Final answer:
Agricultural subsidies, such as those on sugar, can result in prices dropping below the cost of production for foreign producers, undermining their ability to compete and leading to reduced income and international trade.
Step-by-step explanation:
When a government provides a subsidy to its domestic agricultural sectors, such as the sugar industry, it artificially lowers the cost of production. This enables domestic producers to offer their goods at a lower price, shifting the supply curve down (or to the right), which can lead to a decrease in the market price of sugar. If the subsidy is significant, it may cause the price of sugar to drop below the production costs of foreign producers, making it financially unsustainable for them to compete in the market.
This impact is exacerbated when the subsidized nation does not have a comparative advantage in sugar production, as in the case of the United States and Brazil. The presence of subsidies thus disadvantages international competitors by creating a price discrepancy that undermines fair competition and can lead to decreased income or potential losses for foreign sugar producers. This adversely affects the economies of these foreign producers and could lead to less international trade.