5/5/17
MusingsonU.S.DairyTradewith
CanadaandMexico
AndrewM.Novakovic,PhD
TheE.V.BakerProfessorofAgriculturalEconomics
May2017
Outline
• WhatisthehistoricalcontextforGATTand
NAFTAastradeagreements?
• Whatdidweexpecttobetheoutcomesor
benefits?
• Whathavebeenthegeneraloutcomessince
NAFTA(andUruguayRound)?
• Howdoweevaluatethesuccessofatrade
agreement?
• Whatdoesbetterlooklike?
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Inthebeginning
Sometimespolicychoicesare
aboutwhattheyseemto
beonthesurface,and
sometimenot.
Wasthecheesetariffabout
protectingourfledgling
dairyindustry,or
Wasittopokeastickin
England’seye
1598
Juan de Onate brings dairy
cattle from Mexico to his
fledgling colony in what will
become New Mexico
1611
Sir Thomas Dale brings 100
dairy cattle to Jamestown
1789
George Washington is
inaugurated
1790
A 4¢/lb. tariff is levied on
cheese imports, the U.S. is
exporting butter and cheese
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Subsidizing Exports is a Big Instinct
•
•
Agriculture was called on to increase production for World War I
After the war,
– the farm economy became depressed
– Cooperative bargaining became less effective as non-cooperative firms
learned new ways to bargain with farmers and many coops over
reached their grasp.
– Packers and Stockyards Act of 1921 protects ranchers from
“unscrupulous practices” of meat packers. Capper-Volstead of 1922
seeks to bolster cooperative marketing
– McNary-Haugen bills, vetoed twice by President Coolidge in mid to
late 1920s, sought to stimulate exports by having a federal agency buy
surplus products for export sale at reduced prices
•
•
The stage was set for government regulation but the form it took was
problematic and things had to get a bit worse before we were ready
to do it. The Great Depression made it “worse” enough
If you can’t increase exports then decrease imports, I guess
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The Milk Price Support Program leads to Dairy
Import Quotas
• Early experience with DPSP
“teaches” us
Be careful about sellback
We want to enhance prices, not
stabilize them
• Dairy import quotas - Strict quotas
are implemented via Trade
Agreements Extension Act of 1951
with original authority from Section
22 of AAA of 1933. Recognizes we
could not risk supporting world
prices
• Quotas terminated by the Uruguay
Round General Agreement on Tariffs
and Trade
• Tariffs: WTO allows for minimum
market access and restrictive tariffs
on amounts above that level.
–
–
•1930 to 1941 to 1945
–We began using public funds to purchase
surplus butter for food relief and school
feeding programs
–This ramped up during the War, with a
parity based price supporting strategy
•1949
–Following the post-WWII slump in exports
and rise in costs, Congress made a Milk
Price Support Program permanent in 1949
•1950
– Support program revenues exceed costs for
the first and only time.
•
1951
– Strict dairy import quotas are established
with Secretarial authority to suspend them
1953-54
– USDA net removals hit a record 11.3
billion pounds (milk equivalent), net
expenditures soar to $474 million.
Secretary drops support back to 75% of
parity (a big cut) and markets adjust fairly
quickly over the rest of the decade.
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GainsfromTrade
• Inmorepopularthought,weseemtoassumethatthe
beneficiaryofanexchangeisthepersonwhoendsupwith
thecash(theseller)
• Bythisthinking,exportsaregood,importsarebad,andan
economyisbestoffwhenitisanetexporter.
• Fromthis,wegetpoliciestoprotectdomesticindustriesby
limitingimportsand/orsubsidizingexports.
• Thisisavery“mercantilist”viewoftradethatdeniesthe
gainsfromtradeexperiencedbyconsumerswhogettobuy
goodsandservicesatalowerprice.
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WhyTrade– CompetitiveAdvantage
IfthepriceofmilkinWIis
$12percwt.,thenanyNY
• anexchangeoccurswhenthe
processorwillingtopay
buyerwantsagoodmorethan morethan$15.50(theWI
hewantscurrencyandtheseller priceplusthe$3.50itwill
costfortransportation)will
wantscurrencymorethanhe
receivemilk.IftheNYprice
wantsthegood.(Thisiswhy
islessthan$15.50thenno
politeshopkeepersand
tradingwilltakeplacecustomersbothsay“thank
thosearethebarriersthat
you”.)
thelawsofeconomicsplace
• Inthecaseoftradebetween
ontradewithinorbetween
countries.
countries(I.e.,buyersand
sellerslocatedindifferent
MarkStephenson,1994
politicaldivisions),onewayto
explaintradeissimplyby
lookingatpricedifferences.
AdamSmith(late1700s)
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But,whydoesthissituation/opportunityexist?
• DifferentFactorendowments
– Theamountoflabor,capital,orlandavailableina
country(largecountryvssmallcountry)
– Therelativeamountsofeach(laborrichvslandrich,
etc.)
• DifferentTechnicalefficiency
– Shapeoftheproductionpossibilityfrontierormetaproductionfunction
– Factorintensity
– Factorproductivity
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WhyTrade– ComparativeAdvantage
TheTheoryofComparativeAdvantageassertsthat:
– everycountry(producer)hassomethinginwhichithasa
relativeorcomparativeadvantage,somethingitdoes
relativelybetter– basedonfactorefficiencyand
endowments
– Theadvantageisnotnecessarilyevidentorexpressedin
termsofmonetarycostofproduction,perse
Sellersgainfromthesale,butbuyersalsogainfrom
thepurchase.Thegainsaremeasuredintermsofour
collectiveabilitytogrowtheeconomicpie.
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OriginsofWTO– TheGATT
• GeneralAgreementonTariffsandTrade(GATT)
– Establishedin1947asaforumtoreducetradebarriers
– GATTwasmoreapoliticaldecisionthananeconomicdecision
• Negotiationstakeplacein“rounds”
– Revisitedaboutevery7years
– Beginswithanagreementamongmembersonagenda
– Therehavebeen9todate,witheachnewtreatyreferredtobya
distinguishingname,usuallyrelatedtolocationoffirstmeeting
• Geneva(1948),Annecy(1949),Torquay (1951),Geneva(1956),Dillon(1962),Kennedy(1967),
Tokyo(1979),Uruguay(1994),Doha(aborted)
– KennedyRound– shouldwetalkaboutAg?No!(cf.Canada)
– TokyoRound– let’stalkaboutAg!Ok,justalittle,butnotdairy
– UruguayRound– getoverit,wearedoingdairy!
• WTOreplacedGATTSecretariatin1995aslegalandinstitutional
foundationofmultilateraltraderelations
– Designedtostrengthenthetraderulesbyprovidingastrongersetof
institutionsforresolvingdisputesandenforcingagreements
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PreferentialTradeAgreements– GATTlite
• FTAs/PTAsareBilateralorRegionalTradeAgreements
intendedtoreduceoreliminatetradebarriersamong
signatories,consistentwithbutsimplerthanGATT.Hopeto
leveragepreferentialtreatment– gettotheheadoftheline
– withinGATTframework
• PTAsGATT/WTOlegaliftheyeliminatetradebarriers
completelyormoveinthatdirection
• USagreementsinclude:
– NAFTAandCAFTA
– Australia,Bahrain,Canada,Chile,Colombia,CostaRica,Dominican
Republic,ElSalvador,Guatemala,Honduras,Israel,Jordan,Korea,
Mexico,Morocco,Nicaragua,Oman,Panama,Peru,Singapore
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NorthAmericaFreeTradeAgreement
NAFTA
Really3SeparateTradeAgreements
ØCanada– USTradeAgreement(CUSTA)
effectivein1989
ØCanada– MexicoTradeAgreementeffectivein
1993
ØUS– MexicoTradeAgreementeffectivein1994
ØNAFTAwasconsideredacombinedagreement
in1993
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NAFTAChallenges
(reallyalltradeagreements)
Overallprovisionthathascausedconflictinvolvestheability
ofthethreecountriestomaintaintheirowndomestic
subsidiesinthesettingoffreertrade– reductionsintariffs.
– Iffreetradeistoexisttheremustbeharmonizationofpolicies.
• Farmsubsidies
• Marketinformation
• Gradesandstandards
• Infrastructure
• Plantandanimalprotection
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NAFTADisputeProcedures
Basicmethodfordisputesettlementinvolvesthe
establishmentofPanelswhichactas“judges”of
whodidwhattowhom(legalrightsand
obligations)
– Membersofthesepanelsinclude:
• 2memberschosenbyonecountry
• 2memberschosenbytheothercountry
• 1mutuallyagreeduponchair
– Originalagreementshadaprovisionforcontinuing
discussiontoeliminatedomesticprogramissuesbut
noSecretariatwasestablished(comparabletoEU
Commission)tocontinuetoprocessofnegotiation
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CanadianTradeAgreement
CUSTA
– Tariffsonmostcommoditiesphasedoutover510yearperiodwithfollowingimportant
exceptionsbeingTariffRateQuotas(TRQ)on:
ØPoultry:CanadianPoultryBoard
ØDairy:CanadianDairyBoardandUSpricesupports
ØSugar:USpricesupports
– ATRQallowsacertainamountofimportsata
lowertariff(sometimeszero)withimpactsabove
thequotaassessedahighertariff.ExampletheTRQin
Canadaforcheeseis245%ofthepriceat20,412MT.FortheUSitis58%at
134,995MT.
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WhatReallyHappened– Canada
inparticularcheese(cf.MPIcontroversy)
ValueofUSDairyExportstoCanada,1980to2016
80,000
70,000
60,000
Butter&Milkfat
Cheese
NonfatDryMilk
thousanddollars
50,000
40,000
30,000
20,000
10,000
0
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PrimaryConcerninCanadaisProducerPrices
UsingtheaveragenetmilkpriceatthefarmforQuebecandNewYork
inMay1995andthepredictedchangesfromthebasesimulationto
thetwotradescenarios,apriceeffectcanbeestimated.
InQuebec,dairyfarmersreceivedanaverageof$16.00percwtinMay
1995.AftersimulationI,milkpricewouldhavebeenreducedto
$13.25andfurtherreducedto$12.25withtheimplementationof
freetradeconditions.
NewYorkdairyfarmersreceivedanaverageof$12.75percwtinMay
1995.SimulationIresultsinaslightincreaseto$13.00and,under
freetradeconditions,averagepriceinNewYorkforrawmilkatthe
farmwouldriseto$14.50.
Thesepriceeffectsshouldbeviewedasthefirststepinaprice
adjustmentprocessfollowingashocktothemarketstructure.The
finalequilibriumshouldimplyasmallerpricedecreaseforQuebec,
andasmallerpriceincreaseforNewYork.
MauriceDoyon,1997
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MexicanTradeAgreement
US– MexicoTradeAgreement
• NAFTAprovisionsaffectingtheU.S.- Mexicotradein
dairyproductsfallintothreemajorcategories:market
access,sanitaryandphytosanitarystandardsandrules
oforigin.
– Convertalltradebarrierstotariffs(Mexicohad
extensivelicensingofimports)andthenreduceto
zeroover5-15years.
– Mexicogetsalongertimetoopenmarkets
Lastpartcomingin2008(Mexicohopedtodelaymore)
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USDAFASAg.Attache Report,Sept.1993
USexportstoMexicohaveexpanded28%peryear
from$1.1billionin1987to$3.7billionin1992.
TheNorthAmericanFreeTradeAgreement
(NAFTA),ifimplemented,willboostthemfurther.
USdairyproductshaveexcellentpotentialin
Mexico.
– USexportsofallproductstotaled$160millionin
1992,growingat30%peryear.
– Opportunitiesareexcellentforcheese,yogurtandice
cream. USfacestoughcompetitiononNDM.s
– NAFTAwouldeventuallyopenthemarketmuchwider
foralldairyproducts.
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GainsfromTrade– MexicoStyle
Mexicohasarapidlygrowingpopulation,and
otherprovisionsoftheNAFTAareexpectedto
haveapositiveimpactonpercapitaincome
levelsinMexicointhelongrun.Thereisa
tremendousdemandfordrymilkforbeverage
purposesinthetwo-thirdsofMexico's
populationthatispoorandanexport
opportunityforMexicanstylecheesesinthe
restofthepopulation.Onbalance,NAFTAwill
beaplusfortheU.S.dairyindustry.
MarkStephenson,1993
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GainsfromTrade– TheMXPerspective
UsingasophisticatedmodelofUSandMexicandairymarkets
andbasedonchangesduetoNAFTAandGATT:
Mexicanproducerpricesarepredictedtobeaslowas50%of
their1992levels,whereasretailerpricesfallsome10to
25%.DairyprocessinginMexicoispredictedtoincrease
undertradeliberalization,duetothegreateravailabilityof
dairycomponents.
Asexpected,tradeliberalizationispredictedtoincrease
importsofmilkpowderspreviouslysubjecttoimport
controls,butimportsoffinalproductsarelessunderNAFTA
andGATTthanunder1992policies.Thus,Mexicandairy
processingcompaniesandconsumersappeartobenefit
fromdairytradeliberalization,butMexicandairyproducers
willfaceadditionalcompetitivechallengesinthefuture.
CharlesNicholson,1994
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GainsfromTradeDeniers/Realists
JamesCranney (PSU),1992:ToughonMXproducers,goodforMX
consumers.“Substantialopportunities existforU.S.exportsof
nonfatdrymilk,butterandtoalimiteddegree,freshfluidmilk.“
But,USwillhavetobepreparedtomatchlowinternationalprices
anduseexportsubsidies.
WilliamDobson(UW),1994:Mexicowillhaveminimalaffect onUS
dairysector,withcomplicationsarisingfromdifficulttransportation,
lackofUSmarketingacumen,toughforeigncompetition,andbetter
optionsintheUS.
TomCoxetal.(UW),1994:themorelikeLy NAFTAandSTATUSQUO
scenariosgenerateverymodestimpacts onaggregateandregionaL
U.S.dairymarkets.Thisismainlyduetothefactthatwhilethe
NAFTAmaypotentiallygeneratelargeimpactsonU.S.-Mexicodairy
trade,thesechangesinU.S.exportsarelikelytoremainarelatively
smallportionofU.S.totalmilksupply.
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Whatreallyhappened- Mexico
ValueofUSDairyExportstoMexico,1990to2016,thousanddollars
900,000
800,000
Butter&Milkfat
Cheese
NonfatDryMilk
700,000
thousanddollars
600,000
500,000
400,000
300,000
200,000
100,000
0
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Moretoitthanjustdairyfoods
NAFTA,whichcameintoforceinJanuary1994,
alsorepresentedasignificantbreakwith
previouspolicies.AlthoughitprovidesUSdairy
producersandcompanieswithgreateraccessto
Mexicanmarkets,itwillalsoallowMexicandairy
producers(especiallyinthespecializedsystem)
topurchaseimportedinputsmorecheaply.
Thus,NAFTAwillprovidebothincentivesand
disincentivestodairyproductioninMexico.
CharlesNicholson,1994
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MexicohasgrownmorethantheUS,Canada
barelyatalluntilrecently
200
MilkProduction,Index1990=100
190
180
Canada
Mexico
UnitedStates
170
160
150
140
130
120
110
100
90
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Ahostoffactorsthatgobeyondwhohasthe
cheapestpowder.
Competitionunleashedbytradeandinvestmentliberalizationunder
NAFTAwillhavethegreatestimpactonMexico'sdairymarketing
subsectorinthenextdecade.
Tariffreductionsandliberalizationofthetrucking industrypromise
greateravailabilityofimporteddairyproductsinMexicoatlower
prices.
Reformofinvestmentregulations,andthestrapped-for-capital
conditionofMexico'sdairycooperatives,portendgreaterdirect
investmentindairyprocessingbyforeignfirms.
Asdomesticdairycompaniescontinuetoshakeoffthelegacyofprice
controls,competitionbasedonproductquality willtakeongreater
importance.
PostNAFTA,Mexicoincreasedthe”enforcement”ofSPSregulations–
“quality”asabarriertotrade.
CharlesNicholson,1994
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WhatReallyHappened
ValueofUSDairyTradewithCanadaandMexico,1980to2016
$1,800,000
$1,600,000
$1,400,000
$1,200,000
ImportsfromCanada
ImportsfromMexico
ExportstoCanada
ExportstoMexico
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
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NetTradeinDairyProducts
ValueofUSNetExports,World,Canada,andMexico,1980to2016
$4,000,000
$3,500,000
World
Canada
Mexico
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$$-500,000
$-1,000,000
$-1,500,000
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ExperiencewithMexico,toalesserdegreeCanada,mirrorsour
experiencewithothercountries
ValueofUSDairyExportstoAllCountries,1990to2016,thousanddollars
2,500,000
Butter&Milkfat
Cheese
NonfatDryMilk
2,000,000
thousanddollars
1,500,000
1,000,000
500,000
0
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MinimumClassifiedPricing
TheFederalMilkMarketingOrderprogrammaybeunableto
maintainsignificantclassIpricesandproducerrevenuesif
freetradeinmilkanddairyproductsbecomesarealityin
NorthAmerica.Moreover,theadverseaffectswillbe
concentratedinspecificregions.Bothstateandfederal
ordersintheseregionswillbeimpacted.
Asmilkisdivertedfromtheseareastofluidprocessingplants
inCanadaandMexico,thedisorderlyconditionsthatfederal
orderssoughtto,andindeeddid,alleviatemaywellbeginto
reappear.
KeytothisconclusionistherequirementthatCanadareform
itsownpricingsystemtoexploitthispotential.Iftheyfailto
doso,thetablescouldbeturned.
PhilBishop,1997
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FactorPriceEqualization
Thefreetradesimulationresultssuggestaverage
worldmarketfarmpricesnearcurrentU.S.levels,
FarmmilkpricesinWesternEurope,Japan,Canada,
andSouthAmericaaresimulatedtofalll7%,
53%,24%and10%,respectively.
Incontrast,EasternEurope,AustralianandNew
Zealandfarmmilkpricesaresimulatedtorise
140%,43%and
105%,respectively.
CoxandZhu,1997
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Yup,FPEhappens
Producer Prices for Milk, Selected Countries, 1990 to 2015,
US$ per metric tonne
$1,200.00
Argentina
Canada
Germany
Japan
NZ
USA
$1,000.00
$800.00
$600.00
$400.00
$200.00
$-
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Dairy trade protectionism begins to unravel,
and then ravel back up again.
Passage of WTO under Uruguay Round of GATT (1984-94)
begins to seriously open US markets to new imports.
Opportunities exist for exports, but these remain limited by
continuing, albeit reduced, EU subsidies for dairy exports.
Trade issues become increasingly troublesome for dairy,
but with little sympathy outside the industry.
Doha Round (starting in 2001) hopes for more of the same,
but becomes fatally stuck under protests by displaced
laborers, environmentalists, and developing countries that
want greater ag trade liberalization by US and EU and also
less “trade distorting” domestic programs
Trump era ushers in a new protectionist instinct in hopes of
rebuilding jobs from the old economy, as opposed to the
new economy
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HasTradeLiberalizationbeenasuccess?
• Bywhatcriteria?
– Expansionoftheeconomicpie
– Growthinlowincomecountries
– Foodsecurity
– Inspiredinnovationandentrepreneurship
– Reducedinternationaltensions
• Whatneedsimproving?
– Alternativesfordisplacedworkers
– Opportunitiesforthosewhoseemtohaveno
opportunities
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MusingsonU.S.DairyTradewith
CanadaandMexico
AndrewM.Novakovic,PhD
TheE.V.BakerProfessorofAgriculturalEconomics
May2017
18