GAO Says Sugar Import Quotas Need Changing

August 10, 1999

The way USDA administers the tariff-rate quota for raw sugar to restrict low-cost sugar imports, if changed, would result in lower consumer costs for domestic sugar, says the General Accounting Office. For one thing, says GAO, the allocation process could be adjusted by redistributing unused quota allocations to countries that could fill the quotas.

USDA's Foreign Agricultural Service sets the size of the tariff-rate quota for raw sugar to limit the amount of imported sugar in the domestic market and maintain sufficiently high domestic sugar prices to prevent sugar processors from forfeiting their loans. FAS sets the tariff-rate quota at the beginning of each fiscal year using a formula intended to achieve a year-end stocks-to-use ratio of 14.5%.

FAS reserves a portion of the tariff-rate quota to make available during the fiscal year only if the projected year-end stocks-to-use ratio is 15.5% or lower. The size of the ratio is important, says GAO, "because a low...ratio is associated with a smaller tariff-rate quota, tighter supplies and higher prices; a high..ratio is associated with a higher tariff-rate quota, larger supplies and lower prices."

As a result of FAS use of the stocks-to-use ratios, the tariff-rate quota has maintained the domestic sugar price at more than 2 cents per pound greater than the price needed to avoid sugar loan forfeitures, according to GAO. "We estimate that current domestic prices cost domestic sugar users about $200 million annually for every penny in excess of the estimated price for avoiding sugar loan forfeitures," the report says.

The U.S. trade representative allocates the tariff-rate quota for raw sugar. In 1982, the quota for imported raw sugar was divided among 40 countries on the basis of their share of the U.S. market during 1975-81 when imports were relatively unrestricted. From 1993-98, 10 of the 40 countries were net sugar importers; they had to import sugar from the world market to meet their own needs and replace their annual exports to the United States.

Tariff-rate quota shares are not allocated among the countries according to their current capacity to produce and export sugar, says GAO. For example, dominant suppliers in the quota-exempt market have relatively small shares under the tariff-rate quota.

GAO recommends that USTR could reallocate unused portions of the quota to countries with the capacity to export more sugar than their original allocation allows. USTR also could establish a new historical shares period that represents current market conditions. In addition, the United States could choose to administer the tariff-rate quota by auctioning the rights to exporting countries.

In an auction, foreign countries would submit bids to gain access to the U.S. sugar market. The bids would specify an import amount and fee that would be paid to the U.S. Treasury for the rights. The highest bidders would be awarded the right to ship sugar to the United States. In this way, the United States would gain revenue from the fees paid, and the countries with the lowest production and transportation costs would have an advantage in bidding.