Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

351. Telegram From the Department of State to Secretary of State Shultz’s Delegation¹

Washington, January 10, 1986, 0526Z

Tosec 10170/8633. From Allen Wallis. Subject: The U.S. Sugar Program.

1. During your meeting with Beryl Sprinkel on this year’s economic report, you suggested that sugar would make an excellent case study in microeconomics and the functioning of markets. Keith Maskus of EB/PAS has developed a “school note” along those lines for the CEA’s consideration. The text is repeated below for your information (unfortunately the graphs cannot be transmitted with current technology). Doug McMinn has spoken to Beryl Sprinkel who appears to favor its inclusion in the economic report of the President, if he finds it satisfactory.

2. The United States protects the incomes of its raw sugar producers through a program whose central feature is a domestic support price far above the world price. This program has raised domestic production of sugar and sugar substitutes but lowered consumption and imports. The reduction in imports, in conjunction with similar sugar protection in Europe, has imposed losses on many less developed countries. The program is a classic example of the inefficiency inherent in protecting a domestic industry at the expense of consumers and most foreign exporters.

3. As shown in figure 1, the world sugar price has fallen dramatically since 1981. By imposing successively tighter import quotas on raw sugar since 1982, the United States has maintained a price of approximately 20 cents a pound to protect its domestic growers. These quotas have been used to minimize costs to the federal budget but have shifted the costs to the U.S. private economy. Domestic consumption of raw sugar has fallen while, as shown in figure 2, U.S. raw sugar output has remained firm, even rising ten percent between 1983 and 1986. In addition, production of sugar substitutes has risen, and imports have fallen.

4. The economics of this policy are simple. Without a quota, and ignoring transport costs, the United States would import sugar at the world price. The import quota, imposed to protect raw sugar producers, raises the domestic price and lowers the world price. Such a policy in recent years has in fact directed resources into both beet and cane production which became more profitable relative to alternative farm outputs. This allocation is costly because it sacrifices production that would have had higher value in world markets than the domestic sugar output displacing it. Consequently, it could have been used to increase the total value of goods available for domestic use, a waste that is the essence of economic inefficiency. On the demand side of the market the artificially high domestic sugar price induced less consumption of raw sugar. Together, the domestic output and consumption responses restricted the quantity of U.S. imports, forcing a reduction in the world price. In turn, this has tended to reduce sugar production in the rest of the world. Thus, the U.S. quota has shifted production from low-cost export producers (most in less developed countries) to high-cost domestic producers.

5. Two further impacts of the program may be noted. First, it has encouraged greater imports of processed foods containing inexpensive foreign sugar, harming U.S. food processing firms. Second, it has encouraged greater domestic production of alternative sweeteners. These substitutes may be profitably produced and sold at prices below the domestic sugar price, so consumption has shifted from sugar to other sweeteners. As shown in figure 2, for example, there has been a 37 [percent?] increase in domestic output of corn sweeteners since 1982 in response to a substantial rise in demand. Because consumption shifted from raw sugar to other sweeteners, it has been necessary to reduce the quota in order to maintain the 20 cent raw sugar price. This has forced further reductions in the world price and output. In 1986 the domestic price was more than three times the world price. Figure 2 shows that domestic output of substitutes has continued to rise and imports have continued to fall. In fact under the current program the United States is expected to import no sugar at all in two years.

6. The costs to consumers of achieving self-sufficiency in sugar—a product in which the United States lacks a comparative advantage—are huge. To illustrate, current U.S. consumption of raw sugar is around 8 million tons, worth 3.2 billion dollars at the support price of 20 cents a pound. If the United States were to dismantle its sugar program, it is reasonable to expect that U.S. and world prices would converge at about 10 cents a pound. It would cost only 1.6 billion dollars to buy the same 8 million tons for U.S. consumption. The rest, approximately 1.6 billion dollars at 1986 levels, is purchasing power sacrificed for sugar protection. The actual sacrifice is more than this because lower sugar prices would allow greater consumption and reduce expenditures now diverted into sugar substitutes. Of the 1.6 billion dollars, nearly 1.3 billion dollars supports current U.S. production of 6.3 million tons. The remaining 300 million dollars are lost as an economic windfall to particular foreign exporting firms that are allowed to sell sugar in the U.S. market at the domestic price. This windfall arises from a decision to transfer the revenues that would have been generated under an equivalent import duty to foreign producers in partial compensation for declining imports. Nevertheless, this windfall does not change the incentives to reduce output and employment in less developed countries. Instead, it merely creates special interests that expend resources in competing for export licenses.

7. The excessively high domestic price of sugar is a testament to how uncompetitive the domestic industry is. The ultimate irony is that without a market-oriented reform, U.S. producers themselves will eventually be squeezed out of the market by the production of sugar substitutes unless the government chooses to buy raw sugar and dump it on world markets.

Armacost

1. Source: Department of State, Central Foreign Policy File, Electronic Telegrams, [No D Number]. Limited Official Use; Immediate. Drafted by Martin Bailey (E); cleared by Carl Cundiff (EB/TDC/OFP), Marshall Casse (EB/PAS), William Dewald (EB/PAS), Fredi Bove (EB), Ann Hollick (EB/TDC/OT), Denis Lamb (EB), McMinn (EB), James Bindenagel (S/S–O), and Richard Mueller (S/S); approved by Wallis.