Free Trade a Sweeter Deal for Everyone

Tariffs and import quotas ensure that the cost for both raw and refined sugar remains far above freely traded world prices for U.S. consumers.

For more than two centuries, economists have argued that free trade among nations is better than government trade restrictions.  It is better for both the importing and the exporting countries as well as for their consumers and their most productive workers.

Unfortunately, the case for free trade is hard to make to the average citizen because economic analysis can seem counterintuitive.  Superficially, slapping tariffs or quotas on imported goods seems like a good way to save American jobs from the challenge of foreign competitors.  However, studies show that import duties mainly have the effect of forcing consumers to pay higher prices-prices whose total cost to the public is typically in excess of $200,000 per American job "saved."  

The latest casualties of protectionist policies are the 600 employees of the Kraft-owned plant in Holland, Mich., that produces LifeSavers candy.  In 2003, Kraft will move LifeSavers production to Canada.  The reason?  Sugar is cheaper in Canada, which imports it at the lower, freely traded world price.  The United States, on the other hand, has protected its sugar industry with tariffs or quotas since 1922. According to a 1998 estimate from the U.S. General Accounting Office, sugar protection costs Americans nearly $2 billion per year.  (It was Saginaw Congressman Joe Fordney who earned the nickname "Sugar Beet Joe" by sponsoring a bill that doubled the sugar tariff that year.  Fordney was asked by another congressman, "Is it not true that if you had your way you would build a tariff wall around this country so high that it would be practically insurmountable?"  Fordney at first denied it and then said, "But you know, that wouldn't be such a darned bad idea.")

The LifeSavers case provides an unusually vivid example of how the impulse to "protect jobs" with tariffs can backfire, actually costing some Americans their jobs.  In this instance, sugar protection has put LifeSavers and all U.S. sugar-using industries (like cereals) at a serious disadvantage due to tariffs that raise the cost of sugar 2-to-2.5 times the world price.  As a result, U.S. candy producers are exporting less than they could, closing plants, and relocating production to other countries.

Ironically, consumers and taxpayers may have to foot an additional bill if protectionists persuade the government that the LifeSavers jobs should be protected.  In the latest twist, the "protection" being offered is a $25.5-million package for Kraft from the Michigan Economic Growth Authority (MEGA) if the company agrees to keep the LifeSavers jobs in Holland.  (Not surprisingly, other out-of-state companies are clamoring for similar government largesse in exchange for transferring their operations to Michigan.)  But special tax incentives and subsidies are a losing proposition, too, because any "new" jobs that result are simply existing jobs that are relocated-with the attendant amount of economic inefficiency and disruption as well as wastefully expended tax dollars.

So far, Kraft has turned down the MEGA offer, saying that the incentives cannot overcome the cost advantages of moving the LifeSavers operation to Canada.  Kraft's business instincts are sound: the company might benefit from the MEGA offer in the short term, but lowering production costs in the long term will benefit consumers by keeping the cost of LifeSavers down and benefit Kraft by ensuring more consumers will continue to purchase LifeSavers.

The cost of U.S. sugar protection is so high that some companies still find it cheaper to pursue a convoluted process whereby they purchase Canadian "stuffed molasses," or watered down sugar, which is exempt from the protection laws.  Companies then expend additional resources to extract the water so they can use the recovered sugar as an ingredient in their U.S.-made products. 

Legislators who support protectionist measures portray themselves as sympathetic to workers, rarely admitting to the high costs that trade restrictions impose on consumers, taxpayers, and the industries that use the "protected" product (in this case, companies like Kraft or the Battle Creek-based cereal maker Kellogg).  The ratio of jobs in the U.S. food-processing industry, which uses large amounts of sugar, to jobs in sugar production is at least 7 to 1. 

The best way to keep LifeSavers and other candy jobs in the United States is to end sugar protection, pure and simple.

(Economist Robin Klay is a professor at Hope College and an adjunct scholar with the Mackinac Center for Public Policy. Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.)