Sugar Tariffs.
The issue of tariffs and trade in the history of the United States offers detailed information on tariff policy formation throughout the history of America as well as reveal the continued essence of the subject in an era of free trade (Northrup Turney, 2003). Issues involving trade, historically, have played a key role in the making of policy in the Unite States. The tariff for instance has been seen to influence decisions that has led even to major wars. The 1816 tariff passage for example, was intended to assist in the collection of revenue for the U.S Treasury after the military costs of the 1812 war drained it. Governments institute tariffs on imported goods to guard industry within their borders.
In 1897 for instance, an American investor by the name Baruch Mannes invested in the American Sugar Refining Company. A tariff barring foreign sugar had made the enterprise quite popular at that particular time. A Senate bill meant to lower the duty, Baruch thought, would not go through. When Congress eventually defeated the measure, Baruch realized profit was 60,000 on a 300 investment. The sugar industry was also seen to tie countries to the United States. The sugar industry for instance tied Hawaii to the U.S and in 1875 the government of Hawaii secured reciprocity treaty that allowed the entry of tariff free island sugar to the U.S as long as Hawaii did not transfer territorial or economic rights to a third party. The U.S later long revoked the agreement. Consequently, the threat of tariffs to the sugar industry saw the islands plunged into economic crisis.
Historically, according to Krueger (1996), Section 22 quotas on sugar imports and products containing sugar were used not only to protect the United States sugar producers but also give special treatment to identified foreign suppliers. Under the most recent trade restrictions, the domestic production of sugar and beet has been seen to steadily increase since 1980. Soaring domestic sugar prices are also seen as a contribution to the use of high fructose corn sweeteners that increased from less than a fourth of the total caloric sweetener consumption in the period between 1979 and 1981 to almost a half in 1989 to 1991. In 1989, Australia challenged the United States import quotas, under the GATT rules. The reason behind it was that the domestic supply controls were not yet in place at that time. In a measure to settle the GATT dispute, a two-tier tariff regime replaced the import quotas. A limited quantity of imports under this regime, otherwise known as tariff-rate quotas, entered at a low rate of 0.01lb. Any potential additional imports carried with them an over-quota tariff of up to 80 per cent more, which is equivalent to 0.18lb).
While the regime of the two-tier sugar tariff facilitates the access of the United States market in response to the conditions of the world market, not only has the over-quota tariffs been felt as prohibitive, but the two-tier tariffs and the TRQ have also had trade restrictive effects which have been viewed similar to the previous quota system. Imports of sugar have consequently been reduced to less than 2 million metric tons in 1989-1991, from over 3 million metric tons in 1980, in a bid to protect domestic producers. This was just under 15 per cent of the domestic production. Mexico just provided a small fraction of U.S both sugar imports and sugar containing products. Of all the sugar containing products that were imported, Canada provided over a fourth of it.
As far back as 1789, the United States government has been involved, directly, in the sugar market which was part of its national policy. A variety of mechanisms have since been used as the U.S sugar policy instruments. They include support prices, subsidies, domestic acreage restrictions, foreign import quotas, and import tariffs Marks (1993). Three major periods characterize the history of the U.S sugar policy. Between 1789 and 1890, tariffs were introduced and imposed on sugar which was as a way of generating revenue for the government. Initially, there was no domestic production to be protected and this saw the growth of domestic production over the years. In 1980, the United States Treasury scrapped the tariffs and this resulted to low-priced world sugar. As a result of the sugar influx, refiners and processors of the U.S received a bounty equivalent to two cents per pound of produced sugar. A tariff of 40 per cent was hence introduced on all imports of sugar in lieu of the bounty, in 1894.
In the 1930s the U.S sugar policy commenced. It was in response to the rapid expansion of the production of world sugar that had driven prices to an extremely low level. It was not sufficient for the ad valorem tariff to support the industry any more. This saw the passing of the sugar Act in 1934. The sugar act hence was able to establish the sugar policy instruments of import quotas so as to not only restrict supply but also to support domestic prices.
Government tariffs like the tariffs and the quotas persist as a result of the basic sugar economic fundamentals, as a commodity (Schmitz Spreen, 2002).
Some of these fundamentals include
Inelastic supply and demand schedules
Existence of substitutes like the HFCS
Scarcity of processors and refiners
The sweetener industrys economic importance in terms of payroll, jobs, and both indirect and direct economic impact in refining and producing regions.
At the present, sugar policies not only in the United States but also in the rest of the world are in one way or the other affected by the process of the political-decision. In establishing sugar policy, the importance of political power varies from country to country, as opposed to fundamental economic considerations. The combination of inelastic supply, inelastic demand, and the fungible nature of sugar, has been seen to lead to the instability of prices because of the changes in supply, demand, or even both. Intervention of the government to control the volatility of price is made easier due to the small number of control nodes, who are the refiners and processors (Schmitz Spreen, 2002).
As observed in the diagram above, the United States sugar policy is facilitated in the context of further assumption on the trends affecting the consumptions and production of United States sugar. They include assumptions about crop prices substituting sugarcane and sugar beets and also about technology. The U.S sugar projections are further influenced by factors for instance affecting the demand and supply of Mexican sugar. According to Schmitz Spreen (2002), sugar baseline presumed the world price for sugar would average approximately U.S 7 cents per pound throughout the year 2003, then in 2004 increase to U.S 8 cents per pound, and finally in 2004 at the remainder of the projections average at U.S 8 cents per pounds.
The United States sugar processors were anticipated to use the sugar loan so as to keep the prices of sugar at or even above U.S 19.68 cents per pound. Trend improvements in the sugar beet and sugar cane harvesting, processing and growing were all expected to continue throughout the projection period. In addition, in 2003, sugar cane producing states average sugar yield was projected at 4.61 tons per acre and was expected to grow yearly at 0.6 per cent reaching 4.61 tons per acre by the year 2012. In 2003, the U.S sugar beet yield was predicted to reach 3.14 tons per acre, expected to yearly grow at 0.7 per cent to reach 3.35 tons per acre in 2012.
According to Schmitz Spreen (2000), the United States sugar policy is already in a major crisis. For instance, producer sugar prices have been seen to drop drastically. Whole sale retail sugar prices for example range from around U.S. 19 cents per pound. This is seen as a 22 year low in nominal provisions, and most likely a historic low in real terms. In the past several years, major U.S commodity prices were sent to push acreage from other crops into sugar cane and sugar beet.
Pressures for reform of sugar policy have been mounting despite the resilience to change which has been displayed by the OECD sugar regimes for a long time now (Organization for Economic Co-operation and Development, 2007). They include the regional trade agreements, domestic initiatives, and the current WTO Doha round. The agenda is geared towards liberalization of agricultural trade, which includes that of sugar. Even as the multilateral negotiations are going on, there are regional trades as well as unilateral initiatives that have been seen to have potential implications for the reform of the sugar policy in the United States.
The Organization for Economic Co-operation and Development adds that for the United States, the prospect of an integrated sugar market with Mexico from the year 2008 has repercussions for the current United States sugar program sustainability. In addition to this, the United States is in the process of discussing a number of free and bilateral trade agreements. This will include some 28 countries that are not only significant sugar exporters but also who have duty free access to the United States market. IN the recent USAustralia Free Trade Agreement for instance, sugar was seen to be excluded from coverage of the agreement. In yet another agreement with the U.S, commonly known as Central American Free Trade Agreement facilitates a limited additional access to imports of sugar from the Central American countries, usually after an extended transition period. In as much as the impacts of these sugar trade agreements have been limited to date, it still may be difficult to continue to limit sugar coverage in some regional agreements of the future, an example being the Free Trade of the Americas Agreement which is being discussed with countries of Central and South America.
Increased access of the market as a result of the United States liberalization of sugar trade would imply changes in the United States sugar program (Sugar and Sweetener Situation and Outlook Year book, 2001). Assuming the present loan rate was retained, it would subsequently have to be reduces so as to prevent large forfeitures to the United States Department of Agriculture. According to baseline analysis, a sugar loan rate of say 14 cents per pound, which is less 4 cents in the current loan rate, would be essential if preventing sugar forfeitures to the CCC are to be successful, if the United States minimum sugar import obligation were to increase by 50 per cent.
The tightening of the margin between the United States and the world prices may eventually end up limiting high-tier tariff imports from countries like Mexico and at the same time exert pressure on high-cost suppliers of quota. In order to make the sugar TRQ practical, it would call for the modification of the current system of allocating shares on the basis of historical trade patterns. This would see the elimination of those countries that the world U.S price margins appear to be no longer sufficiently wide to facilitate viable exports. Quite a large portion of United States supplies would consequently be sourced from low cost producers like Australia, Brazil and even Mexico.
In 1897 for instance, an American investor by the name Baruch Mannes invested in the American Sugar Refining Company. A tariff barring foreign sugar had made the enterprise quite popular at that particular time. A Senate bill meant to lower the duty, Baruch thought, would not go through. When Congress eventually defeated the measure, Baruch realized profit was 60,000 on a 300 investment. The sugar industry was also seen to tie countries to the United States. The sugar industry for instance tied Hawaii to the U.S and in 1875 the government of Hawaii secured reciprocity treaty that allowed the entry of tariff free island sugar to the U.S as long as Hawaii did not transfer territorial or economic rights to a third party. The U.S later long revoked the agreement. Consequently, the threat of tariffs to the sugar industry saw the islands plunged into economic crisis.
Historically, according to Krueger (1996), Section 22 quotas on sugar imports and products containing sugar were used not only to protect the United States sugar producers but also give special treatment to identified foreign suppliers. Under the most recent trade restrictions, the domestic production of sugar and beet has been seen to steadily increase since 1980. Soaring domestic sugar prices are also seen as a contribution to the use of high fructose corn sweeteners that increased from less than a fourth of the total caloric sweetener consumption in the period between 1979 and 1981 to almost a half in 1989 to 1991. In 1989, Australia challenged the United States import quotas, under the GATT rules. The reason behind it was that the domestic supply controls were not yet in place at that time. In a measure to settle the GATT dispute, a two-tier tariff regime replaced the import quotas. A limited quantity of imports under this regime, otherwise known as tariff-rate quotas, entered at a low rate of 0.01lb. Any potential additional imports carried with them an over-quota tariff of up to 80 per cent more, which is equivalent to 0.18lb).
While the regime of the two-tier sugar tariff facilitates the access of the United States market in response to the conditions of the world market, not only has the over-quota tariffs been felt as prohibitive, but the two-tier tariffs and the TRQ have also had trade restrictive effects which have been viewed similar to the previous quota system. Imports of sugar have consequently been reduced to less than 2 million metric tons in 1989-1991, from over 3 million metric tons in 1980, in a bid to protect domestic producers. This was just under 15 per cent of the domestic production. Mexico just provided a small fraction of U.S both sugar imports and sugar containing products. Of all the sugar containing products that were imported, Canada provided over a fourth of it.
As far back as 1789, the United States government has been involved, directly, in the sugar market which was part of its national policy. A variety of mechanisms have since been used as the U.S sugar policy instruments. They include support prices, subsidies, domestic acreage restrictions, foreign import quotas, and import tariffs Marks (1993). Three major periods characterize the history of the U.S sugar policy. Between 1789 and 1890, tariffs were introduced and imposed on sugar which was as a way of generating revenue for the government. Initially, there was no domestic production to be protected and this saw the growth of domestic production over the years. In 1980, the United States Treasury scrapped the tariffs and this resulted to low-priced world sugar. As a result of the sugar influx, refiners and processors of the U.S received a bounty equivalent to two cents per pound of produced sugar. A tariff of 40 per cent was hence introduced on all imports of sugar in lieu of the bounty, in 1894.
In the 1930s the U.S sugar policy commenced. It was in response to the rapid expansion of the production of world sugar that had driven prices to an extremely low level. It was not sufficient for the ad valorem tariff to support the industry any more. This saw the passing of the sugar Act in 1934. The sugar act hence was able to establish the sugar policy instruments of import quotas so as to not only restrict supply but also to support domestic prices.
Government tariffs like the tariffs and the quotas persist as a result of the basic sugar economic fundamentals, as a commodity (Schmitz Spreen, 2002).
Some of these fundamentals include
Inelastic supply and demand schedules
Existence of substitutes like the HFCS
Scarcity of processors and refiners
The sweetener industrys economic importance in terms of payroll, jobs, and both indirect and direct economic impact in refining and producing regions.
At the present, sugar policies not only in the United States but also in the rest of the world are in one way or the other affected by the process of the political-decision. In establishing sugar policy, the importance of political power varies from country to country, as opposed to fundamental economic considerations. The combination of inelastic supply, inelastic demand, and the fungible nature of sugar, has been seen to lead to the instability of prices because of the changes in supply, demand, or even both. Intervention of the government to control the volatility of price is made easier due to the small number of control nodes, who are the refiners and processors (Schmitz Spreen, 2002).
As observed in the diagram above, the United States sugar policy is facilitated in the context of further assumption on the trends affecting the consumptions and production of United States sugar. They include assumptions about crop prices substituting sugarcane and sugar beets and also about technology. The U.S sugar projections are further influenced by factors for instance affecting the demand and supply of Mexican sugar. According to Schmitz Spreen (2002), sugar baseline presumed the world price for sugar would average approximately U.S 7 cents per pound throughout the year 2003, then in 2004 increase to U.S 8 cents per pound, and finally in 2004 at the remainder of the projections average at U.S 8 cents per pounds.
The United States sugar processors were anticipated to use the sugar loan so as to keep the prices of sugar at or even above U.S 19.68 cents per pound. Trend improvements in the sugar beet and sugar cane harvesting, processing and growing were all expected to continue throughout the projection period. In addition, in 2003, sugar cane producing states average sugar yield was projected at 4.61 tons per acre and was expected to grow yearly at 0.6 per cent reaching 4.61 tons per acre by the year 2012. In 2003, the U.S sugar beet yield was predicted to reach 3.14 tons per acre, expected to yearly grow at 0.7 per cent to reach 3.35 tons per acre in 2012.
According to Schmitz Spreen (2000), the United States sugar policy is already in a major crisis. For instance, producer sugar prices have been seen to drop drastically. Whole sale retail sugar prices for example range from around U.S. 19 cents per pound. This is seen as a 22 year low in nominal provisions, and most likely a historic low in real terms. In the past several years, major U.S commodity prices were sent to push acreage from other crops into sugar cane and sugar beet.
Pressures for reform of sugar policy have been mounting despite the resilience to change which has been displayed by the OECD sugar regimes for a long time now (Organization for Economic Co-operation and Development, 2007). They include the regional trade agreements, domestic initiatives, and the current WTO Doha round. The agenda is geared towards liberalization of agricultural trade, which includes that of sugar. Even as the multilateral negotiations are going on, there are regional trades as well as unilateral initiatives that have been seen to have potential implications for the reform of the sugar policy in the United States.
The Organization for Economic Co-operation and Development adds that for the United States, the prospect of an integrated sugar market with Mexico from the year 2008 has repercussions for the current United States sugar program sustainability. In addition to this, the United States is in the process of discussing a number of free and bilateral trade agreements. This will include some 28 countries that are not only significant sugar exporters but also who have duty free access to the United States market. IN the recent USAustralia Free Trade Agreement for instance, sugar was seen to be excluded from coverage of the agreement. In yet another agreement with the U.S, commonly known as Central American Free Trade Agreement facilitates a limited additional access to imports of sugar from the Central American countries, usually after an extended transition period. In as much as the impacts of these sugar trade agreements have been limited to date, it still may be difficult to continue to limit sugar coverage in some regional agreements of the future, an example being the Free Trade of the Americas Agreement which is being discussed with countries of Central and South America.
Increased access of the market as a result of the United States liberalization of sugar trade would imply changes in the United States sugar program (Sugar and Sweetener Situation and Outlook Year book, 2001). Assuming the present loan rate was retained, it would subsequently have to be reduces so as to prevent large forfeitures to the United States Department of Agriculture. According to baseline analysis, a sugar loan rate of say 14 cents per pound, which is less 4 cents in the current loan rate, would be essential if preventing sugar forfeitures to the CCC are to be successful, if the United States minimum sugar import obligation were to increase by 50 per cent.
The tightening of the margin between the United States and the world prices may eventually end up limiting high-tier tariff imports from countries like Mexico and at the same time exert pressure on high-cost suppliers of quota. In order to make the sugar TRQ practical, it would call for the modification of the current system of allocating shares on the basis of historical trade patterns. This would see the elimination of those countries that the world U.S price margins appear to be no longer sufficiently wide to facilitate viable exports. Quite a large portion of United States supplies would consequently be sourced from low cost producers like Australia, Brazil and even Mexico.
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