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9a.US AGRICULTURAL TRADE ROLE

& BACKGROUND

Larry D. Sanders

Fall 2005

Dept. of Ag Economics Oklahoma State University

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BASIC PROPOSITIONS OF TRADE

1. SCARCITY--Trade based on relative scarcity of factors of production

2. PRICES--Relative scarcities lead to different relative prices within countries if no trade (autarky)

3. PROFIT--Different relative prices lead to opportunities for profit with trade

4. SPECIALIZATION--Flow of trade leads to longrun adjustment within domestic economies, leading to increases in export specialization

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BASIC PROPOSITIONS (cont.)

5. PROFIT--Specialization leads to increased profit

6. INCOME--Fundamental Proposition:

Increasing trade leads to increased income

7. ECONOMIC GROWTH--Increased income provides additional capital for domestic investment

8. STANDARD OF LIVING--Increased domestic investment leads to more economic growth, & thus, higher standard of living

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AG EXPORT BOOM OF THE 1970s US AGRICULTURAL TRADE BALANCE ($mil/FY; ag

product only)

EXPORTS INCREASE

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1960 1965 1970 1975 1980

$million

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AG EXPORT BOOM OF THE 1970s: SOURCES

HIGH OIL PRICES & FOREIGN ECONOMIC GROWTH

EASY CREDIT SOVIET UNION IMPORTS CROP SHORTAGES U.S. DOMINANCE WEAK U.S. $

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AG EXPORT BOOM OF THE 1970s: CONSEQUENCES

INCREASED FARM INCOME HIGHER COMMODITY & FARM LAND

PRICES NEW INVESTMENT & INCREASED

PRODUCTIVITY AGRICULTURAL TRADE SURPLUS

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AG EXPORT BUST OF THE 1980s US AGRICULTURAL TRADE BALANCE ($mil/FY; ag

product only)

EXPORTS GENERALLY DECLINE

05000100001500020000250003000035000400004500050000

80 81 82 83 84 85 86 87 88 89 90

$million

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AG EXPORT BUST OF THE 1980s: CAUSES

STRONG $ WEAK WORLD ECONOMY WORLD DEBT PROBLEMS EXPORT COMPETITION TRADE BARRIERS

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AG EXPORT BUST OF THE 1980s: CONSEQUENCES

GLOBAL RECESSION & LOWER OIL PRICES

DECLINING MARKET GROWTH PROTECTIONISM STRONG U.S. $ & ROLE OF FARM

PROGRAMS EMERGENCE OF EC AS MAJOR

EXPORTER REDUCED FARM INCOME

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AG EXPORT BUST OF THE 1980s: CONSEQUENCES: (cont.)

U.S. GRAIN SURPLUS LOWER COMMODITY PRICES REDUCED FARM LAND VALUES FARM FINANCIAL STRESS

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AG EXPORT BOOM OF THE 1990sUS AGRICULTURAL TRADE BALANCE ($mil/FY;

ag product only)

0

10000

20000

30000

40000

50000

60000

70000

91 92 93 94 95 96 97 98 99 0

EXPORTS

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AG EXPORT RECOVERY OF THE 1990s

MULTILATERAL AGREEMENTS DOMESTIC INTERVENTION ECONOMIC GROWTH SELF-SUFFICIENCY UNCERTAINTY MATURING DEVELOPED MARKETS DEVELOPING & NEWLY EMERGING

MARKETS POTENTIAL FOR INSTABILITY

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Value-Added Exports

More Employment/Income than bulk commodities

Job/Economic Activity Retention Economic Growth Contribution Greater

than Non-Ag Sectors 1960-1990: 9X increase US share less than 10% Half of US ag exports are value-added Trend increasing

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AG EXPORT BOOM-BUST CYCLE? US AGRICULTURAL TRADE BALANCE ($mil/FY; ag

product only; 5-yr data)

EXPORTS INCREASE--cyclically

0

10000

20000

30000

40000

50000

60000

70000

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SUMMARY Export boom-bust cycle

– Exists over past 30+ years– Export trend remains up

More market-oriented Competitiveness important Protective response Trade future uncertain

– Trade agreements seem to moderate cycle– Trade talks uncertain

Lessons for agricultural producers, agribusiness & rural communities

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READING/SOURCES

Ahearn, R.J. “An Overview of the International Trading Environment”, Managing Trade Relations in the 1980s. Rubin & Graham, eds. Allanheld Pub., 1983.

Drabenstott, M. et al. “The Latin American Debt Problem & U.S. Agriculture”, Economic Review, Federal Reserve Bank of Kansas City, July/Aug 1988.

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READING/SOURCES (cont.) Henneberry, D. et al. “A Weaker Dollar & U.S. Farm Exports:

Coming Rebound or Empty Promise?”, Economic Review, Federal Reserve Bank of Kansas City, May 1987.

Jackson, J.H. The World Trading System. Cambridge: MIT Press, 1989.

Rosson, P. International Marketing for Agribusiness: Concepts & Applications. GEMS, TAMU Press, 1994.

Southern Extension International Trade Task Force. Southern Agriculture in a World Economy. Department of Agricultural Economics, Oklahoma State University.

USDA, FATUS Series (annual data).