An Economic Weapon v. Free Trade

--THE U.S. SUGAR QUOTAS--

SUGAR, one of the world's most closely regulated commodities, has become a powerful economic weapon as the strain in U.S.-Cuban relations has increased. Last week President Eisenhower asked Congress to extend the Sugar Act for four years, grant him authority to cut the quotas of any of the 15 foreign nations (including Cuba) that export sugar to the U.S. Beyond its political implications, Ike's action raised a more basic question: Should the U.S. continue a protectionist quota system that compels the consumer to support the price of sugar?

Many a free trader answers no. Says John Hight, executive director of the Committee for a National Trade Policy: "The Sugar Act is bad economics all the way around. There ought to be more competition. It's part of the whole protectionist problem. This part just happens to have been around longer." Free traders argue that the Sugar Act was spawned by an emergency that has long passed. The act is the outgrowth of a 1934 measure to

1) help U.S. beet-and cane-sugar producers meet foreign competition, and

2) revive the Cuban sugar industry, wrecked by U.S. tariffs and the Depression. Because of Cuba's close relationship and U.S. investments in sugar companies there, the island was put in a privileged position. Today Cuba supplies 33% of all U.S. sugar, sells more than half its annual 6,000,000-ton crop to the U.S. at a premium price that brings over $100 million more than the world market price.

Such a marketing setup is routine for sugar. Nearly all of the world's countries have some form of controlled buying or subsidy system that keeps prices for sugar higher than the world price. In the U.S. the price, in effect, is controlled by the Secretary of Agriculture, who can increase or cut it by changing the quota (9.4 million tons in 1960). U.S. refiners pay more than 5-c- per Ib. for sugar, about 2-c- above the world price, pass the extra cost on to consumers.

But sugarmen argue that the 3-c--per-lb. world market price for sugar is misleading. Of the 52 million tons of sugar to be consumed in the world in this year, some 38 million tons will be used in countries where it is produced. Of the remaining 14 million tons, more than 8,000,000 tons will be sold to nations with quota systems similar to the U.S. The remaining 6,000,000 tons, which sells at the world market price, is largely surplus sugar. Says Boyd MacNaughton, president of C. Brewer & Co. Ltd., Hawaii's second largest sugar company: "The so-called 'world market' is a dumping ground for surplus sugar that doesn't have a home."

Free-trade advocates contend that with such a surplus, prices would be lower, and competition increased if the quotas were abolished. While free market competition would drive the price down temporarily, Cuba in a pinch could probably produce sugar more cheaply than other nations, thus dominate the U.S. market. Cuba, which now limits its output, could expand it, squeeze out many foreign competitors and U.S. domestic sugar producers, which supply 53% of the U.S. market. Elimination of the quota system would bring violent price swings and leave the U.S. open to high prices or shortages during an international crisis, such as Suez or the Korean war.

But a return to a free market is highly unlikely because of the power of the U.S. sugar lobby, which draws its strength from 25 beet-and cane-sugar-producing states, the Philippines and Puerto Rico. The lobby argues that the consumer, although paying for the quota system, has benefited from it through price stability. Over the past ten years sugar prices have risen less than the general rise in consumer food prices. The U.S. retail price of 11.5-c- per Ib. is about 5-c- per Ib. below the median price in 121 other nations around the world. Says a top Agriculture Department expert: "We have managed our protection system in such a way as to pass on the benefit to all parties concerned. It has worked by limiting our protection to only part of our requirements and moving halfway toward free trade. To throw out this system which has worked so well would be unthinkable, politically and economically."

But most sugarmen see no objections to giving the President the power to change the quotas. Long before Castro, the quota system was a point of contention. Many other producing nations, e.g., Mexico and the Philippines, thought they were being shortchanged because of Cuba's huge share. Florida's Democratic Senator George A. Smathers last week urged that the U.S. cut Cuba's quota and redistribute the amount to such friendly nations as Mexico and Brazil. U.S. Ambassador to Mexico Robert C. Hill has also urged that Mexico's share be increased.

Thus, the U.S. has a potent weapon to reward its friends and punish its enemies, a weapon that more than balances the problematical gains that might be had by abolishing the quotas altogether.

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