The U.S. Department of Agriculture imposes regulatory on agricultural goods as a way of putting restriction on certain commodity supplies and raise the consumer price. Import barriers are used extensively by the sugar industry. It significant to note that through trade barriers, the prices are high and as a result of high prices, the consumers are hurt more because they are forced to buy fewer products at a high price. According to USDA there is a trade barrier in the sugar industry so as to protect the producers from competition so that they can increase their returns to scale (usda.gov). Though the government had ensured domestic sugar producers protection from the foreign sugar market, rising sugar cost have resulted to candy companies closing down their operations and offshoring their companies. This paper will look at some of the trade barriers the US has implemented as a way of protecting domestic sugar producers and some of the effects of the high sugar price.
The cost of raw sugar on the world markets is 13.55 cents whereas the cost of raw domestic sugar in the US is 27.60 cents. This indicates that the world market price is significantly lower than the domestic raw sugar. The main reason as to why domestic prices are above the world price is because they have different programs that impact the domestic market price for sugar to be higher than the world price (usda.gov). One of the programs integrated in the sugar industry is setting the loan rate as the price floor. This means that through the price floor, the farmers are protected in such that in the long run they will enjoy returns to scale for their sugar. It is important to note that the sugar industry does not make any direct payments but rather uses the price floor as their market price (usda.gov). Sugar programs have been effective in the US in that the government aims at keeping foreign or imported sugar out of the country as a way of curbing any form of competition in the sugar industry.
One of the strategies that the US has used to maintain high domestic sugar prices is through price supports where the USDA sets high prices for the sugar. Through this, the USDA grants loans to the sugar producers and in return the sugar farmers have to sign their cane sugar or sugar beet as their collateral (usda.gov). Since the farmers are given loans by the USDA, they co sign an agreement with the USDA by agreeing to sell their sugar at the minimum price set by USDA. In case the market price for sugar rises, the sugar producers’ benefit and can use the money to offset their loans. However, if the market price falls, the sugar producers can be excuse by the government not to pay their laws and they can forfeit their collateral which breaks the agreement they had signed up on (usda.gov). On the other hand, the producers can pay part of their load such that it is reduced from the actual loan granted. Through this, the government ensures that the sugar producers are protected from any market backlash and that the producers cannot be indebted as a result of market failures. This indicates that the federal government protects sugar farmers by setting the sugar price at a higher value price to enable sugar producers to pay off their loans. In case of a high yield, which leads to an oversupply in the market, the government pays off the farmers to discard some its produced sugar to minimize any chances of oversupply.
Trade restrictions are another way the US government uses to maintain high domestic sugar prices relative to the world market price. The government has implemented a two-tier tariff as a way of restricting sugar imports into the country. The two-tier tariff encompasses two types of quotas known as the in-quota and the over-quota. The in-quota tariff is assigned to forty different nations that are allowed to import sugar into the US but there is a set volume as to how much can be accepted into the domestic market (usda.gov). On the other hand, over-tariff is placed on the excess sugar imported that is beyond the quota volume assigned. In addition, it is crucial to note that the government does not allow cheap sugar into the market because it will bring about competition to the domestic farmers. This competition will have an effect on the overall economy in that the consumers will buy the cheap sugar in place of the high cost domestic sugar. According to the USDA, in the 1980s the US government did not have much stricter laws on sugar in that sugar imports composed of more than half of the sugar market but today, imported sugar accounts for about ten percent (usda.gov). This shows a dramatic decrease in foreign sugar imports into the country.
Given the high prices incurred by the sugar consumers, the Jolly Rancher Company, which manufacturers’ candy, has moved to Canada and Mexico. This means that many people have had to lose their jobs as a result of candy makers setting their businesses offshore. Given the rising sugar price in the domestic market as a result of the government protecting the sugar farmers, candy manufacturers have been forced to offset their businesses in another country as a foreign direct investment (Jolly Rancher). Chicago, being one of the largest cities in the country to produce candy, may become bankrupt if all the candy manufacturing industries decide to close down their businesses. Thus, the government may want to reconsider their protection to the farmers in that businesses like Jolly Rancher have shut down their operation due to the high cost in price for the sugar (Top Crop Manager). It is crucial to note that the US allocates high domestic prices for its sugar but, its surplus is dumped into the global market at cheap prices contrary to what the American pay.
In conclusion, it is evident that the domestic sugar prices are way high relative to the world market sugar price. This means that the consumers have to pay a higher price for their sugar compared to the global market price. Some of the initiatives that the federal government has taken to ensure that the sugar program stay in place is by setting the domestic sugar price equal or above the loan rate as a way of ensuring the farmers enjoy returns to scale. It is crucial to note that the trade barriers have ensured less competition in that the government has initiated two-tier tariffs. The two-tier tariffs limit the amount of sugar imported in the country such that the domestic goods do not face competition. In addition, these tariffs ensure that low coast sugar is not brought to the market as a way of protecting the farmers. The high sugar coast has threatened the candy factories because sugar is their main ingredient. Companies such as Jolly Rancher have moved to Canada and Mexico due to high sugar prices.
"Import Requirements for Sugar and Sugar Containing Articles." USDA Foreign Agricultural Service (FAS). N.p., n.d. Web. 9 Dec. 2013. <http://www.fas.usda.gov/>.
"In Focus." USDA Foreign Agricultural Service (FAS). N.p., n.d. Web. 9 Dec. 2013. <http://www.fas.usda.gov/>.
"Jolly Rancher." hersheys.com. N.p., n.d. Web. 9 Dec. 2013. <http://www.hersheys.com/jolly-rancher.aspx>.
"Top Crop Manager." Top Crop Manager. N.p., n.d. Web. 9 Dec. 2013. <http://www.topcropmanager.com/content/view/1527/67/>.