The Impact of Globalization and Free Trade on the U.S. Sugar Policy - Essay Example

Globalization is the process by which different, cultures, nations, economies, and societies have now become integrated for the purposes of communication, trade, and transportation. From an economic standpoint, globalization is the true pursuit of free market policies throughout the world economy. This is important as it strives to connect countries all over the globe through their politics and economics through the use of social activity. All capital markets are beginning to connect world wide, and this affects even those who are not globally connected. The larger economies will at some point influence those not globally invested as their performance begins to evolve and shape the global financial markets. There may be no other free-trade policy like the U.S. sugar program that illustrates such hypocrisy, and the need for reform. The United States has often prided itself as a world leader in terms of the free trade movement. The culture has always pushed for Globalization and the use of technology to integrate economies. However, there are some industries that remain well protected due to the strength of forceful interest groups and absence of pressure to reform. These protection barriers often hurt our domestic economy and counteract the efforts to promote more open markets and trade negotiations around the world. (Grombride, Mark) In this paper I will examine the flaws in the U.S. Sugar Policy and demonstrate how they affect domestic and international farmers. This essay will also demonstrate to show how globalization is reflected in the consumption, production and labor of the sugar industry. The U.S. Sugar policy operates under the Farm Bill, which was overwhelmingly passed in 2008 by Congress. The basic premise behind the sugar policy is that supply should equal demand. The U.S. Department of agriculture has imposed several tools in order to ensure that the sugar policy operates at a minimum cost to the taxpayers. These tools are that: first, they can limit foreign imports to those required in the trade agreement obligation with the exception of Mexico; second, they can control the amount of sugar the U.S. American farmers are allowed to sell; and third, the bill can divert any excess surplus of sugar into ethanol production. (American Sugar Alliance) These tools and policies such as the preferential loan agreements and tariff rate quotas, serve to effectively keep foreign sugar out of the U.S. In return this forces the price of sugar in our market to increase substantially. According to the World Agricultural Supply and Demand Estimates, the U.S. Production projection for sugar produced in April of 2011 was 7,950,000 short tons raw value and the import amount was 3,135,000 short tons raw value. The amount projected in export equaled just 225,000 short tons. In areas such as the Caribbean, sugar is one of their largest earning industries. However, during the past two decades, Caribbean agriculture has experienced a decline in their agricultural production. Once globalization occurred the countries in the Caribbean were greatly affected as the some of the most vulnerable producers. This was due to their limited physical size not allowing them to benefit from economies of scale. For them this translated into higher world prices for production of their main principal products. The Caribbean exported only 669,630 tones of sugar around 2000. (Ahmed, Belal) There are several factors that determine the international competitiveness of sugar production. Some of these factors include: tariffs and quotas, the availability of sugar as a natural resource, the cost of production, and international trade agreements. Tariffs and quotas affect the sugar market as American consumers and business are forced to purchase sugar at the U.S. average price vs. the world price. This is due to our low import of foreign sugar. Government enables have protected domestic sugar growers by placing trade restrictions on imported sugar that comes into the U.S. and is sold for the world price. There several global areas such the Caribbean, Africa, and Central America that can afford to produce sugar at much lower prices. On average, Americans consume about 9.412 million metric tons of sugar a year. What this means is that with every one-cent increase, sugar prices will cost Americans another $207 million per year. Due to the factor of quotas, Americans are only allowed to import around 2.2 metric tones of cane sugar each year. This is only about 23% of the total sugar consumed. If the sugar quotas were eliminated, Americans would have saved around $2.5 billion by being allowed to purchase at the world price. (Perry, Mark J.) Surprisingly, United States is the world’s fourth largest producer of sugar after Brazil, India, and China. The U.S. is also the fourth largest importer. Although sugar-cane plants are often found in tropical or sub-tropical locations we see that the U.S. has encouraged farmers to produce more sugar through the U.S. sugar program that makes loans available to millers and processors of sugar. We must ask ourselves, if it makes since in a Global Market to produce a product at great rates when there are several countries that can offer the same product much cheaper. Please see Attachment A, a diagram that shows the U.S. prices compared to that of the world’s prices. In the table we can see how the price of U.S. raw sugar is consistently higher than that of the world’s average price. It is apparent to see how the factors of labor and production costs can change the cost up and down along with the natural availability of the resource. The last factor to consider is how the International trade agreements and policies like the Farm Bill affect the global trade of sugar. In most cases the United States engages in a set of negotiations that focus on lowering trade barriers for sectors in which the U.S. is highly competitive. However, in the case of the sugar program trade barriers are raised for our own economic benefit to the government. (Groombridge, Mark). There are several consequences occurring from the implementation of the U.S. sugar program to both producers and consumers. After examining the price of U.S. sugar to that of the world price, it is apparent that the U.S. consumer is on the losing side of the spectrum. Not only do American consumers lose out on great prices, but also foreign exporters, who lose out on the chance to sell some of their greatest exports. The only benefactors in the U.S. sugar program are the United States government who receives more money based on higher prices to consumers, and the domestic producers who are allowed to charge more money for their product. It is hard to say whether or not or how much the U.S. should intervene in the sugar market. Many may argue that the increases in domestic production will actually create more domestic jobs, and stimulation of the economy. However, others may argue that we should not pay a premium for goods when the rest of the world is purchasing for the same product for a cheaper price. It is also easy to see that this program does not fall in line with the U.S.’s global ideology for free trade. It seems as though the United States government can bend the rules when they allow for a direct benefit to U.S. policy makers. The sugar program will continue to raise prices for Americans, increase prices for foreign producers, encourage domestic farmers to produce sugar, and lastly discourage free trade which is inconsistent with the Global tone previously set by the U.S. The Stop Unfair Giveaway and Restrictions Act or SUGAR is intended to phase out the current sugar program in the U.S. This most interesting part of this act is the part about implementing a program to increase the tariff-rate quotas that will ensure a competitive processing industry and sufficient supply at a reasonable price. This act will also change some the way assistance loans are processed for produces. Look for opposition of this act by large domestic sugar companies. They will know have to be more conscious of the loans they take, and they will be forced to deal with more foreign competition. Several politicians will also likely oppose this bill as many of them probably have interests with the large agricultural companies located in the U.S. However, consumers and foreign producers will support this act. It should offer foreign global markets a better chance to compete, and that will translate to lower product costs for consumers. It is apparent to see the ways in which the current U.S. sugar program is inconsistent with the notion of globalization and free market. This policy has been under scrutiny for sometime as tariffs, quotas, and trade restrictions are allowed to block out foreign nations from competing in the U.S. Market. There are several political and economic forces such as cost of production, labor rates, taxes, import/export amounts, and political affiliations with agricultural companies that shape the economic landscape. It is time that the United States reexamines the sugar policy to make sure it is consistent with the message of free trade and fair globalization practices for everyone. Countries in the Caribbean and other foreign nations rely heavily on their agricultural exports to sustain their economy. The United States has an unfair advantage due to these trade regulations and their economy of scale. In order for other countries to respect the concept of globalization in regards to the economic climate- there must be a policy revision. These countries don’t mind competing, but they want the same level of competition that the U.S. receives in other industries. In the end, a policy reform will be good for the consumer, as it will lead to lower prices for costs of goods. Some may argue that the sugar program is good for domestic economic stimulus, but the U.S. is already involved globally in all other industries. Sugar regulations may be a method to create more jobs and money in the U.S., but it doesn’t look like we can rely on this market for economic salvation going into the future. Reference: Ahmed, Belal. The Impact of Globalization on the Caribbean Sugar and Banana Industries. Vol 2. 2001. The Society For Caribbean Studies Annual Conference Papers. Retrieved from http://www.scsonline.freeserve.co.uk/olvol2.html Coker, Robert E. Position on FTAA. 4 November 2003. United States Sugar Corporation Trade Press Kit. Globalization. 21 June 2002. Stanford Encyclopedia of Philosophy. Retrieved from http://plato.stanford.edu/entries/globalization/ McConnell, Michael. World Sugar Price Volatility Intensified by Market and Policy Factors. September 2010. Amber Waves. Retrieved from http://www.ers.usda.gov/AmberWaves/September10/Features/WorldSugarPrice.htm Perry, Mark J. Sugar Tariffs Cost Americans $2.5 Billion in 2009. Benzinga Retrieved from http://www.benzinga.com/105260/sugar-tariffs-cost-americans-2-5-billion-in-2009 Samaila, Babu. 18 December 2008. The Importance of Globalization and Technologies to Development.Telecentre.org. Retrieved from http://www.telecentre.org/profiles/blogs/the-importance-of Attachment A: Summary and Conclusion Read More