1 9a. US AGRICULTURAL TRADE ROLE & BACKGROUND Larry D. Sanders Fall 2005 Dept. of Ag Economics Oklahoma State University

2 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

3 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

4 AG EXPORT BOOM OF THE 1970s US AGRICULTURAL TRADE BALANCE ($mil/FY; ag product only) EXPORTS INCREASE

5 AG EXPORT BOOM OF THE 1970s: SOURCES F HIGH OIL PRICES & FOREIGN ECONOMIC GROWTH F EASY CREDIT F SOVIET UNION IMPORTS F CROP SHORTAGES F U.S. DOMINANCE F WEAK U.S. $

6 AG EXPORT BOOM OF THE 1970s: CONSEQUENCES F INCREASED FARM INCOME F HIGHER COMMODITY & FARM LAND PRICES F NEW INVESTMENT & INCREASED PRODUCTIVITY F AGRICULTURAL TRADE SURPLUS

7 AG EXPORT BUST OF THE 1980s US AGRICULTURAL TRADE BALANCE ($mil/FY; ag product only) EXPORTS GENERALLY DECLINE

8 AG EXPORT BUST OF THE 1980s: CAUSES F STRONG $ F WEAK WORLD ECONOMY F WORLD DEBT PROBLEMS F EXPORT COMPETITION F TRADE BARRIERS

9 AG EXPORT BUST OF THE 1980s: CONSEQUENCES F GLOBAL RECESSION & LOWER OIL PRICES F DECLINING MARKET GROWTH F PROTECTIONISM F STRONG U.S. $ & ROLE OF FARM PROGRAMS F EMERGENCE OF EC AS MAJOR EXPORTER F REDUCED FARM INCOME

10 AG EXPORT BUST OF THE 1980s: CONSEQUENCES: (cont.) F U.S. GRAIN SURPLUS F LOWER COMMODITY PRICES F REDUCED FARM LAND VALUES F FARM FINANCIAL STRESS

11 AG EXPORT BOOM OF THE 1990s US AGRICULTURAL TRADE BALANCE ($mil/FY; ag product only)

12 AG EXPORT RECOVERY OF THE 1990s F MULTILATERAL AGREEMENTS F DOMESTIC INTERVENTION F ECONOMIC GROWTH F SELF-SUFFICIENCY UNCERTAINTY F MATURING DEVELOPED MARKETS F DEVELOPING & NEWLY EMERGING MARKETS F POTENTIAL FOR INSTABILITY

13 Value-Added Exports F More Employment/Income than bulk commodities F Job/Economic Activity Retention F Economic Growth Contribution Greater than Non-Ag Sectors F :9X increase F US share less than 10% F Half of US ag exports are value-added F Trend increasing

14 AG EXPORT BOOM-BUST CYCLE? US AGRICULTURAL TRADE BALANCE ($mil/FY; ag product only; 5-yr data) EXPORTS INCREASE--cyclically

15 SUMMARY F Export boom-bust cycle –Exists over past 30+ years –Export trend remains up F More market-oriented F Competitiveness important F Protective response F Trade future uncertain –Trade agreements seem to moderate cycle –Trade talks uncertain F Lessons for agricultural producers, agribusiness & rural communities

16 READING/SOURCES F Ahearn, R.J. “An Overview of the International Trading Environment”, Managing Trade Relations in the 1980s. Rubin & Graham, eds. Allanheld Pub., F Drabenstott, M. et al. “The Latin American Debt Problem & U.S. Agriculture”, Economic Review, Federal Reserve Bank of Kansas City, July/Aug 1988.

17 READING/SOURCES (cont.) F 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 F Jackson, J.H. The World Trading System. Cambridge: MIT Press, F Rosson, P. International Marketing for Agribusiness: Concepts & Applications. GEMS, TAMU Press, F Southern Extension International Trade Task Force. Southern Agriculture in a World Economy. Department of Agricultural Economics, Oklahoma State University. F USDA, FATUS Series (annual data).