International Trade PDF

International Trade DXP02712 —UN—23FEB11 INTRODUCTION DXP02318 —UN—25FEB11 This text has been written from a mi...

International Trade DXP02712 —UN—23FEB11 INTRODUCTION DXP02318 —UN—25FEB11 This text has been written from a microeconomic operating in the market structure that is generally available perspective. That means it has been written from for agricultural enterprises. An agricultural producer must a producer's orientation. It considers an individual keep the national and international market in perspective, enterprise, an individual farm, or an individual person however, when evaluating what to produce and how to (or group of persons operating as an individual) in the produce. It can have a strong impact on prices received. types of analysis discussed. This is the type of analysis This chapter on international trade has been included that should be used by an agricultural producer when because of these considerations. SP63763,3BAA2DC -19-06AUG14-1/1 12-1 090117 PN=190  International Trade IMPORTANCE OF WORLD TRADE impact on U.S. agriculture. There is every reason to expect the importance of this topic to grow in the future, Jeremy's class is starting a discussion of international he suggests, and Jeremy is increasingly convinced the trade, and Jeremy has been asked to lead the discussion. topic is an important one. All the students have heard reports that trade between countries is getting more attention with each passing AGRICULTURAL TRADE year. Trade is apparently of huge economic and political importance. Given all this, it is important to understand The United States possesses a large amount of available why, and Jeremy gets the assignment. land for agricultural production, the production and marketing technology to utilize the available land, Jeremy's teacher helps him get started. First, they agree the infrastructure (e.g., roads, rail, ports, and storage that the study will be restricted to agricultural commodities, facilities) to move the agricultural products to the rest of the traditional food and fiber products such as wheat, the world, and a financial system to ensure that sufficient cotton, soybeans, pork, and beef. Jeremy's teacher then funds are available for the production and marketing arranges a meeting between Jeremy and Mr. Ken Brown, of the agricultural commodities. All of these factors a trade specialist in the state department of economic have combined to position the United States as a major development. Mr. Brown leads state officials on missions producer of food and agriculturally based industrial to other countries. He has been involved in planning products and as a net exporter in the world market. state-level efforts to increase exports to international markets. TRADE IN GRAIN AND OILSEEDS Mr. Brown's first assignment is to explain why the The soybean, corn, and wheat complex is one category area of trade is so visible. He notes that the attention of commodities to which trade is very important. The flow and emphasis comes primarily from the long-standing is primarily from the U.S. to other buying countries. The realization that trade can make people better off and U.S. is a major producer of all three commodities. In raise their standard of living. This is a powerful incentive. the presence of farm legislation designed to allow U.S. It underlies the energy and time spent on trade and market prices to react to the world market, what happens trade issues over the past two decades. The mood and to U.S. exports may be the key determinant of prices to movement of the world-level GATT (General Agreement U.S. farmers. on Trade and Tariffs) negotiations has been toward moving to “free” and “fair” trade. Mr. Brown indicates that Of the grain and oilseed crops produced, the U.S. is a efforts are being made to reduce tariffs, taxes, domestic large exporter of soybeans, wheat, and corn. Because subsidies, and other barriers to a free flow of products of the excessive production of grains, available breeds, around the world and that production practices and and livestock market structure, the U.S. is also a major requirements be uniform for all trading partners (fair). producer and exporter of beef and poultry. Utilization He indicates that there are few, if any, topics of more of production through trade immensely increases the importance to the economic well-being of the U.S. citizen opportunities for available resources. and the U.S. farmer. Mr. Brown then lays out a plan for their discussion. He will start with some evidence of just how important trade in agricultural commodities is to the U.S. Having established that importance, coverage will then turn to the source of the improved standards of living that trade can bring. The important economic concepts of absolute and comparative advantage will be introduced and explained, and Jeremy is cautioned to pay close attention to this issue. Some of the important determinants of how competitive the U.S. is in the world market will also be discussed. The GATT negotiations and the World Trade Organization (WTO) will be covered briefly with an eye toward their particular Continued on next page FB87413,000008F -19-03APR14-1/14 12-2 090117 PN=191  International Trade Soybeans Soybeans 100 90 80 A 70 60 B DXP04858 —UN—25MAR14 50 40 30 20 10 0 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Fig. 1 — U.S. soybean oilseed production and exports (shown in million metric tons) A—Production B—Exports In the graph (Fig. 1), it can be seen that the largest produced, the world market price could have a significant amount of soybean production is used domestically in impact on the U.S. domestic price of soybeans. While the U.S. It also shows that about one-third of production world production of soybeans continues to increase, is exported, usually in the form of whole beans, oil, and consumption also is rising rapidly. China's population crush. The U.S. is the world's second largest exporter will increase substantially over the coming years as well of soybeans, exporting over 28 billion tons of soybeans as their per capita demand for meat, soy protein, and in 2013. Brazil in recent years has become the world’s soybean oil for industrial products. Furthermore, China is largest exporter of soybeans, exporting over 30 billion opening its borders more than ever to let in outside trade tons of soybeans in 2013 (Fig. 2). The largest importing (e.g., agricultural commodities). Mr. Brown notes that all country is China because of a diet that is heavily weighted of these events are a benefit to the U.S. soybean producer. in meal and oil products. The U.S.'s relative proximity to the Pacific Rim region (e.g., China) is also a benefit to U.S. exporters as the per capita Mr. Brown explains that due to increased competition from income in this region continues to grow rapidly, increasing the Brazilian market, U.S. farmers have had to become their demand for U.S. soybeans and soybean products. increasingly aware of the world market and world prices. With increased competition and increased quantities Continued on next page FB87413,000008F -19-03APR14-2/14 12-3 090117 PN=192  International Trade The U.S. has planted over 70 million acres of soybeans A in recent years with a total crop that exceeds 3.0 billion bushels. South America, especially Brazil, has grown in importance as a producer and exporter of soybeans since the 1970s. Brazil's crop exceeds 3.0 billion bushels in recent years, making Brazil the worlds leader in soybean DXP04859 —UN—25MAR14 production. Roughly 35% of Brazil's soybeans are exported or crushed into meal and oil, which are then exported. Jeremy is beginning to understand that the U.S. farmer B D F must be alert to weather and crop-related issues not only C E G U.S., but also in Brazil and other soybean producing countries as well. Harvest in Brazil is in March and April, and the weather in the U.S. during the mid-winter H months is important to crop development in the Southern Hemisphere. It is important to note that during the period the U.S. farmer is trying to decide how many soybeans to plant, conditions in Brazil and other Southern Hemisphere DXP04860 —UN—25MAR14 soybean producing countries are adding uncertainty to world soybean supplies and prices. I J L N P R K M O Q S Fig. 2 — 2013 soybean trade in the world market A—Exporters of Soybeans K—Mexico 3% B—USA 38% L— Japan 3% C—Brazil 42% M—Taiwan 2% D—Argentina 8% N—Thailand 2% E—Paraguay 6% O—Egypt 2% F— Canada 4% P—Indonesia 2% G—Rest of the World 2% Q—South Korea 1% H—Importers of Soybeans R—Turkey 1% I— China 66% S—Rest of the World 6% J— European Union 12% Continued on next page FB87413,000008F -19-03APR14-3/14 12-4 090117 PN=193  International Trade Corn Corn 400 350 A 300 250 B DXP04861 —UN—25MAR14 200 150 100 50 0 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Fig. 3 — U.S. corn production and exports (shown in million metric tons) A—Production B—Exports Mr. Brown notes that exports are of major importance will play a large role in the future demand for U.S. corn. in corn as well. Importing countries use corn largely as Corn production in the U.S. is centered in the mid-continent a feedstuff for livestock. With crops in the 8.0 to 10.0 states, or “Corn Belt” (e.g., Iowa, Missouri, Illinois, Indiana billion bushel range in recent years from planted acreage and Ohio). The major reason that most of the corn around 80 million acres, approximately 5.6 billion bushels produced for feed is consumed in the U.S. is due to the go into the U.S. hog, cattle feeding, poultry, and dairy U.S.'s dominance in the production of grain-fattened beef. sectors. Mr. Brown points out that while feed is the most important current use for corn, the growth in demand Mr. Brown uses the graph in Fig. 3 to show that roughly for high-fructose syrup (i.e., for soft drinks and other one-fifth of the corn produced in the U.S. is exported. sugar-based products) and ethanol, both products of corn, Continued on next page FB87413,000008F -19-03APR14-4/14 12-5 090117 PN=194  International Trade The U.S. is by far the world's largest producer and exporter A of corn, exporting 36% of the world's trade in 2013. The largest importers of corn are those countries that raise beef themselves but do not have the land available to produce the grain needed to feed the animals, namely Japan and the Pacific Rim (Fig. 4). Mexico is also an importer of corn DXP04862 —UN—25MAR14 due to a growing finishing industry, not only for the lack of land for production, but also the available capital. It is not unusual for the U.S. to produce 25-30% of the world's feed grain supplies (called “coarse grains” in the B D F world trade) and handle anywhere from 50 to 70% of C E G exports. Competition comes from feed grains produced in Brazil, Argentina, and the European countries. Clearly, Mr. Brown stresses, this means the U.S. farmer is directly H exposed to variability in the world market for feed grains. If corn prices were modeled in such a way that importance to the various uses could be allocated, changes in exports DXP04863 —UN—25MAR14 would be a very important determinant of changes in corn prices. Thus, one of the important sources of the price risk facing U.S. farmers discussed in the chapter on marketing is coming from the world arena. The U.S. producer, as an individual, is helpless to change price and needs to try to manage risk exposure that is world-level and worldwide in origin. I J K L Mr. Brown tells Jeremy that of the many economic shocks Fig. 4 — 2013 corn trade in world market that emerge and require U.S. farmers to cope with their impacts, most are from the world trade arena. The chapter A—Exporters of Corn G—Rest of the World 14% on marketing discusses the economic shock associated B—USA 36% H—Importers of Corn with sharply higher grain and oilseed prices in the early C—Argentina 12% I— Japan, South Korea, 1970s. It was purchases by the Soviet Union in the export D—Brazil 19% Taiwan, China, Malaysia E—Ukraine 16% 35% market that prompted the sharply higher U.S. prices. F— India 3% J— Middle East, North Africa, Those higher prices were, in turn, the catalyst for surges European Union 28% in corn, wheat, and soybean production. It is clear that the K—The Americas, Caribbean U.S. farmer has been and is a part of a world market. It is 27% L— Other Developed Countries trade that makes possible the idea of a “world market.” 10% Continued on next page FB87413,000008F -19-03APR14-5/14 12-6 090117 PN=195  International Trade Wheat Wheat 80 70 A 60 50 B DXP04864 —UN—25MAR14 40 30 20 10 0 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Fig. 5 — U.S. wheat production and exports (shown in million metric tons) A—Production B—Exports Wheat is another dual-purpose commodity that is crops, the export market determines U.S. wheat prices. produced for human consumption in the form of breads, The domestic milling market is relatively stable and cannot cereals, and the like, but can also be used as a feedstuff use all of the roughly 2.5 billion bushel wheat crops the in the finishing of grain-fattened animals. As a feedstuff, U.S. normally produces. Feed use and other incremental wheat may be used as a substitute for corn in feed rations. uses in the “other” category are simply not important The U.S. produces and exports two times more wheat enough to make much difference to price. Exports, than any other single country, exporting over 40% of its changes in exports, and anticipation of changes in exports production (Fig. 5). Wheat as a consumable food is a are the important price determinants. dietary staple for many developing countries. Mr. Brown shows the importance of exports to wheat. More than any of the three big U.S. grain and oilseed Continued on next page FB87413,000008F -19-03APR14-6/14 12-7 090117 PN=196  International Trade Compounding the problem facing the U.S. wheat producer A is the broad array of competing countries around the world. Australia, Canada, the European Union, and the Former Soviet Union are major producers. In recent years, the U.S. has produced 20-25% of the world's wheat (Fig. 6). DXP04865 —UN—25MAR14 U.S. exports have varied in the 20-25% range. The heavy dependency on the world market by the U.S. in the presence of potentially large production in other countries creates a most uncertain price outlook for wheat. Whether the U.S. exports will be weak or strong can depend on weather in virtually every corner of the world. B C D E F Perhaps more than any other grain, wheat is the focus of attention in the GATT and other world-level negotiations G on trade. It is the basic food grain in many countries where rice does not fill that role. It is wheat that has been subsidized to ensure production in many countries and it is wheat that has been a bone of contention with the European Economic Community (EEC), Canada, and DXP04866 —UN—25MAR14 Australia. Mr. Brown indicates that this area will need to be explored in more detail later in the discussions when the GATT negotiations are introduced. H J L N I K M Fig. 6 — 2013 wheat trade in world market A—Exporters of Wheat H—Middle East, North Africa B—USA 20% 23% C—Australia 12% I— South, East, and South D—Canada 14% East Asia 25% E—European Union 17% J— South America 5% F— Former Soviet Union 22% K—Sub-Saharan Africa 3% G—Importers of Wheat L— Mexico 3% M—European Union 3% N—Rest of the World 38% Continued on next page FB87413,000008F -19-03APR14-7/14 12-8 090117 PN=197  International Trade MEAT TRADE Trade in meat and livestock, though not as large a quantity or value in relation to grains and oilseeds, is an important market in terms of importing and exporting meats from countries and regions that are best apt to produce. For instance, many of the European Union countries would not be able to enjoy delicacies of meat if they were required to rely on their own meat production. It is only through the trade of a multitude of meat products that production and consumption can be best utilized. FB87413,000008F -19-03APR14-8/14 Pork Pork 12 A 10 8 B DXP04867 —UN—25MAR14 6 4 2 0 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Fig. 7 — U.S. pork production and exports (shown in million metric tons) A—Production B—Exports The U.S. is not a large producer of pork compared to other Mr. Brown suggests that there are two dimensions of the pork-producing countries, mostly due to the competition situation. First, the inedible by-product exports are not between pork and beef for feed grains and the higher included in the export calculation. A big part of the market value of beef to the producer versus the labor intense for the by-products of the slaughter process in pork is practices involved in producing pork. Jeremy examines overseas. Hides, for example, are widely used in shoe the graph in Fig. 7 above, which illustrates exports and manufacturing, but much of that manufacturing activity domestic consumption as a share of total disappearance is in other countries. for pork. During the time period of 2001/2002 to 2012/2013, pork exports averaged only 16% of total The second important point is that the edible pork that disappearance. Jeremy concludes that world trade in pork is exported tends to be the high-value cuts. This makes is not very important to the U.S. industry, but Mr. Brown sense to Jeremy. It is expensive to ship fresh, chilled is not so sure. On the surface, it does appear that trade meats to Japan, Europe, or other points of overseas in pork is not important to the U.S. industry because the destination. The higher-value cuts are more likely to quantity is not as large as it was with the grains. But that justify that special treatment. initial conclusion about importance could be wrong. Continued on next page FB87413,000008F -19-03APR14-9/14 12-9 090117 PN=198  International Trade In recent years, when (Fig. 8) exports were above the A long-term average levels, movements of pork into world trade had a significant impact. If Japan buys pork loins, for example, that purchase brings short-run competition to the marketplace. Fast-food chains, supermarkets, and restaurants in the U.S. have to bid up available prices DXP04868 —UN—25MAR14 in an effort to get part of the supply. Short-run (weekly) price surges of 20% or more on pork loins have not been uncommon. The domestic processing industry feels the price variability. Producers may be misled in making their B D F long-term plans if they do not recognize that any short-run boost in hog prices is likely to be temporary. C E G Again, it is apparent to Jeremy that the world market can be the source of much of the price risk and uncertainty with H which U.S. producers must deal. The ability to sell in other markets is clearly important and has positive results for the pork industry as a whole. Jeremy knows from following the news that many economists argue that the growth potential DXP04869 —UN—25MAR14 of markets in other countries exceeds that in the U.S. It is not difficult to accept an argument that pork demand could be increased by penetrating foreign markets, but many other producing countries are competing for those markets, especially hog-producing countries like Canada. I K M O Q The price variability that comes from variable exports can be negative. U.S. producers are exposed to more price J L N P R risk because they are increasingly part of a world market. Fig. 8 — 2013 pork trade in world market Through world trade it can be seen that the countries that consume the largest values of pork are not the countries A—Exporters of Pork J— Japan 18% that produce the most. This again reinforces the point B—USA 32% K—Russian Federation 16% C—Canada 18% L— Mexico 12% that trade is of benefit to all that participate, in addition to D—European Union 31% M—South Korea 6% providing the products desired to those regions most in E—Brazil 9% N—Philippines 3% want. F— China 4% O—China 17% G—Rest of the World 6% P—Canada 3% H—Importers of Pork Q—Australia 3% I— USA 6% R—Rest of the World 22% Continued on next page FB87413,000008F -19-03APR14-10/14 12-10 090117 PN=199  International Trade Beef Beef 14 12 A 10 B DXP04870 —UN—25MAR14 8 6 4 2 0 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Fig. 9 — U.S. beef production and exports (shown in million metric tons) A—Production B—Exports For beef, the tons exported of meat, are less than the tons are low. Mr. Brown tells Jeremy that there is currently in of meat imported, but the value of the exports exceeds effect legislation that limits the volume of beef that can the value of the imports. Fig. 9 shows data Mr. Brown be imported. The legislation puts limits on the volume, has collected that shows that exports across a recent not value, of beef imports. However, in most years these 10-year period have averaged about 13% of total U.S. limits are not met by importing countries. These limits may production. However, in 2004 and 2005 exports dropped be adjusted for the level of domestic production. When off precipitously as a result of the single case of bovine production in the U.S. is high, tighter constraints on the spongiform encephalopathy (BSE) found in the United volume that can be imported move into place. Conversely, States, which resulted in our major export markets such when production in the U.S. is low, more beef can be as Japan, the European Union, and Mexico closing their imported. The idea is to allow beef imports to run counter markets to our beef products. to beef production in the U.S. Beef imports have been an important part of industry Beef production in the U.S. falls under a lot of controversy dialogue and industry arguments for many years. Jeremy as far as trade. Like the case with pork, the qualities of knows something about this. He has an uncle who lives in imports are not the same as the qualities of beef exports. Oklahoma, and he has heard the arguments that many of As stated in the case of grains and oilseeds, due to the the price problems U.S. producers face are due to those availability of grains, the U.S. can produce beef products “cussed” imports! Many U.S. producers and producer that are highly valued in the world market. groups see imports as the culprit whenever cattle prices Continued on next page FB87413,000008F -19-03APR14-11/14 12-11 090117 PN=200  International Trade From Fig. 10 it can be seen that, with the exception of the A European Union and the U.S., the same trade functions are present in beef as they are in the other commodities we have discussed. Countries that produce excess quantities are exporters, and generally not importers of the same commodity. In the case of the U.S. and the DXP04871 —UN—25MAR14 European Union, values of both imports and exports are substantial. The reason the U.S., the European Union, and other countries may import and export the same B K commodity is that there exists quality differences between C E G I L the products that are produced and exported and the products that are imported. In the case of beef, we D F H J M export higher-valued beef products such as steaks and roasts and import lower-valued products such as ground beef. The United States does not produce enough lean N ground beef and thus must import that product to fulfill the demand for hamburgers. This trade is beneficial for the United States cattle producers. Faced with higher production costs (e.g., land), U.S. cattlemen produce DXP04872 —UN—25MAR14 high-value beef with their resources and import the lower-valued products from abroad. O X Much of the imported beef is frozen and is processing beef designed for the ground beef and processed meat P R T V Y market. Australia is the largest supplier with significant volumes coming into the U.S. from Argentina and New Q S U W Z Zealand. In the U.S., the imported product competes Fig. 10 — 2013 beef trade in the world market directly with cow beef, the beef from cull beef, low-quality fat cattle (e.g., grades below select), and dairy cows that A—Exporters of Beef N—Importers of Beef go into the processing market. With roughly 50% of U.S. B—USA 12% O—USA 14% per capita consumption in the form of ground beef, an C—Brazil 20% P—Russian Federation 14% argument could be developed in support of a need for D—Australia 17% Q—Japan 11% imports to supply that growing market and keep the prices E—India 18% R—European Union 5% F— Canada 4% S—Mexico 3% at reasonable levels compared to competing meats. G—New Zealand 6% T— South Korea 5% Unfortunately not all observers see the issue that way, H—Argentina 2% U—Venezuela 3% and Jeremy agrees with Mr. Brown's suggestion that beef I— Uruguay 4% V—Canada 4% imports will continue to be a volatile and controversial area. J— Paraguay 3% W—Egypt 3% K—European Union 3% X—Hong Kong 6% The importance of beef exports is understated by Mr. L— Mexico 2% Y—China 5% Brown's data. Exports of edible beef, often high-quality M—Rest of the World 9% Z— Rest of the World 27% cuts, more than doubled in past decades, reaching nearly 2.6 billion pounds in 2003. Negotiations that reduced rib primal cuts that move into world trade. The round and restraints on movement into Japan, Korea, China, and chuck, the remaining two important primal cuts, tend to Europe have boosted exports. With U.S. beef production stay in the U.S. Once again, the direct competition with of nearly 27 billion pounds in recent years, exports U.S. food stores and restaurants is apparent. Most beef are now approaching 10% of total production. U.S. menu items in the restaurants are from the loin and rib, consumption of beef slightly exceeds 27 billion pounds and the items featured in the supermarket at grilling time with imports of roughly 3.3 billion pounds, representing tend to be sirloin cuts and ribeye steaks. Jeremy can see about 12% of consumption. that U.S. beef producers feel both the pleasure and pain As Mr. Brown has already noted, it is the high-value beef as prices at the farm level move with developments in cuts that tend to get exported. Among the primal cuts, it the world trade arena. is the boneless or semi-boneless cuts from the loin and Continued on next page FB87413,000008F -19-03APR14-12/14 12-12 090117 PN=201  International Trade Poultry Poultry 18 16 A 14 12 B DXP04873 —UN—25MAR14 10 8 6 4 2 0 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Fig. 11 — U.S. poultry production and exports (shown in million metric tons) A—Production B—Exports The production of poultry has increased over recent Approximately 20% of the U.S. production goes toward history, due to improvements in genetics and technology. exports (Fig. 11). The U.S. has stepped out as a world exporter, trafficking 38% of the world's trade value from its borders. Demand for further processed cuts has boomed since the 1980s, and both broilers and turkeys are increasingly Though production has increased, exports have remained being sold as cuts. If consumption in the U.S. is primarily more constant due to changes in the American diet. The in the form of breast filets, breast quarters, or even wings, poultry industry also utilizes corn in the broiler finishing then the leg quarters, chicken backs, paws (feet), and process, providing to the world a grain-fattened product. other lower-value parts have to go somewhere. Continued on next page FB87413,000008F -19-03APR14-13/14 12-13 090117 PN=202  International Trade Part of those lower-value cuts are going into pet foods, A but the export market has been extremely important. Processors have shipped huge volumes of leg quarters, chicken backs, and other lower-value cuts into the former Soviet Union and other foreign consuming markets. With the price in the U.S. so low and down to the levels that DXP04874 —UN—25MAR14 make use for pet food look attractive, prices from foreign buyers can be very competitive, even after allowing for shipment costs. At least part of the rapid growth in the U.S. poultry industries, therefore, has to be credited to B D F H international trade and the ability to move product at competitive prices into foreign markets (Fig. 12). C E G I Mr. Brown summarizes the discussion about why trade is getting so much attention. He reminds Jeremy that J their discussion has emphasized the important grain and oilseed crops and the major meats. Obviously, there are other agricultural commodities for which international trade is important. Cotton, for example, is exported from and DXP04875 —UN—25MAR14 imported into the U.S. in large volumes. The short staple cotton produced in the U.S. is often shipped to overseas markets, and U.S. processors, in turn, may import long K staple cotton from Egypt. Breeding stock in the dairy sector and in the rapidly growing horse industry are often L N P R T shipped in world trade. Fruits and vegetables are imported and exported and comprise a large share of the total value M O Q S U of both. Much of the trade in fresh fruits and vegetables is a Fig. 12 — 2013 poultry trade in world market result of the seasonality of their production. The Southern Hemisphere countries export to the United Sates in the A—Exporters of Poultry L— European Union 8% winter months while their growing season is favorable and B—USA 32% M—Japan 10% ours is not. In our summer, the trade flows in reverse. C—Brazil 34% N—Saudi Arabia 9% D—European Union 10% O—Mexico 8% Mr. Brown indicates his purpose was not to present E—Thailand 5% P—China 3% an exhaustive listing of widely traded items. Rather, F— China 4% Q—Venezuela 3% his purpose was to document the growing economic G—Argentina 3% R—Iraq 8% H—Turkey 3% S—Angola 4% importance of international trade before moving ahead. I— Rest of the World 7% T— South Africa 4% Now, it is time to move to a discussion of the “why” of J— Importers of Poultry U—Rest of the World 43% trade, the source of the benefits from trade, and some K—Russian Federation 6% specific economic factors that influence the direction in which goods and services will flow. It would not be to any country's advantage to try to produce all needed higher than that of low cost countries and lower than that products, any more than it would be logical for a family of of high cost countries. Without government intervention four to produce all of their own clothing, food, and shelter through tariffs, quotas, producer subsidies, and the like, needs, and expect to be efficient. It is only through world production can be driven from one region to another, not trade and opened borders that commerce can take place, only impacting producers but the production country's utilizing production and consumption where applicable. economy as a whole. Through (1) careful utilization of Keeping in mind that an opened world market can impact the world market, (2) management and observation of price in a multitude of ways, opening trade between plantings, harvests, feedlot and feeding placements, and countries and introducing a world market will cause the (3) price discovery through hedging, producers can reap world price to find equilibrium. This world price can be the benefits of increased opportunities. FB87413,000008F -19-03APR14-14/14 12-14 090117 PN=203  International Trade PRINCIPLES OF TRADE acreage seeded to wheat. In sharp contrast, the average U.S. yield has been in the 35-50 bushel range. Kansas, COMPARATIVE ADVANTAGE AND ABSOLUTE the state that produces by a substantial margin more ADVANTAGE wheat than any other state, has average yields around 35 bushels. The Midwestern states have an absolute The discussion swings back to the principles of absolute advantage in both corn and wheat production. That is, and comparative advantage that was mentioned earlier. their cost of production per bushel of corn and wheat is Mr. Brown reminds Jeremy that these principles lower than the cost in any other region of the country. were singled out for special attention because of their However, the Midwestern states specialize in corn importance in world trade. He moves into the discussion production. Wheat production is more concentrated in by indicating that there are few more important economic the drier Plains states from Texas north to North Dakota, concepts than the “principle of comparative advantage.” with Kansas and Oklahoma the first and second largest It is the source of the benefits from trade, and it is the producers of hard red winter wheat in the nation. North means by which standards of living can be increased Dakota is the top producer of Durum wheat and spring through trade. wheat. Thus, even with production of wheat, there is To help clarify things for Jeremy, Mr. Brown indicates he specialization with varieties. Why? The question is put to will use the familiar patterns of regional specialization Jeremy, and he admits that it is an intriguing question. It is in the U.S. to illustrate the concepts of both absolute also a question he is not ready to answer! advantage and comparative advantage. The concepts can Mr. Brown indicates that the more subtle concept of then be extended to a discussion of international trade. comparative advantage is the answer. The Midwestern A region in the U.S. has an absolute advantage in states cannot produce all the corn and wheat that is production of a certain crop if it can produce each needed. Kansas needs corn or other feedgrains. It trails bushel with fewer resources than some other region. only Nebraska and Texas in cattle-feeding activity. But The Midwestern states, for example, have an absolute Kansas cannot grow corn efficiently without irrigation, so advantage in corn production. Topsoil is deep and rich, both regions are better off to specialize and trade. Kansas and rainfall is usually adequate. The Midwest has been can do a reasonably good job of producing wheat, so the primary center of corn production for years. In normal it has something of a comparative advantage in wheat years, the three Midwestern states of Iowa, Illinois, and production even though the Midwest has an absolute Indiana produce 40-50% of the U.S. corn crop. Add the advantage in both corn and wheat. While both regions states of Minnesota and Nebraska, and the percentage may be able to produce all the wheat and corn that they jumps to about 65%. need, by specializing in one crop and trading, both regions can increase the total amount of both crops that can be The same soil and rainfall conditions that make the produced with the available resources. Both regions are Midwestern states dominant in corn production would better off to specialize and trade, and this is the reason allow excellent wheat production. In recent years, Illinois for trade to occur. and Indiana have averaged nearly 60 bushels per acre on Continued on next page FB87413,0000090 -19-03APR14-1/4 12-15 090117 PN=204  International Trade PRODUCTION POSSIBILITIES CURVE Fig. 13 shows what is happening in Kansas. There are 10 million acres of dry land (land where irrigation is not available) available to produce crops in Kansas. Each acre could produce 40 bushels of wheat or 70 bushels of corn. If the state produces only wheat, 40 million bushels could be produced. If only corn is produced, 70 million DXP01763 —19—10NOV10 bushels of corn would be produced. The total bushels of corn and wheat possible with various combinations of Kansas's 10 million acres is illustrated as the outer edge of the area charted. This outer edge or curve is a production possibilities curve. Fig. 13 — Various combinations of corn and wheat can be produced in Kansas Continued on next page FB87413,0000090 -19-03APR14-2/4 12-16 090117 PN=205  International Trade Fig. 14 shows what is happening in Illinois. Illinois contains roughly 11 million acres of dry land that can produce 150 bushels per acre of corn or 60 bushels per acre of wheat. If only corn is produced in Illinois, 1.65 billion bushels could be produced. However, if all the Illinois farmers elected to produce wheat, 660 million bushels could be produced. For Kansas and Illinois together, the total amount of corn that could be produced is 2.35 billion bushels. The total DXP01764 —19—10NOV10 amount of wheat that could be produced with both state's allocating all of their dry land to wheat is 1.06 billion bushels. If either state tries to be self-sufficient in both corn and wheat, its total output — a measure of a state's standard of living — is constrained to the combinations along each state’s production possibility curve. Jeremy struggles a bit with this explanation, but he is beginning Fig. 14 — Trade makes more total produce available to any to get the picture. He suspects that the next step will be one state, region, or country to show how Kansas, for example, can be better off via trade, and his prediction turns out to be true. The people of Illinois would be happy to trade with Kansas Mr. Brown has prepared Fig. 14 to show how trade by giving 70 bushels of corn for 40 of wheat, because 150 helps. Compared to some combination of corn and bushels of corn would provide 86 bushels (150/70 x 40) wheat at point B if Kansas tries to produce both, the of wheat. Again, while this trade benefits the people of “boundary” that was the production possibilities curve Illinois, the people of Kansas would not be any better off can now become a “boundary” like that shown by the with this trade than they were when they produced both dashed line. By trading wheat to the Midwest, Kansas crops. In order for trade to occur, both states will have to can take advantage of the Midwest's production efficiency benefit. After some negotiations the two states arrive at a in producing corn and end up with more total product in trade rate of 40 bushels of wheat for 85 bushels of corn. terms of corn or wheat equivalent. Only if Kansas insists At this trade rate both Kansas and Illinois will end up with on using all its resources to produce either corn or wheat more wheat and corn than they could have produced by do the two curves coincide. Jeremy is reminded that if themselves. Specialization in production and trade have he thinks about these curves as boundaries or restraints, increased the economic well-being of the people in both trade allows Kansas in the illustration to reach a higher states. “boundary.” He can see that getting more product from the same resources means the people of Kansas and the The states are better off because, through trade, they get region can be better off in terms of standard of living. variety. In addition, the Midwestern states cannot produce all of the goods and services they need. The flour mill in CUMULATIVE BENEFITS St. Louis needs wheat to serve the surrounding consumer There are costs to trade, of course. The correct mixture of markets. Corn will not work. All standards of living are local production and trade will be when all the net benefits increased by trade through either increases in product to trade, after covering all costs, are exhausted. That availability and/or access to needed variety. means all the incremental benefits have been garnered On the domestic scene, therefore, Mr. Brown observes and the cumulative benefits have been maximized. that the Midwest specializes in corn. The Southwest Jeremy is still not clear on how trade begins. How do specializes in wheat. Cotton is grown in the Southeast Kansas and Illinois know to trade? Mr. Brown asks and across into Texas and California. Georgia is the Jeremy to look at the trade-off between wheat and corn in ''peach state” and Florida and California specialize in each of the states. In Kansas, for every acre, 40 bushels citrus production. California produces a large portion of wheat or 70 bushels of corn can be produced. That of the nation's vegetables, crops that need warm is, Kansas is willing to give up 40 bushels of wheat to weather and have a high per-unit value that justifies obtain 70 bushels of corn. Illinois, on the other hand, irrigating. Dairy production is geographically spread, but can produce either 150 bushels of corn or 60 bushels of is increasingly consolidated in the North Central states wheat. The ratio of 150/60 (5/2) is equivalent to 100/40 (especially Wisconsin) and California. Cattle feeding (5/2). Thus, in Illinois they are willing to give up 100 activity has gravitated to the Southwest in search of bushels of corn to get 40 bushels of wheat. The people of favorable climates, access to feedgrains, and ease of Kansas would be happy to receive 100 bushels of corn for handling the waste coming from concentrated livestock 40 bushels of wheat, since their own production of corn feeding. Sugar beets are grown in Colorado, and tobacco in replacement of the 40 bushels of wheat would be 70 in North Carolina. Tart cherries come from New York, and bushels. This trade would benefit the people of Kansas edible beans are grown in Michigan. but would not make the people of Illinois any better off than if they were to produce both crops themselves. Continued on next page FB87413,0000090 -19-03APR14-3/4 12-17 090117 PN=206  International Trade In the U.S., Jeremy can see that there are essentially Mr. Brown notes that it is important to recognize that zero barriers to trade. Certain handling and inspection these same benefits can accrue to the countries of the requirements have to be met if product is to move in world through international trade. There are parallels interstate commerce, but these rules are for safety of to the Midwest in the U.S. in the form of countries with consumers and do not block movement. excellent production capability. There are many parallels to the deserts of Arizona and New Mexico in countries The benefits of specialization and trade are apparent if around the world. In such harsh climates, countries must one imagines each state trying to be self-sufficient. How trade to get access to the needed variety of products and much would it cost to produce oranges in the cold climate services and to guarantee access to necessary levels of of North Dakota? What would it cost to produce corn in important food products. the deserts of Arizona? The high standard of living U.S. citizens enjoy is based in large part on specialization of production and an effective transportation system that allows efficient and low-cost movement and trade. FB87413,0000090 -19-03APR14-4/4 12-18 090117 PN=207  International Trade BARRIERS TO WORLD TRADE Mr. Brown is enthusiastic when he indicates that the potential for trade is there at the world level. But, he has to add, there are also more barriers to product flows at the world level. Movement between countries is more difficult than movement between regions or between the states. Mr. Brown wants to make sure Jeremy recognizes that the potential is present at the world level. The barriers to trade at the international level are both DXP01765 —UN—10SEP10 political, social, and economic in nature. Over time, the economic barriers may eventually resolve themselves. Some of the political and social barriers may never disappear. FEAR OF SHORTAGES Most of the political barriers to trade come from desires Fig. 15 — Some argue we need protection against foreign competition to be self-sufficient and/or to protect domestic industries. Countries, including the U.S., who suffered shortages during World War II and other major world conflicts, may told that entire sectors of the economy often lobby the be very willing to forego the benefits of trade to avoid central government for protection against competition the prospects of future shortages. For example, the U.S. from other countries (Fig. 15). In the U.S., this plea subsidizes sugar production, and the subsidies and price for protection comes from the textile mills, the shoe support programs keep the U.S. price of sugar well above manufacturers, the steel mills, the auto industry, and the world market. But there is no major public outcry of the producers of almost any storable and transferable opposition. During World War II, sugar was one of the product. Even the cattle industry, a producer of perishable products that was rationed by the government because products, has sought protection. In the early 1990s, some access to foreign producers was cut off. To date, society in the U.S. sheep industry were calling for protection seems to be saying that this barrier to trade is okay. Other against imports of lamb from New Zealand. often costly price support programs have continued with The economic dimensions of the arguments are apparent no major widespread objections. Jeremy sees that the upon examination. Advocates of protective tariffs, taxes, issues are very complex at the world level. or quantity quotas on imports point to the economic Access to important food grains was important to turmoil that would be associated with the failure of an European countries during World War II. Countries in the entire sector. What would happen, the advocates ask, if EEC, countries such as France, have exhibited a clear the U.S. steel industry collapsed? Who is being served? willingness to pay a heavy price in the form of subsidized Similar concerns are voiced about the auto industry, and wheat and grain production to ensure the shortages massive government subsidies were extended in the will not occur again. In the past 30 years, several EEC 1980s to keep Chrysler from going broke. At least part of member countries have gone from heavy importers of Chrysler's problem was tough competition from Japanese wheat to large exporters of wheat. National security and auto makers. self-sufficiency were seen as most important. One of the Newly developing countries often protect industries just most difficult areas in the GATT negotiations of the early beginning from outside competition. These new industries 1990s was the reluctance of some of the ECC countries may be vital to creating new employment within the to reduce their subsidies to wheat producers. Japan also country or providing products using less inferior domestic suffered severe food shortages during WW II and the resources. Whatever the rationale, import quotas or Japanese are strongly in favor of continued subsidies to high import tariffs are often used by newly developing rice farmers and restrictions on rice imports. economies to protect domestic industries. PROTECTIONISM Another form of protectionism emerges in producers' Mr. Brown indicates that there are countless other concerns about the flight of technology. Grain producers, examples of barriers to trade that are rooted in national for example, have often complained about the exporting security and self-sufficiency issues. In virtually every of technology to Brazil or to other countries. Foreign industrialized country, there are examples of insisting on producers, it is argued, are using U.S.-developed producing a crop or a product, in spite of the possible production technology to produce products that compete inefficiency of the process, for “security” reasons. in the world market with U.S. producers. The charges are especially emotional when public or private U.S. concerns Protectionism, the protecting of a domestic industry, is a have as their objective the enhancing of production political issue that has economic overtones. It is also a efficiency in other countries. widespread barrier to specialization and trade. Jeremy is Continued on next page OUO1023,0002D13 -19-24FEB11-1/2 12-19 090117 PN=208  International Trade Jeremy can see that any barriers to the free flow of be placed upon the producers in other countries and product in world trade have the potential to block the thus may gain an advantage (absolute) in production. workings of the marketplace that would tend to move For instance, U.S. farmers with highly erodible cropland countries toward specialization and trade. Until the early must implement a conservation plan to obtain any federal 1990s, Japan had specific quotas in place to constrain benefits (e.g., crop insurance, operating loans, disaster movement of beef into Japan. The objective, apparently, assistance). This conservation plan is written to prevent was to protect the fragile Japanese beef industry. excessive soil erosion and damage to water and air quality. Brazil, with many soil resources more erodible The EEC countries have subsidized wheat and grain than those in the United States, has no such requirement. production by guaranteeing their farmers returns nearly double the world price. The rationale for these subsides is In Japan, there are many structural impediments to trade. to maintain the current structure of agriculture in Europe. The markets are highly compartmentalized, with each step The Europeans value the landscape with many small in the market process clearly delineated. One group of farms surrounded by hedgerows and have a strong desire laborers is required to unload the ships, another to move to keep them. In recent years they have spent nearly the cargo to the warehouse, still another to move the cargo $50 billion in subsidies to maintain the rural landscape. to a wholesale outlet, etc. Each of these steps increases Until recently Canada had large transportation subsidies the cost of the item until it reaches the final consumer. for moving goods in and out of the central provinces. Not only does the process reduce the competitiveness of These subsides were necessary to establish and maintain foreign goods, it also reduces the demand of the goods as industries in the Canadian interior that were competitive a result of the artificially higher prices. with industries around the globe with better access Countries in Europe impose restrictions on the imports of to markets. Throughout the world there are complex fruits and vegetables which require that these products subsidies, quotas, tariffs, and other politically based be identified by production location, the type of practices barriers to world trade that are entrenched and difficult to used, any chemicals added, and a whole list of other remove. While trade will generally benefit the societies requirements that make it difficult for newly developing who trade, there are often losers on both sides of the countries to comply. The EEC also has many restrictions in trade initially. How the losers are dealt with and how much place that are based upon their own beliefs regarding the political power they wield often determines whether free safety of foods that are at odds with the findings of science. trade will occur. The elimination of barriers to trade must include those Mr. Brown notes that the discussion so far has been that distort price as well as those that prevent free trade related to “free” trade and that “fair” trade is also a major through some other sort of non-price barrier. However, concern for U.S. industries and agriculture in particular. the elimination of these barriers is only a first step to fair Even if all subsidies, quotas, tariffs, and the like are trade. Free and fair trade will require the absence of removed such that free trade is obtained, the trading price and non-price trade barriers and a consistent set of may not occur along the lines that may be suggested science-based rules and regulations that are uniformly by comparative advantage because it is not fair trade. applied to all market participants. Farmers and ranchers in the United States face many regulations and restrictions on production that may not OUO1023,0002D13 -19-24FEB11-2/2 12-20 090117 PN=209  International Trade TARGET PRICE AND MARKET PRICE in GATT negotiations argue that the U.S. producers really look at the target price when making their decisions. They In the 1950s and 1960s, U.S. policies made participation do not look at the cash market price, the price that is in world trade difficult. With price of key storable tied to the world price, when deciding whether to keep commodities such as corn and wheat supported at some resources in corn or wheat production. percent of parity tied to a base period, price in the domestic U.S. market was supported at levels above the equilibrium Jeremy can see that the criticisms have merit. Recent or market-clearing price in the world market. This was actions by the U.S. to gradually lower the target price an interference with the workings of the marketplace, appear to be unspoken acknowledgements that the U.S. precisely like that discussed in the chapter on marketing. policy does constitute a subsidy and a barrier to world Exporters had to be subsidized to ship product in world trade. The political motivation has been to stabilize the trade, and there existed what was called a “two-tier pricing U.S. agricultural sector and protect the viability of the system.” Surpluses were held in storage, used in federal so-called family farm. If the target prices continue to fall in food aid programs or, occasionally, destroyed. the wake of the GATT negotiations, Jeremy can see that there will be a political issue if those lower prices start to On paper, the farm bills of the 1980s and 1990s did threaten the smaller single-family farms in the U.S. not appear to interfere with world trade, but Mr. Brown suggests that first impression is deceiving. Discretionary It is not just political moves that shape the nature of authority afforded the Secretary of Agriculture allowed the world trade, however. Basic economic forces are always legislatively mandated loan price to be dropped to below at work, forces that may be influenced by the political world price levels, but eligible producers receive more realities. The discussion moves to consideration of some than the loan price. A deficiency payment is paid if the of these important economic issues. cash market is below the legislated target price. As recently as 1991, the target price for corn has been set at $2.75 and the target price for wheat at $4.00. Critics OUO1023,0002D14 -19-24FEB11-1/1 ECONOMIC ISSUES BALANCE OF TRADE Mr. Brown notes that the balance of trade is a much watched and much debated economic issue. When the balance of trade is negative, then the value of goods being imported exceeds the value of those goods being exported. In very basic terms, this means the U.S. DXP01766 —UN—10SEP10 consumer is spending dollars to support economic activity in other countries. If there is in fact specialization and trade, there will be significant imports of some food and fiber products into the U.S. from some other country that has a comparative advantage in production. An example is the long-standing importation of processing quality beef that is so widely used in processed meat products in the U.S. Australia, with lower land values and lower wage Fig. 16 — The balance of trade for Agriculture is positive rates, can apparently produce this product cheaper than the U.S. Fig. 16 provides data that Mr. Brown uses to show the But a continued negative balance of trade, a common balance of trade for agricultural commodities across a occurrence in the U.S. for decades, has economic recent 10-year period. The levels are all positive and are implications. U.S. dollars flowing to other countries can often quite large. Clearly, the agricultural sector makes a increase the supply of dollars in the world market and major contribution toward keeping the U.S. balance of reduce the dollar's price or exchange rate (its value trade at acceptable levels. relative to other currencies). Higher interest rates can result as the marketplace and the central government seeks to attract those U.S. dollars back into the U.S. Therefore, there are both economic and political reasons to worry about the balance of trade. Continued on next page OUO1023,0002D15 -19-24FEB11-1/2 12-21 090117 PN=210  International Trade In Fig. 17, Mr. Brown shows his record of the balance of trade for all trade across the same 10-year period. The news is bad. If it were not for the agricultural sector, the picture in Fig. 17 would be even more bleak! Jeremy is excited about this information. He identifies with the agricultural sector, and he sees that there is a very positive story to tell! It is, they both agree, extremely important that the world DXP01767 —19—10NOV10 market be open to U.S. agricultural products. In the world arena, there are few sectors of our economy in which the U.S. has the strong comparative advantage that it enjoys in agriculture. This is one of the reasons the move in farm policy in the U.S. is toward programs that allow the U.S. to compete in the world markets. The U.S. economy badly needs the contribution the agricultural sector makes to Fig. 17 — The balance of trade for all U.S. trade is negative the overall balance of trade. Another economic force that is important in international the world financial markets. Jeremy recalls that earlier trade is the exchange rate of world currencies. Since in the chapter, there was discussion of exports as the the early 1970s, the world economy has moved toward primary source of the risk and uncertainty facing U.S. “floating” currency rates. What this means is an exchange producers. Much of that risk comes from fluctuating rate that is tied to demand and supply for a particular exports. The variable exchange rate for the U.S. dollar is, currency. in turn, a factor in the export picture. Every analyst of the EXCHANGE RATE grain, oilseed, fiber, and meat markets keeps a wary eye on the exchange rates for the U.S. dollar. A varying exchange rate has significant implications to demand for the products of a particular country. This is Overall, the U.S. economy needs a strong U.S. dollar. especially true for agricultural commodities where the U.S. When economic activity is strong and the U.S. economy is often in competition with a number of other potential is growing, the dollar is strong or high relative to other supplying countries. currencies. Investors around the world see the U.S. economy as a safe place to invest and want to hold part To illustrate, Jeremy is encouraged to consider the of their wealth in U.S. dollars. This adds strength to the situation where Canada and the U.S. are trading. Canada dollar and tends to keep U.S. interest rates, the cost of is one of the major trading partners with the U.S. In recent money in the U.S., relatively high. But a strong U.S. dollar years, the Canadian dollar has traded within a broad is not what the U.S. farmer always wants to see if export range of exchange rates from $0.75 to $0.90 in U.S. activity in corn or some other key crop is needed to boost dollars. A move by the U.S. dollar from a $0.90 to a $0.75 market prices. exchange rate means it takes $1.33 Canadian dollars ($1.00 divided by $0.75) instead of $1.11 ($1.00 divided Mr. Brown and Jeremy agree that study of exchange rates by $0.90) Canadian dollars to buy $1 worth of U.S. goods. is thus a way to identify the obvious interrelationships This is effectively a 20% increase in the price of U.S. between the overall economy and the agricultural sector. products, and Canadian buyers look to other suppliers. It is also apparent why agricultural policy is increasingly concerned about impacts on the overall budget and the The same thing happens when the U.S. dollar changes overall economy. Finally, with the importance of the relative to the Japanese yen or the German, and Italian balance of payments and exchange rates, it is apparent Euro. The “price” of U.S. agricultural products changes, why the GATT negotiations increasingly deal with the not because of changes in the underlying supply-demand farm sector. Mr. Brown suggests it is time to extend the balance but because of the fluctuating exchange rates in discussion to cover the GATT negotiations. OUO1023,0002D15 -19-24FEB11-2/2 12-22 090117 PN=211  International Trade GENERAL AGREEMENT ON TARIFFS AND early 1990s. Among the many proposals dealing with TRADE (GATT) agricultural commodities was one by the U.S. that essentially calls for the elimination of any policy that would The GATT emerged after World War II to help bring order block or distort trade for all commodities. The changes to the international economy. The basic idea was to would be incorporated across a 10-year period. encourage trade between countries by setting up some rules. The rules lay out the rights of the various countries Other participants in GATT wanted even more rapid and also identify ways in which governments can protect removal of impediments to trade. But there was no domestic markets. easily reached universal agreement. One of the tough issues was the wide range of domestic policies toward A “most favored nation” provision is important. Actually, agricultural commodities. The U.S. policy is designed to the provision is a way of stopping discrimination. A subsidize farmers directly. This approach would mean that country is supposed to offer everybody the same trade U.S. farmers would face some exposure to world markets. program it provides to its best trading partner(s). If production stays high, it would mean lower relative prices over time and the related need for increased Throughout the negotiations, Mr. Brown indicates subsidies to keep U.S. farmers in business. that there have been efforts to restrict or limit tariffs or other levies on imports. The first three GATT rounds The European community (EEC), in contrast, seeks (Switzerland in 1947, France in 1949, and the United to keep its complex-appearing system of dual pricing, Kingdom in 1950-’51) did not pay much attention to variable levies, and export subsidies. The two positions agricultural commodities. Most of the efforts were aimed are in conflict, and it is the confrontation between the U.S. at reducing tariffs on non-agricultural commodities. and the EEC that has blocked full realization of the GATT objective of bringing agriculture fully into the agreements. Agricultural production and agricultural surpluses started to get considered in the 1950s. The security and Perhaps the most significant result of all the prolonged protectionism issues already discussed started to appear. discussions is the growing recognition of how important The fourth GATT round was located back in Geneva, domestic farm programs are to international trade. Jeremy Switzerland, in 1955-’56 and this round of negotiations did can see that detailed coverage of the GATT negotiations deal with agricultural products. Every round of negotiations is not needed to recognize that it is the domestic farm since the 1955-’56 round has made some attempt to deal programs in the U.S., the EEC, and other countries that with the barriers to trade for agricultural commodities. are blocking progress toward freer trade. The benefits of trade are being held hostage by the multitude of complex Mr. Brown indicates that the most recent round in GATT and often inconsistent farm programs and farm policies is the Uruguay Round of GATT, which was started in around the world. September of 1986. Negotiations continued into the OUO1023,0002D16 -19-24FEB11-1/1 12-23 090117 PN=212  International Trade SUMMARY likely to be a beneficiary. The technology developed in the U.S. in the land grant university system and other publicly Mr. Brown pauses, collects his thoughts, and seeks and privately supported research efforts may keep the to summarize all this for Jeremy. Agricultural trade, U.S. farm sector out front. But to get to that position, he observes, is being influenced by a growing domestic policies will have to change. The subsidies to the interdependence between the economic well-being of U.S. farm sector are likely to be reduced. The U.S. farm countries of the world and domestic economic policies. sector moving into the 21st century is, therefore, likely to The benefits from following the dictates of the important be different because of the importance of international economic principle of comparative advantage are present trade. Mr. Brown suggests there will be fewer farms, with but may be difficult to realize for security and political the average size much larger than current farms and that reasons. farmers will increasingly be producing for a world market. Domestic farm policies that stabilize and support domestic Mr. Brown and Jeremy agree that what happens is prices or subsidize producers interfere with the natural important to the U.S. and to other countries. The benefits workings of the marketplace. Jeremy can see that this of trade constitute a tremendous economic incentive for is a key point. Economic policies designed to influence change. In the long run, those benefits may do more to the trading level of currencies also have implications to bring about change than all the well-intentioned efforts of export demand. Technology, the source of the efficiency countries in the world community. that brings the benefits of trade should not be stopped from flowing around the world. It is clear to Jeremy that Jeremy walks away from the discussion much better Mr. Brown is fully aware of just how sensitive these issues prepared to report back to his class. In addition to all the can be and how difficult the conflicts are to get resolved. information he has gathered, he knows another change has occurred. He will always be much more serious about What the future holds for the U.S. farmer in the the topic of international trade because he sees how international arena is not clear. Mr. Brown believes that important it is to the people of every country in the world. if the GATT negotiations can be a complete success in reducing the impediments to trade, the U.S. farm sector is OUO1023,0002D17 -19-24FEB11-1/1 12-24 090117 PN=213