Category: Trade

The term inflation is commonly used to describe a general increase of prices.  However, back in the mid-1800s where the term started to emerge in the literature, it was not in reference to something that happens to prices, but as something that happens to a paper currency.  Back in those days “bank notes,” a private paper currency redeemable for a specific amount of metal, were becoming widely used. At times, banks did not have enough gold or silver to satisfy all of their claims, therefore, they “inflated” the number of bank notes in relation to the amount of metal they had.  Therefore, inflation was the fall in value of paper currency or money due to an excessive issuance of paper currency or money.  From March 2020 to February of 2022 the money supply in the US increased by 41.2 percent, or 20.6 percent per year, while average GDP growth over the same period of time was 3.7 percent (FRED, 2022).  As a reference point, money supply over the last decade had increased an average 8.2 percent per year.

On the other hand, rapid changes in commodity prices are very common in agriculture and usually is due to supply shifts.  Good weather, improved technology and political stability are some variables that shift supply to the right causing an increase in supply and a decrease in prices (Graph 1).  On the other hand, bad weather, increase in input prices and political instability or war are variables that shift supply to the left causing a decrease in supply and an increase in prices (Graph 2).  The Russia and Ukraine war has caused a supply shift to the left in many commodities such as wheat, corn, fertilizer, and oil, given that these two countries are major producers.  Therefore, as quantity supplied of those commodities decreased, prices increased.  However, these increased prices caused producers of those commodities around the world to react and produce more and now prices are on a downward trend.  Also, demand for those commodities decreased contributing to the decrease in prices.  These supply shifts happen very often in agricultural commodities without causing inflation to spike.  In fact, Asian economies are experiencing normal levels of inflation as seen in the chart by The Economist.

Dr. Milton Friedman, winner of the 1976 Nobel Prize in Economic Sciences, stated back in 1963 that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”  Dr. Friedman was right then and still is now.

Bryan, Michael F., 1997. “On the Origin and Evolution of the Word Inflation,” Federal Reserve Bank of Cleveland, Economic Commentary, 10.15.1997.

Federal Reserve Economic Data.  https://fred.stlouisfed.org. Accessed July 23, 2022.

Ribera, Luis. “Difference Between Inflation and Changes in Commodity Prices“. Southern Ag Today 2(31.4). July 28, 2022. Permalink

International trade is pivotal to the U.S. meat industry. Yet, firms that engage in international markets differ widely in terms of their foreign market participation. Using transaction-level bills of lading for meat firms in the Southern United States, we calculated the destination and source market concentration in the meat trading industry. We used the number of firms and their meat trade share to measure market concentration in the meat export and import markets from 2010 to 2020.

We find that more than 60 percent of meat exporters and importers are engaged only in a single foreign market, while only a few dominant firms participate in more than ten foreign markets. These firms account for 5 percent of all meat exporting firms while being responsible for more than 80 percent of meat exports. Their trade share has increased by 10 percent from 2010 to 2020. In contrast, the export share of firms exporting to less than four destinations decreased from 20 percent to less than 10 percent in that period. The meat import market is less concentrated and more stable over time. Meat firms importing from only one source market accounted for 9 percent of all meat imports in 2020, while that share is merely 3 percent in the meat export market. The import market concentration is significantly larger than in the export market. Fewer than 2 percent of firms export to 10 or more markets, while they accounted for a considerably smaller share of overall meat imports (47 percent) in 2020.

A potential explanation for the high market concentration in the meat trading market is that firms face fixed costs in serving foreign markets and need to recoup sufficient revenue to cover the high fixed cost of serving multiple markets. Smaller firms that are not profitable enough to cover these fixed costs are less likely to build foreign distribution networks. In comparison, larger firms benefit from economies of scale in their international distribution network. Therefore, the observed market structure is likely a result of the domestic market concentration, which results in larger firms being more active in international markets. The benefits of global logistics operations are easier to reap for larger firms, making meat supply chains more vulnerable to domestic and foreign market shocks than other industries. The current supply chain crisis increased the costs of doing business, making it harder for smaller meat trading firms to stay in the market due to lower international profit margins. Southern meat firms must have access to reliable and economical transportation options to ensure their economic success. 

Heidi Schweizer, Agricultural and Resource Economics, North Carolina State University, email: hschwei@ncsu.edu; Sandro Steinbach, Corresponding Author, Agricultural and Resource Economics, University of Connecticut, phone: 860-486-1923, email: sandro.steinbach@uconn.edu; Xiting Zhuang, Agricultural and Resource Economics, University of Connecticut, email: xiting.zhuang@uconn.edu. We are grateful to IHS Markit for facilitating access to the PIERS database and acknowledge financial support from the Storrs Agricultural Experiment Station for this study.

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Schweizer, Heidi, Sandero Steinbach, and Xiting Zhuang. “International Market Concentration in the Southern Meat Trading Market.” Southern Ag Today 2(29.4). July 14, 2022. Permalink

In 2021, beef and beef products were the third highest exports for the U.S. ($10.6 bill.), behind soybeans ($27.4 bill.) and corn ($18.7 bill.) (USDA, 2022a). A key trading partner for the U.S. beef sector is Japan ($2.4 bill. in 2021), which was the leading foreign market for U.S. beef by volume. Through existing trade agreements (e.g., U.S.-Japan Trade Agreement [USJTA], Comprehensive and Progressive Agreement for Trans-Pacific Partnership [CPTPP]), the U.S. and major competitors like Australia face lower beef tariffs in Japan relative to the Most Favored Nation (MFN) rate of 38.5%. The tariff rate for the U.S. and Australian beef in Japan (excluding offal and processed products) is currently 24.1% and is continually declining to 9% by 2033. However, both USJTA and CPTPP allow the Japanese government to increase tariffs on beef products when imports from the U.S. or CPTPP countries exceed a certain volume during a specified period. This specified volume is often referred to as a safeguard. In general, safeguard measures are used to limit excessive import growth by allowing governments to increase tariffs on a product when imports exceed a certain level during a specified period.

U.S. beef faced a particularly restrictive safeguard in Japan of 242,000 metric tons (MT) when USJTA was enforced in 2020 and in 2021 (Japanese fiscal years: April-March). Japan’s beef safeguard for CPTPP countries was 625,400 MT during this period. The CPTPP safeguard was predominantly applied to Australian beef given Japan’s limited beef imports from other CPTPP countries, and unlike the U.S. safeguard, significantly higher than actual imports from all non-U.S. countries, let alone Australia (See Figure 1). This safeguard difference put U.S. beef at a significant disadvantage relative to Australian beef in the Japanese market because U.S. exports to Japan averaged more than 245,000 MT per year between 2017–2021. Thus, it was no surprise that the safeguard was triggered after the first year of USJTA’s enforcement, leading Japan to raise tariffs on U.S. beef to 38.5% for one month. Consequently, the U.S. government was able to negotiate a new three-trigger safeguard mechanism for U.S. beef in Japan this year. Moving forward, the Japanese government can increase tariffs on U.S. beef only if all the following occur: 1) Imports of U.S. beef exceed the USJTA beef safeguard; 2) The total volume of beef from the U.S. and original CPTPP countries exceed the CPTPP beef safeguard; and 3) imports of U.S. beef exceed imports from the previous year (USDA 2022b). The most important aspect of this change is that the U.S. and Australia are now essentially sharing the CPTPP safeguard. That is, even if Japan’s imports of U.S. beef increase and exceed the USJTA 2022 safeguard (246,900 MT), the Japanese government can raise tariffs on U.S. beef only if total beef imports from the U.S. and CPTPP countries exceed 637,200 MT (CPTPP safeguard for 2022), which is not likely to occur.

Figure 1. Japan’s Beef Imports (2017 –2021) and Respective CPTPP and USJTA Safeguard Triggers for 2022

References

Muhammad, A., Griffith, A., Martinez, C., and Thompson, J. (2021). Safeguard Measures and US Beef Exports to Japan. UT Extension Publication W1023. https://ageconsearch.umn.edu/record/313523

Trade Data Monitor® (2022). https://www.tradedatamonitor.com/

U.S. Department of Agriculture (USDA), Foreign Agricultural Service (2022a). Global Agricultural Trade System. https://apps.fas.usda.gov/gats/default.aspx

U.S. Department of Agriculture (USDA), Foreign Agricultural Service (2022b). U.S., Japan Reach Deal on Beef Tariff Safeguard. FAS Press Release. https://www.fas.usda.gov/newsroom/us-japan-reach-deal-beef-tariff-safeguard

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Muhammad, Andrew, and Charley Martinez. “Understanding the New Safeguard Policy for U.S. Beef in Japan.” Southern Ag Today 2(27.4). June 30, 2022. Permalink

Under the USMCA, Canada established tariff rate quotas (TRQs) for 13 categories of U.S. dairy products.^[i] Up to the defined quota amount, these products were to receive tariff-free access to the Canadian market. However, last year, Canada reserved between 85 and 100% of the TRQs for many of the product categories exclusively for Canadian dairy processors. As a result, TRQs were substantially under-filled for many of the products (Figure 1a).^[ii]

In May 2021, the U.S. filed the first official grievance under the USMCA, claiming that Canadian dairy quota administration procedures were in violation of USMCA trade obligations. In a decision publicly released on January 4, 2022, the dispute settlement panel found that, “The current Canadian system, which sets aside significant TRQ volumes only for processors, does not pass muster under the Treaty.”^[iii] Canada is now required to reach agreements with the U.S. on the allocations process or face retaliatory trade sanctions.

In an upcoming working paper, Chris Wolf and I calculate the economic costs of these Canadian dairy quota restrictions for the U.S. dairy industry. We find that the effective trade barrier created by Canadian quota allocation practices was as much as 71% to 94% more restrictive than the negotiated quota for some products.

Figure 2 plots the total TRQ value versus actual imports under USMCA holding current prices and quota fill rates constant. The administrative trade barrier created by Canada dairy quota allocation practices equates to approximately $1.27B in lost trade, or 67% of the total TRQ value, between now and 2030. 

Figure 1: USMCA Dairy Quota Fill Rates (2021)

Figure 2: Total TRQ Value versus Actual Imports

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^[i] Canadian Dairy Quotas are defined in Chapter 2 “National Treatment and Market Access” of the United States-Mexico-Canada Agreement (USMCA). 

^[ii] Data for this figure are obtained from the Canadian Government Supply-Managed Tariff Rate Quota Utilization Tables (https://www.international.gc.ca/trade-commerce/controls-controles/supply_managed-gestion_offre.aspx?lang=eng&type=Utilization%20Tables#data)

^[iii] USMCA Arbitral Panel (2021). Final Report. Canada – Dairy TRQ Allocation Measures (CDA-USA-2021-31-010). 

Schaefer, K. Aleks. “The Economic Costs of Canadian Dairy Quota Restrictions under USMCA“. Southern Ag Today 2(25.4). June 16, 2022. Permalink

Animal disease outbreaks have severe economic consequences, especially for international trade. A recent example was the identification of two atypical cases of bovine spongiform encephalopathy (BSE) in Brazil in early September 2021. Although Brazil’s BSE status did not change within the World Organization for Animal Health, severe sanitary restrictions interrupted Brazilian beef trade. Egypt and Saudi Arabia halted beef imports from Brazil for two weeks. China and Hong Kong, which account for about 60% of Brazil’s beef exports, suspended beef imports from Brazil for more than three months. In the month following the notification of the BSE cases, international shipments of Brazilian beef were 49% lower compared to the same period in 2020. Consequently, domestic prices of live animals decreased by 8% in September, and 11.8% in October 2021, leading to the most unfavorable cattle market conditions in Brazil since 2000.

As in the case of Brazil, identification of animal disease is an imminent risk for the U.S., simply because diseases can be difficult to control and have widespread consequences. This risk is demonstrated by the current outbreak of avian influenza in the U.S., which has affected 24 states so far and led to restrictions on American poultry products imported by Canada, Mexico, and China. The extent of the economic damage from this current outbreak is still unknown.

Countries that are major exporters of animal products, such as the U.S., are substantially impaired by sanitary barriers when animal disease outbreaks occur. Trade diversion to other suppliers can cause significant export market losses, as observed during the 2000’s after the BSE outbreak in the U.S. Animal disease events in Brazil and the U.S. highlight the importance of understanding risks within agricultural systems in terms of the direct impact of disease on animal health and food safety, as well as the amplified international trade impacts.

Figure 1. Monthly Beef Exports and Cattle Price Index in Brazil in 2021

Menezes, Tais and Amanda Countryman. “The Imminent Menace of Sanitary Barriers in International Trade.” Southern Ag Today 2(23.4). June 2, 2022. Permalink