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December 4, 2001No. 13
Nowhere is there a larger gap betweenthe U.S. government’s free-trade rhetoricand its protectionist practices than in thesugar program. Through preferential loanagreements and tariff-rate quotas, the U.S.government thwarts price competition tomaintain an artificially high domesticprice for sugar—a price that can be twicethe world market price or higher.The program benefits a small numberof sugar producers, but virtually everygovernmental and nongovernmentalsurvey concludes that the programresults in a net loss of welfare for the U.S.economy, with U.S. consumers sufferingthe most. Direct costs to consumers dueto higher prices could be as much as $1.9billion a year and the net welfare loss tothe U.S. economy nearly $1 billion.Moreover, the U.S. government spendsclose to $1.68 billion a year buying andstoring excess sugar to maintain thoseartificially high domestic prices.U.S. sugar consumers would not bethe only winners if U.S. price supportsand quotas were removed. Poor nationswould benefit as well. Freeing just theU.S. market would boost global demandand raise world prices by 17 percent,increasing the annual export earnings of developing nations by $1.5 billion.America’s sugar quotas pose a threatto multilateral and regional trade negoti-ations. U.S. trading partners routinelyand rightly point to quotas as beinginconsistent with U.S. demands for moreopen markets abroad. The sugar pro-gram has become an obstacle to loweringforeign trade barriers to U.S. exports.The U.S. sugar program is a classiccase of concentrated benefits and dis-persed costs: a very small number of sugar growers receive enormous benefits,while the costs of providing those bene-fits are spread across the U.S. economy,specifically to consumers and confec-tioners. Repealing the sugar quota pro-gram will require more vigorous leader-ship from the president and the manymembers of Congress who represent farmore people who suffer from the U.S.sugar program than who benefit.
 America’s Bittersweet Sugar Policy
by Mark A. Groombridge
Mark A. Groombridge completed this study while a research fellow at the CatoInstitute’s Center for Trade Policy Studies. He is now an adviser to the undersecretaryfor arms control and international security at the U.S. State Department.
Executive Summary
 
Introduction
The United States has long championeditself as the world leader of the free-trademovement. Recognizing that protectionisttrade barriers hurt consumers as well asexporters and import-consuming industries,the United States has been at the forefront of trade liberalization since World War II. Butthat leadership has been missing in severalpolitically sensitive sectors of the U.S. econo-my. Despite the economic arguments in favorof free trade, some industries remain highlyprotected because of the strength of powerfulinterest groups and the absence of countervail-ing consumer pressure to reform. Those barri-ers hurt the domestic economy and undermineU.S. efforts to launch successful multilateraland regional trade negotiations to promotemore open markets around the world.Perhaps there is no more egregious exampleof the U.S. government’s hypocrisy in thisregard than its sugar policy. Through policiessuch as preferential loan agreements and tariff-rate quotas, the U.S. sugar industry is highlyeffective at keeping foreign sugar out. By guar-anteeing a minimum price for sugar, the U.S.government forces the price of sugar in ourmarket to go up substantially.Who pays the price for our sugar programs?The answer is U.S. industries that rely on sugaras an input and, ultimately, of course, U.S. con-sumers. Sugar programs raise prices for con-sumers through restricted competition andimpose costs on taxpayers because the U.S. gov-ernment must buy and store excess sugar tomaintain those artificially high domestic prices.It is not just U.S. consumers that suffer fromtrade protections in the sugar industry—thefoundations of the multilateral trading systemsuffer as well. A number of countries point tothe U.S. policy on sugar as a justification fornot lowering their own trade barriers. Giventhe number of Latin American nationsinvolved in the production of sugar, U.S. sugarpolicy will likely make it difficult to successful-ly conclude a free-trade agreement of theAmericas (FTAA), which would establish theentire western hemisphere as a free-trade zone.U.S. sugar policy will also complicate efforts tolaunch a new round of global trade talksthrough the World Trade Organization.Advocates of trade barriers in the U.S. sugarindustry argue that other countries protect theirown sugar industries far more than does theUnited States. In some cases that is true, but it isa very weak excuse for keeping foreign sugar outof the U.S. market. Lowering trade barriers inthe U.S. sugar industry, even unilaterally, is afavor that we can bestow upon ourselves.Yet the sugar program endures. The U.S.House of Representatives, in February 1996,came within five votes of abolishing the U.S.sugar program; five years later, on October 4,2001, the House could only muster 177 votesfor a modest amendment to cut the sugar loanrate by 1 cent per pound. The U.S. sugar pro-gram is a failure by every measure except itspolitical support in Congress.
Sugar Policy in theUnited States
The United States is the world’s fourthlargest producer of sugar (behind Brazil, India,and China) and the fourth largest importer.
1
Since 1981 the U.S. government has operateda price support program for sugar beet andsugar cane producers and processors. Theostensible goal is to maintain high prices bylimiting imports. Unlike other agricultural sec-tors in the United States, there are no restric-tions on domestic sugar production. Therewere cosmetic changes to sugar policy in theFederal Agriculture Improvement and Reform(FAIR) Act of 1996, but no substantivereforms were made.
2
Historically, the United States producedabout 55 percent of the sugar it consumed andimported 45 percent. Largely as a result of cur-rent U.S. sugar protections, today the UnitedStates produces 88 percent of domestic con-sumption and imports only 12 percent.
3
The U.S. sugar program has two primaryfacets. The first is price support loans. Unlikeother farm loan programs, the U.S. sugar pro-
2
The U.S. sugarprogram is a failureby every measureexcept its politicalsupport in Congress.
 
3
gram makes loans available to millers andprocessors, which are generally corporations orcooperatives, rather than directly to individualfarmers. Under a system of “non-recourse”loans, processors agree to pay growers the gov-ernment-established minimum price based onloan rates for cane and beet sugar, pledging thesugar as collateral. When the loan matures,processors must decide whether to pay off theloan, plus interest, and sell the pledged sugaron the domestic market, or forfeit the sugarand keep the money paid to them by the U.S.government. If domestic sugar prices fall belowthe loan rate, sugar processors may forfeit up to10 percent of their sugar to the U.S. govern-ment, with a 1-cent per pound penalty, ratherthan repay the loans.Of course, if the U.S. sugar market were opento unrestricted imports, the artificially highdomestic price would attract lower-pricedimported sugar, driving down the domestic priceand forcing the government to acquire hugeamounts of sugar as processors decided to forfeittheir sugar to the U.S. Department of Agriculture. To avoid that scenario, the U.S. gov-ernment intervenes in the market a second time:through a system of tariff-rate quotas (TRQ).Tariff-rate quotas for raw cane sugar are allo-cated on a country-by-country basis among 41countries in total, while those for refined sugarare allocated on a global first-come, first-servedbasis. If demand for sugar outstrips supply in theUnited States, the USDA can alter the quota asneeded. Although sugar can enter our market inexcess of the TRQ, a prohibitive duty of close to16 cents per pound is imposed.
4
Government intervention is somewhat lim-ited by international agreement. In accordancewith the 1994 Uruguay Round Agreements(which established the WTO), the UnitedStates is committed to importing roughly 1.25million tons of sugar annually. Similarly, underthe North American Free Trade Agreement,the United States must accept an increasingamount of sugar imports from Mexico andgrant Mexican producers full access to the U.S.sugar market by 2008.
5
Despite those mildconstraints, the U.S. sugar program remainshighly interventionist.
Who Pays the Pricefor Protectionism?
Documenting the exact cost of trade pro-tectionism in any industry is no easy task, andthe sugar industry is no exception. Virtuallyevery governmental and nongovernmental sur-vey, however, concludes that the U.S. sugarprogram results in a net loss of welfare for theU.S. economy, with U.S. consumers sufferingthe most.
A Huge Consumer Tax
Although there is some fluctuation in price,U.S. consumers over the past 20 or so yearshave typically paid roughly twice the worldmarket price (Table 1). Currently, the numberis higher, with U.S. consumers paying 22 centsa pound for sugar, while the world price (as of October 15, 2001) is just under 7 cents apound.
6
World market prices will likely remainlow as well in light of expanding production.Global sugar production has increased 22 per-cent in the last six years, with Brazil accountingfor the largest gain.
7
The U.S. General Accounting Office, whichdoes not take a policy position in the debate,estimated in its latest analysis that the sugar pro-gram cost domestic sweetener users $1.9 billionin 1998. By “users” the GAO means sugar canerefiners, food manufacturers, and consumers.
8
Complementing the GAO report, the U.S.International Trade Commission concludedthat abolishing the U.S. program would result ina net annual welfare gain to the U.S. economyof $986 million.
9
Other studies have also found that signifi-cant economic costs are imposed by U.S. sugarprotectionism. One study by the AustralianBureau of Agriculture and Resource Economicsconcluded that U.S. government supportaccounts for around 40 percent of Americansugar producers’ revenue. According to theABARE study, if the United States unilaterallyremoved its trade barriers on sugar, U.S. con-sumers would save an estimated $1.6 billion ayear, and the U.S. economy as a whole wouldgain an additional net $456 million per year.
10
The U.S. GeneralAccounting Officeestimated in itslatest analysis thatthe sugar programcost domesticsweetener users$1.9 billion in 1998.
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