Wednesday, May 4, 2011
The Great Sugar Shaft
The U.S. government has devotedly jacked up American sugar prices far above world market prices since the close of the War of 1812. The sugar industry is one of America's oldest infant industries — yet it dodders with the same uncompetitiveness that it showed during the second term of James Madison. Few cases better illustrate how trade policy can be completely immune to economic sense.
The U.S. imposed high tariffs on sugar in 1816 in order to placate the growers in the newly acquired Louisiana territory. In the 1820s, sugar plantation owners complained that growing sugar in the United States was "warring with nature" because the U.S. climate was unsuited to sugar production. Naturally, the plantation owners believed that all Americans should be conscripted into the "war." Protectionists warned that if sugar tariffs were lifted, then the value of slaves working on the sugar plantations would collapse — thus causing a general fall in slave values throughout the South.
In 1934, the U.S. government imposed sugar import quotas to complement high sugar tariffs and direct government subsidies to sugar growers. By the 1950s, the U.S. sugar program was renown for its byzantine, impenetrable regulations. Like most arcane systems, the sugar program vested vast power in the few people who understood and controlled the system. As author Douglas Cater observed in 1964, "In reviewing the sugar quotas, House Agriculture Committee Chairman Cooley has had the habit of receiving the [foreign representatives interested in acquiring sugar quotas] one by one to make their presentations, then summoning each afterward to announce his verdict. By all accounts, he has a zest for this princely power and enjoys the frequent meetings with foreign ambassadors to confer on matters of sugar and state."
Sugar quotas have also provided a safety net for former congressmen, many of whom have been hired as lobbyists for foreign sugar producers.
Since 1980, the sugar program has cost consumers and taxpayers the equivalent of more than $3 million for each American sugar grower. Some people win the lottery; other people grow sugar. Congressmen justify the sugar program as protecting Americans from the "roller-coaster of international sugar prices," as Rep. Byron Dorgan (D.-N.D.) declared. Unfortunately, Congress protects consumers from the roller-coaster by pegging American sugar prices on a level with the Goodyear blimp floating far above the amusement park. U.S. sugar prices have been as high as or higher than world prices for 44 of the last 45 years.
Sugar sold for 21 cents a pound in the United States when the world sugar price was less than 3 cents a pound. Each 1-cent increase in the price of sugar adds between $250 million and $300 million to consumers' food bills. A Commerce Department study estimated that the sugar program was costing American consumers more than $3 billion a year.
Congress, in a moment of economic sobriety, abolished sugar quotas in June 1974. But, on May 5, 1982, President Reagan reimposed import quotas. The quotas sought to create an artificial shortage of sugar that would drive up U.S. prices and force consumers to unknowingly support American sugar growers. And by keeping the subsidies covert and off-budget, quotas did not interfere with Reagan's bragging about how he was cutting wasteful government spending.
Between May 1982 and November 1984, the U.S. government reduced the sugar import quotas six times as the USDA desperately tried to balance foreign and domestic sugar supplies with domestic demand.
While USDA bureaucrats worked overtime to minutely regulate the quantity of sugar allowed into the United States, a bomb went off that destroyed their best-laid plans. On November 6, 1984, both Coca Cola and Pepsi announced plans to stop using sugar in soft drinks, replacing it with high-fructose corn syrup. At the drop of two press releases, U.S. sugar consumption decreased by more than 500,000 tons a year — equal to the entire quotas of 25 of the 42 nations allowed to sell sugar to the United States. The quota program drove sugar prices so high that it wrecked the market for sugar — and thereby destroyed the government's ability to control sugar supply and demand. On January 16, 1985, Agriculture Secretary John Block announced an effective 20 percent cut in the quota for all exporting countries.
Sugar quotas made it very profitable to import products with high amounts of sugar. As a USDA report noted, "The incentive to circumvent restrictions had led to creation of new products which had never been traded in the United States and which were designed specifically for the U.S. market." On June 28, 1983, Reagan declared an embargo on imports of certain blends and mixtures of sugar and other ingredients in bulk containers. Naturally, businesses began importing some of the same products in smaller containers. The Economic Report of the President noted, "Entrepreneurs were importing high-sugar content products, such as iced-tea mix, and then sifting their sugar content from them and selling the sugar at the high domestic price." On November 7, 1984, the Customs Service announced new restrictions on sugar- and sweetener-blend imports.
Federal restrictions made sugar smuggling immensely profitable. The Justice Department caught 30 companies in a major sting operation named Operation Bittersweet. Federal prosecutors were proud that the crackdown netted $16 million in fines for the government — less than one-tenth of 1 percent of what the sugar program cost American consumers during the 1980s. The Justice Department was more worried about businessmen's bringing in cheap foreign sugar than about the sugar lobby's bribing of congressmen to extort billions of dollars from consumers. (Public Voice for Food and Health Policy, a Washington, D.C., consumer lobby, reported that the sugar lobby donated more than $3 million to congressmen between 1984 and 1989.)
A few thousand sugar growers became the tail that wagged the dog of American foreign policy. Early in 1982, Reagan announced the Caribbean Basin Initiative (CBI) to aid Caribbean nations by giving them expanded access to the U.S. market. In his May 5, 1982, announcement, Reagan promised, "The interests of foreign suppliers are also protected, since this system provides such suppliers reasonable access to a stable, higher-priced U.S. market. In arriving at this decision, we have taken fully into account the CBI." But between 1981 and 1988, USDA slashed the amount of sugar that Caribbean nations could ship to the United States by 74 percent. The State Department estimated that the reductions in sugar-import quotas cost Third World nations $800 million a year. The sugar program has indirectly become a full-employment program for the U.S. Drug Enforcement Agency, as many poor Third World farmers who previously grew sugar cane are now harvesting marijuana.
The Reagan administration responded to sugar-import cutbacks by creating a new foreign-aid program — the Quota Offset Program — to give free food to countries hurt by reductions. In 1986, the United States. dumped almost $200 million of free food on Caribbean nations and the Philippines. As the Wall Street Journal reported, "By flooding local markets and driving commodity prices down, the U.S. is making it more difficult for local farmers to replace sugar with other crops." Richard Holwill, deputy assistant secretary of state, observed, "It makes us look like damn fools when we go down there and preach free enterprise."
The U.S. government's generosity to sugar farmers victimizes other American businesses. Brazil retaliated against the United States for cutting its sugar quota by reducing its purchases of American grain. In the Dominican Republic, former sugar growers are now producing wheat and corn, thereby providing more competition for American farmers. American candy producers are at a disadvantage because foreign companies can buy their sugar at much lower prices. Since 1982, dextrose and confectionery coating imports have risen tenfold and chocolate imports are up fivefold.
The sugar program has also decreased soybean exports. In the Red River valley of Minnesota, heavily subsidized sugar growers have bid up the rents on farmland by more than 50 percent. As a result, relatively unsubsidized soybean farmers can no longer find sufficient land to grow soybeans, America's premier export crop. This illustrates how restrictions on imports become restrictions on exports.
The sugar program is corporate welfare in its most overt form. The General Accounting Office estimated that only 17 of the nation's largest sugar cane farmers received more than half of all the benefits provided by the sugar cane subsidies. GAO also estimated that the 28 largest Florida sugar cane producers received almost 90 percent of all the benefits enjoyed by Florida sugar producers from federal programs.
The number of American jobs destroyed by sugar quotas since 1980 exceeds the total number of sugar farmers in the United States. The Commerce Department estimates that the high price of sugar has destroyed almost 9,000 U.S. jobs in food manufacturing since 1981. In early 1990, the Brach Candy Company announced plans to close its Chicago candy factory and relocate 3,000 jobs to Canada because of the high cost of sugar in the United States. Thanks to the cutback in sugar imports, 10 sugar refineries have closed in recent years and 7,000 refinery jobs have been lost. The United States has only 13,000 sugar farmers.
Many observers expected that, with the Republican Revolution in Congress, the sugar program would be abolished when the new farm bill was written in 1996. Instead, the sugar program's survival became one of the starkest symbols of that revolution's collapse. Two-hundred and twenty-three House members cosponsored a bill to get rid of the sugar program; but, when push came to shove, the sugar lobby persuaded several sponsors of the bill (including freshman conservative stalwarts Rep. Steve Stockman [R.-Tex.] and Rep. Sue Myrick [R.-N.C.]) to switch sides. The House voted 217-208 to continue the program.
Environmentalists were anxious about the adverse effects of Florida sugar cane production on the Everglades. Congress did not choose the obvious solution — ending subsides that irrationally encourage sugar production in a fragile area — but instead voted $200 million to clean up the Everglades by buying some of the sugar cane fields from farmers.
There is no reason why the United States must produce its own sugar cane. Sugar is cheaper in Canada primarily because Canada has almost no sugar growers — and thus no trade restrictions or government support programs. Paying lavish subsidies to produce sugar in Florida makes as much sense as creating a federal subsidy program to grow bananas in Massachusetts. The only thing that could make American sugar cane farmers world-class competitive would be massive global warming.
Mr. Bovard is the author of Lost Rights: The Destruction of American Liberty (St. Martin's Press, 1994) and Shakedown (Viking-Penguin Press, 1995).