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WebMemo #771 on Trade and Economic Freedom

June 23, 2005

Fatally Flawed: DR-CAFTA or the Sugar Program?

By

To listen to the sugar lobby, you would think that sugar imports were at the heart of every recent trade agreement. It seems whenever the United States considers trading more freely with another region or country, the sugar industry hijacks the debate. Because trade agreements negotiated under the President's Trade Promotion Authority must be approved or disapproved by Congress without amendments to the text of the agreement, the sugar industry can derail a proposal if it can generate enough concern that the agreement is unfair to sugar producers. If successful, the sugar industry and its lobbyists win a little; almost everyone else in America-including most households, farmers, and manufacturers-loses a lot.

 

Putting It In Perspective

Assertions that the proposed free trade agreement with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua (DR-CAFTA) is so "fatally flawed" that it will flood our already oversupplied market with cheap sugar do not hold up to scrutiny. Sugar is not a major issue in the agreement-certainly not to the extent that it would send 61,000 U.S. sugar farmers and workers to the unemployment line, as the sugar industry charges. Nor is there validity to the "'Domino' Sugar Theory" that DR-CAFTA is the first of many trade pacts designed to whittle away domestic sugar's grip on the U.S. market.

 

All DR-CAFTA allows is for qualifying Central American countries to export an additional 107,000 tons of sugar to the U.S. in the first year of the agreement. This represents about 1.2 percent of annual U.S. sugar consumption-equal to about a teaspoon and a half of sugar per American per week and little more than one day's average domestic sugar production. Even after 15 years of DR-CAFTA, new sugar imports would amount to no more than 1.7 percent of domestic demand.

 

By the numbers, DR-CAFTA would not allow the countries of Central America to dump sugar on our shores. Moreover, if imports under DR-CAFTA were ever to threaten the stability of the sugar program, safeguards in the agreement would allow the U.S. to turn off the trickle of imports. But that is unlikely to be necessary: contrary to the sugar industry's claims, the U.S. sugar market is not oversupplied. The latest forecast from the U.S. Department of Agriculture (USDA) projects that America will need to import at least 600,000 tons of sugar to meet domestic demand in 2006.

 

Studies from the United States International Trade Commission, the American Farm Bureau Federation, the Office of the United States Trade Representative, and the USDA Foreign Agricultural Service have all concluded that DR-CAFTA will not impact the domestic sugar industry in any significant way. The artificially high prices that U.S. consumers and producers pay for sugar today will not plunge, and the sugar industry will continue to enjoy its protection from having to compete on the global market. Contrary to Big Sugar's squeals and fears, DR-CAFTA does not portend the demise of the industry or a significant drop in its employment.

 

The Real Flaw

The sugar industry enjoys an unusual level of protection that has survived every ratified U.S. bilateral and multilateral trade agreement-with the exception of the North American Free Trade Agreement (NAFTA). Even the recent free trade agreement with Australia left in place complete protection for the U.S. sugar industry at the expense of U.S. firms' access to Australia's wheat and services markets. Market data show that the sugar industry is not a "victim" of trade. Rather, U.S. consumers and firms are victims of the sugar industry's shrewd and successful lobbying campaign.

 

American households and companies pay two to three times the world price for sugar. This leaves U.S. industries that use sugar, such as confectioners, less competitive than foreign firms and at a disadvantage on the world market. In the U.S., there are more than ten times as many jobs in sugar-using industries as in the sugar industry itself, but these industries are losing jobs due to the artificially high cost of sugar. Many confectioners, for example, are moving offshore.

 

The "fatal flaw" in DR-CAFTA, then, is that it does not go far enough to open the U.S. sugar market to the rigor of international competition. The remaining jobs in sugar-using industries will remain vulnerable as long as the price of sugar remains artificially high under the sugar program. According to the World Bank, even with DR-CAFTA, the sugar industry will continue to cost the American public at least $1.3 billion annually in high prices and direct program support. Political unwillingness to apply the rules and principles of free trade across all sectors of the American economy in a fair manner will continue to cost Americans jobs, and at the supermarket.

 

When the U.S.-Australia Free Trade Agreement was proposed, the sugar industry sang its siren song for unadulterated trade protection and prevailed. The industry is making the same doomsday predictions about DR-CAFTA. But is protecting 1.2 percent of an industry that contributes less than 1 percent to total U.S. farm earnings worth dashing increased opportunities for so many other farmers and businesses across the U.S. economy? Are the gains to almost 297 million Americans worth the overblown fears of the 61,000 people employed by the sugar industry?

 

In the interest of protecting the welfare of the common good, Congress should look beyond Big Sugar to the millions of Americans who would benefit from DR-CAFTA. And if the Administration and Congress want to focus on a real problem, why not consider the issue of sugar itself and eliminate the wasteful price supports, loans, and quotas?

 

Daniella Markheim is a Senior Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.

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