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Global Competition Made 2018 a Bad Time to Start a Trade War

John M. Crespi (jcrespi@iastate.edu) and Chen-Ti Chen (ctc@iastate.edu)

The United States is one of the largest players in the international agricultural market. With the continued growth of its agricultural output, the US agricultural sector has relied heavily on export markets to maintain its competitiveness and profitability. In fact, projections show the United States will export $137 billion in agricultural commodities in 2020 (Daugherty and Jiang 2019). However, the 2018 trade disruptions with Canada and Mexico that led to a renegotiated, but still unratified NAFTA-like treaty (the USMCA) and the presently unresolved trade dispute between the United States and China have adversely impacted US agricultural exports (Amiti, Redding, and Weinstein 2019; Balistreri et al. 2018; Sumner and Hanon 2018).1 Of concern is how such disruptions might affect the competitive structure of markets. As Balistreri et al. (2018) discuss, disruptions to US grain exports to the former Soviet Union in 1980 had long-run impacts on US export competitiveness. Likewise, as Chen et al. (2019) find, trade disruptions from the bovine spongiform encephalopathy (mad cow) disease outbreak had a severe impact on the competitiveness of US beef exports even long after markets reopened. Today, Iowa farmers are concerned about the long-run implications of the trade disruptions to exports of major importance, especially beef, corn, pork, and soybeans. In this article, we discuss a metric of the historical export performance of these commodities from 1980 to 2018 and show that the trade disruptions occur at a time when the United States is in a particularly precarious position. At the outset of the trade disruptions in 2018, Iowa farmers faced the most competitive markets they had ever faced for these commodities. The longer the disruptions continue, the harder it will be to regain market share in the future.

Consider competition in the soybean market. To say that a country has a comparative advantage in the production of a good is not to say that they are the best at producing that good. Rather, comparative advantage means that a country is better at producing that good in terms of its opportunity cost of producing something else. Even though China can and does produce soybeans, the United States has a comparative advantage in the production of soybeans because they can produce a lot of soybeans at a lower opportunity cost than China currently can. Thus, the United States ships soybeans to China and China ships, say, cell phones (its comparative advantage) to the United States. Both countries buy these products from each other for less than it would cost if they produced all of their own soybeans and cell phones for their respective domestic markets (see Balistreri 2019 for a longer discussion). If the United States and China were the only producers of soybeans, the United States would be in a very good market position.2 Obviously, the United States is not the only soybean exporter—Brazil, Argentina, Canada, Paraguay, and the Ukraine are also major players. So, what we need to know is how does the United States’ comparative advantage compare with other soybean exporters?

Economics literature commonly uses the revealed comparative advantage (RCA) index (Balassa 1977; Balassa 1986) to measure the competitive position of a country in the international market. We adopt a modified version of the RCA index by Yu et al. (2009), the normalized revealed comparative advantage (NRCA) index, to present the United States’ and other top exporters’ comparative advantages in the four agricultural commodities of interest.3

A country has a comparative advantage in a good if its NRCA is greater than zero, and it does not have a comparative advantage if its NRCA is less than zero. Likewise, NRCA indices that are higher or lower than that of another country indicate relatively competitive positions. The NRCA index allows us to study the dynamics of the United States’ international competitiveness in commodities over time.

Figure 1 presents export values and the NRCA indices from the top exporters of beef and pork. For both sectors, major exporters have generally experienced steady growth in export values since the 1980s. As of 2018, the United States has become the leader in export value in both beef and pork. Export values alone, nonetheless, do not necessarily reflect the competitiveness of the market. The graphs on the right side of figure 1 show that both the beef and pork export markets only became more competitive over time (the NRCA indices converge). Although the export values are high, the United States is not as competitive in either pork or beef as it used to be. Figure 1 shows how the mad cow disease outbreak in 2003 led to a sharp decline in US beef exports (red line). The United States has slowly begun recovering its previous competitive position in terms of comparative advantage—for both pork and cattle, the international markets are very competitive.

Figure 1
Figure 1. Beef (top) and pork (bottom) export value (left) and NRCA index (right).
Source: UN Comtrade Database.
Note: West Germany data replaces Germany data prior to 1990.

Figure 2 shows corn and soybean export values and NRCA indices. In the 1980s, the United States was arguably the dominant supplier of corn and soybeans and had a relatively strong competitive position. For corn, as the industries in other countries started to expand, the US comparative advantage dropped significantly—Argentina and Brazil even surpassed the United States when severe drought hit in 2013. We see a similar story for the soybean market with Brazil catching up by the 2000s and currently having a comparative advantage over the United States. The recent China-US trade disputes will likely only widen the gap.

Figure 2
Figure 2. Corn (top) and soybean (bottom) export value (left) and NRCA index (right).
Source: UN Comtrade Database

These graphs all suggest the United States is entering a period of trade disruptions at a time when it is facing some of its most fierce export competition. Agricultural trade is often subject to shocks from trade disputes and phytosanitary emergencies. As such, a careful design of both domestic agricultural policies as well as cross-country trade negotiations is important to maintain competitiveness in the agricultural sector. We will explore this in future APR articles as more data become available, but in terms of the United States’ competitive position in these four commodities, this may have been the worst time to enter into a trade war.

References

Amiti, M., S.J. Redding, and D. Weinstein. 2019. The Impact of the 2018 Trade War on U.S. Prices and Welfare. NBER Working Paper Series, WP 25672. National Bureau of Economic Research, Cambridge, MA.

Balassa, B. 1986. “Comparative Advantage in Manufactured Goods: A Reappraisal.” The Review of Economics and Statistics 68(2):315–319.

Balistreri, E.J., C.E. Hart, D.J. Hayes, M. Li, L. Schulz, D.A. Swenson, W. Zhang, and J.M. Crespi. 2018. “The Impact of the 2018 Trade Disruptions on the Iowa Economy.” CARD Policy Brief 18-PB 25. Center for Agricultural and Rural Development, Iowa State University.

Balistreri, E.J. 2019. “International Trade Policy: Insights from a General-equilibrium Approach.” Agricultural Policy Review Winter 2019.

Chen, C.-T., J. M. Crespi, W. F. Hahn, L. L. Schulz, and F. A. Taha. 2019. “Long-Run Impacts of Trade Shocks and Export Competitiveness: Evidence from the U.S. BSE Event.” CARD Working Paper 19-WP 594. Center for Agricultural and Rural Development, Iowa State University.

Daugherty, K. and H. Jiang. 2019. Outlook for U.S. Agricultural Trade, AES-109. USDA, Economic Research Service and Foreign Agricultural Service, August 29, 2019.

Sumner, D.A. and T.M. Hanon. 2018. “Economic Impacts of Increased Tariffs that have Reduced Import Access for U.S. Fruit and Tree Nuts Exports to Important Markets.” University of California Agricultural Issues Center, University of California, Davis.

United States International Trade Commission. U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors. Publication No. 4889. Investigation No. TPA 105-003. Washington, D.C. April 2019.

Yu, R., J. Cai, and P. Leung. 2009. “The Normalized Revealed Comparative Advantage Index.” The Annals of Regional Science 43(1):267–282.

Footnotes

1. The U.S. International Trade Commission’s (USITC 2019) own projections of the overall economic impact of the USMCA on US GDP and US employment compared with the current baseline are an increase of less than 1% each.
2. We shall leave aside the fact that China is gearing up to produce even more soybeans in the near future.
3. Chen et al. (2019) discuss the index in more depth.