FREE TRADE IN THE AMERICAS: INTERNATIONAL AGRICULTURE AND TRADE-- SUMMARY November 1998, WRS-98-1 November 06, 1998 Approved by the World Agricultural Outlook Board ------------------------------------------------------------------------------ This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete text of FREE TRADE IN THE AMERICAS: INTERNATIONAL AGRICULTURE & TRADE will be available 3-4 weeks following this summary release. ------------------------------------------------------------------------------ Participation in Hemispheric Free Trade Agreement a Plus for U.S. Agriculture A Free Trade Area of the Americas (FTAA) is one of several trade agreements that the United States is encouraging and actively pursuing. An FTAA that eliminates tariffs among the 34 Western Hemisphere countries would benefit the U.S. agricultural sector--and the U.S. economy as a whole--if the United States were part of the arrangement. If the other Western Hemisphere countries formed an FTAA without the United States, the impact on the U.S. agricultural sector and the general U.S. economy would be slightly negative. In either case, the expected economic impact of an FTAA on the United States would be small in the short run (3-5 years), primarily because tariffs in the region are already relatively low and are being further reduced through bilateral and multilateral agreements. Further, broad-based trade liberalization could boost economic growth by stimulating investment and reallocating capital and other resources toward more productive uses. This process could create additional economic gains over the long term beyond the static effects captured in this analysis. The U.S. interest in forming an FTAA comes, in part, from the broad U.S. goal of fostering economic and political stability in the hemisphere and from a desire to secure more open and transparent rules for U.S. trade and investment in the rapidly growing markets of Latin America. An FTAA, like all other trade arrangements, could help the countries in the region "lock in" the economic reforms they have already adopted, improving the long-term outlook for growth and stability in the hemisphere, and deepen the trade liberalization that is already taking place. It could simplify the complex system of regional and bilateral trade preferences that is emerging in the hemisphere. It would also ensure that U.S. exporters gain or retain access to regional markets on a basis comparable to other exporters. The key findings are: An FTAA that includes the United States would cause annual U.S. farm income (in 1992 dollars) to be $180 million higher than it would be otherwise. An area that excludes the United States would cause annual U.S. farm income to be an estimated $50 million lower. These represent very small changes in U.S. farm income, which was around $50 billion in 1997. Including the United States would increase annual U.S. agricultural trade as well, with exports $580 million higher (1 percent) and imports $830 million higher (3 percent). If the United States is not included, annual U.S. agricultural exports would decline about $130 million (0.2 percent), while imports would be $90 million (0.3 percent) lower. An FTAA would have virtually no impact on gross domestic product (GDP) in the short run. Annual U.S. GDP would be about $3.8 billion higher annually with a full FTAA, while an FTAA that excludes the United States would lower U.S. GDP by $740 million. With an FTAA, the United States and Canada should increase their wheat market share in Brazil. If U.S./Brazil phytosanitary problems are resolved, and given competitive transport costs to Northeast Brazil, the U.S. share of Brazil's imports would likely increase further. Implementation of an FTAA, with or without U.S. participation, would have little impact on U.S. rice sales in the Western Hemisphere, where transport costs are a more important factor than the existing low tariffs. The United States dominates rice exports to Mexico and Central America, largely because cheaper Asian rice is banned in many countries for phytosanitary reasons. As long as these restrictions remain in place, U.S. exports are expected to remain stable. The gains in corn trade for the United States from participating in an FTAA would be positive but modest. An FTAA without U.S. participation is likely to cause diversion in corn trade with Argentina exporting more to Latin America and less to the rest of the world. U.S. soybean exports would be expected to benefit from the removal of tariffs. An FTAA would expand soybean oil sales to the Caribbean, and would cause several countries that now crush soybeans to import soybean meal and soybean oil instead. Brazil, Argentina, and the United States would compete for the expanded soybean product exports, with the United States at some disadvantage if it were not a member of the FTAA. The impact of an FTAA on U.S. cotton would be relatively small, regardless of whether the United States was a member. Marginally higher U.S. exports could result from an arrangement that includes the United States. U.S. imports would probably change far less then exports. U.S. meat trade would not be significantly affected by an FTAA, regardless of whether the arrangement includes the United States, because it is assumed that current health and sanitary requirements will remain unchanged. U.S. imports of beef, pork, and poultry are restricted by sanitary regulations that require countries shipping uncooked beef, pork, or poultry to be certified as free of foot and mouth disease, swine fever, and Newcastle disease. These diseases are considered endemic in most Latin American countries, which thus cannot export fresh or chilled meat to the United States. These restrictions are unlikely to be affected by an FTAA, although regionalization could be a factor. Dairy trade also is unlikely to be significantly affected by an FTAA. Argentina has free access to the Brazilian market under the MERCOSUR agreement. If the United States received the same access, U.S. exports could displace some of Argentina's exports to Brazil. At the same time, U.S. imports from Argentina could expand. A hemispheric FTAA that liberalized U.S. sugar trade could have major implications for the U.S. sugar industry. U.S. prices, production, and exports could decline significantly, and imports could increase. U.S. consumers would have access to inexpensive imported sugar, especially from low-cost producers like Guatemala and Brazil. Lowering or reducing tariffs under an FTAA would have little effect on U.S. orange juice exports, which have grown in recent years as domestic demand has stabilized. However, there could be an incentive for the United States to import more Brazilian orange juice. A hemispheric FTAA would likely have little impact on the U.S. tobacco market. Current U.S. trade policies for tobacco are not very restrictive (Brazil, the major U.S. supplier, filled only 68 percent of its allotment during the first year that the current tariff-rate quota was in place), so further liberalization is not likely to have much impact on U.S. imports. U.S. exports of tobacco leaf and cigarettes are unlikely to be adversely affected by an FTAA. Peanuts could be affected by an FTAA. U.S. producers of "additional" peanuts currently dominate the world export market, indicating that this segment of the industry can compete effectively at world prices and could benefit under an FTAA. U.S. producers in the traditional "quota" production areas of the Southeast might have difficulty competing at world prices, at least in the short run. Liberalization of the U.S. peanut market under an FTAA would likely imply a continued movement of the industry away from traditional production areas. Canada and Mexico might be slightly better off with an FTAA that excludes the United States than with a full FTAA, because the two countries already benefit from trade liberalization with the United States under NAFTA. In an FTAA including the United States, the preferences currently enjoyed by Canada and Mexico would be extended to the rest of the hemisphere, eroding some of their gains from NAFTA. Printed copies of Free Trade in the Americas will be available in about three-four weeks. For more information, contact John Link (202)694-5228. The full report will also be available electronically via the ERS Website at http://www.econ.ag.gov. For details on electronic access, call ERS Customer Service (202) 694-5050. END_OF_FILE