Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared on June 22nd in Project Syndicate.
As the US, Mexico and Canada get ready to begin talks on the re-negotiation of NAFTA – possibly as early as August – governments are giving a lot of attention to one particular product: sugar. The outcome will predictably be a sweet deal for the US sugar industry, quite the opposite of Trump promises to “drain the swamp” of disproportionate influence in Washington by special interests.
It’s an old story, in the US as in other industrialized countries. The politically powerful sugar producers receive protection in the form of tariffs and quotas on imports, to keep the domestic price of sugar far higher than the price in such low-cost supplier countries as Brazil, Australia, the Dominican Republic, the Philippines, and Mexico.
Sugar in NAFTA
As part of NAFTA, the US was supposed to open up the American sugar market to Mexico. Indeed sugar was one of the few products in which free trade meant the removal of high US barriers, whereas the Mexicans had high barriers on many US products that NAFTA required them to remove. But the required sugar liberalization was delayed long after NAFTA took effect in 1994.
Mexican sugar exports to the US did not rise strongly until 2013. Then when they did, American producers and refiners lost no time in seeking protection. The Commerce Department decided to give it to them: tariffs up to 80%. This threat forced Mexico to agree in 2014 to limit its sugar exports and to explicitly prop up the US price.
Mexico this month apparently agreed to extend the limits. According to Commerce Secretary Wilbur Ross, “The Mexican side agreed to nearly every request by the US industry.” (The recent agreement apparently has as much to do with protecting American refiners per se by tightening the limits on trade in raw sugar, as with any adjustment in the overall level of protection of the sugar industry a whole.)
Why is sugar protection bad? Consider some cost/benefit analysis.
Let’s start with the benefits, because the list is short. The beneficiaries are American sugar growers – particularly a small group of wealthy cane producers concentrated in Florida plus sugar beet farmers in places like Minnesota and the Dakotas. They have a long history of generous campaign contributions to the relevant politicians. For example the famous Fanjul brothers, Alfonso and Jose (who incidentally are Palm Beach neighbors and friends of Secretary Ross), reportedly gave a half million dollars for the inauguration ceremonies of President Trump in January. Another company, US Sugar, has been donating equally generously to Florida Governor Rick Scott.
Economic costs of sugar protection
The costs of measures to protect the sugar industry are far more numerous than the benefits.
- As with trade barriers in most industries, American consumers are hurt by the high price of US sugar, which has been double the world price on average over the last 35 years. The cost to consumers has been estimated at $3 billion a year.
- Candy and ice cream companies of course use sugar in their production and so are also hurt by the distortedly high price. They have been shedding employment for years, as confectioners move their factories offshore where their chief input is less expensive. (Outsourcing of manufacturing jobs, anyone?) The International Trade Administration of the US Commerce Department found that “sugar costs are a major factor in relocation decisions” and estimated that “For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.”
- One might think that making sugar expensive would at least have big benefits for Americans’ health. But no. For one thing, the artificially high price of the white crystals was partly responsible historically for the explosion in the production of high-fructose corn syrup as a substitute and its use in a startlingly wide variety of foods. HFCS is at least as bad as sugar health-wise.
- Sugar cane in Mexico is produced by hundreds of thousands of small, mostly poor, farmers. Depriving them of their livelihood is bad foreign policy. Think of the undesirable alternatives to which those farmers might turn. Or think of the larger message that is sent to the world when US actions are seen to contradict its lectures about the virtues of the market system.
- Limiting imports is also bad for US exporters. The macroeconomic channels may not be obvious. But if Mexicans can’t earn dollars by exporting to the US, they won’t have dollars to spend on US goods; the dollar will appreciate against the peso and so render US exports uncompetitive. More tangibly, if the US were to ratchet up tariffs against Mexican sugar as it threatens (which it would do in the name of fighting dumping and subsidies), the Mexicans would immediately respond by raising tariffs against US exports (again in the name of fighting dumping and subsidies).
- The taxpayer is on the hook as well. Besides import barriers, another way that the US government protects domestic sugar farmers is a policy of putting a floor under the price via nonrecourse marketing loans (from the USDA’s Commodity Credit Corporation). When the domestic price dips down near the floor, as it did in 1999 and 2013, the government in practice subsidizes the producers at taxpayer expense (despite “no-cost” promises to the contrary).
Environmental costs of sugar protection
- If the US hadn’t historically blocked sugar imports from countries such as Mexico and Brazil, it could have used sugar-based ethanol in auto gas tanks, at lower cost to both the environment and the consumer. (This policy failure was worse before 2012. The American taxpayer paid directly to subsidize corn-based ethanol produced in Iowa, under an incorrect claim of environmental benefits. At the same time, the US maintained a tariff of 54 cents per gallon on imports of sugar-based ethanol from Brazil, which is indeed good for the environment on net. Even after those egregious features were removed five years ago, an inefficiently high fraction of corn production is still diverted from food use into ethanol.)
- Speaking of the environment, the last negative effect on the list brings us back to the topic of swamps. The Everglades – the unique system of wetlands in southern Florida that includes a National Park – have suffered environmental degradation for a century. They have shrunk to half their original size because the incoming flow of water was diverted by federal water projects early in the last century (by the US Army Corps of Engineers). Furthermore, phosphorus run-off has altered the eco-system (choking out sawgrass, feeding algae blooms). In recent years, plans to reverse the damage to the “river of grass” legislated by Congress in 2000 have been delayed. The main problem all along has been the nearby sugar cane industry, which demands the diverted water, supplies the phosphorus run-off, and lobbies politicians with some of the resulting profits. Most recently, sugar interests have posed financial and political obstacles to efforts to build a reservoir (south of Lake Okeechobee) as part of the year-2000 Everglades restoration plan.
Under a free market, it would not be profitable to grow so much cane on valuable South Florida land, if any. But Trump’s idea of “draining the swamp” in Washington is evidently to artificially stimulate the sugar industry through import protection and subsidies, and to let everyone else bear the cost: consumers, candy manufacturers, Mexico, and the environment. That includes draining the Everglades.
This post written by Jeffrey Frankel.