Ag Trade and Trade Agreements

By Lee L. Schulz and Chad Hart

International trade and trade agreements have been a major part of the political discussion during the Presidential election and in the first few months of the Trump administration. From the withdrawal of the United States from the Trans-Pacific Partnership (TPP) to the ongoing debate about the North American Free Trade Agreement (NAFTA), trade policy is transforming and trade relationships are in a state of flux. Currently, the United States has free trade agreements with 20 countries, via 14 trade agreements (two multilateral agreements, NAFTA and the Dominican Republic-Central America-United States Free Trade Agreements [CAFTA-DR]; 12 bilateral agreements). Worldwide, there are currently 274 trade agreements in force, thus the United States is not involved in the vast majority of trade agreements. Countries in the European Union are involved in 40 trade agreements, and several other countries are involved in more trade agreements than the United States (Chile 27, Iceland 29, India 15, Japan 15, Liechtenstein 27, Mexico 15, Norway 28, Panama 16, Peru 17, Singapore 22, South Korea 18, Switzerland 29, Turkey 22, and Ukraine 17).

Trade agreements can cover or exclude various goods and services. The choice of goods and services covered are adjusted during the trade negotiations and agreed to by all parties. For the United States, agriculture has been a major component in most, if not all, trade agreements; and agriculture is one area that has definitely benefitted from more open trade brought about by trade agreements and an area where the United States has traditionally enjoyed trade surpluses.

Figure 1 shows the historical growth in US agricultural trade and the timing of these trade agreements. One thing to remember about most of the agreements is that the provisions are typically slowly rolled in over a number of years. For example, NAFTA was signed in 1994, but was not fully in effect until 2008. Agricultural trade was relatively small prior to the early 1970s. The development of global agricultural trade in the mid-1970s boosted farm prices—agricultural trade values quadrupled during the decade. The impact of the 1980s farm crisis can be seen in the trade flows as well. It was in the depths of that crisis that the United States signed its first free trade agreement with Israel in 1985. NAFTA was agreed to in 1994. In the early 2000s, there was a flurry of activity with multiple trade agreements being consummated. The latest set of agreements, with Colombia, Panama, and South Korea, were signed in 2012.

Since the time of that first trade agreement, US agricultural exports have grown from $30 billion to the current total of $135 billion. Agricultural imports have grown as well, but not as quickly, moving from $20 billion in 1985 to $115 billion in 2016. To highlight the impacts the free trade agreements have, Figure 2 breaks down US agricultural exports by partners (free trade agreement [FTA], China, and other non-FTA). As the figure shows, much of the growth in US agricultural exports has occurred with our free trade partners, with Canada and Mexico representing a substantial portion of that growth. Since 1985, US agricultural exports have averaged a 29 percent growth rate with our FTA partners. Over the same period, our agricultural exports have averaged a 7 percent growth rate with non-FTA countries, including China. Removing China from the non-FTA list slows the annual export growth rate to 5 percent.

More open and free trade has benefitted US agriculture, while it is not the only driver in export growth, as the growth in the US-China trade exhibits, it is a very significant factor, which makes sense from an economic perspective. Economic theory in trade outlines the idea of comparative advantage, the ability for an entity to produce a good or service at a lower cost than other entities competing with it. Different countries will have different products where they have a comparative advantage. Given the dispersion of comparative advantage across countries and products, trade can be mutually beneficial to all countries involved. Tariffs, border taxes, and other trade-restricting policies distort cost structures and thus, distort comparative advantages and trade flows.

In the case of agriculture, the United States has a comparative advantage. We are the world’s largest producer of many agricultural products and have developed significant resources to transport our agricultural products throughout the country and around the world. Compared to other countries in the world, the United States is a high production, low cost source of agricultural products. As the figures show, the removal of trade barriers, such as tariffs, via free trade agreements provides an economic boost to US agriculture.

Many of our agricultural products now rely on international demand as a major component of total demand. For the major Iowa crops, exports for the 2016/17 crops consume 15 percent of US corn and 48 percent of US soybeans. However, other crops are just as, if not more, reliant on exports. Forty-five percent of the US wheat crop is exported, along with 47 percent of US sorghum, 51 percent of US rice, and 84 percent of US cotton. International trade is also important to the livestock and dairy industries. Twenty-one percent of all US pork is shipped to other countries, along with 10 percent of US beef, 17 percent of US broilers, 9 percent of US turkeys, and 22 percent of US dairy. US agricultural production has expanded to match the demand we see from the rest of the globe.

So the chatter about the renegotiation of trade agreements has concerned many in US agriculture. The industry does not want to lose the gains of the previous couple of decades. Much of the new administration’s discussion of trade has highlighted sectors of the economy where the United States arguably does not have a comparative advantage. However, as Secretary Perdue enters his new role, he has moved to highlight the importance of trade for US agriculture by creating a new position in USDA, Undersecretary for Trade. The question for agriculture going forward is how strong a voice will USDA have as new trade talks begin.

Suggested citation:

Schulz, L. and C. Hart. 2017. "Ag Trade and Trade Agreements." Agricultural Policy Review, Spring 2017. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=66.