A Sticky State of Affairs: Sugar and the U.S.-Australia Free‐​Trade Agreement

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In August 1940, after the Battle of Britain, Prime MinisterWinston Churchill famously remarked, “Never in the field of humanconflict was so much owed by so many to so few.” In theconsiderably lower stakes field of trade policy, a variation ofthat phrase aptly captures the perverse standing of the U.S. sugarindustry: “Never have so few taken so much from so many.“Washington uses preferential loan agreements and tariff‐​rate quotasto keep the price Americans pay for sugar artificially high.Although there is fluctuation, U.S. consumers paid roughly twicethe world market price for sugar between 1985 and 1998.[1] The gap has beeneven worse in recent years. Currently, a March 2004 contract ondomestic sugar costs 20.35 cents per pound while the same sugar atworld prices costs 5.74 cents per pound. [2] In other words, because of thesugar program, a U.S. buyer is forced to pay three and a half timesthe market rate for sugar.

The U.S. sugar program stands in stark contrast to the Bushadministration's avowed goal of igniting "a new era of globaleconomic growth through a world trading system that is dramaticallymore open and more free." [3] Most recently, the yawning chasm betweenfree-trade rhetoric and the reality of sugar protectionism washighlighted in negotiations for a free-trade agreement (FTA)between the United States and its close ally Australia.

Even though negotiators missed an end-of-year deadline set byPresident Bush and Australian prime minister John Howard,U.S.-Australian FTA negotiations made significant progress over thecourse of 2003. For the past two weeks, however, the talksthreatened to fall apart, with much of the bitterness centered onthe U.S. sugar program. The U.S. position was that increased marketaccess for sugar is not an option, while Australia insisted thatits exclusion would be a deal breaker. [4]

Mark Vaile, the Australian trade minister, and Robert Zoellick,the U.S. trade representative, met regularly in Washington duringthis period in a dogged effort to save the agreement. In the end,they succeeded--sort of. On Sunday, negotiators announced thatAustralia had capitulated and accepted a deal that excludes sugar.The United States, in turn, had softened demands that Australiaopen up a number of protected sectors. This fight to "keep sugaroff the table"[5] was a disappointing departure from the priorU.S. commitment to negotiate high-quality FTAs that open marketsfor all products across all sectors.

Of course, even without sugar, the United States and Australiawill both gain from this deal. Two-way trade between Australia andthe United States is already some $28 billion per year. Americansenjoy access to Australian goods such as wine, transportationequipment, and chemicals, while exporting machinery, electronics,services, and a range of other products. An FTA will enhance thisproductive relationship. A recent study by the American-AustralianFree Trade Agreement Coalition estimated that free trade betweenthe two countries would boost U.S. exports by $1.9 billion and U.S.GDP by $2.1 billion.[6]

The United States is Australia's number-one source of capitalfrom abroad. And a full 50 percent of Australia's foreigninvestment--more than $23 billion--comes to the United States.Those Australian investments support the livelihoods of more than83,000 Americans. [7] An FTA will encourage additional capital flowsbetween the United States and Australia, building on the base ofhigh-paying jobs that has already been created.

In contrast to some proposed trade agreements, an FTA betweenthe United States and Australia should be an easy sell in Congress.Both parties to the agreement are wealthy countries with highwages. Both have stringent laws intended to protect labor and theenvironment. The argument that free trade spurs a "race to thebottom" was always flawed, but it lacks even the patina ofplausibility in this case.

Yet sugar's absence from this FTA is disappointing on threecounts. First, sugar stands out as a symbol of perceived Americanhypocrisy on trade. The unwillingness of the administration to evenattempt to dismantle self-defeating protectionism in a relativelyinsignificant sector of the economy calls into question its largercommitment to open markets. Second, in order to get a pass onsugar, U.S. negotiators were forced to overlook Australianprotectionism on wheat, broadcasting and audio visual services, andother areas. Third, the exclusion of sugar from free-tradedisciplines sets a terrible precedent that emboldens otherimport-competing producers to demand similar favors. The U.S. dairymarket, for example, will also be spared full competition underthis FTA.

The U.S. Sugar Program: An Unjust, ExpensiveBoondoggleIt was a mistake for the Bush administration to sacrifice thebenefits of true free trade with Australia to save a program thatmilks consumers and taxpayers, harms sugar-using industries,shortchanges poverty-stricken developing countries, and is asubstantial drain on the U.S. economy. The General AccountingOffice looked at the sugar program's impact for 1998 and estimatedthat it cost domestic users of sweetener some $1.9 billion.[8]Similarly, the U.S. International Trade Commission has concludedthat abolishing the program would result in a net annual welfaregain to the U.S. economy of more than $1 billion. [9]

Sugar protectionism also costs American jobs. According to theUSITC, there are some 61,000 full-time-equivalent sugar productionjobs in the United States. That figure includes all farm jobsinvolved in the growing and harvesting of sugarcane and sugarbeets. This contrasts with approximately 724,000 people counted bythe Commerce Department as working in sugar-using industries. Inother words, more than 10 times as many Americans face possible jobcuts and slower growth because of the U.S. sugar program than arehelped by it.

Sugar-Related Employment: Producers versusUsers

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Sources: USITC and U.S. Department of Commerce.A study commissionedby the Sweetener Users Association calculated that between 7,500and 10,000 jobs have been lost since 1997 because of artificiallyhigh sugar prices. [10] In fact, this estimate understates potentialjob losses from sugar protectionism because it counts only jobsdirectly impacted by the price of sweeteners. If theprogram were dismantled, resources that are currently wasted onexpensive sugar would shift to other parts of the U.S. economy,creating new growth and opportunity in unrelated sectors.

In addition, workers in export sectors are victims of "bigsugar." As negotiations teetered on the brink of disaster lastweek, William Lane of the Caterpillar Corporation noted, "We arevery concerned that an agreement that is going to help U.S.manufacturers at this critical time -- could be hijacked by a fewprotectionist interests that are, quite frankly, unwilling tocompete on a fair basis." Under the "sugar-free" compromise,American drug manufacturers, wheat farmers, and entertainers willbe denied the opportunity to sell freely to Australians. And theU.S. unwillingness to accept sugar now makes future FTAnegotiations with Thailand, Colombia, Peru, and other proposedsugar-producing partners far less likely to succeed.

Most worrisome is the fact that the sugar program has become animpediment to the war on terror--a conflict in which Australia hasbeen a steadfast ally of the United States. The Bush administrationhas rightly recognized on numerous occasions that fightingdangerous extremists requires the promotion of freedom, democracy,and prosperity around the world. Indeed, as the president urgedeven before 9/11 "We must reject a protectionism that blocks thepath of prosperity for developing countries. We must rejectpolicies that would condemn them to permanent poverty." [11]

Sugar is an important export for many fragile democracies,including those in our own hemisphere. Many reform-minded leadershave staked their political futures on the promise of free tradewith the United States. They are greatly weakened by anadministration that expects trading partners to accept politicallydifficult concessions and wrenching economic dislocation while itclings stubbornly to a closed sugar market at home.

Who's Getting Fat on Sugar?The administration's retreat from free trade for sugar withAustralia was reportedly prompted by the reaction of powerful U.S.growers to the increase in sugar quotas--the equivalent of aboutone day's production of the U.S. sugar industry--negotiated in theCentral American Free Trade Agreement. [12] This minuscule increasesparked a panic among domestic growers, who fear any erosion oftheir power to force Americans to buy their sugar.

The U.S. sugar program is a classic case of concentratedbenefits and diffused costs. A very small number of sugar growersreceives enormous benefits, while the costs of providing thosebenefits are spread across the U.S. economy. Consequently, U.S.sugar producers have a very strong incentive to lobby and fundcampaigns of U.S. policymakers. And they have done so. Dominatedlargely by two companies in Florida (Flo-Sun and U.S. Sugar), thesugar lobby has been a major financial contributor to incumbentpoliticians. In the 2000 election cycle, for example, Flo-Sun,owned by the wealthy Cuban-American Fanjul family, contributed$690,750 in "soft money" to both the Democrats and the Republicansand $78,200 in direct funds to candidates and the parties. [13] Overall, theU.S. sugar industry contributed $7.2 million to political actioncommittees and $5.7 million in soft money donations, for a total of$13 million--a bargain in exchange for protection worth hundreds ofmillions. [14]

ConclusionThe U.S. sugar program has always been wasteful and unfair, taxingAmerican consumers and sugar-using businesses to protect arelatively few well-connected growers. Now the program threatens toadd the U.S. trade agenda to its list of victims. If this isallowed to happen, a merely foolish program will have become adangerously reckless program. The U.S.-Australia FTA negotiationsoffered an excellent opportunity to begin dismantling sugarprotectionism. It's unfortunate that the president failed to seizeit.

[1] MarkGroombridge, "America's Bittersweet SugarPolicy," Cato Institute Trade Briefing Paper no. 13, December4, 2001, p. 4.

[2] Pricestaken from Wall Street Journal, February 4, 2004, p. C13.

[3] GeorgeW. Bush, speech to the World Bank, July 17, 2001, http://edition.cnn.com/2001/ALLPOLITICS/07/17/bush.speech.transcript.

[4] "TimeRunning Out for U.S., Australia FTA Talks, Large Gaps Remain,"Inside U.S. Trade, February 5, 2004.

[5] Robert B. Zoellick quoted in "SweetSabotage," Wall Street Journal, February 3, 2004, p.A14.

[6] "Partnership for a Stronger Future:U.S.-Australia Free Trade Agreement," American-Australian FreeTrade Agreement Coalition report, July 2003, p. 2,

[7] Ibid.

[8] U.S. General Accounting Office, "SugarProgram: Supporting Sugar Prices Has Increased Users' Costs WhileBenefiting Producers," GAO/RCED-00-126, June 2000, p. 5.

[9] U.S. International Trade Commission, "TheEconomic Effects of Significant U.S. Import Restraints: ThirdUpdate 2002," Investigation no. 332-325, publication 3519, June2002, p. 75.

[10] "Food & Beverage Jobs Disappearing dueto Sugar Program," Promar International Report, December2003.

[11] Bush.

[12] "Sugar: Putting CAFTA into Perspective,"USTR Trade Facts, January 26, 2004, http://www.ustr.gov/new/fta/Cafta/2004-01-26-sugar.pdf.

[13] Larry Lipman, "New Battle Is Brewing overU.S. Sugar Program," Cox Washington Bureau, June 17, 2001,www.coxnews.com/washingtonbureau/staff/lipman/061701SUGAR17.html.

[14] Common Cause, "The $1 Billion PB&JSandwich," Pocketbook Politics: How Special-Interest MoneyHurts the American Consumer, 1998, www.commoncause.org/publications/pocketbook5.htm.

Aaron Lukas

Aaron Lukas is a former policy analyst at the Center for Trade Policy Studies at the Cato Institute.