Role of international politics on agri‐food trade: Evidence from US–Canada bilateral relations

A well‐functioning trade relationship between Canada and the United States is crucial to the economic vitality of the Canadian agri‐food industry. However, agri‐food trade is more susceptible than other sectors to political interventions. The Trump presidency has strained Canada–US relations and his trade policy actions have significantly increased trade restrictions and trade policy uncertainty and undermined the rules‐based global trading system. We examine the pattern of agri‐food trade between the two countries and find that the upward trajectory of bilateral agri‐food trade ended in 2013. Although this flatlining predates the Trump administration, we show that Trump increased trade policy uncertainty starting in 2017 and likely impacted further expansion of trade. We examine what might change under the Biden presidency and argue that the new administration is likely to restore strong relationships with allies and work to rebuild important international institutions such as the World Trade Organization (WTO). Although protectionist forces will continue to impact bilateral agri‐food trade, we expect closer political ties between a Biden administration and the Canadian Prime Minister. This should have a positive effect on the Canadian agri‐food industry by reducing trade uncertainties, thereby increasing agri‐food trade between Canada and the United States.     

Introduction to the policy articles on Trump to Biden: Implications for Canadian Agriculture

President Biden was sworn in on January 20, 2021 after a 4‐year term by President Trump. Certainly, Trump's norm breaking presidency impacted Canada in significant ways and the agricultural sector was no exception. In this issue, we have a set of four short articles discussing the possible implications on Canadian agriculture of transitioning from a Trump to Biden presidency. Issues related to Canada‐U.S. agricultural trade, political norms and uncertainty, U.S. domestic support, participation in trade agreements, and U.S.‐China relations are all considered.     

A new president in the White House: implications for Canadian agricultural trade

Canadian agricultural trade has experienced several volatile periods over the past 15 years. The Great Recession (2007–2009), the 2015–2016 global trade slowdown, unilateral policy actions by the United States against key trade allies and the multilateral system more generally, and the impacts of the Covid‐19 pandemic are among the most significant events during this period. Given the close integration of Canadian and US agricultural markets, the recent US election is likely to again impact the relative competitiveness of Canadian agricultural exports. While many observers suggest President‐elect Joe Biden will return to normal times regarding multilateral cooperation with key allies and international institutions such as the World Trade Organization, the new administration is likely to face headwinds given the significant fraying of ties with key trading partners and allies due to disruptive actions taken by his predecessor. This article provides an overview of potential implications of a Biden administration for Canada's agricultural trade. We start by reviewing recent trade shock events affecting Canada's agricultural trade with a particular focus on trade actions taken by the United States. Relevant components of the President‐elect Biden's platform, considerations affecting the implementation of this platform, and the implications of this for Canadian agricultural trade are considered.     

The impact of EU trade preferences on the extensive and intensive margins of agricultural and food products

In this article, we study the trade creation effects of EU preferential trade agreements (PTAs) in the agriculture and food sectors for a large sample of developing countries in the period 1990–2006. We investigate the extent to which the PTAs affect trade through the extensive margin—number of exported products—or the intensive margin—volume of existing products. We use a gravity framework in a panel data setting, and different estimators to deal with the issues of zero trade flows and the presence of an upper bound in the dependent variable. The results show that EU PTAs positively affect the extensive margin in agricultural trade, but not in processed foods. As regards the intensive margin, the effect is driven by the role of tariffs alone, whereas the other provisions of PTAs do not exert any other significant impact on agricultural or food products.     

US farm support under a Biden administration: Plus ça change,plus c'est la même chose?

During the Trump administration, there has been an unprecedented increase in the level of domestic support provided to US agricultural producers. Direct farm supports, including price and income support payments, federal crop insurance, and supplemental assistance to compensate losses due to the trade war with China and the pandemic, have accounted for more than one‐third of net farm income. Those payments have threatened to push the United States over its World Trade Organization (WTO) domestic support obligations and increased its vulnerability to potential dispute settlement challenges in the WTO. The incoming Biden administration will likely bring a new focus to repurpose farm subsidies to provide environmental benefits, such as reduced greenhouse gas emissions, but to achieve those reforms they will need to convince a US Congress that has historically been prone to maintaining the status quo.     

Impacts of trade liberalization in Canada's supply managed dairy industry

Trade is an integral part of the Canadian economy. The main institutional drivers governing trade are bilateral and multilateral agreements outlining permissible trade distorting measures. Since its inception in 1972, Canada's supply management system has remained protected throughout trade negotiations. The system appears, by any economic measure, to be having an increasingly disproportional influence in recent trade negotiations. However, trade agreements serve not only to maximize social surplus, but also to maximize some measure of political welfare. Canada has recently negotiated three prominent trade agreements: the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) came into effect in the latter part of 2017; the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into effect at the end of 2018; and the Canada-United States-Mexico Agreement (CUSMA) could come into effect in 2020. Collectively, these agreements have guaranteed increased market access for fresh and processed dairy products. We build a spatial partial equilibrium model of the Canadian dairy industry consisting of three regions and 10 commodities to assess the individual and cumulative effect of these trade agreements. We pay particular attention to the institutional drivers within today's dairy sector: milk protein isolates; component pricing, including Class 7; and differential demand growth. We find that the aggregate impacts are: (a) a 1.4% decrease in the marginal retail price; (b) a 4.8% decrease in the blended producer price; and (c) an overall increase in social welfare of 7.8%. Worth noting, the decrease in producer surplus varies from 0.7% in the western region to 1.5% in Ontario. Our results may be relevant to future negotiations as well as the publicly promised compensation package for dairy producers.     

A Framework for Evaluating Non-Tariff Barriers to Trade Related to Sanitary and Phytosanitary Regulation

Under recent trade agreements, a two part science and policy test is used to evaluate whether a country's sanitary or phytosanitary regulatory regimes constitute illegitimate non-tariff barriers to trade. We present a framework for operationalising this test, focusing on how the SPS regime affects trade flows through differences in compliance costs, which in turn depend on the level of regulatory rapprochement between trading partners.     

Implications of the Comprehensive Economic and Trade Agreement for Processed Food Markets

Canada and the European Union (EU) recently completed the Comprehensive Economic and Trade Agreement (CETA) to liberalize bilateral trade. Processed food trade between Canada and the EU is one of the fastest growing markets, in spite of large trade restrictions due to high tariffs and egregious nontariff barriers (NTB). The processed food sector is characterized by firms which differ in size, productivity, produce differentiated products, and engage in monopolistic competition. We implement a four‐region (Canada, the EU, the United States, and the Rest of the World) model of the processed food industry, incorporating these firm characteristics to study the effects of CETA. The results show Canadian and EU bilateral trade flows expand, the number of exporting firms rises, and net welfare in both these countries increases. Though CETA does not liberalize NTBs, we examine the impacts of a 40% cut in NTBs to highlight the benefits that would have accrued had CETA also covered NTBs. Under this scenario, the trade flows would have expanded significantly, and, more importantly, Canadian and EU welfare would have risen by 11.8‐ and 39.4‐fold, respectively. Since CETA excludes the United States, the U.S. processed food industry loses due to greater competition in Canadian and the EU markets, and the net U.S. welfare declines.     

Effects of Regional Trade Agreements on Trade in Agrifood Products: Evidence from Gravity Modeling Using Disaggregated Data

The recent proliferation of regional trade agreements (RTAs) has intensified the debate on their merits. This study contributes to this debate by analyzing trade creation and diversion effects of the North American Free Trade Agreement (NAFTA) on trade in six important agrifood products. An extended gravity model is estimated using pooled data and generalized least squares methods. The result shows that the share of intraregional trade is growing within NAFTA and that NAFTA has displaced trade with the rest of the world. While NAFTA has served to boost trade among its members, it reduced the degree of openness to trade with nonmembers.     

NORTH AMERICAN MALTING BARLEY TRADE Differences in Quality and Marketing Costs

Differences between U.S. and Canadian marketing policies in malting barley have been identified as potential sources of trade distortions. Most important are issues related to quality control, yield differentials between feed and malting varieties, and differences in handling costs. This study analyzes effects of changes in selected marketing policies on trade flows and prices in the North American malting barley sector using a mathematical programming model. Simulation results illustrate impacts of relaxed variety release requirements, increased selection rates for malting barley, reduced Canadian handling costs and the effect of increased Canadian exports of malting barley to offshore markets. The results quantify effects of these strategic issues on both the United States and Canadian barley sectors.     

The Impact of Trade Liberalization on the International Oilseed Complex

One approach to trade liberalization is the zero-for-zero sectoral approach which involves agreements to eliminate export subsidies, import tariffs, and export taxes in a sector. This article provides an assessment of the impact of border trade liberalization on oilseeds and oilseed products trade. The analysis suggests that under all of the scenarios examined, North American oilseed crushers and oilseed producers gain from trade liberalization. The exact size and the distribution of these gains depends on the number of countries that participate in trade liberalization. The results suggest that the United States and Canada would gain from the adoption of the zero-for-zero proposal.     

Agriculture in the United States,Mexico, Canada Agreement: Agreeing to keep things pretty much the same

North American Free Trade Agreement (NAFTA) was referred to by U.S. President Trump as one of the worst trade deals ever made. Given this billing, one might have expected the result of its renegotiation to be a major change to the trading relationship between the United States and Canada. The new United States, Mexico, Canada Agreement (USMCA), however, retains a great deal of its predecessor. This is particularly true for agricultural trade. Canadian market access into the United States remains virtually unchanged. No major domestic regulatory changes were agreed to by Canada. While there were concessions made on market access for U.S. products into Canada's heavily protected sectors where the supply management policy applies, they do not appear to threaten the system. While the value of the compensation has not yet been announced, compensation for losses that will be suffered by farmers producing under supply management is agreed in principle. The USMCA is an agreement to keep things pretty much the same.     

Agricultural Trade Liberalisation in the 21st Century: Has It Done the Business?

Based on a novel, detailed, time‐consistent tariff database taking account of import protection developments in the agricultural sector since 2001, we propose a statistical decomposition of the changes in the various types of tariffs. The results show that the multilateral system has played a limited role in trade liberalisation over the period. Many countries have continued to apply much lower tariffs on agricultural products than their WTO ceilings. Moreover, there has been substantial unilateral dismantling of tariffs over the period, so that much of the liberalisation took place outside WTO and regional agreements. The number of regional trade agreements has surged, but their impact on applied agricultural tariffs has been limited. Finally, we investigate the tariffs, trade and production implications for food and agricultural products of two extreme scenarios in the future development of trade negotiations: an ambitious surge of regional agreements and a trade war within the WTO context.     

特惠贸易协定对果品进出口贸易的影响——基于关税削减的实证分析

构造并运用放松约束的变量系数PCS引力模型,从关税削减角度,分析双边自由贸易区建设对我国水果和坚果产品进出口贸易的影响。研究发现:双边贸易自由化给果品产业发展带来的机遇与挑战并存,关税削减对中国果品进口贸易的影响大于对出口的影响;正在考虑建设的自由贸区一旦建成并在关税上做出较大让步,会有力地促进中国的果品进出口贸易;中国与特惠贸易协定签约国之间的果品贸易中,贸易创造效应与贸易转移效应并存,非关税的贸易便利化措施是中国与部分签约国果品贸易发展的主要推动力。     

Partial Market Liberalization and the Efficiency of Policy Reform: The Case of the European Dairy Sector

This article analyzes the efficiency of partial market liberalization and policy reform with an application to the European dairy sector. In a second best world, partial moves toward market liberalization are not always efficiency improving. We develop a general equilibrium model to investigate the efficiency implications of discrete changes in government policy. The analysis covers price and quantity instruments used in both domestic and trade policy. We derive simple conditions under which partial market liberalization is efficiency improving. We apply the approach to agricultural policy reform in the European dairy sector and identify market liberalization scenarios that are "not" efficiency improving.     

Regional trade agreements and trade in agri-food products: evidence for the European Union from gravity modeling using disaggregated data

The proliferation of regional trade agreements in recent years has intensified the debate on the desirability of these agreements in themselves and their coexistence with multilateral free trade under the WTO. This study contributes to this debate by analyzing trade creation and trade diversion effects of the European Union on trade flows of six major agri‐food products from 1985 to 2000. An extended gravity model is estimated employing pooled data and generalized least squares methods. The results show that the developments in the EU since the mid‐1980s have served to boost agri‐food trade significantly among the members. Some of the growth in intra‐EU trade in agri‐food products came at the expense of nonmembers as the EU reduced the degree of relative openness to trade with nonmembers during this period and diverted trade from the rest of the world into the intra‐EU channels.     

A Spatial Equilibrium Analysis of U.S.–Canadian Disputes on the World Softwood Lumber Market

This paper utilizes a world spatial equilibrium model to examine the effects of U.S.–Canadian softwood lumber disputes on U.S., Canadian, and other exporters' and importers' lumber markets. Results show that the U.S. import tariff on Canadian softwood lumber impacts prices, supply, demand and trade flows not only in the United States and Canada but also in the other countries. Though the goal of U.S. trade restriction is to limit imports from Canada and protect its producers, the United States cannot fully accomplish this goal as non-Canadian exporters fill the void left by the reduced imports from Canada. Canadian producers lose from the U.S. policy, but their loss is mitigated as Canada redirects its exports to other importers. Importing countries such as Japan and the European Union benefit from the U.S. trade restrictions as Canada seeks to sell its softwood lumber to these countries.     

A POLICY ANALYSIS OF EXCHANGE RATE FLUCTUATIONS ON THE RURAL SECTOR: THE EXPERIENCE OF THE CANADIAN RED MEAT INDUSTRY*

Since 1976 the Canadian dollar has devalued by more than 20 percent vis-à-vis the US dollar. Many commentators have hypothesised that the devaluation has provided substantial benefits to Canadian producers of red meat. To test this hypothesis, a policy model of the North American red meat sector is formulated which captures the exchange rate effects on both product and factor prices. The model specification and validation are presented, followed by the simulation results for a 10 percent devaluation of the Canadian dollar. The major conclusion is that the exchange rate has not been a significant factor in the determination of production, consumption and trade of red meats.     

The Utilisation of Trade Preferences for Developing Countries in the Agri‐food Sector

Both the European Union and the United States grant non‐reciprocal preferences to developing countries under the Generalised System of Preferences as well as under several regional schemes. The benefits of these preferences have recently been questioned. Several authors have pointed out the under‐utilisation of these preferences due to the constraints attached. There have been claims that rules of origin requirements and administrative costs, as well as uncertainty on eventual eligibility, have deterred exporters from using preferential regimes. We calculate various indicators of the utilisation of preferences in the agricultural, food and fisheries sector. We conclude that only a very small proportion of the imports eligible for these preferences is actually exported outside a preferential regime. The rate of utilisation is therefore high. However, the flow of imports from the poorest countries remains very limited in spite of rather generous tariff preferences, which leads to questions over the overall impact of the preferential agreements. In addition, preferential regimes overlap, and in such cases some regimes are systematically preferred to others. We use econometric estimates of the (latent) cost of using a given preference to explain why particular regimes are used. We focus on possible explanations, such as the cumulation rules (that restrict the use of materials originating from other countries), fixed administrative costs and differences in the preferential margin.     

Impacts of Australia’s free trade agreements on trade in agricultural products: an aggregative and disaggregative analysis

The importance of free trade agreements (FTAs) has been increasing as such agreements help reduce barriers to trade. This paper estimates the agricultural trade creation and export diversion effects of Australia’s free trade agreements (FTAs) at the aggregate and disaggregate levels, using the Poisson pseudo‐maximum‐likelihood (PPML) estimator. It includes 24 of Australia’s major trading partner countries comprising FTA and non‐FTA members and covers 22 years from 1996 to 2017. The heteroscedasticity robust regression error specification test (RESET) confirms the relevance of PPML over the Ordinary Least Square (OLS) estimator. Results showed that China–Australia, Korea–Australia, Australia–USA and Japan–Australia have larger trade creation effects in the agricultural sector. At the commodity level, variation in trade creation effects is estimated from the different trade agreements. Among the selected commodities, the larger effects were generated in trade in sugar and wine by the implementation of the majority of the trade agreements. Overall, the trade creation was greater than the export diversion of the FTAs. The findings of the study have implications for Australia’s future trade agreements.