Under pressure from the sugar lobby, which feared a flood of sugar entering thro
ID: 1211944 • Letter: U
Question
Under pressure from the sugar lobby, which feared a flood of sugar entering through Mexico, the U.S. Congress demanded limits on the amount of sugar that Mexico could export to the U.S. as a condition for passing the North American Free Trade Agreement (NAFTA) in 1993. When those limits expired, which occurred at the beginning of 2008, Mexicans or the Mexican government could have, in principle, purchased sugar on the world market to re-export to the U.S. to sell at the higher, quota-supported U.S. sugar price. Mexican sugar exports to the U.S. did indeed increase following expiration of the limits, from about 4.9 million cwt in 2007 to 14 million cwt in 2008 and then to 28 million cwt in 2009, before falling back to 16 million cwt in 2010. Since 2008, U.S. policymakers have complained that the growth and high variability of Mexican sugar exports to the U.S. have complicated their ability to set quota levels to achieve desired sugar prices, leading to calls for some form of coordination between Mexico and the U.S. One such proposal would have required the U.S. and Mexican governments to consult at least every three months to review data on both countries’ sugar markets; to establish a permanent joint sugar commission to coordinate national sugar policies, monitor implementation of the framework’s objectives, and handle any disputes that may arise under the framework; to consult about the likely impact of future trade agreements on how their sugar programs work; and to work together to improve the collection and publication of reliable data on each country’s sugar supply and use, including mandatory and enforceable reporting requirements for sugar producers. At the time of the expiration of limits on Mexican sugar exports to the U.S., the U.S. consumed 200 million cwt (“hundred weights” = 100 lbs) of sugar per year, of which U.S. producers produced 160 million cwt, with the remainder, including 4.9 million cwt from Mexico, imported from other countries holding U.S. quota rights; the price of sugar in the U.S. was $20.00 per cwt (20 cents per pound); the world market price of sugar was $14.00 per cwt; the elasticity of demand for sugar in the U.S. was 0.15; the U.S. elasticity of sugar supply was 0.25. Since U.S. consumes only about 4% of world sugar production, assume that changes in U.S. sugar imports will not affect the world market price.
Question 2. Like the U.S., Mexico sets quotas on sugar imports and, consequently, Mexicans cannot in fact buy as much sugar as they would like on the world market. As a result, the amount of sugar available for Mexico to export to the U.S. depends on Mexican consumption relative to its own domestic sugar production plus imports allowed under its quota. Not surprisingly, Mexican sugar producers prefer to sell their sugar in the U.S. when the U.S. price is higher than the Mexican price, and vice versa. Assuming that the U.S. keeps the quota for sugar imports from countries other than Mexico unchanged (that is, at 40 million cwt – 4.9 million cwt = 35.1 cwt), calculate the effect of the increase in Mexican exports to the U.S. in 2008 to 14 million cwt (from 4.9 million cwt the previous year) on the price of sugar in the U.S.
(Please only answer this if you know what you are doing, this is for a final exam)
Explanation / Answer
If the quota for sugar imports from other countries remains constant at 35.1 million cwt, and Mexico increases its exports to 14 million cwt, total imports will be 49.1 million.
Substituting the demand and U.S. supply equations
Total imports into QD = QSUS + QSF yields
230 * 1.50P = 120 + 2P + 49.1
Solving for P yields P = 60.9/3.5 = $17.40
Price will be 17.40 in US
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