The International Food Market Kohls and Uhl: Chapter 7

Introductory Remarks Compared to 2% in the 1950’s, some 15% of the world’s food supply now moves across international boundaries. The U.S. is the world’s largest exporter of agricultural commodities along with being a major importer. In 1990, 24% of U.S farm output was exported accounting for about 14% of world food exports.

Consequences of Imports and Exports Exports represent a source of market expansion for U.S. farmers. Participation in world markets provides incentives for increasing the productivity and output of U.S. agriculture, i.e., increased production efficiency. Influences the volume, price and variety of the food supply for American consumers.

Consequences of Imports and Exports Cont. Trade related commerce can contribute to the economic development of low-income countries by providing them with needed imports and with purchasing power in world markets. Trade plays a role in diplomacy and foreign relations.

Consequences of Imports and Exports Cont. Agricultural exports make an important contribution to the balance of trade. Increased trade in agricultural commodities has made the nations of the world more interdependent. This implies American farm prices have become more variable and subject to climate, economic, political, and social changes throughout the world.

Why Nations Trade The profit incentive for countries to specialize in producing certain commodities and to trade these to countries specializing in other commodities. The fundamental bases for food trade are that productive resources are unevenly distributed throughout the world.

Why Nations Trade Cont. Besides giving consumers more freedom of choice and a varying diet, trade allows consumers to indicate the appropriate products to be produced in each country.

Principle of Comparative Advantage An economic principle that holds that economic gains are to be had, in the form of reduced costs of production and/or increased standard of living, if, under free trade conditions, each nation will specialize in and export those products it can produce relatively most efficiently, by virtue of its resource endowment, and import commodities for which it has a comparative disadvantage.

Principle of Comparative Advantage Cont. Trading comparative advantage products for comparative disadvantage products is a form of indirect production. The principle of comparative advantage goes counter to the common-sense notion that self-sufficiency is best. This also suggests that trade is not just a one-for-one exchange between countries.

Remarks on Comparative Advantage Every country will have some comparative advantages and disadvantages. This is true even if a country has an absolute advantage in all goods. When a country can produce all goods more efficiently over another country.

An Example Suppose the U.S. can produce 4 bushels of wheat or 2 bushels of corn an hour. Suppose the EEC can produce 2 bushels of wheat or 3 bushels of corn an hour. The U.S. would find it in its best interest to produce wheat when allocated with only one hour of labor.

Another Example Suppose the U.S. can produce 4 bushels of wheat or 2 bushels of corn an hour. Suppose the EEC can produce 3 bushels of wheat or 1 bushels of corn an hour. The U.S. would find it in its best interest to produce corn when allocated with only one hour of labor.

Costs of Trade Transportation of goods from country to country. The frequent resource adjustment imposed by competitive world markets and changing comparative advantages. Loss of self-sufficiency and increased dependency on others.

Costs of Trade Cont. The incentive for nations to create artificial comparative advantages through subsidies or government policies that distort costs and prices.

U.S. Farm Product Exports There has been large fluctuations over the years because of changes in world economic conditions. American trade policies War and peace Changing worldwide demand for food

A Few Statistics In 1981, $44 billion dollars worth of Agricultural commodities were exported accounting for 38% of world agricultural trade tonnage. From 1981-1987 U.S. tonnage and world share dropped due to an increase in global food production and intensified competition.

A Few More Statistics In the 1990’s, grain and oilseeds have accounted for 48% of the value of U.S. farm product exports. In 1992, more than one-third of U.S. wheat, rice, tobacco, cotton and soybean crops were exported. Illinois, Iowa, Texas, California, Kansas, Nebraska, Indiana and Minnesota accounted for more than 50 % of farm product exports.

U.S. Food Imports U.S. is the world’s largest importer of farm products. About 10% of U.S. food supply is imported. Canada and Mexico are the largest exporters to America accounting for 15% of U.S. farm product imports. In 1993, the U.S. purchased 52% of its agricultural imports from developing countries.

Implications of Food Imports They contribute to a more varied and lower-cost diet for Americans. They provide other countries with the purchasing power to buy American products. Farmers frequently complain that food imports adversely affect their prices and income.

Different Types of Imports Complementary or noncompetitive imports include bananas, cocoa beans, tea, coffee, and spices. These products can indirectly compete with domestically produced substitutes. Supplementary or competitive imports include meat products, sugar, fruits and vegetables, wool, dairy products, and oilseed products.

A Few Comments Recently, the U.S. has been attempting to increase its exports of high value-added products in order to increase export sales and create more jobs in the food sector. In 1992, value-added export products exceeded bulk farm export products.

Multinational Firms These firms facilitate rapid transfer of technology, management skills, and marketing strategies around the world. They must answer the following questions: Whether to sell abroad? Which markets to enter? How to enter new markets? What production and marketing strategies to use in foreign markets?

Protectionism vs. Free Trade Trade policies range from the two extremes of protection from trade for domestic industry to free trade. Free trade rests on the belief that unrestricted trade among all nations will result in more efficient use of the world’s resources and a higher standard of living for all.

Currency Exchange Rates It is the value of the dollar in relationship to other currencies. U.S. farm product exports and imports are significantly influenced by the value of the dollar. Fluctuating currency exchange rates alter the costs and prices of a country’s imports and exports and can change the competitive position of an exporting country.