Canada’s sweet success

Donald Coxe February 18 2002

Canada’s sweet success

Donald Coxe February 18 2002

Canada’s sweet success

Donald Coxe

Holland, Mich., is a pleasant little town (population 35,000) across the lake from Chicagoland. It’s located in a Dutch farming region, so it’s naturally a great place for fruits, vegetables and flowers, especially tulips.

As detailed in a story in the Chicago Tribune, prosperous Holland is taking a body blow from the forces of globalism. Its pride and joy, the factory where Life Savers have been made since 1967, is closing. Six hundred jobs will be lost when production shifts to Montreal.

Nor is that likely to be the last candy company to exit the Midwest. Profits have been sour for the industry, but not because customers have suddenly become caries—or calorie— conscious. It’s all about the massive protection for American sugar producers. Sugar costs three times as much in the U.S. as in Canada and the rest of the world because Washington protects farmers who produce sugar from beets or cane.

That’s a big problem for Kraft Foods, which makes Life Savers. Those candies with the hole are, the Tribune notes, 99per-cent sugar. When they are made in Quebec, they can be sold into the U.S. at a good profit for Kraft. The town of Holland’s problem comes from the operation of an important maxim on politics—Hamilton’s Law: “Where you stand depends on where you sit.”

This law explains why congressmen frequently vote against their basic ideological principles. Yes, sometimes it’s because of campaign funds. But more important is the requirement to represent one’s constituents. A classic example of this law at work was the voting record of late Arizona senator Barry Goldwater, “Mr. Conservative.” He had only one deviation from his pattern of voting against subsidies and protectionism: he voted in favour of aid to the mining industry, an important employer in his home state.

Sugar is farmed in many states, even Michigan. It is an insignificant crop in Kansas, whose representatives generally vote in favour of free trade. But not for sugar. Bob Dole, who led the Republicans in the Senate until his presidential run in 1996, ensured that sugar continued to get massive protection. Why? Because agribusiness giant Archer Daniels Midland, with large Kansas operations, was a big Dole backer. Among its products are sweeteners from corn, which are economical only when compared with high-priced sugar. Similarly, the large-scale sugar cane producers in Florida have enormous clout with both Democrats and Republicans in Congress, despite a record of polluting rivers that flow into the endangered Everglades.

World sugar prices are low by historical standards because of global overproduction. Robert Atkins, the Dr. Atkins of pro-

Life Savers candy is moving north, fleeing protectionist American farm policies that triple the price of sugar

tein diet fame, claims North Americans consume, on average, 52 kg of sugar annually while our 19th-century forebears consumed only 2.3 kg. Sugar is nearly ubiquitous in prepared foods and snacks.

Kraft’s dilemma illustrates a downside of globalism: if you are part of a free-trade zone and you force producers to pay skyhigh costs for a major input, you’re going to lose those producers. Free trade means exactly that: to get the benefits, you must break down the barriers to production and distribution.

The Tribune quotes an unhappy James Donaldson, an official from the state business development organization that came up with a US$38 million grant for Life Savers in a losing bid to keep the factory in Michigan. He worries that Kellogg’s and Kraft-owned Post might have to close their gigantic cereal operations in Battle Creek because of sugar prices. So far, the area plant closures have been confined to candies, but no one can

_ be sure the flakes-makers won’t join the

exodus. Another Chicagoland sweets producer, Ferrara Pan Candy, gave up hoping for Congress to free the sugar market, and has opened one plant in Mexico and two in Canada.

As more and more candies sold in the United States have a “Made in Canada” label, the stupidity of protectionism becomes more obvious. Those big farms getting those big subsidies are losing domestic market share to the sugar in products made abroad. To date, their response has been to jack up the subsidies and tariffs. When the farm bill is fashioned in the agricultural committees of the House and Senate, legislators representing the four major crops—wheat, corn, soybeans and cotton—cut deals with congressmen representing producers of the minor crops, such as peanuts, almonds and sugar.

The overall result is a monstrosity whose cost to taxpayers could reach US$170 billion or more. Indiana Republican Senator Richard Lugar, himself a grain farmer, is fighting to bring this Balrog-sized beast under control, urged on by President Bush.

But even if the overall scale is reduced, there seems to be no chance of opening up the domestic sugar market to foreign producers. It is often observed that free trade benefits everyone because we are all consumers, but it has no constituency because the losers from it are so vocal.

The folks in Holland are about to get a lesson in the folly of protectionism—and the folks in Montreal will give it to them. EB

Donald Coxe is chairman of Harris Investment Management in Chicago and Toronto-based Jones Heward Investments.