CAMBRIDGE – As the United States, Mexico, and Canada prepare to renegotiate the North American Free Trade Agreement, as US President Donald Trump's administration has demanded, much attention is being devoted to one item in particular: sugar. The negotiations will probably produce a sweet deal for the US sugar industry, highlighting the emptiness of Trump's promises to "drain the swamp" of special-interest influence over policymaking.
Sugar producers' political clout is nothing new, in the US or other industrialized countries. They have often received trade protection, in the form of import tariffs and quotas, to ensure that domestic sugar prices far exceed those in supplier countries like Australia, Brazil, the Dominican Republic, the Philippines, and Mexico.
In fact, sugar was one of the few goods facing high US barriers that had to be dismantled under NAFTA. (Mexico had to eliminate high import barriers in many areas.) But the required liberalization was delayed long after NAFTA took effect in 1994. Mexican sugar exports to the US did not rise substantially until 2013.
At that point, US producers and refiners quickly sought protection. And the Commerce Department agreed to give it to them, in the form of tariffs on sugar imports of up to 80%. To stave off the tariff hike, Mexico agreed in 2014 to limit its sugar exports and prop up US sugar prices. This month, it agreed to even stricter limits. According to Commerce Secretary Wilbur Ross, "We have gotten the Mexican side to agree to nearly every request by US industry."
Such actions benefit American sugar producers – particularly a small group of wealthy sugarcane growers, largely in Florida, who offer generous campaign contributions to the relevant politicians. For example, the Florida-based Fanjul brothers, Alfonso and José, reportedly contributed a half-million dollars to Trump's January inauguration. US Sugar has also recently donated generously to Florida Governor Rick Scott.
But the high US sugar prices – double the world price level, on average, over the last 35 years – sustained by protectionist trade measures hurt American consumers, who face an estimated $3 billion per year in added costs. And such measures harm US industries that need sugar, with economic costs that outweigh the benefits of a more profitable domestic sugar industry.
Notably, candy companies have been shedding workers for years and moving their factories offshore. The US International Trade Agency confirms that high sugar costs are a "major factor in relocation decisions." For each "sugar growing and harvesting job saved through high US sugar prices," the Agency estimates, "nearly three confectionery manufacturing jobs are lost."
Yet the US government refuses to allow sugar prices to drop. Beyond import barriers, the US has created a price floor, via nonrecourse marketing assistance loans provided by the US Department of Agriculture. When the domestic price falls close to the floor, as it did in 1999 and 2013, the government effectively subsidizes the producers – with US taxpayers footing the bill, despite "no-cost" promises to the contrary.
One might think that higher sugar prices would at least have major benefits for Americans' health. In fact, the artificially high price of sugar was probably responsible for the explosion in production of cheaper high-fructose corn syrup, which is at least as unhealthy.
America's protection of its sugar industry is also bad foreign policy. For one thing, America's artificial inflation of sugar prices can come across as hypocritical, given the country's fondness for lecturing the world about the virtues of the free market. For another, US policy has a direct negative impact on one of its closest neighbors, Mexico, where sugarcane is produced by hundreds of thousands of small, mostly poor farmers – people who, deprived of their livelihoods, may end up turning to far less constructive ways to make ends meet.
The damage done to Mexico will also blow back onto the US economy. If Mexicans can't earn dollars by exporting to the US, they won't have dollars to spend on US goods. As the dollar appreciates against the peso, US exports will become uncompetitive. Moreover, if the US were to ratchet up tariffs on Mexican sugar, as it threatens to do (in the name of fighting dumping and subsidies), the Mexicans would respond by raising tariffs against US exports (also in the name of fighting dumping and subsidies).
There is also an environmental case against protecting domestic sugar producers. If the US hadn't discouraged sugar imports from countries like Mexico and Brazil, it could have been using sugar-based ethanol in its cars, which would have been both more environmentally friendly and less costly than relying corn-based ethanol from Iowa.
The Florida sugar industry causes severe environmental damage more directly. Over the last century, the Everglades – the unique wetlands system in southern Florida that includes a national park – has shrunk to half its original size, because the US Army Corps of Engineers, responding to demands by the state's sugarcane industry, diverted water inflows. Phosphorus run-off created by the industry has also altered the ecosystem. Algae blooms have been fed, while switchgrass has been choked out.
In 2000, Congress legislated a plan to reverse the damage to the "river of grass." But implementation has been delayed, owing largely to pressure from sugar interests. Even this year, sugar interests have posed financial and political obstacles to the construction of a reservoir that was part of the plan to save the Everglades. Far from "draining the swamp" in Washington, DC, the Trump administration seems prepared, in the NAFTA negotiations, to drain Florida's indispensable wetlands.
If the US sugar industry had to operate in a true free-market system, it would quickly find that it is not profitable to grow a lot of – or any – sugarcane on valuable South Florida land. But, for the sake of a few wealthy political donors, the US government seems committed to sustain that industry artificially, at the expense of US consumers and exporters, Mexican farmers, and the environment.
Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.
© Project Syndicate 1995–2017