ERS Report Shows that U.S. Free Trade Agreements (FTAs) Benefit Developing Countries

ERS Report Shows that U.S. Free Trade Agreements (FTAs) Benefit Developing Countries

The United States has 14 free trade agreements (FTAs) across 20 countries, the majority of which are in lower- or middle-income countries. Overall, FTAs increase trade, lower prices for consumers, and provide export opportunities for producers. As such, FTAs are usually described as beneficial to both the U.S. and partner countries. However, gains from FTAs are not always shared equally. As noted in the report, developing countries might hesitate to join an FTA with a developed country if they believe that their industries are less competitive. That is, an FTA can expose firms in the developing country to more efficient producers in developed countries, resulting in decreased sales and firm closures in the developing country. The ERS report examines whether developing countries with FTAs with the United States benefited in terms of increased trade (exports) and macroeconomic indicators before and after agreement implementation. In this article, we focus solely on their results for total agricultural exports from developing countries.

Figure 1 shows the agricultural export growth rate by U.S. FTA partner, 5 years prior to and after the agreement entered into force. Note that the figure also includes developed countries (e.g., Australia, Canada) for comparison purposes. The figure shows that Mexico’s total agricultural exports were shrinking by an average of 1.5% percent in the years prior to the North American Free Trade Agreement (NAFTA) but grew by an average of 13.6% in the years following the agreement. As the figure shows, many developing countries experienced relatively faster growth in total agricultural exports in the post-FTA period (Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Oman, Panama, Peru, and Singapore). However, several countries experienced slowing agricultural export growth (Morocco and Nicaragua), which could also indicate that resources in these countries were diverted to be used more efficiently in other sectors of the economy. Overall, the share of U.S. imports from developing FTA partner countries rose from 21.6 percent in 1989 to 31.4 percent in 2020.

Figure 1. Total agricultural export growth by U.S. free trade agreement (FTA) partner, 5 years pre- and post-agreement.

Notes: Reprinted from Ajewole et al. (2022).
Source: USDA, Economic Research Service calculation using data from Trade Data Monitor®.

For more information:

Ajewole, Kayode, Jayson Beckman, Adam Gerval, William Johnson, Stephen Morgan, and Ethan Sabala. September 2022. Do Free Trade Agreements Benefit Developing Countries? An Examination of U.S. Agreements. Report Number EIB-240. U.S. Department of Agriculture, Economic Research Service. https://www.ers.usda.gov/publications/pub-details?pubid=104854

Muhammad, Andrew. “ERS Report Shows that U.S. Free Trade Agreements (FTAs) Benefit Developing Countries“. Southern Ag Today 2(41.4). October 6, 2022. Permalink

Why is Trade Freedom Important?

Why is Trade Freedom Important?

Recently the importance of agricultural trade for the United States was discussed which accounts for over one-third of U.S. gross farm income.  However, the benefits of trade freedom or having less trade barriers go well beyond a specific industry or country as seen in the graph below.  Countries are divided into three trade freedom groups, lowest, middle, and highest.  The areas compared for each trade freedom group are higher average per capita national income, food security, political stability along with violence and terrorism, and the environment. Countries with more trade freedom have higher average per capita national income, $28,947, compared to $8,513 and $3,769 for the middle and lowest trade freedom groups, respectively.  Moreover, countries with higher trade freedom scored higher in terms of food security.  This is an interesting point as some people believe that in order to have food security most of the food must be produced domestically, which is not necessarily the case.  Countries should produce agricultural products in which they have comparative and competitive advantages and import the ones that they do not or cannot produce them year-round.

Countries with higher trade freedom experience more political stability and less violence and terrorism. Something very important for law-abiding citizens that just want a peaceful life for themselves and their families. Finally, countries with more trade freedom also have healthier environments and less polluted ecosystems.  As in the area of food security, trade freedom allows countries to be more efficient in the use of their resources by producing those products that they are competitive and import the rest.

USDA: U.S. Agricultural Exports are Projected to Decrease $2.5 Billion in Fiscal Year 2023

USDA: U.S. Agricultural Exports are Projected to Decrease $2.5 Billion in Fiscal Year 2023

Given the delay in how U.S. trade data are reported (two-month delay), the value of U.S. agricultural exports for fiscal year (FY) 2022 (October 2021 – September 2022) will not be available until November. However, the latest USDA trade outlook has projected that agricultural exports in FY 2022 will reach a record $196 billion. Which is a 14 percent increase when compared to the previous year (USDA, 2022a). With year-to-date (October 2021 – June 2022) exports at $152.5 billion (USDA, 2022b), it looks like U.S. agricultural exports for FY 2022 are on pace to reach or exceed the projected record. Although FY 2022 is projected to be a record year, the latest projections also indicate that U.S. agricultural exports in FY 2023 will be $193.5 billion, down $2.5 billion when compared to FY 2022 (See Figure 1). 

The reason for this projected decline is that the global economic outlook for 2023 is growing more uncertain. For instance, global GDP is projected to increase by 3.2 percent in 2022, a downward revision from the prior forecast of 3.6 percent, but is projected to increase by even less in 2023 (2.9 percent). The Russian invasion of Ukraine is still ongoing and continues to impose economic disruptions. The disruptions have thus far led to elevated energy prices that continue to disproportionately affect the European market. Supply chain complications have slowly abated, but spot shipping rates remain elevated compared to pre-pandemic levels. Finally, central banks around the world have begun monetary tightening cycles to combat rising inflation. While this tightening can counter inflation, it can also result in short-term barriers to economic growth and spending.

USDA is projecting lower exports of cotton, beef, and sorghum in FY 2023. But USDA is also projecting that these decreases will be partially offset by higher exports of soybeans and horticultural products. Cotton exports are projected to decrease by $1.8 billion due to drought-lowering export volumes. Beef exports are forecast down $1.1 billion due to tight U.S. supplies. Overall livestock, poultry, and dairy exports are projected at $41.1 billion, down $1.5 billion. Sorghum exports are forecast at $2.0 billion, down $700 million, on sharply lower supplies. Total grain and feed exports are forecast down $1.3 billion to $46.5 billion and wheat exports are forecast down $300 million, mostly due to an expected fall in prices. That said, soybean exports are forecast up $2.2 billion to a record $35.2 billion based on higher prices, and horticulture exports are projected to rise by $400 million to $39.5 billion as higher exports of fresh and processed fruits and vegetables more than offset a decline in tree nut exports. Exports to major destinations are essentially unchanged. U.S. agricultural exports to China are forecast at $36.0 billion, unchanged from FY 2022, and exports to Canada and Mexico are forecast at $28.5 billion each, also unchanged from FY 2022.

Figure 1. U.S. Agricultural Exports (Actual and Forecast): FY 2011 – FY 2023

Note: FY is the fiscal year (October – September) 
Source: U.S. Department of Agriculture, Foreign Agricultural Service, Global Agricultural Trade System (GATS) (2022) 

Reference

U.S. Department of Agriculture (USDA). 2022a. Outlook for U.S. Agricultural Trade: August 2022. Situation and Outlook Report AES-121, Washington, D.C. https://www.ers.usda.gov/webdocs/outlooks/104622/aes-121.pdf?v=8728.2

U.S. Department of Agriculture (USDA). 2022b. Global Agricultural Trade System (GATS). Foreign Agricultural Service, Washington, D.C. https://apps.fas.usda.gov/GATS/default.aspx

Muhammad, Andrew. “USDA U.S. Agricultural Exports are Projected to Decrease $2.5 Billion in Fiscal Year 2023“. Southern Ag Today 2(37.4). September 8, 2022. Permalink

Importance of Agricultural Trade for the U.S.

Importance of Agricultural Trade for the U.S.

Trade is very important to production agriculture in the United States. Over the last decade, 2011 to 2020, agricultural exports have accounted for over one-third of U.S. gross farm income, 33.7 percent (USDA ERS and FAS).  U.S. gross farm income ranged from $399.4 billion in 2016 to $470.3 billion in 2014 while U.S. agricultural exports ranged from $137.2 to $154.5 billion in 2015 and 2014 respectively. Total agricultural exports reached a record in 2021 at $177 billion, but gross farm income data for 2021 is not out yet.  Moreover, in terms of volume, U.S agriculture exports over 20 percent of its production.  However, for some commodities that number is considerably higher.  In 2021, 83.6 percent of the U.Ss cotton crop was exported as well as 64.8 percent of U.S. sorghum crop (Table 1).  Soybeans, Wheat, and Rice producers also depend on exports for close to half of their production.  Also, the top five crops in Table 1 are very important crops in the South.

Table 1. U.S. Agricultural Exports as Percentage of Production, 2021

Commodity Percentage of Production Exported
Cotton83.6%
Sorghum64.8%
Soybeans48.7%
Wheat 48.6%
Rice43.5%
Pork25.4%
Poultry16.5%
Corn 16.2%
Beef12.3%
Source: Production, Supply, and Distribution (PS&D). USDA, ERS

U.S. consumers also benefit from agricultural trade as they have year-round supply of food products that either cannot be produced domestically or are highly seasonal such as fruits and vegetables.  Virtually all limes and bananas consumed in the U.S. are imported and over 95 percent of the coffee consumed is not produced domestically (Table 2).  Orange juice and tomatoes are produced in the U.S. commercially, however, U.S. consumers depend heavily on imports for year- round supply of these products.

Table 2. U.S. Agricultural Imports as a Share of Domestic Consumption, 2021

Commodity Percentage of Consumer Expenditures
Limes99.9%
Bananas99.9%
Coffee95.1%
Orange Juice 57.8%
Tomatoes41.2%
Beef12.5%
Pork 7.0%
Sources: Production, Supply, and Distribution (PS&D). USDA, ERS
Food Availability System, USDA, ERS

Regardless of where the agricultural products are produced, domestically or overseas, all U.S. consumers benefit.  Table 3 shows the ranking of the top 10 countries in terms of lowest to highest percentage of disposable income spent on food at home and does not include eating out. U.S. consumers spend on average 7.1 percent of their disposable income on food which makes it the lowest out of 104 countries where data is available.

Table 3. Percent of Consumer Expenditures Spent on Food Consumed at Home, 2020.

Country/TerritoryShare of Consumer Expenditures
1USA7.1%
2Singapore7.9%
3United Kingdom9.4%
4Austria9.7%
5Switzerland10.2%
6Ireland10.3%
7Canada10.6%
8Australia10.8%
9South Korea11.6%
10Germany11.7%
Sources: ERS, USDA Calculations based on annual household expenditure data from Euromonitor International, Available at HTTP://www.euromonitor.com

Ribera, Luis. “Importance of Agricultural Trade for the U.S.“. Southern Ag Today 2(35.4). August 25, 2022. Permalink

How Important is the Phillippines for U.S. Agricultural Trade?

How Important is the Phillippines for U.S. Agricultural Trade?

Last month (July 2022), the Foreign Agricultural Service of USDA led a trade mission to the Philippines that included representatives from nearly 30 agribusinesses and farm organizations and 10 state departments of agriculture. The primary purpose of the mission was to help expand agricultural trade, increase collaboration on key issues impacting agriculture in both countries, and strengthen Philippine food security. The trade mission highlights the importance of the Philippines for U.S. agriculture. In 2021, U.S. agricultural exports to the Philippines totaled $3.6 billion making it the 7th largest foreign destination for U.S. agriculture. Most of these exports were from the Western United States ($2.5 billion in 2021) primarily comprised of wheat, dairy, and soybean meal. 

The Philippines is not as important for agricultural export sales in the U.S. South ($508 million in 2021) (See Table 1), ranking 31st among destination markets for the region. However, for certain agricultural commodities, the Philippines is very important (USDA, 2022). The major agricultural exports to the Philippines originating from southern states are reported in Figure 1. In 2021, poultry and related products were the leading agricultural export at more than $140 million. This was a significant increase above 2020 during the height of the pandemic. The next leading exports, soybean meal and pork, were valued at $132 million and $59 million, respectively. For all these products, the Philippines was the 7thlargest destination market for the U.S. South.

Table 1. U.S. agricultural exports to the Philippines, total and by region: 2018-2021

2018201920202021
$ million$ million$ million$ million
Total U.S.$3,089.7$3,004.2$3,215.5$3,554.3
U.S. Region
West2,114.82,207.62,502.72,524.5
South517.1375.6285.6508.4
Midwest385.8351.5357.2437.7
Northwest72.169.470.083.7
 
Source: USDA, Foreign Agricultural Service, Global Agricultural Trade System (GATS) (2022)

Figure 1. Top U.S. exports to the Philippines from the Southern U.S.

Note: The Southern U.S. includes the following: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.
Source: USDA, Foreign Agricultural Service, Global Agricultural Trade System (GATS) (2022)

Although the Philippines is important for U.S. agricultural trade, there is no trade agreement between the two countries. While this trade mission was an important step in the right direction, MOUs and unofficial promises are not substitutes for official trade liberalization policy. The Philippines is a founding member of the Association of Southeast Asian Nations (ASEAN), which is a political and economic union of 10 member states in Southeast Asia that includes important U.S. trading partners like Vietnam, Indonesia, Singapore, and Thailand. Other than Singapore, the U.S. has no trade agreements with ASEAN countries. This is important because non-tariff barriers (NTM’s) in ASEAN have progressed slowly. NTMs on agri-food trade in ASEAN’s priority sectors rose from 434 measures in 2000 to 1,192 measures in 2010 and to 2,181 measures in 2019, with sanitary and phytosanitary (SPS) measures making up the largest component of NTMs, accounting for about half of total measures (Suvannaphakdy and Kevin, 2021). Officially addressing these NTM’s could increase U.S. and regional agricultural exports to ASEAN countries including the Philippines.

References

Suvannaphakdy, Sithanonxay and Neo Guo Wei Kevin. 2021. “Why ASEAN Needs to Reduce Its Non-Tariff Measures on Agri-Food Imports.” The Diplomat (July 02, 2021).

US. Department of Agriculture. 2022. Global Agricultural Trade System (GATS). Foreign Agricultural Service, Washington, DC.

Muhammad, Andrew. “How important is the Philippines for U.S Agricultural Trade?”. Southern Ag Today 2(33.4). August 11, 2022. Permalink

Difference Between Inflation and Changes in Commodity Prices

Difference Between Inflation and Changes in Commodity Prices

The term inflation is commonly used to describe a general increase of prices.  However, back in the mid-1800s where the term started to emerge in the literature, it was not in reference to something that happens to prices, but as something that happens to a paper currency.  Back in those days “bank notes,” a private paper currency redeemable for a specific amount of metal, were becoming widely used. At times, banks did not have enough gold or silver to satisfy all of their claims, therefore, they “inflated” the number of bank notes in relation to the amount of metal they had.  Therefore, inflation was the fall in value of paper currency or money due to an excessive issuance of paper currency or money.  From March 2020 to February of 2022 the money supply in the US increased by 41.2 percent, or 20.6 percent per year, while average GDP growth over the same period of time was 3.7 percent (FRED, 2022).  As a reference point, money supply over the last decade had increased an average 8.2 percent per year.

On the other hand, rapid changes in commodity prices are very common in agriculture and usually is due to supply shifts.  Good weather, improved technology and political stability are some variables that shift supply to the right causing an increase in supply and a decrease in prices (Graph 1).  On the other hand, bad weather, increase in input prices and political instability or war are variables that shift supply to the left causing a decrease in supply and an increase in prices (Graph 2).  The Russia and Ukraine war has caused a supply shift to the left in many commodities such as wheat, corn, fertilizer, and oil, given that these two countries are major producers.  Therefore, as quantity supplied of those commodities decreased, prices increased.  However, these increased prices caused producers of those commodities around the world to react and produce more and now prices are on a downward trend.  Also, demand for those commodities decreased contributing to the decrease in prices.  These supply shifts happen very often in agricultural commodities without causing inflation to spike.  In fact, Asian economies are experiencing normal levels of inflation as seen in the chart by The Economist.

Dr. Milton Friedman, winner of the 1976 Nobel Prize in Economic Sciences, stated back in 1963 that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”  Dr. Friedman was right then and still is now.

Bryan, Michael F., 1997. “On the Origin and Evolution of the Word Inflation,” Federal Reserve Bank of Cleveland, Economic Commentary, 10.15.1997.

Federal Reserve Economic Data.  https://fred.stlouisfed.org. Accessed July 23, 2022.

Ribera, Luis. “Difference Between Inflation and Changes in Commodity Prices“. Southern Ag Today 2(31.4). July 28, 2022. Permalink

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