Tuesday, May 02, 2006

Sugar Quotas

An ec 10 student emails to ask for some information about U.S. sugar quotas. I am not an expert on the subject, but here is what I know.

Most economists view U.S. policies toward sugar as a deplorable departure from the principles of free trade. About a year ago, The Economist magazine summed up the situation as follows:
Outrageous import quotas keep the domestic price of sugar at double that of the world price. CAFTA [the Central America Free Trade Agreement] would allow more imports in from Central American countries, but still less than 2% of US sugar production. For the sugar lobby—and the 15 or so Republican politicians who follow its bidding—that is still too much.
See also George Will's old column on the topic and this Reuters article on the current situation.

The economics here is straightforward. It is a standard case of protectionism for the benefit of politically powerful domestic producers (including the producers of sugar substitutes, such as corn syrup). The losers are American consumers and farmers in developing nations.

One interesting wrinkle is that sugar is used to make ethanol. If the United States had truly free trade, we would be enjoying not only cheaper soft drinks but also cheaper fuel, as Harvard historian Niall Ferguson (alternate link) pointed out in yesterday's LA Times. In a column called "Put some sugar in your tank," he writes:

Unnoticed in the northern hemisphere, one country is pioneering a transportation revolution by switching from petrol to ethanol. That country is Brazil. Today, ethanol accounts for 40 per cent of all automobile fuel in Brazil, while 80 per cent of new Brazilian cars are flexible-fuel cars that can run on either petrol or ethanol.

What's preventing the northern hemisphere from following Brazil's lead? The answer is not so much Big Oil -- though American oil companies have fought tooth and nail against the introduction of ethanol, even as a fuel additive -- as Small Agriculture. To protect northern farmers, huge tariffs are currently imposed on imports of Brazilian-produced ethanol by both the United States and the European Union.