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Sugar Tariffs (CGL)

First, here are data to help you remember that import prices are not everything. Prices effectively triple between the wholesale price sugar farmers such as the Fanjul brothers receive, and the price you pay in a store. A big baker will pay something much closer to the wholesale than the retail price - if you buy by the train car (not the truckload!), delivery costs per pound are very low. The price gap between Brazilian and US sugar is about 40%. So even if the tariff was eliminated, the price would only fall by about 6¢ wholesale, and by about the same retail. How eager would consumers be to fight over 6¢ per pound? Even though I do some baking,
it takes me over 1 year to use a 5 lb bag!

Prices 1980's Average 2013
Brazil Raw Sugar Price - 14 cents
U.S. Raw Sugar Price 22.16 cents 20.46 cents
US Wholesale Refined Sugar Price 27.06 cents 27.22 cents
Grocery Store Refined Sugar Price 33.59 cents 64.32 cents

Source: US Sugar Prices - American Sugar Alliance, IndexMundi for the Brazil price and XE.com for the Brazilian Real / US$ exchange rate.

Then there is the political economy. The first sugar tariff dates to 1789. Protection was strengthened during the Great Depression with the 1934 Sugar Act, including policies to raise farmer's incomes while at the same time using rationing (esp during WWII) to avoid raising consumer prices. That Act expired in 1974, but in view of his pending election campaign President Ford tripled the import tariff. Presidents Reagan, and George HW Bush also implemented protective measures, while George H Bush was able to veto the Farm Bill in 2008 knowing that Congress would (did!) override his veto. Both Carter (a farmer!) and Clinton (who grew up in a farm district) turned down policies that would have increased sugar protection. There were no changes under Obama. See the Coalition for Sugar Reform for details.

In both the EU and the US the sugar that you buy in a store or get in a restaurant sugar packet is beet sugar. Production dates to the 19th century, when new cultivars with higher sugar content made it a profitable crop, first in Europe and then in the US. In Japan sugar beets were cultivated in the 19th century, but then the expansion of the Empire southward to Taiwan (1895) led to more sugar cane. Today 2/3rds of Japan's sugar is imported, and there remains enough near-tropical land that 20% of domestic output is from sugar cane. Sugar beets are still the overwhelming domestic source. Oh, and that's because of tariffs in all 3 regions.

Sugar growers are a powerful lobby. The Fanjul brothers own over 150,000 acres of Palm Beach County, Florida. That's a potential swing state in national elections (do you know the term "hanging chad"?). Both are politically active – one a Republican, the other not by chance a Democrat. In the Midwest corn farmers are a potent lobby, and in a handful of states so are sugar beet growers. The Senate thus has a big block in favor of agricultural protection. This political economy – enough farmers in enough electoral districts that their vote is essential – is true in Japan, the European Union and NAFTA. In the former two, unless I'm mistaken, direct and indirect farm subsidies are greater than aggregate farm income. The CAP (Common Agricultural Policy) is the single biggest item in the EU budget. Through the good fortune of geography agriculture in the US is inherently more productive, so our overall subsidies are less. It is nevertheless the sector where trade is most constrained by a web of quotas, tariffs, subsidies, cropping restrictions, loan programs and tax breaks.

...trade in sugar could have sweetened the Doha Round...

This matters not just because it was a barrier to the continued integration of the European economies – agriculture has been the biggest sticking point in the various EU expansions, and with attempts to create greater policy cohesion among existing members. On the global trade front, the Doha Round was intended to extend the WTO to cover agriculture, which largely left the sector untouched, other than requesting countries adopt tariffs in place of quotas. [See the textbook for why tariffs are far the better means of protection.] But the politics – dispersed consumers but a geographically concentrated industry, big enough to affect a significant minority of electoral districts in every high-income economy – meant no progress was made. Without progress, however, there was little "benefit" for negotiators from developing countries to take home. The talks have effectively collapsed, and there is no near-term ability to renew them.

...comparative advantage implies we benefit from unilaterally making importing easier...

One real challenge is that several large developing countries are themselves facing pressure to subsidize farmers. China may not be a democracy, but the majority of urban residents have close relatives back on the farm. Keeping urban areas quiet requires making life better in the countryside. Most Chinese farmers now receive cash subsidies. Ten years ago they might have gladly offered many "concessions" to the US and Europe and Japan in agriculture. Now that dynamic is changing. We all lose. Comparative advantage implies we benefit from unilaterally making importing easier. That includes agricultural products. If we're concerned with issues of urban poverty, as is the case now in China, then agricultural imports are particularly beneficial. But because of the politics of "reciprocity," the agricultural sector impedes continued global negotiations. That would be fine if we could rest on our laurels. However, economies are not static, and so areas where all would benefit (healthcare-related sectors, under the rubric of "intellectual property") cannot be addressed because the horse-trading, multilateral most-favored-nation process of global trade negotiations has fallen under the weight of agricultural lobbies. The very real fear is that trade deals are like bicycles: unless they keep moving forward, they fall over and retrogress. Trade in sugar could have sweetened the Doha Round. Politics nixed that.

I will need to address Voluntary Export Restraints in a separate blog post (if at all).

26 thoughts on “Sugar Tariffs (CGL)

  1. johnsonj20

    In his article, "Why Are Some Countries Rich and Others Poor?" (which I accessed through FRED), Scott Wolla substantiated your point that trade would curb poverty in China. Based on per capita Gross Domestic Product, China is poor relative to the United States, Canada, and South Korea. China could greatly benefit from trade, which would give it access to capital resources, a larger market for its products, and opportunities to increase its total factor productivity. Amazingly, according to Wolla, "Recent research suggests that the removal of trade barriers could close the income gap between rich and poor countries by 50 percent." Evidently, China would significantly bolster its standard of living by way of trade.

    1. the prof

      Wolla's numbers are high. We'll look at the logic next week when we look at the sources of growth. Trade does help, but only to a point. Trade realigns sectors, towards higher productivity ones. It doesn't directly increase productivity within a sector. In our Ricardian model, that's the production coefficient, how much 1 unit of labor could turn out. For the gap to be closed, that coefficient – TFP – has to rise.

      For China in particular, it's a large economy, and so the share of trade is more limited. Small economies in general have higher trade shares. The share of trade in the US economy is relatively low

  2. yuy20

    It's interesting to see how this blog mentioned only a handful of sugar beet growers are a strong political presence. The USDA research tables show that beet is about 10% more than cane in total production. A major difference is the fact that almost all sugar beets are genetically modified, and companies switching to cane sugar have discovered that there is a shortage.
    Also, in regards to closing the income gap by removing trade barriers, I think it's also important to think of the social impacts along with the economics benefits. Removing trade barriers increases competition domestically and can negatively impact smaller producers or even countries that are not as developed.

    1. the prof

      What is the impact on Caribbean sugar producers if the US removes barriers on cane sugar? In the US the sector is trivial in size, even within Florida. Farmers can (do) grow alternate crops in Maine and Idaho and northern Michigan (potatoes). And for that matter, the Fanjul family owns the sugar refineries and distributors, so at a personal level they have diversified their businesses. But that's not true for some Caribbean islands, or certain regions of Brazil. It's a (potentially) large sector – if global markets were open. If together the US, Europe and Japan opened their markets, it would help some very poor tropical regions of the world, at small cost even to the farmers directly involved in the temperate world.

  3. Chris Vogel

    I feel as though there is little downside for the US, at least, to remove trade barriers as there are reasonable substitutes for farmers if they no longer want to produce sugar. There is also not many farmers who produce sugar cane/beets, so it wouldn't be a significant issue for most. I think after a CBA the benefits of removing tariffs would outweigh the costs, and it would help countries like Brazil, India, and others. Just saying they do have a comparative advantage in production of sugar cane/beets. It would just be more efficient to open up trading with lower tariffs.

  4. lentza20

    How does government intervention in the sugar industry (and others for that matter) effect the tariffs on that product? If the government subsidizes sugar farmers incomes, would the tariff on sugar be likely to go down or up? And if the tariff goes down, is that in order to promote consumption of domestic sugar? Or maybe to decrease the reliance on import sugar consumption? And finally, does the governmental tariff policy tend to promote international trade over domestic growth or visa versa?

    1. the prof

      The tariff is stated as a percentage of imported value, set by the legislation that passed the WTO and (for Mexico/Canada) NAFTA. If domestic policies change, the tariff doesn't. Since we are a high-cost producer, the domestic price is pintl * (1 + tariff). A grower's cost will be fertilizer + diesel + ... less subsidies. [The price they see will be less because of refining costs.]

      Does that help?

  5. hermana20

    Although the removal of such protection measures like the tariff protecting American sugar producers would only drop the price of sugar by 6 cents this small number adds up when every person buying sugar is taken into account. According to Forbes, "U.S. sugar policy costs taxpayers millions of dimes per year." Also, with the price being 6 cents higher in the U.S. "Americans paid an unnecessary $1.4 billion extra for sugar." What is also alarming, is that our current President has proposed all sorts of steep taxes on countries shipping goods to the U.S. which could have negative political implications if other countries choose to respond and establish their own "protective" measures impeding global trade.

    https://www.forbes.com/sites/timworstall/2017/01/18/if-us-sugar-tariffs-make-americans-poorer-then-donald-trumps-tariffs-will-make-americans-what/

    1. the prof

      One little exception here or there, well, we do live with it, especially if we keep working on new deals. But if things snowball, it's disaster, and that's more likely if we've declared we will focus only on retrogression / do nothing to offset or entice other countries not to retaliate. This is the "bicycle theory" of negotiations – if you don't keep moving...!

  6. motturt20

    It seems like the aggressive protection of US sugar farmers simply redistributes economic struggle onto other manufacturers in the US. Although sugar producers are given an advantage by these policies, other domestic producers compete with other firms globally but face an artificially high sugar price here in the US, putting them at a disadvantage.

    1. the prof

      I don't think it's such a big deal for bakers in the US, but the logic is correct. And indeed, in Japan domestic makers of rice crackers have a hard time, as rice is heavily protected, a 700% tariff the last time I looked, while rice crackers can be imported with no or at most a low tariff.

    1. the prof

      OK, others should try to think through the effects. I can look over and add later. But to start with, here's one you might miss: Congressmen very angry at others in their parties for threatening their re-election campaigns.

    2. the prof

      I see your blog on Cote d'Ivoire. I can guess at most of the content ... cocoa, political instability, the national park with baobab trees and pigmy hippos.

  7. Juliana Kerper

    I was wondering how effective the 1934 Sugar Act was during the Great Depression. If it was effective, why wasn't the act renewed and/or a similar act created in its stead? When President Ford tripled the import tariff, did that have similar effects to the Sugar Act, or did it strengthen protection overall? I suppose the differing economic climate after the Great Depression had an immense effect on the tariffs and quotas that were put into place afterwards.

    I also find it interesting how you said agricultural lobbies are holding back global trade negotiations, and how this problem is paralleled with the fact that sugar growers can make certain states swing states in presidential elections in the US. Has the US (and the world) relied on tariffs and quotas long enough that a complete absence of these things would destroy the incomes of the industry-growers of sugar cane and sugar beet?

    1. the prof

      There were a lot of attempts during the Great Depression to prop up farm gate prices, I don't know the details but pictures of dairy farmers pouring out milk on the ground are a staple of history books. In Japan the opposite happened during WWI: global prices rose, and urban consumers rioted. Efforts to hold down prices included imports from Taiwan and Korea. But that led to rural unrest, that ultimately quashed the Taisho Democracy as it allowed rural militants to gain support. There's no winning when the population is evenly rural/urban.

  8. Nate Abercrombie

    Considering that US Raw Sugar prices have actually dropped and US Refined Sugar prices have only increased marginally, the ginormous ~90% spike in grocery store retail price stands out much more prominently. Is this increase more the result of a spike in consumer willingness to pay or of government/WTO policies that may have raised costs?

    1. wilkinsonw20

      Since Clinton and Carter both vetoed policies that would have increased sugar production, it is also confusing to me why those prices dropped. However, towards the end of the post, it goes on to relate how international trading of food is impeded by the agriculture sector which in turn accounts for the "retrogress" noticed in sugar consumption today.

  9. grims20

    I find it interesting the relationship between sugar farmers and politics, and how the views of sugar farmers such as the Fanjul brothers could have enough power to impact a swing state such as Florida to one political party or the other. I did not really think of agriculture having such a large impact on matters such as EU expansion and other large political movements.

  10. Lukas Campbell

    The USDA's policy on sugar subsidizes sugar farmers to guarantee a minimum price despite true market conditions. This price setting does not affect the average American consumer so much as it does small business or manufacturers that require a large input of sugar. According to the Department of Commerce, for each sugar producing job saved by the U.S.'s high sugar prices, around three sugar/confectionery manufacturing jobs are lost. While American consumers may not notice a 6-cent-per-pound drop in sugar prices, they may perhaps be more inclined to argue in favor of less restrictive trade barriers if they considered the economic impact of the gain of more domestic manufacturing jobs.

  11. thaia19

    I remember learning in microeconomics that political barriers to trade would always have a negative effect on the economy. Given that the economy is one of the most important issues in politics, I was surprised that I had not learned this fact about economics earlier. However, we were not given a real-world example of this fact as we have in this blog post. I do wonder, if an anti-sugar tariff lobby were to be successful, would it have an impact on the US economy?

    1. the prof

      Sugar is "small" in the overall economy. Trade in the aggregate is not – that's why the GATT / WTO is so important. Lots of little reductions do add up to a big deal for consumers (and firms that rely on import-competitive inputs, as even if there are zero actual imports, international prices limit domestic pricing power of would-be monopolists).

  12. hartigank20

    Since based on the fact that comparative advantage implies that we benefit from making importing easier, how do you think removing the tariff would effect our economy? Do you think this could ever happen or does politics play too big of a role?

    Based on a May 2013 paper by John Beghin and Amani Elobeid from Iowa State University’s Center for Agricultural and Rural Development, abolishing the program would result in $2.9B to $3.5B in consumer welfare each year. (https://promarket.org/sugar-industry-buys-academia-politicians/). The paper also said it would create up to 3,000 more jobs.

    Also, I found it interesting how much influence the sugar industry has on politics, especially the Fanjul brothers. I googled their name and throughout the pages I looked at, their political influence in the US was described. For example, Alfonso Fanjul contributed to Bill Clinton’s Florida campaign in 1992 while his brother Pepe contributes to the Republicans.

    1. the prof

      Yes, the brothers are smart political operators, and have extended their business downstream into processing so I suspect are good at the business end, too. We'll (or at least you'll) see if the next generation of the family is as capable.

  13. Kathryn Martin

    The comparison of the increase of wholesale refined sugar prices and grocery store refined sugar prices is interesting. Why is the burden of inflation so heavy on the consumer? Are the grocery stores the reason for the 30.73 cent increase in refined sugar prices since the 80s? Are there any limits in place to restrict grocery stores from selling at obscene prices?

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