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424 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS

APPLICA TION 10.7
Sweet Deal: The U.S. Sugar Quota
cereal or fruit are clearly harmed by the elevated
Program 17 prices due to the sugar quotas. But they are also indi-
rectly harmed because manufacturers of products
One of Chicago’s many distinctions is that it is the center such as breakfast cereal, candy, and ice cream also pay
of candy production in the United States. In the late a high price for the sugar they purchase, and this high
1990s, the candy industry employed 10,000 people in the price is, at least in part, passed along to consumers of
Chicago metropolitan area. For this reason, in early 2006 these products. The Valentine’s Day report cites a
politicians and businesspeople eagerly awaited the study by the Government Accountability Office and
study completed by the U.S. Department of Commerce, the U.S. International Trade Commission that pegged
known as the Valentine’s Day Report (released on the economic loss to sugar cane refiners, food manu-
February 14, 2006), which would document the impact facturers, and end consumers at $1.9 billion in 1998.
of the U.S. sugar quota program on U.S. consumers, U.S. In addition to harming end consumers, the U.S.
candy producers, and jobs in the U.S. candy industry. sugar quota program hurts employment in the indus-
The U.S. sugar quotas, which have been in effect tries that consume sugar. The Valentine’s Day report
since 1981, restrict the amount of sugar that sugar- suggests that employment in industries that consume
growing countries can sell in the United States. The sugar fell by more than 10,000 jobs between 1997 and
countries with the largest quotas are the Dominican 2002. By contrast, employment in non–sugar-consuming
Republic, Brazil, and the Philippines. As a result of the industries increased by more than 30,000 over the same
quotas, U.S. consumers pay a higher price for sugar than period. Sugar quotas have hit the Chicago area espe-
if they had been able to purchase sugar at the prevailing cially hard. The Valentine’s Day Report points out that
price in the world market. According to the Valentine’s Chicago lost more than 4,000 jobs between 1991 and
Day report, “Over the last 25 years, the U.S. price of 2001 in the candy, gum, cereal, and bakery industries,
wholesale refined sugar has been on average two to a decline of 27 percent. The number of manufacturing
three times the world price, and in 2004, the world re- jobs in Illinois decreased during this period, but only
fined price was 10.9 cents per pound compared to the by 7 percent. The shutdowns of Brach’s Candy’s Chicago
U.S. price of 23.5 cents per pound” (p. 3). This, of course, operation in 2003 and Fannie May’s Chicago opera-
is good news for producers of sugar, who are shielded tion in 2004 provided a vivid illustration to Chicago-
from the effects of fluctuations in the world market area politicians and Chicago voters of the cost of the
price. It is also good news for companies that produce U.S. sugar quota program.
substitutes for sugar: Demand for their products goes up The Valentine’s Day report shone a light on a pro-
because the price of sugar in the United States is higher gram that, to many people, had been obscure or un-
than it would have been otherwise. Archer Daniels known. With the U.S. Commerce Department having
Midland, a leading food processing company, at one now documented the significant negative economic ef-
time ran an advertisement on Sunday morning news fects of the quotas and the Central American Free Trade
programs pointing out how much of a bargain sugar Agreement (approved by the United States in 2005)
was for U.S. consumers. They did so not because they pro- having resulted in reductions in quotas to allow addi-
duced sugar, but because they produced high-fructose tional sugar imports from Central America, it seems pos-
corn syrup, a substitute for sugar in, among other things, sible that the U.S. sugar quota may eventually be elimi-
the production of soft drinks. Convincing U.S. consumers nated. However, sugar producers, as well as companies
that sugar is a bargain is a good strategy for companies that produce substitutes for sugar, remain powerful
that benefit when the price of sugar is high. advocates for keeping sugar quotas in place, and any
End consumers who purchase refined sugar for attempt to overturn them will have to face their strong
the purpose of cooking or sweetening foods such as opposition to eliminating their “sweet deal.”

17 This example is based on U.S. Department of Commerce, U.S. International Trade Commission,
“Employment Changes in U.S. Food Manufacturing: The Impact of the Sugar Price” (February 1996);
“Sugar Daddy; Quotas and the U.S. Government,” Case 5-204-255 Kellogg School of Management
(2002); “U.S. Sugar Rules Costly,” Chicago Tribune (February 12, 2006), Section 3, p. 3.