in sugar industr
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The areas covered by A, B, C and D would be the consumers’ surplus before the tariffrate
quota was applied. Once the tariff-rate quota is applied, supply will shift to the left causing high-rise in prices to P2. These high prices will result in the reduction of consumers’ surplus to represent only area A and the area B will represent the suppliers’ surplus. The government would make revenue represented by triangle C and D. The revenue made by the government through the tariff-rate quota program does not find it way to the consumers but rather to the producers for more support programs, making consumers the net losers and the producers the net gainers. The 2002 Farm Act requires USDA to operate the U.S. sugar loan program at no cost to the Federal Government. This provision means that USDA must operate the program in a manner that keeps price high in order to avoid the forfeiture of sugar to the government as loan repayment. In order to discourage forfeiture of loans, the sugar price at the time of loan repayment must be high enough to cover the loan principal plus interest expenses and other costs incurred by sugar producers. Another way the U.S government protects their sugar farmers is by preventing foreign sugar or control the amount of sugar that enters the United States’ sugar market. This method of putting a quantitative limit on foreign sugar is referred to as quota. Quotas unlike subsidies keep prices up and allow suppliers to charge astronomical prices, and since consumers have no other choice, they will pay the charging price. However, unlike regular quotas, sugar industry quotas are mixed with tariffs. In other words, tariffs come along with the quantitative limit on sugar and if a country goes over the prescribed limit, their tariff rate will be increased and this will discourage them from importing more sugar to the U.S because then at the going tariff rate, they will not be profitable. In the sugar industry, this policy of mixing the tariffs with the quotas is called tariff-rate quotas. The U.S department of Agriculture announced sugar quotas at the beginning of every fiscal season year. These announcements are made by the secretary of agriculture and are kept for a year until the next season when they can be adjusted to fit the sugar production level. Quotas and subsidies are tabulated together to determine what price will prevail after the implementation of such policy. Looking at demand side of the market, one would find quite the opposite of the supply side. Determinants of sugar demand include consumers’ taste and preference, income, price of substitute goods, number of buyers, and the U.S government’s policies such as taxes, subsidies and quotas. Demand is a very important component in the market structure just as the supply. For those who believe in a market system, government involvement in either side of the market either the consumers or the producers side causes inefficiency in both sides. Subsidization in general is supposed to help consumers by making sugar cheaper in theory because producers are getting money from the government. The subsidies will make suppliers produce more, therefore increasing supply by shifting the supply curve outward as shown on in graph # 1. The increase in quantity supplied would cause prices to fall and consumers would buy more. The scenario described above does not prevail or hold in the U.S sugar industry, at least the price falling part. Although suppliers will produce more, consumers do not reap the benefits because as stated earlier surplus does not hit the market to help lower the price. This surplus is bought and kept by the government to maintain the promise that guaranteed prices for sugar farmers in the U.S. or else the processors will forfeit sugar to the government to pay repay their loan. Imposing tariff-rate quotas on the incoming sugar automatically keep prices high because consumers are limited in terms of how much sugar they can buy from outside. U.S government make sure that the amount of sugar allowed into the United States market is not too much to alter prices that were pre-determined earlier at the beginning of the season. The tariff-rate quota system has been successful as reflected in historic prices for United States’ sugar that are from two to four times the price of sugar in the world market (Markheim pg. 2). |
Source: USDA Economic Research Services http://www.ers.usda.gov/Briefing/Sugar/Data.htm |
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These high prices are good for the U.S. sugar industry and particularly the domestic producers but not good for American consumers who pay more than the world prevailing sugar price for their daily sugar use. The money lost in this trade by the consumers would have otherwise gone to another industry or been saved, or best used to invest in education. The high prices are also not good for any American business that must purchase overpriced sugar for use in production of its own goods especially the soft drinks companies, bakeries, and any other high volume users of sugar. The highly priced sugar in the United States not only becomes a burden on regular consumers but also the manufacturers as well (see prices comparison in graph # 4). Inflated sugar prices also erode the competitiveness of the sugar-using industry because it must charge higher prices for its own goods to cover excessive production costs. This effect results in the spillover cost of protecting the sugar industry. The U.S government allows the producers in the sugar industry to charge high sugar prices and control outside sugar because of different labor cost associated with different countries such as wage differences. Wages in countries like Brazil are so low compared to the wages in United States. Brazil has a comparative advantage in terms of wage compensation for laborers who work on the farm. To ensure that the lower world sugar price due to cheap labor in countries like Brazil do not distort sugar prices in the United States, the U.S government must put in place a policy deem protective of the domestic farmers
Challenges facing the U.S sugar policy |
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There are number of challenges that face the U.S in their sugar policy. They include World Trade Organization, trade agreements, and politics. The recent rounds of talks in the World Trade Organization charter have been focused on the lowering trade barriers and encouraging global trade. It makes United State look like hypocrite to emphasize the important of international trade and at the same time hinders trade. The third world especially countries were United States do not apply preferential trade arrangements, complain that the support programs given to the agricultural products including commodities like sugar is unfair and should not be allowed. The farmers from these countries do not enjoy the same privileges that their counterparts in the United States enjoy, because their governments are often weak and cannot afford to subsidizedomestic farming. These countries are the price takers of the world price
Another big challenge facing the United States in their sugar policy is the issue of free trade agreement; there are several trade agreements in which the United States has participated. These agreements include the North American Free Trade Agreement (NAFTA). Before the adoption of the agreement, the proponent of such policy persuaded the public that the agreement would produce real economic benefits, including increase in employment in the United States and increase in productivity. What is interesting is the fact that sugar was some how exempted from this agreement although free trade was deemed positive for the welfare of the United States and its neighbors; Ironically the government pushed for this agreement claiming that it would also make Mexico a good neighbor politically and turn around then hold on to the traditional ways when it came to sugar industry. There was an exchange of a side-letter agreement that changed key sugar provisions of NAFTA. The agreement stipulates that projected Mexican sugar production would have to exceed Mexico’s consumption of both sugar and HFCS for Mexico to be considered a net surplus producer. For the first 6 years of NAFTA, Mexico was entitled to duty-free access for sugar exports to the United States in the amount of its projected net surplus production, up to a maximum of 25,000 metric tons (Swartz and Bonello) If Mexico was not a net surplus producer, it still would have duty-free access for 7,258 metric tons (USDA). During fiscal years 2001-07, Mexico will have duty-free access to the U.S. market for the amount of its surplus as measured by the formula, up to a maximum of 250,000 metric tons (USDA). Part IV. Conclusion Cost of trade barrier and protectionism are high both for country that support them and the country that are denied the access to the market. Much like the EU, the U.S. is constrained on what agricultural product market to not control heavily, luckily, the sugar producers are among the protected one. While U.S. agricultural subsidies differ in both size and scope from the EU Common Agriculture Policy, they are both well funded, solidly entrenched by protectionist interests that equally protect them. Real and significant cuts in U.S. domestic programs, as called for by other WTO members, would be extremely difficult to push through Congress, especially without extensive commitments by other countries to reduce their own barriers in commodities that United States deem important. For consumers, global barriers to trade in agricultural products such as sugar automatically keeps domestic prices high for food that involve sugar products. This raises the cost of living for families. According to a 2004 OECD study, U.S. farm programs resulted in higher food prices and caused the transfer of more than $16 billion from American households to domestic farmers over and above what the farmers received from direct government assistance. As one can see above, when the government is supporting high domestic prices, it is robbing “John to pay Peter” John being the American consumers and Peter being the domestic producers. Barriers to sugar industry in the United States also depress world prices of sugar in other part of the world, impacting farmers in developing countries. William Cline of the Institute for International Economics has estimated that by removing trade barriers, developed countries could convey economic benefits to developing countries that are worth about twice the amount of annual aid transfers (Cline). In administering subsidies or support program to sugar farmers, infancy is used sometime as the argument, which implies that small farmers who are starting out are primarily supported heavily, compared to big ones. Contrary to the perceptions that support goes only to small, lowincome farmers, is the fact that large, high-income farms are increasingly the beneficiaries of U.S. support programs. A recent report found that both the number and market dominance of large farms (those with sales of at least $500,000) grew significantly between 1989 and 2003. At the same time, the number of small farms (those with sales between $10,000 and $250,000) fell from 40 percent of all farms in 1989 to 26 percent in 2003 (Drusilla, Alan and Robert) Liberal trade enables more goods such as sugar to reach American consumers at lower prices, giving families more to save or spend on other goods and services. Moreover, the benefits of free trade extend well beyond American households. Free trade fosters economic development in poor countries. Because today’s global economy offers unparalleled opportunities for the U.S., it is in America’s economic interest to continue to expand trade by lowering barriers to trade in goods such as sugar. The unprotective policies would create a level of competition in today’s open market that leads to innovation and better products, higher-paying jobs, new markets, and increased savings and investment. This research was very hard for me because sugar industry is a very complicated industry in the United States. There are different ways of getting sugar, sugar cane, sugar beets, and other sweeteners. In the analysis of this paper, I have maintained that all these different types of sugar are classified into one industry. I was not interested in analyzing a particular sugar source but rather the policy that government the United States sugar industry. Works consulted |
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