In an article from August 2015, we see Marco Rubio’s justification for supporting sugar subsidies:
Battling crony capitalism and corporate welfare has been a central theme of this weekend’s gathering.* In that vein, Mike Allen of Politico asked Marco Rubio at Sunday’s lunch, commented on Rubio’s votes against a federal backstop for terrorism risk insurance and the Export-Import Bank, and then noted that Rubio made one exception to his opposition to crony capitalism. Rubio instantly knew what Allen was talking about: the federal sugar program.
Rubio has consistently voted for and defended the federal sugar program, which drives U.S. sugar prices higher by keeping out foreign sugar and provides federal loans to guarantee those high prices.
Rubio said, “I’m ready to get rid of the loan program for sugar, as long as the countries that export sugar into the U.S. get rid of theirs as well, and here’s why: Otherwise, Brazil will wipe out our agriculture and it’s not just sugar.”
This is nonsense. Other agricultural products do just fine without tariffs. And imposing tariffs on imports from other countries hurts us.
Before we get into why that is the case, let’s clarify what the “loan program” really is: price-fixing by the government. SugarCane.org describes the program this way:
The U.S. Department of Agriculture (USDA) provides loans to sugarcane and sugar beet producers and processors that guarantee a minimum price regardless of the true market conditions. At the end of the loan term (generally 9 months), sugar producers and processors make one of two choices:
1. Turn over to the government the sugar they produced as payment for the loan, or
2. Sell their sugar on the market if the going price is higher than the USDA loan amount
In other words, the government sets a floor for sugar prices. In addition, the government institutes two other forms of corporate welfare for U.S. sugar companies, including domestic market controls and tariff-rate quotas. All of these distort a free market in sugar, with deleterious effects.
I want to concentrate on Rubio’s argument that we have to allow government to interfere with the operation of the free market in sugar, because other countries do the same thing. The argument appears to be: if they slap tariffs on us, we have to slap tariffs on them!
The problem with this argument is the lazy, populist assumption that when we slap tariffs on them, we are hurting them and not ourselves. This, I will explain, is not the case. When we slap a tariff on imports, there is a trade-off. (Remember Thomas Sowell’s dictum: there are no solutions, only trade-offs.) And in that trade-off, we hurt ourselves badly when we slap tariffs on imports of any sort.
The following analysis is based on two rock-solid assumptions:
First: In a free market, people tend to buy the products that they believe are the best value. In other words, they gravitate towards the best products offered for the least amount of money. This means different things to different people, but the collective decisions of a free people result in some products being winners and some being losers.
Second: In a free market, people tend to benefit on both sides of a transaction. The seller believes he is better off with the money he receives, and the buyer believes he is better off with the goods or services he buys.
Any government interference distorts both of these principles.
Let’s first consider what happens when we slap tariffs on other countries’ imports. That will provide us a framework for considering what happens when other countries slap tariffs on our goods.
When we slap tariffs on other countries’ goods, it feels like we’re hurting the other country. But to a large degree, we are hurting ourselves.
Think about what happens when, in the absence of any tariffs, an American chooses to buy a product manufactured in a foreign country rather than one manufactured here at home.
If the good is a consumer good, the consumer benefits because he gets a better product at a lower price. (If he thought he could get the best deal by buying the domestic product, he would.) The consumer gets to keep more of his money and gets a better product — all of which increases his standard of living.
If the good is a capital good, certain American companies benefit if they use that capital good to make consumer goods. What is more, customers of those American companies benefit because they can buy those goods more cheaply.
Some goods are both consumer goods and capital goods — like sugar. Consumers buy sugar as a consumer good. American candy companies and soft drink manufacturers (among others) purchase sugar as a capital good (or used to), which they use to make their products. In these cases, without tariffs, American consumers benefit, certain American companies benefit, and customers of those American companies benefit.
American companies that export goods benefit from a lack of tariffs, for at least two reasons. First, other countries tend to retaliate against our tariffs with tariffs of their own — not a wise policy, but one that occurs. When we remove tariffs, other countries’ retaliatory tariffs are often removed, making our exports more attractive. Second, when we buy foreign goods, that gives citizens of other countries American dollars, which they can then use to buy our exports.
Finally, in all these transactions, the foreign company benefits, because it gets the sale and the profits that go along with it.
American companies making inferior or more expensive products like to argue that they are also “harmed” by a pure free market that lacks of tariffs — because the American company is not making the sale, foreign companies are. And it is true: when tariffs are instituted, it may benefit American companies that make products that do not succeed on a free market, because they are inferior, too expensive, or both.
But a tariff does not just help American companies making inferior and more expensive goods, and hurt foreign companies making better and cheaper products. These tariffs also hurt the people listed above who benefit from a lack of tariffs.
American consumers are hurt because of the lack of choices and because they are incentivized to pay more for inferior products, lowering their standard of living.
If the goods slapped with a tariff are capital goods, certain American companies are hurt because they must pay more for those goods. In turn, the customers of certain American companies are hurt because they must pay more for the products, or receive inferior products.
When the goods slapped with a tariff are both consumer and capital goods — like sugar — all three groups are hurt by tariffs. Consumers are harmed. Certain American companies are harmed. And the consumers of those American companies are harmed.
What’s more, there are ripple effects from the massively increased price of capital goods like sugar — including businesses moving to other countries and the loss of jobs resulting from such moves. In March of 2014, I published a post titled Planet Money on Rent-Seeking, Part 4: The Government-Mandated Minimum Prices for Sugar
The Planet Money episode opens with a CEO of a candy company talking about how he could expand his operations here in the U.S., rather than send massive parts of his operations to Mexico. What does he need? he asks rhetorically. Lower tax rates? Workers’ comp reform? A right to work law? Nope. He says he could pay no taxes, and get all those other things, and would still manufacture candy canes in Mexico. What does he ask for?
“Let us buy sugar on the free market.”
Finally, as noted, American companies that export goods are harmed by tariffs on imports.
Now let’s turn to the case Rubio is talking about: the distortion that occurs when a foreign government distorts the market by, say, slapping a tariff on imported goods from the United States.
Again, a simplistic analysis says: when a foreign country slaps tariffs on our goods, they are hurting us. But in reality, they are largely hurting themselves. This flows from taking the analysis above and applying it to the country imposing a tariff.
If Brazil imposes a tariff on U.S. sugar, that can have the effect of helping Brazilian sugar companies, to the extent that they are producing inferior or more expensive products that would not be purchased absent the tariff. It can also have the effect of harming U.S. sugar companies, to the extent that U.S. sugar companies would be able to compete in Brazil absent the tariff.
But, as we have seen, a Brazilian tariff on sugar also imposes harms on Brazil. Brazilian consumers are hurt, as their sugar prices rise, lowering their standard of living. Certain Brazilian companies are hurt — namely, ones that use sugar as a capital good. And the customers of those Brazilian companies are harmed. Also, Brazilian companies that export goods generally are hurt.
It’s not as if Brazil can slap tariffs on us without consequence.
What about the argument that retaliatory tariffs act as a “crowbar” to loosen tariffs in other countries, promoting free trade for all? Jim Powell has examined this argument and found that it lacks any evidence to support it, saying: “it is hard to find a single significant case in which trade retaliation or retaliatory threats have forced open a foreign market.” Trade retaliation tends to close markets, not open them.
As one of several problems with trade retaliation, Powell explains what I have explained above: that tariffs and sanctions harm the country that imposes them as well as the country targeted:
[T]he “tougher” the sanctions, the more they harm people in the retaliating country. Import restrictions trigger shortages and higher prices for consumers, and export restrictions wipe out business for exporters. Sanctions probably inflict as much harm at home as they do on the target country. That is why tough sanctions are seldom adopted, despite continuing objectionable practices in a target country. When such measures are adopted, they lead to losses, black markets, and corruption.
Powell also notes that a retaliatory tariff “tends to inspire nationalism and xenophobia in the target country”; “forces a country to reorient its economy toward alternative suppliers and markets”; “expands the role of government in the target country, much as warfare does”; and “cannot do anything about the worst cases, nations whose economies are already closed.”
Finally, in addition to having wonderful economic benefits, free trade has the effect of increasing the peace. As Stephen Lai argues at the Foundation for Economic Education:
When nations depend on one another for trade, there is little cause for war. As Frederic Bastiat stated, “If goods do not cross frontiers, armies will.”
Rubio supports sugar subsidies because they are goodies for big sugar companies in Florida. His justification for them does not withstand scrutiny.
And, by the way?
Ted Cruz opposes sugar subsidies.