Sunday, 25 June 2017

US sugar producers' sweet deal continues

One of the things we discuss in the first week of ECON110 is rational ignorance - where it is better for voters to not know what decisions policy makers are making on their behalf. How does that work?

It is costly for voters to keep track of how the decisions that policy makers (and politicians) make on their behalf will affect them (we call these monitoring costs). When the costs to each voter of a policy change are smaller than the monitoring costs, it is in the best interests of the voter to remain rationally ignorant. It would cost them more for the voters to keep a close eye on the decisions of policy makers than the cost of the negative effect of the policy on them.

So, if policy makers can spread the negative consequences (costs) of a policy change across many voters then few of those voters will be made unhappy. Policymakers can then concentrate the benefits of the policy change on a few (or many) favoured individuals.

One of the examples I use to illustrate this is sugar tariffs in the U.S. The Heritage Foundation reports:
In fiscal year (FY) 2013, Americans consumed 12 million tons of refined sugar, with the average price for raw sugar 6 cents per pound higher than the average world price. That means, based on 24 billion pounds of refined sugar use at a 6-cents-per-pound U.S. premium, Americans paid an unnecessary $1.4 billion extra for sugar.
That works out at about US$4.36 per person, which is hardly enough for any voter to worry about. It also means that sugar consumers pay about 39% more for refined sugar as a result. However, the Heritage Foundation also reports:
That is equivalent to more than $310,000 per sugar farm in the United States.
Which of course makes sugar farmers and their workers much better off. So, sugar consumers may remain rationally ignorant of the effects of trade protection for sugar, while the sugar industry contributed some US$4 million to politicians in the 2016 election cycle (which a cynic might note is why the politicians are happy to enact trade protection for the sugar industry).

Anyway, I was interested to read a couple of weeks ago that the U.S. and Mexico have agreed a new deal for Mexican sugar producers. The Washington Post reports:
There is good news and bad news in U.S.-Mexico relations.
Unfortunately, they're the same news: The Trump administration and the Mexican government have reached a new agreement on access to the United States for Mexican sugar producers.
This is good news because it avoids an impending trade war over the commodity, thus preserving a modicum of good relations leading into negotiations over updating the North American Free Trade Agreement (NAFTA), according to the Washington Post.
It's bad news because the whole business perpetuates a system of market manipulations that hurts American consumers of the commodity while benefiting no one but a well- connected few who produce it in the United States...
Things have come to quite a point when the only way to save a free trade agreement is by enforcing less-free trade. But that is what is happening: Mexico's sugar exporters are being forced to accept a version of the country-by-country quota system they thought they had negotiated their way out of, fair and square, back when everyone signed NAFTA a quarter-century ago.
I recommending reading the whole article. This is not how free trade is supposed to work.

1 comment:

  1. Enjoyed this article - love seeing the connections between the micro and macro at play.