Summer School 7: Trade blocks and blockages

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0:26Welcome back to Planet Money Summer School, the only economics class you can slip under your pillow and listen to as you fall asleep. Just drift away. I'll wake you for the vocabulary words. We are almost done with the summer semester, and what a romp we have had through the world of government and business. We've had classes on the power of federal taxes and the dangers of federal spending. We've taught you how a country can make industrial policy work and why sometimes markets fail. But there is one big area we have not touched until today. Trade. Yes, yes, I know. As I'm sure you have noticed, trade policy, specifically tariffs, are in the news every single day.

1:13So today on Planet Money Summer School, we're going to step back a little and talk about the bigger picture of trade policy. Tariffs are, of course, the favorite tool of our current president, but there are lots of other ways that governments insert themselves into the free exchange of goods and services. Some of these trade barriers are so insidious and have been going on for so long, it may surprise you that they even exist. But in fact, we will feature two of them today that are costing you money every single day. Maybe you should wake up for this part. Our guest professor is an expert in all forms of trade shenanigans.

1:48My name is Carolyn Freund, and I'm the dean of the School of Global Policy and Strategy at UC San Diego. Come for the policy, stay for the strategy. Oh, I like that. Maybe we can use that as a slogan. You can put that on a t-shirt. Thank you. So before we hear our case studies, I want to talk about the word protectionism. This is the policy of protecting a country's industries by keeping out foreign goods and services. And the U.S. has this long history of protectionism. The very beginning of our country, we've had tariffs, tax on imports, and that protects American industries by making other countries' goods more expensive.

2:23So that's tariffs. But there are other ways of protecting an industry. Let's just go through them now, Carolyn. There are quotas, which limits the quantity of a good coming in, because if there's only so much of a good, then there's more space for domestic industry. So in the United States, we used to have quotas on Japanese automobiles, for instance, and foreign clothing, not as common a tool anymore. How does the government know exactly how much of a certain item to let into the country? They don't. So they do it typically based on history, which isn't always a good judge because you never know what shocks, especially, say, in agriculture, are going to hit our own markets.

3:07And sometimes the government just makes it a hassle to import items with regulations and paperwork, even like packaging. It has to be in a certain kind of package. All these things to just make it difficult for another country to send us something and more expensive. Absolutely. And, you know, some regulations are really to protect the consumer, but some are completely there to make it harder for other countries to export. Which, again, protects American businesses who are better set up to meet those regulations. So trade is usually between a private company in one part of the world and a private company in the United States.

3:46They agree on a price. They decide to import that item. What are the dangers when the government gets involved in this transaction? The fundamental danger is about the use of resources in this world. So by getting involved in that transaction, you are effectively distorting how resources are being used. So let me give a really wild example that's kind of true. Saudi Arabia wants to produce dairy. But as you know, Saudi Arabia is a really hot country. So to have cows in Saudi Arabia, they need to be in air-conditioned barns. Well, that's super expensive and not really the best use of resources around the world.

4:36So if goods are produced in the places where the resources are cheaper, so labor-intensive goods in countries with lots of labor, capital-intensive goods in countries with a lot of capital, water-intensive goods in countries with lots of water, etc., we use less of the world's resources for actually more. We can produce more that way, and everybody can be better off. So today in our case studies, we are going to get into the impacts of some of this protectionism on two specific products that we see all the time, but we don't really think about the source of. The first is the sugar in our candy.

5:19And the second is the car that might be in your garage right now. After the break.

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6:52That's Grammarly.com slash podcast. Okay, okay, class, listen up. This is the classic story of what happens when you try to protect an American industry and end up hurting another American industry. Professor Freund, you used this story in your classes, I know. What should our students be listening for as this story is played? They should be thinking about the unintended consequences for the users of the product. In this case, sugar. In this case, sugar, exactly. Sugar. In 2013, Zoe Chase and Jess Zhang traveled to the Midwest to bring back this story about sugar protectionism. Even though the reporting is more than a decade old, the problem they talk about is still the same.

7:38The U.S. pays more than twice as much for sugar as the rest of the world. Take it away, Zoe. Everybody knows dum-dums. They're those lollipops. You've seen them at your doctor's office or your bank. Sugar, corn syrup, little wax wrapping, a bunch of different flavors, sticks. But lots of people don't know where they come from. Do you like orange? Sure. It's a warm orange thumb, though. We're looking at thousands of these little wrapped lollipops clattering out of this big steel pipe at the Dum Dum factory in northwest Ohio. In a minute and a half, he's going to mix sappy blueberry. Can you wait for that?

8:17Yes. Dean Spangler is the former CEO of the Spangler Company, and he's showing us around the kitchen at the candy factory. It's a little bit Willy Wonka. Imagine a kitchen made for giants, with a couple of busy little chefs running around in aprons and hairnets. They're pouring these big steel pots of sticky sugar and corn syrup into this KitchenAid that is as tall as a basketball hoop. And there's what looks like paint buckets just standing right next to it. The buckets are filled with flavors and colors. There's blueberry, cream soda, root beer, watermelon. Dum Dums is the signature product of this place, the Spangler Candy Company.

9:01The factory is several football fields big. They need a whole separate building just for the ingredients. Well, one ingredient in particular. We use about 100 ,000 pounds of sugar a day. Where's the sugar? In the sugar shack. The room is basically big enough for four huge tanks of liquid sugar, eight Olympic-sized swimming pools were. We have about enough sugar storage here for about four days. So we're receiving sugar, you know, constantly. All year long? All year long, all day long, 24 hours a day. Lots of places replace sugar with corn syrup. And there's corn syrup in these lollipops too. But Dean says to get the true flavor of your childhood, there is no substitute.

9:44Nothing delivers flavor like sugar. The Spangler Company, they actually make this other iconic piece of candy, something even more nostalgia-inspiring than a lollipop. Red and white candy canes. They used to make them here at this factory in Ohio, but about 10 years ago, they moved the red and white candy cane operation to Mexico. It had gotten too expensive to make them here. The places that buy the candy canes to sell the Targets and the Walmarts of the world, they don't care about the brand. They don't care where they come from. They want them cheap. Candy canes are treated like a commodity by the big box stores, completely the red and whites.

10:23And when you go to the big box retailers of the world, they leave for a quarter of a cent a cane, a half a cent a cane. I mean, they're going to the lowest price. So this story so far, a factory moving its operations from Ohio to Mexico, where it could operate more cheaply, that's a typical story. You might think you know the reasons for that. But Kirk Vasha, the current CEO of the Spangler Company, he's pretty sure you don't know the reasons. In fact, recently he was giving a talk at the Kiwanis Club in town. It's kind of like a rotary club. And he explained he could expand his operations in a huge way right here in Ohio and not send any candy canes to Mexico at all.

11:05And I said, I just need one thing. And people get excited. And then I ask them to guess, what's the one thing that you need? And people guess all kinds of things. Lower tax rates. And how about workers' comp reform. And let's get rid of OSHA. And let's repeal the Food Safety Modernization Act or pass a right-to-work law. Or let's get some government development money. Those are some of the things I guess, amongst other things. And I said, no, it's not any of those. In fact, it's not all of those put together. If I paid zero taxes and got all those other things, which some of them don't even matter to us, it's not as important as the one thing that I need.

11:48And people are still guessing what it is. And I said, let us buy sugar on the free market. And there's this silence. And then this kind of collective, huh? Why can't you do that? And then I say, it's a story, and I'm about to tell it to you. Before we dive in, here's the most important thing you have to know to get into this story. There are two prices for sugar, the price you pay when you're in the United States and the price you pay almost everywhere else in the world. On average, over the last decade, the price you pay in the United States, it's about 15 cents more than you pay outside the country.

12:2915 cents more per pound of sugar. 15 cents extra per pound of sugar, if you're in the business of making candy, adds up to a lot of money. We're using 100 ,000 pounds a day. That's$15 ,000 a day. That's$75 ,000 a week. Multiply that by 52 weeks, it's$3 to$4 million. $3 to$4 million a year. That's what these guys call the sugar penalty. Now, who would do this? Who would impose this utterly random tax on U.S. candy makers? The U.S. Congress. The Food, Conservation, and Energy Act. It is better known as the U.S. Farm Bill. I'm just going to read this one part that this whole story is really about.

13:14Subtitle D, Sugar, Section 156, Sugar Program, Subsection B, Sugar Beets. It says that the U.S. government will guarantee this minimum price for sugar that is not to drop below, quote, quote, 22.9 cents per pound, end quote. That's the guarantee. No matter how low the price goes in the rest of the world, in the United States, you will be paying at least 22.9 cents per pound. And it's all in the name of these guys. We're driving into the field where we're going to plant sugar beets in 2013. And the snow is only about three inches deep at the moment right here. It looks like a barren wasteland.

14:04Blaine Benedict, he's a sugar beet farmer here in Saban, Minnesota, and he runs a farm with his two brothers. It's a hard conversation to come out onto someone's fourth-generation farm and say, why do you get this special treatment? Why do you deserve a special line written in a bill that guarantees a minimum price for your product? There's government involvement in most developed countries at some level or another with a price control on sugar. The U.S. sugar guys say, just look at Brazil. The Brazilian government gives a couple billion dollars in subsidies to their sugar industry. They say the Mexican government actually owns most of its factories that make sugar.

14:48I think our biggest fear is that we're all on a fair playing, competitive field. If you're competing against other government policies, that's what makes us nervous as a producer. A lot of people told us there is this really big reason that sugar has a price guarantee embedded in the law. And this reason has nothing to do with Brazil or actually economics at all. The sugar lobby. It is really powerful, super well organized. Each year, it gives a lot of money to political campaigns and it spends a lot lobbying for or against bills. A big chunk of that money goes to people like this guy, U.S. Representative Colin Peterson.

15:36He is a Democrat from Minnesota. And until recently, he was chair of the Agriculture Committee in the House. I've been called a communist before. I'm OK with that. That's because Colin Peterson is a big advocate of the central planning of the sugar supply and the guaranteed minimum price. We asked him if the reason he's such a champion of the sugar program is that the sugar companies like American Crystal are the biggest contributors to his campaign. If American Crystal gave me zero, I would take the same position. Really? It wouldn't make any difference. Well, how do you know? This is 25 percent of the economy in my district.

16:13Do you think I'm not going to fight for this? If you eliminate the sugar program, what will happen is we will not grow sugar in the United States. And why is that such a bad thing? Because it's a huge economic activity in many parts of this country that have created a lot of jobs and a lot of economic activity. Now, the other side of this, the candy manufacturers, they make the same argument, just in reverse. Peterson says jobs might be lost. The candy guys say jobs that might otherwise have been created weren't. That's what's so strange about this whole thing. We're not so different, you and I.

16:52They're both these classic American industries, Minnesota farming, Ohio manufacturing. In Minnesota, there's four generations of farmers farming this land. But in Ohio, those guys are fourth generation too. The Spangler factory has been around since 1906, always run by a Spangler. Jess Jang and Zoe Chase from 2013. In the more than a decade since we've aired this story, many, many people have tried to get rid of the sugar protections, and they have all failed. We are still paying more than twice as much for sugar as the rest of the world. You're welcome. Let's bring back in our professor, Carolyn Freund, from UC San Diego.

17:32Hey, Carolyn. Hi, glad to be here. This sugar story blows my mind because obviously I'm eating sugar in some form every single day. And I'm paying every single day a little bit more in everything I use than I have to pay, right? Absolutely. And I think we're at a point now where it's roughly twice the price of world sugar. And, you know, this isn't just a recent thing. I look back, the first tariff on sugar was in 1789, mostly to raise money at that point. But almost continuously since this nation's founding, we have supported sugar farmers in one way or another through tariffs and quotas and subsidies.

18:19At one point, even mandating that excess sugar has to go to ethanol and the government has to buy it. Why is sugar so important to the government of the United States of America to make it more expensive for everybody? Well, it's because, one, when you have tariffs historically, they're very hard to get rid of. And that's a big danger because companies, farms get used to having that protection and they want to maintain it. That's the way they've built their business. So the history really, really matters. So that's one part of it. Because there is literally no one alive in the sugar industry who has ever competed on a global stance with sugar.

19:04Yes. So they've made all their investments and designed their whole farms around, assuming they have that protections, you take that protection away and many wouldn't be profitable. So they want to keep it. So they are going to lobby super hard in Washington. So the only people who will get elected are people who will support them, who will then push their interests in Washington. There is a term in political economy called institutional path dependence, which means what? Basically, it means history matters. So if you set up this type of policy historically, everything develops around that policy being in place.

19:48And it's super hard to reverse. And I think that is one fear around the escalation in protection now is it took us a long time for countries to slowly reduce tariffs, yet they can go up overnight. And that's, I think, one of the things I'm most worried about is the persistence of protection. It's much easier to raise a tariff than it is to lower it because now there's somebody who probably wants to keep it in place and is going to fight to keep it there. So I feel like we're agreeing too much here. So let me take another point of view. United States of America, greatest economy in the world. I can't imagine a scenario under which you say the United States just can't compete on sugar.

20:37We can't have any of our own sugar. So maybe it's worth all of these problems it creates in order to just have a thriving or at least a surviving American sugar industry. I think one could make that argument for some things that are really critical, like medicines or I guess the reason for steel is because it goes into weapons, semiconductors. but it's hard to say, given how many countries around the world make sugar and that sugar is not even good for you, that it matters that we have a thriving sugar industry. And I guess because there's no objective reason why we need to have a sugar industry, that's why there are so many lobbyists and industry associations who work so hard to keep these protections in place.

21:28It costs all of us a few extra pennies every day, but it really matters for the sugar beet farmers. May they enjoy our pennies. Coming up, our second case study. And this is a doozy. What happens when there is a trade barrier that no one really wants? We visit the New York International Auto Show after the break.

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22:32Vital Farms' mission is to bring ethical food to the table. We only have one earth, and we have to make it count. Like my boys, I want to see them taking care of the land, for them to be able to farm, and then generations come. To learn more about how Vital Farms farmers care for their hens, visit vitalfarms.com. Okay, everyone, quiet down. We have a guest in the classroom and a second Keith study. We talked at the beginning of the class about protectionism using regulations, and this is a great example. We in the United States are not getting all the cool cars from around the world. There are regulations in place that make it too expensive to bring some international cars here, and that keep some cool U.S.

23:16cars from being affordable in the rest of the world. All of this in the name of safety. Professor Freund, what should the students be listening for in this story? I think they should think about whether they feel safer in U.S. cars than in cars elsewhere if they've been abroad and rented a car. Great. This next story comes from 2014 when Zoe Chase and I went to the New York International Auto Show. And it was a scene, I tell you. Cars on those big rotating stages. Fashion models pointing out the different features of the cars. There was even this place where you could test drive big SUVs right in front of the convention center.

23:56We definitely wanted to do that, and we approached the Jeep representative. Would you like to ride in the Cherokee, the Wrangler, or the Grand Cherokee? We'll get into anything. We're getting a test drive. Since this is Manhattan, we can't really take it off-road, but Jeep has built a driving track. A bunch of fake hills and bumps all set up right in the middle of the city. Well, welcome to Camp Jeep, you guys. My name's Steve, and I'll be your operator. And we are going to slide around the track here in our Jeep Wrangler. This is the unlimited, so it has the four door. And all of a sudden, the Jeep takes off, and we are going up this incline, and I swear, I swear, the car is about to tip over.

24:33Whoa! This is crazy! This thing's on its side! And then we whip around the corner, and we start bouncing up and down over a bunch of stumps in the road. There's one, there's two, there's three, there's four. Wait, are you OK? Dude, you're going to destroy this thing. All right. So, made it. Could you drive this Jeep off-road? You can drive it on dirt roads? Yeah, absolutely. That's what this particular Jeep, this is the iconic Jeep brand, the Wrangler. Could you drive it through a river? You can waterford with it. That's one of the things that makes Jeep a trail-raided vehicle, is waterfording.

25:08So, can you drive this thing anywhere? You can drive it a lot of places. You can't drive your Cadillac. But you cannot drive this car anywhere, because Steve doesn't mention one very large place that will not allow this car on their roads, Europe. This particular Jeep would be illegal in Paris. It would be illegal in Milan. It would be breaking the law in Berlin because of a technicality. All of the safety features on this Jeep, the airbags, the bumper, they're built to U.S. safety standards. And there is an entirely different set of standards in Europe. And so in order to sell this particular Jeep in Europe, Jeep will have to replace a bunch of parts, redesign other parts.

25:47And the Europeans have the same issue. Each country develops their own regulations. They have their own laws, their own testing standards. And sometimes even the expert car guys, which admittedly is not us, even they cannot figure out some rationale for the standards being different. That's why we met up with Dave Shepardson. He covers cars for the Detroit News. And we met him at the Fiat section of the auto show. And he points to this beautiful car, I think Anyway, the Fiat 500. So cute. And in order to bring this from Italy, where you can drive it all over the place, to America, they had to change a bunch of things, including...

26:22The windshield wipers. American regulations require that the windshield wipers capture a larger part of the windshield versus European ones. But I mean, what is the even logic behind that? You know, I guess Americans might be taller on average. Therefore, they would be looking at a different part. I mean, I'm struggling here, I agree with you, to come up with a rationalization. Yeah, some of the regulations seem totally arbitrary. Like, the very fact that a rule exists at all for this thing seems kind of crazy, let alone that there are two different rules in different countries. Like, we found these two brand new Porsches on the show floor.