Trade Effects of the Free Trade Area of the Americas Won Koo Professor and Director Jeremy Mattson Research 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 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 Ministers in the meeting reaffirmed their commitment to conclude negotiations by January 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 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 States9, , Canada , Mexico , Central America67371,82053 Caribbean51202,47813 South America1, , Total12, ,

Other Characteristics 1. Dissimilarity in resource endowments 2. 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)

U.S. Agricultural Exports, by country, 2001 DestinationExports (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)10231 Brazil (coffee, tobacco, juice)99930 Colombia (coffee, flowers, bananas)92655 Costa Rica (bananas, pineapples, coffee)80454 Argentina (leather, juice, meat)61011 Guatemala (bananas, coffee)60969 Ecuador (bananas, cut flowers)48565 Dominican Republic (tobacco, sugar)25418 Honduras (bananas, tobacco, sugar)23763 Peru (coffee, sugar)20629

U.S. Agricultural Exports to Latin America (excluding Canada and Mexico), by commodity, 2001 HS CodeCommodity DescriptionExports (million $) 1005Corn Wheat Woven Cotton Fabric Food Preparations Soybean Meal Animal Feed Prep Rice Cotton Poultry Meat Soybeans109

U.S. Agricultural or Fishery Imports from Latin America (excluding Canada and Mexico), by commodity, 2001 HS CodeCommodity Description Imports (million $) 0803Bananas Crustaceans Coffee Fish Fillets, Meat Cut Flowers, Dried Grapes Bovine Leather Fruit & Vegetable Juice Sugar 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 FM it = f(RGDP it, RER it, TAR it, D) U.S. Import Demand Model USM it = f(USRGDP t, RER it, USTAR t, TR t, D)

Data Panel data Annual data 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 FM it = f(RGDP it, RER it, RP it, TAR it, PROD it, D Cen, D Car, D Andean, D Mercosur ) USM jt = f(RER jt, RP jt, USTAR jt, ES jt, Trend t, D Cen, D Car, D Andean, D Mercosur )

Data Panel data Annual data for 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.

Estimated Tariff and Income Elasticities U.S. ExportsU.S. Imports Commodity Tariff elasticity Income elasticity Commodity Tariff elasticity Wheat BananasNo tariff Rice CoffeeNo tariff Corn Fruit & Veg Juice Soybean Grapes Soybean Meal Pineapple/Avocados Beef SugarNo tariff Pork Prepared Meat Poultry Meat Fish MeatNo tariff CrustaceansNo 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 e i (  t i /(l + t i ))(1) Verdoorn (1960) calculated TD as TD = TC (M N /M T )(2) TE = TC + TD

Alternative Method TE = M  i (  t i /t i ) = TC + TD(3) Combining Equations (2) and (3) yields TD = TE/(1 + (M n /M t )) TC = TE - TD

Results of Tariff Elimination from the Aggregate Model

Results of Tariff Elimination on Trade of Specific Commodities with 16 Latin American countries ExportsImports Commodity% IncreaseCommodity% Increase Wheat5Grapes 62 Corn38 Pineapples, avocados, mangos 7 Soybeans15 Soybean Meal4 Rice42Fruit & Veggie Juice 216 Pork79 Beef99Prepared/Pre served Meat 1 Poultry Meat55

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.