AGBU 310

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Chapter 7 International Trade and Market
Development Policy
AGBU 310
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Why International Trade?

• World trade has doubled in the last 15 years from
  9 to 19.
• World trade has a potential of 40 if all trade
  barriers are eliminated
• Trade has increased due to
• Trade agreements (NAFTA, GATT, WTO)
• Technological advances
• Dissemination of ideas/theories about free trade

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Why International Trade?

• Agricultural sector well behind.
• Average world tariff level for Manufacturers 5,
  Agricultural products 64
• Ignorance about international trade issues can be
  costly for a country
• U.S. exports twice as much as it imports

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Consequences of Abandoning the Export Market

• Reduced wheat acreage by 50
• Reduce rice, soybean, and cotton acreage by 33
• Reduce feed grain acreage by 20
• Production adjustments of this magnitude would
  put a large number of farmers out of business
• Workers in the input sectors as well as in the
  export-related financing, transportation,
  storage, merchandising, and port operations would
  all lose jobs.

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Competitiveness in Trade

• U.S. price must be meet or beat competition to
  maintain market share
• short-run
• COP must be low
• U.S. most competitive in corn, soybeans, and
  grain sorghum with a world market share of over
  70
• Other countries have an advantage in cotton,
  wheat, barley and rice

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Competitiveness in Trade

• Several factor influence this market share
• Macroeconomic policies (interest rates)
• Geopolitical relationships
• Aggressive competition from other major exporting
  countries
• How then can U.S. farmers be competitive when
  labor cost are so much lower in other countries?

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Competitiveness in Trade

• Public policy plays an important role in the
  short and long run
• SHORT-RUN U.S. cant be competitive if priced
  out of the market by high domestic price
  supports, overvalued dollar, or aggressive
  policies of foreign countries
• LONG-RUN competitiveness is based on endowment
  of resources, investment in production and
  marketing infrastructure, technology, and the
  growth of consumer demand

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Competitiveness in Trade

• U.S. policy in the past was based on bulk
  commodities (wheat, corn, soybeans, cotton, and
  rice)
• With income expanding, opportunities for
  exporting value-added products is growing (Ex
  ready to eat chicken pieces)

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U.S. Trade Policy Goals

• Freer Trade
• Market determined currency values
• Commitment to pursue trade agreements to gain
  market access

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Agriculture Trade Policy Goals

• to open, expand, and maintain global market
  opportunities through international trade,
  cooperation, and sustainable development
  activities which secure the long-term economic
  vitality and global competitiveness of Americas
  rural communities and related food and
  agricultural enterprises. - - -

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Agriculture Trade Policy Goals

• 5 Strategies
• Improve market intelligence regarding export
  opportunities
• Identify, develop, and promote new market
  channels
• Secure free trade agreements, intensify pressure
  for science based sanitary standards, and monitor
  state traders
• Provide credit and export subsidy assistance to
  markets with the greatest growth potential
• Build sustainable export markets through
  technical assistance and food security to less
  developed nations

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GATT

• GATT General Agreement on Tariffs and Trade
• Signed in 1947 by 23 countries
• GATT negotiations called rounds
• Principles
• Non-discriminatory trade (MFN)
• Protection based only on tariff duties
• All countries have access to impartial conflict
  resolution
• No quotas or embargos

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GATT

• First time Ag. center of negotiations
• Tariffication accomplished
• Commitments to reduce tariffs and export subsidies

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WTO

• WTO World Trade Organization
• WTO permanent formal international organization
  that oversees the conduct of trade as agreed to
  by its member nations with the purpose of
  reducing trade barriers
• Created in the mid 90s at the Uruguay Round of
  trade negotiations as the successor to GATT
• 111 countries signed

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WTO

• Key Commitments
• Tariffication, EU converting levies into tariffs,
  US relinquished section 22, Canada, Japan,
  Korea convert quotas to tariffs
• Commitments and schedules for tariff and export
  subsidy reductions (36 in 6 years), as well as
  domestic support expenditures (20)
• Agreement on sanitary regulations

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WTO

• New Issues
• WTO rules and regional agreements
• Biotechnology
• Environmental protection
• State Trading

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Degrees of Economic Integration

• 1.) TRADE AGREEMENTS
• Lower trade barriers among members than
  non-members (Ex NAFTA)
• 2.) FREE TRADE AREA
• All trade barriers to trade removed from members
• Each country retain own trade barriers with
  non-members
• 3.) CUSTOMS UNION
• Free trade area with harmonized external trade
  barriers
• 4.) COMMON MARKET
• Customs union with free movement of labor and
  capital among members
• 5.) ECONOMIC UNION
• Common market with harmonized and unified
  monetary and fiscal policies (Ex EU)

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NAFTA

• Largest free trade zone in the world
• Canada, Mexico, and U.S.
• U.S. is Canada and Mexicos largest export market
• Canada and Mexico are the U.S.s 2nd and 3rd
  largest export markets, respectively (Japan 1st)

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Foreign Market Development

• FAS Foreign Agriculture Service
• Foreign market development
• Develop trade policy
• Supervise trade counselors in foreign countries
  located in U.S. embassies

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Market Development and Promotion Programs

• 3 groups work with FAS as cooperator
  organizations
• PRODUCER ORIENTED GROUPS
• American Soybean Association
• EXPORT ASSOCIATIONS
• U.S. Feed Grains Council
• AGRIBUSINESS FIRMS
• ConAgra, Tyson Foods, McDonalds

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Food Aid

• 1st step towards gaining a healthy export market
  may be through food aid or concession sales
• Tool for economic development, market
  development, and foreign policy
• P.L. 480 helped in the transition of Eastern
  Europe and the former Soviet Union to market
  economies
• P.L. 480 assists poorest countries and helps
  build market economies in emerging democracies
• P.L. 480 helps to dispose of surplus production
• Japan, South Korea, Taiwan, Brazil, Peru, Chile,
  Colombia, and Spain have all graduated from being
  P.L. 480 recipients to customers

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Export Credit

• A country can better compete for export sales if
  it can supply credit to potential buyers
• USDAS Commodity Credit Corporation (CCC) plays a
  major role in seeing that credit is available to
  eligible foreign customers

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Export Enhancement Programs

• Gave foreign countries extra commodities or cash
  to buy our products
• Use primarily for bulk commodities
• WTO is phasing out these programs

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Policies Designed to Enhance Market Control

• MARKETING BOARDS Compulsory marketing
  organization set up under government legislation
  to perform specific marketing functions
• Collect and disseminate market info.
• Product promotion
• Research
• Grading
• Collective bargaining
• Purchase, store, and sell products

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Marketing Boards

• Objectives
• Increase producer prices and incomes
• Reduce fluctuation in prices and incomes
• Different from U.S.
• One agency responsible for buying and selling
  commodity
• Board is directly involved in market operations
• All producers required to participate
• All producers receive the same price before
  adjustments for quality and location

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Marketing Boards

• Ex Canadian Wheat Board
• After harvest, grain is delivered to local
  elevator
• Producer paid on delivery the guaranteed price
• Board sells grain
• Board controls movement of grain from local
  elevators to port elevators
• Proceeds are pooled (costs subtracted from
  proceeds)
• Producers paid the difference between the pool
  price and the advance if pool is less than the
  advance the government makes up the difference

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Board Impacts

• Cost of stability is that there is no opportunity
  to make a higher price than the pool price
• Canadians run the border!

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Trade Agreements

• Trade Agreements contract between 2 countries
  regarding the quantity of a commodity to be
  traded within a specific time period.
• Supply assurance for importing country
• Market assurance for exporting country
• Parties outside agreement are at a disadvantage

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World Cartels

• A combination of independent business
  organizations formed to regulate production,
  pricing, and marketing of goods by the members.
• To offset state trader activities
• To be successful
• Inelastic commodity demand
• Be able to control supplies and entry into
  production
• Prevent substitutes from entering market

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U.S. in an Evolving Global Marketplace

• Taxpayer bears major burden of current trade
  barriers (especially in U.S. and EU)
• U.S. is a residual supplier

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Future Trading Blocs

• NOW
• EU
• NAFTA
• MERCOSUR
• APEC
• Etc
• NEXT???
• FTAA