Excuse Me Waiter, But There’s Some Economics in My Soda

As many of you are undoubtedly aware, the specific formula used to produce Coke varies across countries, spawning in recent decades a somewhat surprising border war: Mexican vs. American Coke. Although there are perhaps other differences between the secret formulas for the two colas, many Mexican Coke proponents site the use of cane sugar, as opposed to the high fructose corn syrup (HFCS) used in American Coke since the 1980′s, as the major difference between the two beverages. The debate has been fueled in part by the backlash against HFCS, the most common sweetener in American processed foods and beverages. (Don’t worry. There’s bound to be Food Doctors chemistry post on this in the near future.)

Besides the difference in sweetener, there’s one other notable difference between the two soft drinks: Mexican Coke comes in glass bottles, while American Coke typically comes in either plastic bottles or aluminum cans. It’s thus actually unclear how the use of different sweeteners affects the taste of Coca-Cola. According to this survey by the Huffington Post, 80% of tasters prefered Mexican Coke; however, the methodology used is unclear. This more thourogh study from Serious Eats, found that in a blind taste test people overwhelmingly prefer the taste of American Coke over Mexican Coke, and Coke in glass bottles over Coke in aluminum cans. And finally this study from Consumer Reports found split results in a blind taste test. Regardless, demand for Mexican Coke in America is high. In fact, a 24-pack of 12 oz. bottles of Mexican Coke sells for between $39.99 and $49.99 on Amazon; whereas, a 24-pack of 12 oz. cans at your local market may cost less than $8.

Setting taste aside, our question today is: Why is American Coke sweetened with corn sugar, while Mexican Coke is sweetened with cane sugar?

One of the most basic principals of economics is the Law of One Price. Basically it just says that in a perfectly competitive market a product should cost the same (accounting for any transportation costs) no matter where you buy it. Now, we don’t live in a perfectly competitive world, and there are in fact many barriers to trade, particularly for agricultural products.  It’s these barriers to free trade that account for the difference in sweeteners in Mexican and American Coke.  The fact is that the United States has two key policies that cause the price of corn sugar in the United States to be significantly lower than the price of cane sugar, making it a more common additive in goods produced in the US.

The first set of policies is in place to support and subsidize American corn producers. The government sets a minimum price for corn produced in the US using direct payments ($0.28 / bushel) to produces as well as an additional payment when the price of corn drops below a target price ($2.63 / bushel). The result of these subsidies is an artificially low price for corn grown in the United States.

The second set of policies is in place to limit the amount of cane sugar imported into the United States. Tariffs (taxes) and quotas (limits) on sugar imports from Mexico were fazed out after the North American Free Trade Agreement (NAFTA) was implemented in 1994. However, there are a complicated set of tariffs and quotas on cane sugar imports from the rest of the world. TheThe result of these tariffs and quotas is an artificially high price for cane sugar in the United States.

The graph below, taken from a report by Schmitz, Schmitz, and Seale (2006), shows the difference between US prices and world cane sugar prices between 1995 and 2004.

Interestingly, in 2002 Mexico, which imports a large number of soft drinks produced in the United States, implemented a 20% tax on soft drinks containing HFCS instead of cane sugar. Undoubtedly an effort to combat the distortion of sugar markets by the United States, the tax did not last long, as the WTO  ruled in 2005 that the policy was in violation of NAFTA.