Economists Do It With Models

Warning: “graphic” content…

Bookmark and Share
Mexican Coke (The Brown Beverage, Not The White Powder) And Unintended Consequences…

March 27th, 2009 · 8 Comments
Econ 101 · Policy

A new friend of mine reminded me about Mexican coke when I was in Austin. (Yes yes, you would expect my first Austin post to be about music, but no…) As someone who spent a couple of summers in Atlanta growing up, I am way more familiar with the Coca-Cola headquarters than I would like to be, and I have even taken the tour where you get to sample the different cokes from around the world. The different cokes taste different not only because the company is trying to appeal to local tastes, but because for economic reasons they are made with different ingredients.

Mexican coke is in fact pretty good, and I would argue it is better than American coke. This is largely due to the fact that it is made with cane sugar rather than high fructose corn syrup. Now let’s think for a second- why would Mexican coke me made with sugar whereas American coke is not? Do people in Mexico have a stronger demand for things made with sugar? Probably not. The real explanation is that there are various trade restrictions on imported sugar that keep the US price of sugar at least twice as high as the world price of sugar. (That links to a pretty interesting New Yorker article, in case you are curious.) These trade restrictions take the form of subsidies, quotas and tariffs. I could ply you with graphs to make my point, or you could just take it from me that these restrictions have the following effects:

  • The price of sugar in the US is higher than it would be under free trade (by about double in this case, as stated above)
  • Less sugar is consumed in the US than would be under free trade (arguably not a terrible thing, but a side issue nonetheless)
  • Less sugar is imported from other countries than would be under free trade (relevant if we care about the welfare of developing countries)
  • More sugar is produced by US farmers than would be under free trade (maybe this is kind of good, but why on earth are we spending our time making sugar rather than things that we could be better at?)
  • The government gets some tariff revenue, but it also pays out some money in subsidies (it’s unclear how these amounts compare)

Now here’s the kicker- the dollar benefits to the sugar producers are outweighed by the dollar cost to the consumers that have to pay more for their sugar. This would imply that somewhere along the line policymakers either didn’t understand this or felt strongly that sugar producers (read, sugar lobbyists) are somehow more important than sugar consumers. I would hope that the latter is the explanation. However, even if it is, there are effects of this policy that were almost certainly not taken into account in the cost/benefit analysis.

Caveat 1: Sugar tariffs make corn more expensive
(This is the less interesting caveat.) So funny thing about substitutes- when one gets more expensive, demand for the other increases. The higher price of sugar increases the demand for corn syrup, and thus corn. However, again without the gory details, if demand for corn increases (essentially a product gets more popular for various reasons), corn gets more expensive. We saw this problem also with the growing popularity of ethanol derived from corn oil, since people weren’t solely relying on used oil for supply. Do we care so much if corn is more expensive? I’m not sure…the corn farmers are happy, and the corn consumers not so much, especially those who were consuming corn on the cob rather than corn syrup. The point is that policy makers should at least be aware of this dynamic when putting regulations in place.

Caveat 2: The way that the sugar tariffs and such are written cost the US manufacturing jobs.
I am guessing that your first reaction to that statement was somewhere along the lines of “wtf?”, but hear me out while I tell a story. A number of years back, I was consulting for a candy company that was based in the UK. (Yes, that one.) They were looking at their costs of production and decided that it made sense to close their plant in…oh, what was the town…Rockford, IL. (I think that is roughly correct.) Now, the reason that you would expect the US plant to close is because labor costs are higher in the US than in other places that they had factories, such as Buenos Aires, Wroclaw or Guangzhou. And while that was part of the issue, it wasn’t the whole story. See, the tariff on sugar is imposed as soon as the sugar crosses into the US, even if the final product that the sugar is put into is being sold in another country. Given that, it doesn’t really make sense, for example, to get sugar from South America, bring it to the US to make candy bars, and then send the candy bars to France, so the company organized in a way that cut the US out entirely. And the sugar tariff was presumably put in place to protect American industry? Hmph.

The bottom line is that the right question isn’t whether the sugar producers are more important than the sugar consumers. The right question is whether the sugar producers (and corn producers I suppose) are more important than the sugar and corn consumers and the candy makers. It gets very complicated very quickly…luckily, I argue that policy wouldn’t be nearly as interesting if it was easy!

On a random note…as I was writing this I kept thinking about this Freakonomics post because it had a picture of Flumps. A Flumps (that sounds weird, but it really isn’t plural) is a British candy that is some sort of marshmallow/licorice hybrid. I’m not sure that I recommend it, but when I was consulting for the aforementioned candy company they had candy everywhere, and a lot of it was stuff that you can’t get in the US. For some reason I remember Flumps the most…and eventually had to switch projects before I went into a diabetic coma…

Tags: Econ 101 · Policy

8 responses so far ↓

  • 1 econgirl // Mar 27, 2009 at 4:17 pm

    P.S. If you are curious, you should be able to currently get kosher for Passover coke, which also doesn’t have corn syrup. See, the post is more timely than it might at first appear. 🙂

  • 2 Andrew // Mar 28, 2009 at 12:02 am

    I’ve noticed the same difference with Canadian coke which I prefer (good thing since I live here). Coke is not sweet enough in the US, and I understand why corn syrup is only used as a substitute when sugar is really expensive. By the way, a more cynical view of politics would suggest that government isn’t actually weighing utility but instead captured by a powerful lobby.

  • 3 Craig // Mar 30, 2009 at 8:26 am

    It’s a minor point, but ‘Corn on the cob’ corn and the corn that is used to produce corn syrup are completely different varieties. You wouldn’t want to eat the kind that gets used to make corn-syrup/ethanol/etc.

  • 4 Pfloyd // Mar 30, 2009 at 11:53 pm

    We just talked about this very thing in my Econ class.

    And of course, with the corn varieties, there is still an opportunity cost involved with growing an edible variety of corn as opposed to the variety used for processing.

  • 5 econgirl // Apr 8, 2009 at 10:58 am

    On an amusing note, I would like to point out that someone found this post by googling for:

    mexican style corn on the cob in rockford

    Wow. If you look closely, all of the words are mentioned, but not nearly in the way that this searcher was likely expecting…

  • 6 gtorell // Apr 10, 2009 at 4:11 am

    You’re off the mark. Sugar policy stays in place because it’s an huge boom to a tiny number of sugar growers (~1000 or so I think?) who make a huge profit from that policy. You and I and everyone else doesn’t have to pay that much (in the grand scheme of things) for this policy, it’s like $20 a year, in a sense.

    Therefore, sugar growers can hire the best lobbying firms in the country, but it doesn’t make any sense for us to lobby congress so that we can pay $20 less a year.

    Your point about corn is pretty pointless, because there are $56.2 billion in corn subsidies paid annually. I guarantee you any effect that sugar tarrifs have are miniscule in the face of the power of corn subsidies.

    “The point is that policy makers should at least be aware of this dynamic when putting regulations in place.”
    You don’t work in ag policy do you? ^_^ PS. they don’t give a damn.

  • 7 Dick // May 12, 2009 at 8:09 pm

    Not only do we pay sugar subsidies and corn subsidies and tax imported sugar to unaffordability, we tax Brazilian ethanol to keep it from competing with our subsidized but still overpriced corn-based ethanol. And consumers pay both at the grocery store AND at the pump as corn prices go even higher. Does anyone in Congress care about the common good?

  • 8 Dick // May 12, 2009 at 8:10 pm

    With apologies for the rhetorical question.

Leave a Comment