An agricultural sector analysis of the United States sugar import policy

Abstract

The United States has maintained a sugar import quota since 1982. This policy, while supporting U.S. producer prices and incomes at a high level, has caused consumers to pay more for sugar and has reduced the incomes of foreign sugar producers. It has also stimulated domestic sugar production along with development of sugar substitutes such as High Fructose Corn Syrup (HFCS) which contributed to the fall in sugar demand. The quota policy has been criticized by previous economic studies and in the GATT trade negotiations. This study extends previous analyses to look at effects of sugar policy changes from a total sector perspective. The study of potential sugar policy reform was done using a mathematical programming sector model. Substitution between HFCS and sugar in sweetener using industries was explicitly modeled. A baseline scenario was constructed and validated using 1986 data which was then compared to alternative policy runs where: (i) the sugar quota was removed, and (ii) a target price was implemented. Comparisons were made with and without farm program provisions for the other sectoral commodities. The results show differing implications in the sugar industry as compared to the agricultural sector. Quota removal raised the welfare of domestic sugar consumers and foreign sugar producers but resulted in a lower welfare level for domestic sugar producers. Welfare for the rest of the society increases with the removal of the quota only if distortions arising from farm programs are eliminated. In the farm program runs, both the removal of the quota and the imposition of target prices resulted in a lower net social welfare compared to the case with the quota. Acreage substitutions towards other crops result in a social welfare loss because of increased government payments. This result provides an empirical example of the theory of the second best as the costs of other distortions outweigh the sugar gains. However, when farm programs for the other crops are eliminated, quota removal results in an increase in net social benefit.