Impacts of U.S. Sugar Policy and the North American Free Trade Agreement in North American Sugar Containing Products

Sugar is one of the most protected agricultural commodities in the United States and other countries around the world through the use of production allotments, preferential marketing agreements, and tariffs. These protectionist measures lead to increased input costs for manufacturers of candies and soft drinks. The North American Free Trade Agreement (NAFTA) has in part altered the nature of sugar trade throughout the North American continent. This paper presents a game theoretical Cournot model which illustrates how trade in sugar containing products and the location of sugar containing product manufacturers in North America is likely to be impacted by the combined effects of U.S. sugar policy and NAFTA. Current international agreements which affect sugar confectioners are incorporated in the Cournot model such as NAFTA along with U.S. and Mexican re-export programs. Preliminary results indicate that domestic firms are at a cost disadvantage to firms that export into the domestic market due to current international agreements and domestic policy. Furthermore, due to the nature of policy in Canada, Mexico and the U.S., firms are implicitly given an incentive to locate in another country and export to Mexico or the U.S. The nature of current policy affects the amount of sugar trade between North American countries as firms seek to gain an advantage in the cost of inputs as well as the volume of finished goods traded between countries.