SUGAR SUBSIDIES: Sweet for Whom?

 

SUGAR SUBSIDIES: Sweet for Whom?

The United States, Japan, and the EU strongly protect their domestic sugar industries, though they all lack comparative advantage in sugar production. A World Bank report called sugar the “most policy-distorted of all commodities.” Before the WTO forced changes in 2005, the EU's domestic sugar prices were triple world market prices.

U.S. sugar tariffs have been in place since 1789. The U.S. Farm Bill allocates imports among 40 nations through a quota equal to about 15 percent of the U.S. market, except in case of a domestic shortfall. The U.S. Department of Agriculture also provides loans that guarantee sugar farmers a minimum price, regardless of the market. The farmer repays the loan in either sugar or revenues from sugar sale at the market price. This policy encourages domestic overproduction, yet the U.S. price has recently averaged more than double the world price.

Protecting a small number of U.S. sugar growers in 18 states, providing 146,000 U.S. jobs costs U.S. consumers and businesses an estimated $4 billion annually. Free trade in sugar would eliminate fewer than 2,500 workers, meaning the cost of each protected job is more than $1.5 million a year. High sugar prices also led to the loss of 112,000 jobs at sugar-consuming food and beverage companies between 1997 and 2009 and were a factor in companies' decisions to leave the United States for Canada and Mexico, increasing U.S. imports of sugar-containing products. The Life Saver candy brand moved its plant from Michigan to Montreal so it could acquire sugar on the world market, which as a U.S. company it could not import.

Sugar accounts for less than 1 percent of U.S. agricultural sales, but an estimated 17 percent of all agricultural political contributions since 1990. “It's a very effective lobby,” commented Claude Barfield of the American Enterprise Institute. “They've traditionally given a lot of money to both parties.”

Change may yet occur. In 2008, the United States and Mexico removed all barriers to trade in sugar. In 2013, the world was awash in sugar, and U.S. bulk prices tumbled more than 50 percent from their 2011 highs. Perhaps encouraged by the new policy with Mexico, Congress continues to attempt reform, but the 2014 Farm Bill extends the protection of sugar until 2018. Two Iowa State University economists, John Beghin and Amani Elobeid, developed a model of a free sugar market in which “the U.S. price of raw sugar falls by 24 percent to 34 percent (rounded). . . . The wholesale refined sugar price falls by 32 percent to 40 percent, and the retail refined sugar price falls by 26 percent to 33 percent.” This would be without the price increase in world sugar created by larger U.S. imports. Free trade in sugar and trade in alignment with WTO principles sounds like a good idea whose time may be approaching. After all, 1789 was a long time ago.

Questions

1.     Should sugar continue to be a protected commodity? Why or why not?

2.     Should the U.S. consumer continue to fund protection for U.S. sugar farmers? Why or why not?