Sugar Quotas

Trade restrictions (both tariffs and quotas) are harmful to (static) efficiency because they distort the allocation of resources across sectors. The story of the US Sugar Program is a useful cautionary tale about the politics of protection, and also illustrates the fact that not all trade restrictions are alike. 

So, the first question we can ask is, why are quotas (potentially) worse than other restrictions, namely tariffs. The neoclassical explanation is that quotas are more likely to allow a domestic monopolist to continue to exert market power over the domestic market. Since a tariff merely adds onto the price at which foreign producers can compete in the domestic market, a domestic monopolist facing foreign competition still must compete as a price-taker at the tariff-inclusive price - it's the same as if the domestic market were still competitive. When the government intervenes with a quota, the effect depends on the domestic market structure in the industry where it is applied (as we might see in Chapter 9 if we have time to cover it). Without getting into the technical details of the theory, applying a quota in a competitive market is the same as applying a tariff designed to allow an equal quantity of imports into the country because the market is competitive either way. Applying a quota in a monopolistic domestic market is worse for domestic welfare because it signals to the monopolist precisely which portion of domestic demand will be allowed in as imports. Hence the domestic monopolist is able to monopolize the remainder of the market and earn "economic rents." 

But as you might expect, there is more to the story than neoclassical theory. Another problem with quotas is that they can be easily manipulated by the country imposing them so as to show favoritism towards some countries over others. As noted by Anne Krueger (1990) in the case of the sugar quota, this was precisely the reason for initiating the sugar program in 1934 and again in 1948. In particular, the allocation of imports under the sugar quota was at first concentrated to Cuba's sugar industry. Why Cuba? Because in 1934 and 1948, the Communists were still not yet in charge in Cuba, and the US wanted to keep it that way. We all see how that story ended in 1959. 

Unfortunately, with the fall of the Batista Regime and Fidel Castro's rise to power, the Sugar Quota didn't die. The Sugar Quota itself had created domestic interests that had a strong incentive to lobby for the continuation of the quota. The Quota was briefly suspended in 1974, but was reinstated by Ronald Reagan in 1981. This, combined with direct subsidies to corn and corn-based sugars, has led to a vast majority of sweetened foods and drinks being made with high fructose corn syrup, rather than cane sugar, which is otherwise the less costly sweetener to produce.