Sugar Industry Is Exhibit A of Tariff Favoritism

December 19th, 2018


Category: Farm Bill, Sugar

(Bloomberg) – Congress last week quietly passed the farm bill, a vast collage of legislation affecting the agricultural economy of the United States. This law, which Congress updates every five years, undergoes constant revision.

But a few things never change. Foremost among these are the elaborate protections and subsidies given to nation’s wealthy farmers of sugarcane and sugar beets. Their ability to fend off foreign competition for nearly two centuries is a case study in the way that protectionist measures can become political economy zombies, defying all efforts to kill them off.

Congress first slapped a tariff on imported sugar in 1789, but this was designed to raise revenue, not protect domestic interests. In 1842, Congress passed a new, two-tiered tariff on foreign sugar, raising rates on refined-sugar imports in the hopes of promoting domestic refiners, while a separate, but lower, tariff on raw sugar sought to protect domestic producers, mostly in Louisiana.

The Civil War left the South’s sugar producers in ruins. As they began rebuilding, they faced growing competition from several quarters: cheap sugar produced in places like Cuba, as well as a growing amount of refined sugar derived from beets grown in Europe and, eventually, the U.S.

Farmers growing sugarcane in Louisiana clamored for protection — and they generally got it. But so, too, did American beet growers, which also struggled to compete in the global marketplace. In Congress, growers made dire predictions that the nation’s sugar industry would perish if not protected.

Then, as now, this was likely correct: Other nations grew sugar far more cheaply than the U.S. did. And had Congress eschewed protective tariffs on sugar at this point in history, sugarcane and sugar-beet cultivation might well have moved to more favorable climes — as it probably should have. But no such thing happened.

Instead, a complicated system of tariffs kept the domestic cane and beet growers in business. But this became increasingly untenable in the 20th century, as Cuba became what the New York Times described as a “sugar colossus,” capable of producing vast quantities at super lower prices.

The solution? More tariffs, of course. In 1930, for example, a bipartisan coalition of legislators from Louisiana and Michigan — home to cane sugar and beet sugar farmers, respectively — begged for tariffs, or what the Wall Street Journal derisively described as “higher duties to save industries afflicted with an extreme form of prolongation of infancy.”

Yet all these tariffs, including the infamous Smoot-Hawley tariff passed that same year, had a perverse consequence. As the United States Tariff Commission would conclude a few years later, protective tariffs ended up hurting, not helping, the domestic producers.

The reason lay with the fact that the excessive production of sugar outside the mainland U.S. was so enormous that, when faced with tariff barriers, producers like Cuba cut labor costs even as they maintained high levels of production. The result was a flood of super-cheap sugar onto world markets that depressed prices still further — a vicious cycle that put domestic producers at a perpetual disadvantage.

To make matters even more complicated, the tariff had spurred a dramatic expansion of sugar production in U.S. territories and possessions like Puerto Rico and the Philippines, both of which could easily produce sugar more cheaply than domestic producers — and did not have to pay a tariff.

The Tariff Commission recommended that the U.S. abandon protective tariffs and instead adopt an even more extreme solution: a complicated system of production quotas that divided up the sugar market between domestic producers of cane and beet; territorial producers of cane; and the balance reserved for Cuba.

This was akin to Soviet central-style planning, but it became enshrined in law thanks to Sugar Act of 1934, which created detailed production quotas, as well as a system of benefit payments designed to provide yet more support to domestic producers.

Three years later, the Sugar Act of 1937 began to micromanage production even more, capping total production at 1,959,062 tons and then dividing it carefully among different constituencies. Domestic producers got the biggest share (29.47 percent), while territorial possessions (Hawaii, Puerto Rico, the Virgin Islands) received 26.11 percent; the Philippines, under American sovereignty, got 15.41 percent, while Cuba received 28.60 percent — a reflection of the huge ownership stakes that American interests held in that nation’s sugar fields.

Anyone else hoping to export sugar to the U.S. would have to pay punitive tariffs.

These restraints struck many as absurd. Harold Ickes, Franklin Roosevelt’s secretary of the Interior, blasted the legislation as a giveaway to the domestic sugar producers, who could not otherwise compete.

Reviewing the past two decades, Ickes observed: “The domestic industry has continued to thrive on public subsidies and has expanded into a larger vested interest.” He calculated that American consumers forced to buy subsidized sugar paid $350 million in excess of what they would otherwise pay.

Congress passed the legislation anyway, and Roosevelt reluctantly signed it after receiving assurances from Congress that “the unholy alliance between the cane and beet growers, on the one hand, and the seaboard refining monopoly, on the other” would cease to exist.

That promise went nowhere, and 10 years later, Congress renewed the legislation. This new legislation, the Wall Street Journal observed, looked like a creation of the “planned economy,” but was not “thrust on the sugar trade by the government. The law was drafted by sugar interests themselves.”

This became the model for future legislation governing sugar production. Some things changed: When Fidel Castro took power in Cuba and confiscated American-owned sugar plantations, it lost its access to the American market. The U.S. now asked other nations to fill the void, bidding on a share of Cuba’s former quota.

There was plenty of incentive to do so. If the U.S. granted another nation a share of the foreign quota, that country could sell its surplus sugar at prices significantly higher than the price in the global marketplace.

Some nations that stepped into Cuba’s shoes, like Liberia or Malawi, grew sugar. Others, like Ireland, shrewdly lobbied Congress for a quota share, then turned around and bought sugar from Communist Poland at the going market rate of 2 cents a pound before reselling it to the U.S. at the protected price of 6 cents a pound.

Though the import quota system lapsed in the 1970s when sugar prices soared, Congress resurrected it in 1979, even if it delayed implementation several years. The principal author of the Senate bill, a lawyer for the Hawaiian Sugar Planters Association, described his inspiration: “We just rewrote [the 1934 Sugar Act] and left out the minimum wage provisions.”

By the 1980s, however, sugar legislation became part of the much larger farm bill, making it even harder to carry out reforms. And as the years went by, the contrivances used to prop up the sugar industry have multiplied, encompassing non-recourse loans; a complex system of tariffs; and even a means of diverting surplus sugar into ethanol production.

In making sugar far more expensive within the U.S., this system of subsidies and supports has had all manner of strange consequences. High-fructose corn syrup, for example, came into widespread use — and abuse — when it became cheaper than subsidized sugar. Once entrenched in processed foods, it helped contribute to the obesity epidemic.

On the other hand, for candy makers who use actual sugar, high prices prompted an exodus of manufacturing to places outside the U.S., where it’s possible to buy the sweet stuff far more cheaply.

The biggest, if most diffuse, impact of these interventions in the market has inevitably fallen on consumers. While estimates vary, it’s thought that consumers pay between $2.4 billion and $4 billion more a year than they would under a free-trade regime.

Last spring, the House debated an amendment to the farm bill that would have begun phasing out the quotas and other subsidies to domestic producers. But in a rare show of bipartisanship, legislators from both parties eliminated it from the farm bill passed last week.

It was a bitter defeat for anyone who believes that market forces should have a place in setting prices. But for the nation’s sugar titans, it was just another sweet deal.

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