An Import Quota in Practice: U.S. Sugar
The U.S. sugar problem is similar in its origins to the European agricultural problem: A domestic price guarantee by the federal government has led to U.S. prices above world market levels. Unlike the European Union, however, the domestic supply in the United States does not exceed domestic demand. Thus, the United States has been able to keep domestic prices at the target level with an import quota on sugar.
A special feature of the import quota is that the rights to sell sugar in the United States are allocated to foreign governments, which then allocate these rights to their own residents. As a result, rents generated by the sugar quota accrue to foreigners. The quotas restrict the imports of both raw sugar (almost exclusively, sugar cane) as well as refined sugar. Figure 9-13 shows the effect of the U.S. import restrictions on the price of raw sugar in the United States relative to the world price. As we can see, these import restrictions have been quite successful in raising the U.S. domestic price above the world price. When the world sugar price sharply increased in 2010–2011, the import restrictions were eased but not enough to limit sharp increases in the U.S. price—which still remained well above the world price.
We now describe the most recent forecast for the effects of these import restrictions and the associated higher sugar prices.3
Figure 9-14 shows the raw sugar market equilibrium with and without the quota restriction. Currently, the quota limits imports of raw sugar to $3.4 million tons, while U.S. production totals 8.4 million tons. This leads to a U.S. sugar price that is 34% above the world price. Absent import restrictions, the U.S. price would drop down to the world price level. The figure is drawn assuming the United States is “small” in the world market for raw sugar; that is, removing the quota would not have a significant effect on the world price. According
to this estimate, free trade would increase sugar imports by 84 percent and an associated 11 percent contraction in domestic production.
The welfare effects of the import quota are indicated by the areas
,
,
, and
. Consumers lose the surplus
+
+
+
associated with the higher price. Part of this consumer loss represents a transfer to U.S. sugar producers, who gain the producer surplus
. Part of the loss represents the production distortion
and the consumption distortion
. The rents to the foreign governments that receive import rights are summarized by area
.
In order to put dollar figures on these welfare effects, one must take into account how the higher raw sugar price leads to a higher refined sugar price, which then feeds into higher prices for all food products containing sugar. Even though the ultimate food price increases paid by U.S. consumers are modest—on the order of 0–2 percent—the total consumer surplus losses are massive because those price increases apply to such a large basket of widely consumed goods. The estimated consumer loss for 2014 (relative to a hypothetical outcome where the sugar quota is phased out in 2013) is $3.5 billion! In addition, the higher prices for refined sugar also generate producer surplus losses for the food industry (all food producers who use refined sugar as an ingredient). This adds another $909 million to the consumer losses, for a total cost estimate of $4.4 billion associated with the U.S. sugar quota.
Of course, U.S. sugar producers gain from the higher sugar prices. Their estimated gain for 2014 totals $3.9 billion. (Most of those gains go to sugar processors/refiners, with “only” $486 million going to sugar farmers.) Lastly, foreign sugar exporters who have been allocated the rights to sell sugar into the United States also benefit from those quota rights—as they pocket the difference between the higher U.S. price relative to the world price. (Several of those foreign sugar exporters are owned by large U.S. sugar processors.) This gain makes up most of the differential between the $4.4 billion loss to sugar users (consumers and food producers) and the $3.9 billion gain to sugar producers, as the deadweight losses are relatively minor.
The sugar quota illustrates in an extreme way the tendency of protection to provide benefits to a small group of producers, each of whom receives a large benefit, at the expense of a large number of consumers, each of whom bears only a small cost. In this case, the yearly consumer loss amounts to “only” $11 per capita, or a little under $30 for a typical household. Not surprisingly, the average American voter is unaware that the sugar quota exists, and so there is little effective opposition.
From the point of view of the raw sugar producers (farmers and processors), however, the quota is a life-or-death issue. These producers employ only about 20,000 workers, so the producer gains from the quota represent an implicit subsidy of about $200,000 per worker. It should be no surprise that these sugar producers are very effectively mobilized in defense of their protection. They donated more than $4.5 million in the 2012 congressional races, and the American Sugar Alliance spent an additional $3 million on lobbying expenses in the 12 months period leading up to the 2013 congressional vote on the U.S. farm bill (which reauthorizes the restrictions on U.S. imports of sugar).4
Opponents of protection often try to frame their criticism not in terms of consumer and producer surplus but in terms of the cost to consumers of every job “saved” by an import restriction. Clearly, the loss of the $200,000 subsidy per employee indirectly provided by the quota would force sugar producers to contract and reduce their employment. Estimates for this employment contraction vary between 500 and 2000 workers. Even taking this larger employment loss, the sugar quota would still cost the U.S. consumer $1.75 million per job saved. And this cost does not factor in all the job losses that high sugar prices impose on the food industry.
If the sugar restrictions were lifted, the drop in the refined sugar price would induce a substantial expansion in the sugar-using food industry. We already mentioned the associated $909 million increase in producer surplus for those sectors; but this expansion would also generate 17,000–20,000 new jobs. In fact, the expansion would be big enough to turn the United States from a net importer to a net exporter of sugar-containing foods. Comparing the figures for jobs saved by sugar producers (500–2,000) with the figures for jobs lost in the food sector (17,000–20,000), we see that the employment dimension of protection is no longer that the consumer cost per job saved is astronomically high; rather, it is plainly that jobs are being lost, and not saved, by the sugar quota.