Trade Effects of the Free Trade Area of the Americas

Won KooProfessor and Director

Jeremy MattsonResearch Assistant

Center for Agricultural Policy and Trade Studies (CAPTS)

North Dakota State University

Overview Progress of the FTAA Characteristics of Economies and

Agricultural Trade Empirical Model

Import Demand Model Trade Creation and Trade Diversion

Results Conclusions

What is the FTAA? To establish a Free Trade Agreement for

the 34 democratic Western Hemisphere countries to create a market of over 800 million consumers with an aggregate GDP of nearly $13 trillion

It will progressively eliminate barriers to trade and investment in the hemisphere.

Purpose of the FTAA To stimulate economies in the region by

increasing trade volume. To increase production efficiency through

further specialization in production. To improve social welfare through lowered

prices of goods due to enhanced competition.

Progress of the FTAA The process began in 1994 at the Summit of the

Americas in Miami. Negotiations have continued at 7 ministerial

meetings between June 1995 and November 2002, and at the Second and Third Summits of the Americas at Santiago in April 1998 and Quebec City in April 2001.

Nine negotiating groups meet regularly throughout the year to advance the negotiating process.

Progress of the FTAA February 15, 2003: deadline for countries

to submit their specific offers to reduce trade barriers in five key areas: agriculture, goods, services, investment, and government procurement.

A ministerial meeting was held in Miami in November 2003. Ministers in the meeting reaffirmed their

commitment to conclude negotiations by January 2005.

They also recognized that countries may have different levels of commitment.

They agreed to implement the agreement by 2006.

Negotiations on market access are scheduled to be completed by September 2004.

The next ministerial meeting will take place this year in Brazil.

The Negotiating Groups Market Access Investment Services Government Procurement Dispute Settlement Agriculture Intellectual Property Rights Subsidies, Antidumping and Countervailing Duties Competition Policy

Objectives of the Negotiating Group on Agriculture Progressively eliminate tariffs and non-tariff

barriers to trade. Ensure that sanitary and phytosanitary measures

are based on sound science in order to prevent protectionist trade practices.

Eliminate agricultural export subsidies that affect trade in the hemisphere.

Identify other trade distorting practices for agricultural products and bring them under greater discipline.

The U.S. Offer for Agriculture All tariffs subject to negotiation. Overall, about 56% of agricultural imports from non-

NAFTA countries in the hemisphere would be duty-free immediately.

Other agricultural tariff reductions fall into staging categories of 5 years, 10 years, or longer, tailored to individual countries.

More than one tariff elimination timetable per product is offered, to reflect different sizes and levels of development of economies.

The U.S. offer extends only to those FTAA countries that make their own offers.

The U.S. Offer – Possible Problems Does not address domestic subsidies. The United

States wants to address domestic subsidies in the WTO negotiations.

Does not address anti-dumping laws. Brazil and other countries want the U.S. to end its anti-dumping laws.

Tariffs on politically sensitive products such as citrus and sugar will be phased out over a longer period of time.

Economic Characteristics, 2000

GDP (billion US$)

Population (million)

Per capita GDP

Ag Exports (billion US$)

Ag Imports (billion US$)

United States 9,825 282 35,019 56 42

Canada 717 31 23,335 16 12

Mexico 581 100 5,754 8 10

Central America 67 37 1,820 5 3

Caribbean 51 20 2,478 1 3

South America 1,255 350 3,589 33 12

Total 12,494 821 15,224 119 81

Other Characteristics1. Dissimilarity in resource endowments2. Major differences in size of countries

More inter-industry trade rather than intra-industry trade

Intra-industry trade Product differentiation under IRS National product differentiation under CRS

Head & Ries (AER, 2000) and Feenstra, Markusen, and Rose (CJE, 2002)

Figure 1. U.S. Agricultural Trade with South America

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

mill

ion

U.S

. do

llars

U.S. Exports U.S. Imports Trade Balance

Figure 2. U.S. Agricultural Trade with Central America

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

mill

ion

U.S

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llars

U.S. Exports U.S. Imports Trade Balance

Figure 3. U.S. Agricultural Trade with the Caribbean

0

200

400

600

800

1,000

1,200

1,400

1,600

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

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U.S

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U.S. Exports U.S. Imports Trade Balance

Figure 4. U.S. Agricultural Exports by Destination, 1997-2001

Canada 14%

Mexico12%

South America4%

Europe17%

Asia42%

Africa4%

Other1%

Caribbean3%

Central America2%

Oceania1%

Figure 5. U.S. Agricultural Imports by Source, 1997-2001

Canada23%

Mexico13%

Central America5%Caribbean

1%South America13%

Europe22%

Asia15%

Oceania6%

Other0%

Africa2%

U.S. Agricultural Exports, by country, 2001

Destination Exports (million $)

Dominican Republic 498

Colombia 452

Venezuela 409

Guatemala 294

El Salvador 241

Brazil 221

Peru 212

Costa Rica 199

Honduras 198

Jamaica 181

U.S. Agricultural Imports, by country, 2001

Source (major products imported in parentheses)

Imports (million $)

Percent non-competitive

Chile (grapes, wine, fruit) 1023 1

Brazil (coffee, tobacco, juice) 999 30

Colombia (coffee, flowers, bananas) 926 55

Costa Rica (bananas, pineapples, coffee) 804 54

Argentina (leather, juice, meat) 610 11

Guatemala (bananas, coffee) 609 69

Ecuador (bananas, cut flowers) 485 65

Dominican Republic (tobacco, sugar) 254 18

Honduras (bananas, tobacco, sugar) 237 63

Peru (coffee, sugar) 206 29

U.S. Agricultural Exports to Latin America (excluding Canada and Mexico), by commodity, 2001

HS Code Commodity Description Exports (million $)

1005 Corn 623

1001 Wheat 490

5208 Woven Cotton Fabric 320

2106 Food Preparations 284

2304 Soybean Meal 256

2309 Animal Feed Prep. 187

1006 Rice 164

5201 Cotton 145

0207 Poultry Meat 134

1201 Soybeans 109

U.S. Agricultural or Fishery Imports from Latin America (excluding Canada and Mexico), by commodity, 2001

HS Code Commodity Description Imports (million $)

0803 Bananas 1128

0306 Crustaceans 959

0901 Coffee 936

0304 Fish Fillets, Meat 559

0603 Cut Flowers, Dried 428

0806 Grapes 394

4104 Bovine Leather 351

2009 Fruit & Vegetable Juice 334

1701 Sugar 329

2402 Cigars, Cigarettes 277

Previous Studies ERS (1998) found an FTAA would

increase U.S. ag exports by $580 million (1%) and imports by $830 million (3%).

Diao et al. (1998) estimated that U.S. ag exports would increase by 7.9% and imports would increase by 6.5%.

Empirical Model – Aggregate Agricultural Product Foreign Import Demand Model

FMit = f(RGDPit, RERit, TARit, D)

U.S. Import Demand Model USMit = f(USRGDPt, RERit, USTARt, TRt,

D)

Data Panel data

Annual data 1989-2000 Ten Western Hemisphere Countries Countries in U.S. Import Demand Model:

Canada, Mexico, Brazil, Colombia, Chile, Costa Rica, Guatemala, Argentina, Ecuador, and the Dominican Republic

Countries in Foreign Import Demand Model: Canada, Mexico, Colombia, Guatemala, Venezuela, El Salvador, Panama, Costa Rica, and Argentina

Empirical Model – Specific Agricultural Commodities

FMit = f(RGDPit, RERit, RPit, TARit, PRODit, DCen, DCar, DAndean, DMercosur)

USMjt = f(RERjt, RPjt, USTARjt, ESjt,

Trendt, DCen, DCar, DAndean, DMercosur)

Data Panel data

Annual data for 1989-2001 16 Latin American countries

Commodities Analyzed Exports

Beef, pork, poultry meat, wheat, corn, rice, soybeans, soybean meal

Imports Bananas; coffee; grapes; fruit & vegetable

juice; pineapples, avocados, and mangos; sugar; prepared meat; fish meat; crustaceans.

Aggregate Import Demand Model

U.S. Exports U.S. Importsestimated coeffiecients (p-values in parentheses)

Intercept-744,520,000 859,564,000

(0.0001) (0.0018)

Real GDP1,452,000 4,000(0.0001) (0.879)

Real exchange rate-306,000 3,083,000(0.0005) (0.0001)

Tariffs-13,515,000 -7,878,000

(0.0001) (0.0432)

Trend24,380,000

(0.0004)

Significant CountryDummy variables

R2 0.9832 0.8215

ElasticitiesReal GDP 0.276 0.024Real exchange rate -0.030 0.244Tariffs -0.121 -0.052

U.S. Exports U.S. Importsestimated coeffiecients (p-values in parentheses)

-744,520,000 859,564,000(0.0001) (0.0018)

1,452,000 4,000(0.0001) (0.879)

-306,000 3,083,000(0.0005) (0.0001)

-13,515,000 -7,878,000(0.0001) (0.0432)

24,380,000(0.0004)

Significant CountryDummy variables

0.9832 0.8215

Estimated Tariff and Income Elasticities

U.S. Exports U.S. Imports

CommodityTariff elasticity

Income elasticity Commodity

Tariff elasticity

Wheat -0.035 0.178 Bananas No tariff

Rice -0.248 0.232 Coffee No tariff

Corn -0.424 0.077 Fruit & Veg Juice -0.834

Soybean -0.147 0.976 Grapes -0.210

Soybean Meal -0.051 0.037 Pineapple/Avocados -0.122

Beef -0.958 1.092 Sugar No tariff

Pork -0.775 0.067 Prepared Meat -0.014

Poultry Meat -0.560 -0.024 Fish Meat No tariff

Crustaceans No tariff

Trade Creation & Trade Diversion Effects Trade Creation – An increase in imports

from member countries by displacing domestic production.

Trade Diversion – An increase in imports from member countries by displacing imports from non-member countries.

Calculation of Trade Expansion (TE), Trade Creation (TC), and Trade Diversion (TD) Effects

Baldwin and Murray (1977) calculated TC as

TC = M ei (ti/(l + ti)) (1)

Verdoorn (1960) calculated TD as

TD = TC (MN/MT) (2)

TE = TC + TD

Alternative Method TE = M i(ti/ti) = TC + TD (3)

Combining Equations (2) and (3) yields

TD = TE/(1 + (Mn/Mt))

TC = TE - TD

Results of Tariff Elimination from the Aggregate Model2001 U.S.

Exports/ImportsTrade

CreationTrade

DiversionTrade

ExpansionPercent Increase

U.S. Exports (million U.S. dollars)Brazil 221 24 6 30 14%Colombia 452 241 42 283 63%Guatemala 294 22 2 24 8%Venezuela 409 53 15 68 17%El Salvador 241 22 2 24 10%Panama 177 19 4 22 12%Costa Rica 199 14 1 15 8%Argentina 116 9 2 12 10%Eight-country total 2,109 404 74 478 23%

U.S. Imports (U.S. dollars)Brazil 999 59 26 85 9%Colombia 926 21 9 31 3%Chile 1,023 10 4 14 1%Guatemala 609 46 21 67 11%Dominican Republic 254 33 15 48 19%Ecuador 485 4 2 6 1%Costa Rica 804 9 4 13 2%Argentina 610 12 5 17 3%Eight-country total 5,710 195 87 282 5%

Results of Tariff Elimination on Trade of Specific Commodities with 16 Latin American countries

Exports Imports

Commodity % Increase Commodity % Increase

Wheat 5 Grapes 62

Corn 38 Pineapples, avocados, mangos

7Soybeans 15

Soybean Meal 4

Rice 42 Fruit & Veggie Juice 216

Pork 79

Beef 99 Prepared/Preserved Meat

1Poultry Meat 55

Conclusions FTAA would have mixed results for U.S. agriculture.

U.S. ag exports to the top 8 Latin American countries would increase by $478 million ($404 million is trade creation), while ag imports increase by $282 million ($195 million is trade creation).

Grain and meat industries could take advantage of increased export opportunities.

Fruit and sugar industries could be harmed by the increased competition from Latin American countries

Conclusions Trade diversion effects on U.S. imports are

significant (30% of increased imports), while trade diversion effects on U.S. exports are not as significant.

Further Considerations Sugar imports could increase significantly as

quotas are removed. Imports of soybeans from Brazil could

increase, similar to the experience with wheat imports from Canada under CUSTA.

Ability for the U.S. to increase market share in Latin America would be affected by future production in Brazil and Argentina.