Coalition For Sugar Reform White Paper



As the trading nations of the world head to Seattle this month to initiate the next round of global trade negotiations, one of the most important agenda items to the United States is the continued liberalization of world agricultural markets. While the United States enjoys a substantial comparative advantage in agricultural production, foreign tariffs on agricultural products now average approximately 40 percent, as compared to an estimated 4 percent for tariffs on industrial goods.(1) U.S. agricultural producers also face a host of non-tariff barriers (NTBs) to trade, such as discriminatory sanitary and phytosanitary standards. The WTO case on Beef Hormones and the recent controversy over genetically-modified organisms provide ample illustration of the trend to seek protection utilizing NTBs. The United States, which possesses a relatively open market with low barriers to trade, currently has precious little room to maneuver in WTO negotiations. And no other U.S. trade barrier more greatly constrains USTR's limited leverage to negotiate robust market access commitments in agriculture and reduce agricultural export subsidies than the U.S. sugar program.

How the U.S. Sugar Program Works

Through the combined effects of price supports and import restrictions, the U.S. sugar program, in order to protect domestic sugar producers from a lower world price for sugar, has kept the domestic price of sugar, on average, nearly twice as high as the world price.(2) By law, the sugar program supports the domestic price of sugar by offering non-recourse loans to sugar processors at a rate of 18 cents per pound for raw cane sugar and 22.9 cents per pound for refined beet sugar, with the sugar serving as collateral. These loans allow sugar producers to simply forfeit their sugar (and keep the Government's money) rather than repay the loan if the market price does not allow them to recoup the cost of the loan interest payments and the costs of transporting the sugar to a refiner.

In order to prevent mass forfeitures of sugar to USDA's Commodity Credit Corporation, the Government has put in place a highly restrictive tariff-rate quota (TRQ), which restricts supply and keeps the price of raw cane sugar above 22 cents. The United States Trade Representative (USTR) allocates shares of the TRQ among some 40 designated countries. Sugar imported under the TRQ is either assessed no tariff or a 0.63-cent-per-pound tariff, while imports above this limit are assessed a 15.82-cent-per-pound tariff, which has, in effect, made them too expensive for U.S. importers, refiners and foreign producers to contemplate.(3) Therefore, the tariff-rate quota for sugar, as administered, is actually a quota.

While the original federal law directed USDA to avoid government expenditures by ensuring that sugar processors could always do better in the market than they could by forfeiting, such restraints were eliminated by the 1996 Farm Bill. Yet USDA continues to maintain the market price for raw cane sugar at levels far above what is necessary to ensure that processors will redeem every pound of sugar they put under loan. As a result of USDA's decision to maintain U.S. prices above the level necessary to prevent forfeitures, the Farm Bill's changes have had little, if any, effect on U.S. prices. Thus, the sugar program escaped the Farm Bill without any meaningful reform.

Economic Impact of the Sugar Program on the U.S. Economy

The cost of the U.S. sugar program to domestic consumers and sugar-dependent producers is well-documented. Figure 1 (see attached) illustrates the economic impact of the program in 1998. At the average world price of approximately 11 cents per pound, 22.8 million pounds of sugar would have been consumed in the United States, much of it imported, because domestic sugar producers cannot meet existing domestic demand. By restricting imports by almost 4 million pounds, however, the U.S. price was increased to slightly more than 22 cents, costing U.S. consumers the entire shaded area of the graph (A + B + C + D), or about $2.4 billion.(4)

Trapezoid A represents the producer surplus gain to domestic sugar growers, approximately $1.2 billion. This figure is striking for several reasons. First, the producers who realize this benefit represent less than 1 percent of American farmers, with a large portion of the benefits going to less than 1 percent of all sugar producers. The program has already created numerous new multimillionaires, including one producer who received a staggering $65 million in a single year. This means that the sugar program is actually an elaborate form of corporate welfare.

Second, these windfall benefits, which are realized by only a handful of sugar growers, are taken directly from the pocketbooks of U.S. consumers in the form of higher prices paid at the market for sugar, as well as foods containing sugar and other sweeteners, such as high fructose corn syrup. Because the demand for sugar is relatively inelastic, companies that utilize sugar as an input in their products are able to pass on their increased costs to the consumer.(5) Higher food costs also affect the cost of government entitlement programs, such as food stamps, school lunches, and Meals on Wheels. In other words, the sugar program acts as a regressive tax, causing a greater negative economic impact on those at the lower end of the income scale, who often spend proportionately more of their income on food.

Third, the high cost of domestic sugar has driven many refiners - who are often located in inner-cities -- out of business and caused many sugar-dependent companies to relocate overseas where the cost of sugar is much lower. Because U.S. sugar producers cannot meet existing domestic demand, refineries are unable to find a consistent supply of sugar year round. This situation creates inefficiency and waste and since 1981, has driven 12 out of 23 U.S. sugar refiners, or about 40 percent of total U.S. capacity, out of business. At least 3,300 workers lost their jobs in these plant closures, and more have lost their jobs as other refineries have cut their workforces in order to stay in business. A major reason why soda manufacturers switched from using sugar in soft drinks to high fructose corn syrup is that the sugar program prices sugar out of the domestic soft drink market. Thus, the high price of sugar under the program forces many businesses to relocate abroad, creates thousands of displaced workers, and results in lost tax revenue at all levels of government.

In addition, USDA has recently shown that U.S. sugar producers remain much more highly subsidized than the vast majority of other American farmers. Utilizing data derived from the OECD, USDA compared producer subsidy equivalents (PSEs), an internationally accepted measure of how much an agricultural product is subsidized, across the globe. The results were astonishing. USDA found that subsidies account for almost half -- 41% -- of the value of U.S. sugar producer revenues. U.S. sugar is more highly subsidized than the 39% average for OECD countries, and is even more highly subsidized than the European Union (38%). USDA also found that the subsidy for U.S. sugar -- measured as a percentage of crop value -- is two-and-a-half times higher than for corn, almost six times as high as for soybeans and other oilseeds, one-and-a-half times as great as wheat, and 14 times as great as for pork. Thus, if one wonders why the acute distress of family-sized hog operations has not been matched by equal financial pain among sugar producers, the answer is simple: the federal government takes better care of them.

Rectangle D, approximately $440 million, was realized by those foreign producers who received quota allotments from USTR, also at the expense of domestic consumers (see attached). The program is injurious in this respect for two reasons. First, if the U.S. had implemented a tariff instead of a quota, the U.S. government would have collected this amount as revenue; instead, it is realized by foreign producers in the form of higher profits. Thus, the program leaves the U.S. economy in a worse position, and it forces U.S. consumers to pay unreasonably high prices to foreign producers for only a small part of what they can actually produce.

Second, under a tariff system, the most efficient foreign producers would still beat out less efficient competitors, even while still at a disadvantage to U.S. producers. Quotas, however, do not work this way. In particular, the sugar quota allotments are based on traditional import levels and political considerations, not efficiency and price. This leads to some bizarre results. For example, eleven of the forty countries that are given allocations are actually net importers of sugar themselves, and Brazil and the Philippines enjoy a similar allotment, even though Brazil produces twenty-one times more sugar than the Philippines.(6) Clearly, the sugar quota creates significant distortions in the domestic and world markets for sugar.

Triangles B and C represent a deadweight loss to the U.S. economy of approximately $820 million. Producers do not realize this amount, nor do consumers or the government - it is simply lost. Triangle B represents the efficiency losses from domestic overproduction, which was stimulated by artificially elevating the domestic price of sugar. Triangle C is the loss from too little domestic consumption; the increased price of sugar rendered some consumers, as well as some producers that utilize sugar as a production input, unable or unwilling to purchase sugar. Indeed, the amount of deadweight loss exacted on the U.S. economy by the sugar program is truly staggering.

The U.S. Sugar Program Hurts Developing Countries

The countries that grow and export sugar have been hit harder by the U.S. sugar program than anyone. Around the world, these include some of the poorest countries in Latin America, the Caribbean, Asia, and Africa. In the absence of the sugar quota, world prices would have been 10-30 percent higher during the late 1970's and 1980's, according to the USDA. An open U.S. market for sugar would have stimulated sugar production in these countries, raising per capita incomes and living standards and enabling some of these countries to begin emerging from debt and poverty. Instead, as reported by the Department of Commerce, the reduction of imports on raw sugar during the latter half of the 1980's -- a decrease that resulted from the effects of the sugar quota -- had practically offset all the benefits from the first five years of the Caribbean Basin Initiative.

Additionally, the sugar program distorts the world market, as quotas often do, because allotments are not assigned based on production efficiency, i.e., to those countries who enjoy natural advantages in sugar cane production (countries that are often poor); rather, they are granted in accordance with traditional shares of the U.S. market and too often, political connections.(7) This scheme perpetuates past trade patterns into the future, which discriminates against the poorest countries, who are both more likely to be new producers and have the most pressing need to secure employment opportunities for their people. When exports of sugar are prohibited, some of these countries are forced to turn to other products, such as illegal narcotics, to secure necessary foreign exchange. For these reasons, securing greater access to the U.S. sugar market is perhaps the major objective of developing countries in the Seattle Round.

Environmental Costs of the U.S. Sugar Program: Destruction of the Florida Everglades

The Florida Everglades is one of world's irreplaceable environmental treasures and must be preserved for future generations. Yet the U.S. sugar program has played a major role in causing the Everglades to shrink to half its original size in the past 50 years. In the mid-1960's, sugar production in the Everglades Agricultural Area (EAA) totaled 50,000 acres. By the mid-1990's, production had expanded to more than 450,000 acres, principally due to the artificially high prices guaranteed for domestic sugar. Consequently, Everglades National Park has been polluted with high concentrations of phosphorus, which is a byproduct of the sugar production process. These phosphorus concentrations harm the natural ecosystem of the Everglades and disrupt the normal water flow through the system. In turn, the water flow disruption damages one of the largest barrier coral reef systems in the world, located in Florida Bay. The potential price tag for the joint federal-state project for restoring the Everglades, as estimated by the recent Clinton Administration proposal, is $7.8 billion, a sum likely to be born primarily by the taxpayers, not the sugar growers who are directly responsible for much of the damage. Sustaining a federal sugar policy that continues to provide incentives for overproduction, given the ongoing attempts to revitalize the Everglades, is, thus, both counterproductive and foolish.

The Arguments Against Reforming the Sugar Program Are Unconvincing

The sugar lobby advances several implausible arguments in favor of maintaining the sugar program in its current form. The first argument is that the world price of sugar is not a true price, but instead, reflects a "dumped" price. In fact, as more countries have reformed their agricultural policies and lowered trade barriers, the world price of sugar has become more representative of sugar's actual value. The price of sugar has hovered between 10 and 12 cents for most of the decade, a figure that is not far off the GAO's estimated long-run equilibrium price of 15 cents (the price at which the market would settle if the United States and other countries stopped protecting their sugar producers).(8) Further, Australia, Thailand, and Brazil have expanded their sugar production by 59, 26, and 66 percent over the past five years, respectively, because their producers were making money at current world prices. Thus, the world price is actually a solid reflection of the value at which efficient producers in these countries and others can profitably produce and export sugar.

The second argument advanced by the sugar producers is that the sugar program protects "the little guy" -- America's family farmers -- and we have an obligation not to abandon them. Quite the opposite is true. In 1991, the GAO reported that 42 percent of the benefits of the sugar program were realized by just 1 percent of the sugar producers, and 33 sugar producers each received more than $1 million in subsidies under the program. While this handful of large growers is reaping windfall benefits from the sugar program, USTR is forced to defend the program in multilateral trade negotiations, complicating U.S. efforts to obtain market-opening commitments in beef, dairy, and other agricultural products from our trading partners. As these industries represent a far greater percentage of U.S. agricultural output and employment than does sugar, "the little guy" is actually being pinched by the U.S. sugar program. Further, while the U.S. sugar sector employs approximately 16,400 full-time workers, according to the ITC(9), this figure pales in comparison to the 520,000 thousand jobs in the food processing industry that are negatively affected by the sugar quota, not to mention thousands of jobs in the tourism industry that are lost though the continued erosion of the Everglades.

U.S. sugar growers also argue that the European Union's sugar subsidy program is worse than that of the United States; thus, if the U.S. scraps its own sugar program, subsidized EU sugar will pour into the United States and drive U.S. sugar growers out of business. The European Union's sugar subsidy does, in fact, distort markets in ways the U.S. sugar program does not, because it depends on export subsidies. However, even without the U.S. sugar program, dumped European sugar would be unable to enter the country due to the anti-dumping duties that have been in place for some time against European sugar producers (Belgium, France, Germany) and the countervailing duties applied to European Union sugar. In addition, the U.S. has deliberately chosen not to follow the European model in other agricultural products in the past, instead attempting to compete in world markets and tear down the trade barriers of other countries. The United States must continue to be a leader in removing barriers to trade; the sugar program remains an all-too-obvious exception to that stance.

Finally, U.S. sugar growers contend that reforming or eliminating the sugar program will force most, if not all, sugar producers out of business. Although it is true that some inefficient producers would likely not be able to compete, reductions would not necessarily be difficult for the U.S. economy to handle. USDA and LMC International rank the U.S. sugar industry as one of the world's lowest cost beet sugar producers; thus, with continued reliance on U.S. antidumping laws, the U.S. beet sugar producers can successfully compete without the sugar program. Second, some growers will simply switch to producing other crops in which they can be more efficient. Third, the respected Food and Agricultural Policy Research Institute estimated that if the sugar price supports and the TRQ were eliminated, U.S. sugar production would only decline gradually, by approximately eleven percent over five years for cane sugar and less than that for sugar beets. Such reductions, when contrasted with the inefficiencies, job losses, and other externalities that accompany the status quo, seem minuscule by comparison.

The Sugar Program Hampers U.S. Credibility at the WTO

Unless the sugar program is fair game in Seattle, little progress is likely to be made in opening foreign agricultural markets to U.S. producers, the Administration's top priority. Agriculture is one of the most trade-dependent sectors of the U.S. economy; thus, growth in trade is critical to the future of the U.S. agricultural industry, as well as the rest of the U.S. economy. U.S. exports of agricultural products totaled $54 billion in 1998, a surplus of $17 billion over agricultural product imports. In short, the U.S. has much to gain from continued liberalization, as well as much to lose if the pace of such liberalization slackens; a steep decline in farm prices could create enough domestic political pressure to force a return to discredited supply management policies of the past.

The Uruguay Round took several steps towards reducing government protectionism in the agricultural sector. The Agreement on Agriculture lowered tariffs, eliminated most quantitative restrictions, and reduced trade-distorting subsidies. Developed countries committed to 36% tariff cuts on average, and developing countries agreed to make cuts at two thirds the level of developed countries. The Agreement on Sanitary and Phytosanitary Measures (SPS) provided that all WTO members would use sanitary and phytosanitary measures based on sound scientific principles, to protect human, animal and plant health, rather than to impose scientifically unjustifiable measures to block imports. Further, the Dispute Settlement Understanding provided a strengthened dispute settlement system in order to enforce these new commitments in agriculture and other sectors.

While these agreements represent small steps for the liberalization of agricultural trade generally, much more needs to be done. Despite the tariff cuts negotiated in the Uruguay Round, world agricultural tariffs average 40%. Similarly, export subsidies, domestic support programs, state trading enterprises, and TRQ's maintained by other countries severely distort agricultural trade and reduce opportunities for U.S. farmers at home and abroad. The European Union is a particularly egregious user of export subsidies; in fact, the EU's $7 billion in agricultural export subsidies makes up 85% of the world total. Likewise, the growing world-wide debate over genetically-modified foods has generated considerable negative publicity, especially in Europe, and such controversy could increase the use of sanitary and phytosanitary standards as trade barriers.

Unfortunately, USTR's ability to produce breakthroughs in these areas during the next round is threatened by the continued existence of the U.S. sugar program. The 1996 Farm Bill ended government controls and phased out payments to farmers of corn, wheat, cotton and other crops. The sugar program is a glaring exception to this progress. USDA continues to tightly control the marketplace through the TRQ, and high price support levels remain in effect. The lower duty applicable to in-quota imports is unchanged, while the over-quota duty rate actually rose initially and has remained at levels that are still prohibitive to imports. Thus, the Uruguay Round Agreement, despite its introduction of important principles for agricultural trade, made almost no progress in altering the basic features of the sugar program.

Because the Uruguay Round left the sugar program virtually untouched, other countries can point to it as the prime example of U.S. hypocrisy and deny U.S. access to their markets. It is difficult to expect other countries to purchase additional U.S. agricultural goods, as well as consumer and technology products, when their access to the U.S. sugar market is limited or non-existent. And USTR's stated goal of eliminating disparities in tariff levels will likewise be unattainable. In one notable case -- the NAFTA dairy and poultry decision -- this double standard has already cost U.S. farmers millions of dollars in potential sales. Ruling in Canada's favor, the dairy and poultry panel pointed to the U.S. tariff-rate quota on sugar as justification for Canada's barriers to imports. As a result of the decision, barriers to the Canadian dairy, poultry, and egg markets actually increased for U.S. producers. Ultimately, for the Seattle Round to succeed, all countries must subscribe to the principle that tariff cuts and TRQ expansions must occur at levels that enhance, rather than restrict, trade.

The United States can no longer allow the interests of the few to outweigh the interests of the overwhelming majority of U.S. agriculture, the rest of the U.S. economy, and overall global living standards and world trade. If the United States desires an ambitious result in agriculture to emerge from the Seattle Round, the sugar program must be subject to reform and trade liberalization just like other trade-distorting programs.

1. John Wainio, Economic Research Service, USDA, "Tariffication and Tariff Reduction," January 21, 1999, at 4.

2. From 1996-98, the U.S. price for raw sugar averaged 22.2 cents per pound, while the world price averaged 11.6 cents per pound. "Changing the Method for Setting Import Quotas Could Reduce Cost to Users." U.S. General Accounting Office, GAO/RCED-99-209, July 1999, at 2.

3. Thus, in 1998, only 16% of domestic sugar consumption was imported. See GAO, supra note 2, at 1-4.

4. Estimates on the cost of the sugar program to U.S. consumers depend on assumptions regarding how much the world price of sugar would rise if the United States eliminated its sugar program, as well as the effect on prices if other countries scrapped their sugar programs.

5. Despite such inelastic demand, past practice demonstrates that if sugar prices declined, retailers would likely pass on those savings to the consumer. From 1990-94, during the last sustained decrease in the price of raw sugar, a six percent decline in raw sugar prices was followed by a six percent drop in the retail price of sugar.

6. GAO Report at 11.

7. See Donald Bartlett and James Steele, "Sweet Deal: Why are These Men Smiling? The Reason is in Your Sugar Bowl," Time, November 23, 1998, at 81, for a discussion of the Fanjul family and the Dominican sugar quota.

8. The sugar lobby will no doubt argue that the decline of the world price of sugar over the past year is the result of dumping and is a sure sign of things to come if the sugar program is eliminated. In fact, both world and domestic sugar prices have declined this year due to unprecedented oversupply, stimulated by favorable weather conditions, increases in acreage due to lower prices for other commodities, and contracting markets in Russia and Asia. To the extent that a lower price may be reflective of dumping, however, U.S. antidumping laws provide an effective remedy to a domestic industry that is being injured by less-than-fair-value imports.

9. "The Economic Effects of Significant U.S. Import Restraints," 2nd update, 1999. United States International Trade Commission. Investigation No. 332-325, Publication 3201, May 1999, at 59.