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December 9, 2016

Mike Madigan, Not Sugar Policy, Driving Mondelez Out of Chicago

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Boxes of Oreos

Our friends at the Illinois Policy Institute have invested a lot of effort over the last few years in documenting how high taxes, regulations, and political corruption and paralysis in Illinois are driving businesses out of the state.  The trend is large, and noticeable:

A recent piece by the Illinois Policy Institute documents “The Fall of Illinois Manufacturing,” and tells the story of a company that moved across the border to neighboring Indiana. The article specifically mentions steep workers compensation costs and high property taxes as reasons why manufacturers are fleeing Illinois. Indeed, on of our other friends, Indiana Senator Brandt Hershman, describes himself in his Twitter bio as “Building Indiana by relocating Illinois businesses, one company at a time....”. Crain’s Business Chicago describes businesses fleeing Chicago as a “giant sucking sound.”

The high taxes, high labor costs, and political paralysis in Chicago and Illinois are well known, and as I said, well-documented by the Illinois Policy Institute. That’s why it stuck me as off-target and a bit uninformed when I read a recent piece from the Illinois Policy Institute blaming US sugar policy for the decision by Chicago-based Mondelez International to move production out of Chicago to Mexico.

We in the policy world look for opportunities to connect our issues to news stories and other developments, so I completely understand the intent behind the piece, linking sugar policy to the election of Donald Trump, who wants to bring jobs back to the US. But it’s simply not true that sugar policy is the reason Mondelez is leaving Chicago for Mexico, and if Mondelez decided to keep production in the US, they’d almost certainly still be leaving Illinois for the many reasons the Illinois Policy Institute has documented in the past.

As I wrote at the time (even citing the Illinois Policy Institute), “If you were Oreo, you’d leave Chicago, too.” Chicago and Illinois policy seems purposely designed to drive companies out of the state. It has nothing to do with sugar policy, and everything to do with terrible Illinois policy.

But there’s actual clear evidence that sugar prices didn’t drive Mondelez out of Chicago: For one thing, Census Bureau data shows that the US confectionary sector is growing, not declining. If raw material costs were such a huge factor, you would expect to see a pattern of confectionery decline in the US, not growth. The decline we see is myriads of companies leaving Illinois, not confectioners declining in the US.

Further, refined sugar, what confectioners actually use, is in fact cheaper in the US.  In November, US wholesale refined sugar prices averaged 28.5 cents per pound, compared to a global average price of 30.93 cents per pound.

And Mexican sugar is particularly expensive—33.5 cents per pound, or 18 percent higher than US prices. So Mondelez will be paying more, not less, for its sweet raw material by relocating to Mexico, which pretty much clinches the fact that it’s taxes, labor and regulatory costs that drove the company out of Illinois, not sugar prices.

Now, this is not to hold up current US sugar policy as an ideal, which is far from an example of the kind of lassiez faire, free-market policy we would like to see. But it is an understandable reaction to the aggressive, also not free-market policies of a handful of international competitors, who subsidize their domestic production with the specific intent of destroying US sugar production and eliminating their major competitor.  IPI has written several times in more detail on the path to a more rational US sugar policy:

Here at IPI, we pay more attention to the details of US trade policy. We were involved for instance as a stakeholder during several of the TPP negotiating sessions, so it’s not a surprise that we may have a broader perspective on trade policy, which is also a federal rather than a state issue.

Trade is going to become a much more lively policy topic during the Trump years, and we may as well start taking a more informed and sophisticated view of trade than perhaps some of us on the Right have had before. Moving away from tariffs and protections is the right thing to do, but it has proven to be hopeless without international agreements, whether they are in the form of WTO processes, bilateral free-trade agreements, or multi-lateral agreements like the proposed Trans Pacific Partnership (TPP).  Unilateral disarmament is a non-starter, regardless of it’s attraction as a salon policy discussion topic. The only way to get our trading partners to give up their subsidies and protections is through a rule-based system, with clear procedures and clear enforcement penalties.

Speaking of which, yes, we would like to see US sugar policy changed so that US producers are competing in a free-market. That’s pretty much the standard position of most on the free-market side, and interestingly enough, it’s also the position of the sugar producers themselves. You can read more description of the proposed “zero-for-zero” proposal for US sugar trade policy in the IPI publications linked above.

In the meanwhile, we hope the Illinois Policy Institute continues its important work toward achieving more reasonable tax and labor policy in Illinois, before the entire state’s manufacturing base up and leaves the state.

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