Oct 19 2007

Protection in the sugar industry- don’t taste so sweet no more!

Published by at 2:25 pm under Barriers to trade,Free Trade,Protection

Seeing Sugar’s Future in Fuel – New York Times

“The sugar producers say whatever its costs, the new farm bill is needed to save their industry.”

We’ve all heard the news about this amazing new fuel that just might save the world from the perils of global warming… ethanol, food fuel, alternative energy, replacement for oil, the panacea to all of America’s energy, climate, and geo-political woes! Corn farmers in America’s grain belt have benefited hugely of late due to large subsidies bundled with America’s latest farm bill.

The new version of this bill, being debated in Congress now, contains a proposal to prop up the country’s 12,000 sugar farmers by promising to buy any surplus sugar resulting from cheap sugar imports from Mexico (themselves the result of market liberalizations accompanying the North Atlantic Free Trade Agreement) at a profitable price. The sugar lobby insists that sugar should play a larger part in the production of ethanol, currently which is made mostly from corn.

To effect that policy, the government would buy excess sugar and sell it at a loss to ethanol producers. They ferment corn starch to ethanol, but adding a little sugar can speed the reaction…

Mr. Keenum suggested that the Agriculture Department would end up buying sugar for 22 cents a pound and selling it to ethanol producers for 4 to 7 cents a pound. “You can easily do the math and look at the loss potential,” he said.

What’s the problem with this picture? Well, clearly America’s 12,000 sugar farmers are benefiting, because they have a guaranteed market for their product, even in the face of much cheaper sugar coming from Mexico (which clearly has a comparative advantage in sugar). But what are the costs? Taxpayers, of course, will foot the government’s bill as it buys up all of the excess sugar, and taxpayers will take the loss when that sugar is sold to ethanol producers at a fraction of the price.

So what’s got the sugar farmers all in a tizzy anyhow? The problem is FREE TRADE!

At issue is a provision of the North American Free Trade Agreement, the big trade pact meant to create a common market among Mexico, Canada and the United States. Though NAFTA was adopted in 1993, some of its more controversial provisions are only now taking effect.

One of them will soon open the United States to unlimited sugar imports from Mexico — the biggest crack in years in the wall of price supports and protectionism the government, at the behest of the sugar industry, has erected against foreign competition. That system includes quotas to limit domestic production and tariffs to limit imports, resulting in a market price for sugar in the United States that is typically twice the world market price.

Here’s the problem with the sugar farmer’s proposal: NAFTA and the removal of tariffs and quotas it mandates are meant to help Americans, Mexicans and Canadians alike as government intervention is reduced and their respective economies shift towards a combination of goods and services in which each nation has a comparative advantage. Through trade, all three countries will eventually enjoy a higher standard of living, with access to more products and better prices than they ever would have without trade!

So the benefits of lower prices and increased output in both Mexico and the US that should result from free trade are being resisted by an extremely small group of farmers in two states in one of the countries. Gains to hundreds of millions of American consumers and tens of thousands of Mexican farmers (not to mention the countless American industries that export products to Mexico and thus benefit from freer trade and higher incomes there) are threatened. And, for what? Read this:

Across a big swath of the state, the sweet smell of molasses wafts on the breeze in autumn, social life revolves around sugar fairs and festivals, and old sugar kettles decorate flower gardens. Whitewashed mansions, stately but not always well maintained, are shaded by live oaks draped with moss.

People fear the loss of a way of life with the onslaught of Mexican sugar. Louisiana’s farmers and mill workers say sugar is in their blood…

How quaint… Millions upon millions of consumers, producers, and farmers, rich and poor, in American and abroad, are to pay higher prices and put $660 million of their tax dollars towards subsidizing the aristocratic, high-browed lifestyle of an inefficient industry that by most counts should have died out decades ago if it weren’t for government protection.

In the meantime, sugar farmers will keep praying… and donating money to those who have the ability to make their fantasy live on…

Sugar producers donated $2.7 million in campaign contributions to House and Senate incumbents in 2006, more than any other group of food growers, according to the Center for Responsive Politics, a Washington group…

The sugar producers say whatever its costs, the new farm bill is needed to save their industry.

“We don’t like the government spending money, but if they are going to give away our market to foreign imports then we have to look for alternatives,” said Mr. Simon of the American Sugar Cane League.

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

7 responses so far

7 Responses to “Protection in the sugar industry- don’t taste so sweet no more!”

  1. Alex Goldmanon 22 Oct 2007 at 10:56 pm

    In the big picture, the resistance of the small group of sugar farmers seems completely unreasonable. Not only will importing stimulate the sugar trade in Mexico and Canada, but it will also help the production of alternative fuel. Sure, this may cost Americans more tax dollars, but when the environment is at stake this is a relatively cheap price to pay. The greater good should not be hindered by the complaints of a few. The farmers should take the money they are using to endorse lobbyists and use it to specialize in a different product.

  2. Marco Garofaloon 23 Oct 2007 at 10:24 am

    Clearly the American's are trying to save a sunset industry. The fact that the sugar producers need a subsidy to stay in business is proof that Mexico has a comparative advantage in the production of sugar.

    By subsidizing its sugar producers, the US government is protecting its sugar sunset industry. Protectionism reverses the effects of the NAFTA agreement, which was made to reduce the trade barriers.

    The motive for reducing trade barriers is to allow countries to specialize in the production of goods to which they have a comparative advantage. Specialization increases the collective output potential, making people's material well-being better off as a whole. However, protectionist policies are considered barriers to specialization, and make the NAFTA redundant.

  3. Dennis Melzeron 23 Oct 2007 at 10:33 am

    The United States do believe in protectionist policies and for this reason, subsidize their sugar farmers in order to protect the domestic industry from Mexico, which has the comparitive advantages in sugar production. NAFTA proposes that both countries can benefit from free trade, lowering of tariffs and elimination of quotas but Americans can argue that the employment of their citizens and the economy of their industry is important as well.

  4. Kajon 23 Oct 2007 at 10:38 am

    The United States is trying to protect their industry, even though this industry has no future. Sugar farmers in Mexico can produce sugar at much lower costs and therefore the United States farmers should be put out of business. The US farmers that cannot compete with the Mexican farmers should leave this market and enter another, in which they can compete. If they join another market, this would allow the US to import sugar from Mexico with the money they make from the export of the products from the new market which the sugar farmers entered. Mexico has a comparative advantage for producing sugar and the US has the advantage for producing other goods, therefore both countries should produce what they have the largest advantage for. This way both countries would have the largest amount of all goods.

  5. optional.xuon 23 Oct 2007 at 8:55 pm

    The United States is feeling the strain here obviously from the NAFTA agreement. In one hand, it holds better trade agreements, cheaper products, and overall more comparative advantage and specialization with its neighbors, but to American citizens, its disaster. People who are so traditional like these sugar farmers are going to be forced to work in fields of which US has comparative advantage which is most likely the high-tech industry. I understand the complaints of these farmers and it is hard to change so suddenly, but in the name of efficiency and global environment, its something that needs to be changed.

  6. Helenon 23 Oct 2007 at 10:15 pm

    The whole sugar industry is not achieving the allocative efficiency it should be in America's "free market" economy. Too many resources are devoted to a product in which, through its surplus, is apparent that its supply already exceeds demand. Without government intervention, these farmers would soon leave the sugar industry in pursuit of a more profitable industry. Then resources would be directed to somewhere where they are needed and demanded, not burning to waste in an industry of excess.

    It's good that the bill is passed on economic conscience on the government's part, but the justification for the bill by the sugar farmers is just ridiculous. If they were smart and entrepreneurial enough, they could reallocate their resources to another industry, and who knows, they might even be able to keep their "stately mansions".

  7. kevinchiuon 28 Oct 2007 at 4:22 pm

    The fact that the sugar industry is not efficient enough to withstand as an industry should be a clear sign that the U.S. needs to work in an industry where the US has more comparative advantage so they can be more efficient. Like others have said, the US needs to close down this inefficient industry and have the farmers work in an industry in which its compartive advantage would allow a greater gain for the US as a whole, rather than just attempting to help a dying-industry survive that causes inefficiency.