International Economic Commentary: U.S. Sugar Tariffs on Mexican Sugar

In October 2014, the U.S. imposed tariffs on Mexican sugar. A tariff is a tax that is charged on imported goods, typically used to raise their price and thus promoting the consumption of domestic goods.

Figure 1- Diagram to show impacts of Mexican sugar tariff (The distinction on Mexican sugar is made since the article states that the vast majority of U.S. sugar imports come from Mexico, rather than all of the world) on the U.S. sugar market.

As evidenced in Figure 1, a tariff would shift the Mexican supply (Sm) curve upwards to Sm+tariff by the amount the U.S. decides to impose, from 39.54% to 47.26%, since the costs of the Mexican sugar producers will increase. Mexican sugar producers will try to pass on this cost to the consumers by raising the price of the sugar from Pw to Pw+t. Consequently, the demand (D) for sugar will decrease to Q4 from Q2. Before, domestic producers were producing 0Q1, after the tariff, domestic production increases to 0Q3, as shown by a corrective movement along the domestic supply (Sd) curve. This happens because the Mexican producers will not be able to supply as much as they did before. Since more domestic products will be consumed, their revenue increases from g to g+a+b+c+h. Meanwhile, the Mexican producers will see their exports decrease from Q1Q2 to Q3Q4 as shown by a corrective movement along the Pm+t curve. Their revenue will decrease from h+i+j+k to i+j.

The reason why the U.S wants to impose this tariff is due to dumping accusations. Dumping is a type of predatory pricing. It involves producers exporting a good at a price below its cost of production. The tariff can offset the cost advantage of the dumped imports, meaning that the U.S. can be more dependent and not rely on Mexican sugar. Additionally, domestic employment may increase due to increased domestic demand. Finally, the U.S. will see revenues d+e from the tariff.

On the other hand, tariffs raise prices to consumers and leave them with less choice. Furthermore, they reduce specialization and can lead to world inefficiency. Referring back to Figure 1, we can see f and c are a dead-weight loss of welfare. Demand falls and there is thus a decrease in consumer surplus, this is represented by f. Moreover, Mexican producers would be able to supply Q1Q3 sugar with a minimum revenue of h whilst the U.S. producers can only produce it with h+c. The extra c is considered inefficiency.

The article only states that decreased U.S. sugar consumption is a consequence of cheap Mexican imports, this is an assumption. This decrease could also be due to other factors like the subsidy of substitute goods like high fructose corn syrup (HFCS) in the U.S. A subsidy is an amount of money paid by the government to a firm to lower their costs of production. Substitute goods are those which satisfy the same needs and wants of the consumer.

 Figure 2- Diagram to show the impacts of subsidies on HFCS in the U.S.

When a country implements a subsidy, a firm is able to supply more, domestic supply will increase, as shown by a shift in the Sd curve to the right. Consequently, the new production will be 0Q3 and receive Pw+subsidy for every unit produced. Due to increased consumption their revenue increases from a to a+b+e+f+g. Foreign producers will now only supply Q3Q2 as opposed to Q1Q2. They will thus see a revenue decrease from b+c+d to c+d.

A solution to incentivise the consumption of domestic sugar would be to take away the subsidies on HFCS and implement tariffs on this market. The world market for HFCS is not large as the one for sugar and thus the impact of this on other countries would be minimal, differently from the high impact tariffs on Mexican sugar would have on Mexico. At the same time, the rise in price of HFCS would make some domestic consumption switch to a cheaper substitute, such as sugar.

In the short run, we might see tariffs being implemented in Mexico, but as the article states, this will not sustain due to various free trade agreements. It is likely the U.S. will have to switch to other solutions in order to incentivise domestic consumption of sugar, such as removing subsidies and placing tariffs on substitutes. Otherwise, some producers in the U.S. sugar market may have to reallocate to another, more successful market.

By,

Vivian Garciacano

References

http://www.wsj.com/articles/u-s-imposes-new-sugar-tariffs-but-pact-may-negate-them-1414459977