Welfare Analysis of the U.S.-Mexican Tomato Suspension Agreement

Transcription

1 Welfare Analyss of the U.S.-Mexcan Tomato Suspenson Agreement Eljah Kosse and Stephen Devadoss Department of Agrcultural and Appled Economcs Texas Tech Unversty and Abstract Ths study develops a three-county trade model of the Unted States, Mexco, and Canada to analyze the effects of the 2013 Suspenson Agreement on prces, producton, consumpton, trade flows, and welfare n each country due to the U.S. mnmum mport prce on Mexcan tomatoes. Whle only the Unted States and Mexco are sgnatores to the agreement, Canada was also ncluded snce the U.S. mnmum prce dstorts prces across the regon. Three tomato categores feld, greenhouse, and cherry & grape are studed snce each has a dstnct mnmum prce. The overall welfare effects are postve for Mexco and Canada, but negatve for the Unted States. Keywords: Canada, Mexco, Tomato Trade Agreement, the Unted States, Welfare Analyss The authors thank the three anonymous revewers and the edtor, Andrew McKenze, for valuable suggestons. JEL: F13, F14 1

2 Welfare Analyss of the U.S.-Mexcan Tomato Suspenson Agreement 1 Introducton Tomatoes are an mportant export commodty for Mexco because they are the second most valuable agrcultural export for Mexco Bayls, The Unted States s the second largest producer of tomatoes worldwde processng and fresh markets combned, wth Florda and Calforna producng between two-thrds and three-quarters of tomatoes for the fresh market. Florda supples tomatoes durng the wnter months October-May and Calforna n the summer months June-September. Outsde of wnter months, Canada also supples tomatoes, prmarly those grown n greenhouses, but t s a net mporter of feld tomatoes due to ther short growng season. Between , 16% of greenhouse tomatoes mported to the Unted States came from Canada ERS, Durng the wnter months, Mexco and Florda supply about 97 percent of all tomatoes n the Unted States Calvn and Barros, Snce the late 1960s, when U.S. tomato mports from Mexco started to ncrease, Flordan growers have clamed that Mexco dumps.e., sells at a prce below the cost of producton tomatoes on the U.S. wnter market, causng domestc prces to fall Johnecheck et al., Mexco contnues to deny that t engages n dumpng. Economsts term ths long-lastng trade dspute the Great Tomato War Bredahl et al., NAFTA was supposed to brng a new age of free trade between the Unted States and Mexco. However, ths trade war escalated when the Unted States ntated an antdumpng nvestgaton aganst Mexco shortly after the sgnng of NAFTA n But n 1996, the two countres sgned an agreement to suspend the antdumpng nvestgaton hence the name Suspenson Agreement and set a prce floor or mnmum prce at whch Mexcan fresh tomatoes are to be mported. The mnmum prce s generally set above Mexcan prce plus transportaton cost from Mexco to the Unted States. In other words, the mnmum prce 1

3 s desgned to equalze the Mexcan producer prce for exports sold n the Unted States and the U.S. producer prce. If the Unted States pursued the nvestgaton and were to fnd that Mexco had dumped, heavy tarffs could have been mposed on Mexcan tomatoes. Though ths trade war orgnally dealt wth wnter tomatoes, whch predomnantly ncluded Florda and a few Mexcan states because they harvest the majorty of ther tomatoes durng these months, summer tomatoes were also brought nto ths cross-border trade conflct Zahnser et al., 2000; Bayls and Perloff, Thus, t s mportant to consder all tomatoes, not just Florda wnter tomatoes, n studyng ths dspute. Whle the trade dspute arose due to Mexcan tomatoes, n recent decades Canada has begun to grow sgnfcant quanttes of greenhouse tomatoes. Even though ther clmate does not allow for large amounts of conventonally-grown feld tomatoes, the use of greenhouses allows for large-scale producton n all seasons except wnter. Between 2010 and 2014, Canadan greenhouse tomato exports to the Unted States accounted for between 15 and 24 percent of all U.S. mports ERS, Because of the Suspenson Agreement, dversonary effects from Mexco to Canada has occurred see Bayls and Perloff, Snce about 98.5% of all fresh tomato mports orgnate from Mexco and Canada, a three-country trade framework s sutable for ths study. Thus, our analyss ncludes Mexco and Canada as exporters and the Unted States as an mporter. In 2012, after heavy lobbyng from Florda growers who clamed that Mexco contnues to dump tomatoes on the U.S. market, the U.S. government decded to termnate the Suspenson Agreement, whch had been n effect n varous forms for 16 years. 2 In response, Mexco threatened to nsttute $1.9 bllon worth of retalatory tarffs. Instead of escalatng ths trade war, both countres ultmately sgned a new agreement, whch was mplemented n 2013 and rases the mnmum prce for mported tomatoes Wngfeld and Cattan, Ths new agreement ncreases the mnmum prce by nearly ten cents per pound and nsttutes new prce mnmums for all categores of tomatoes USDA, These categores nclude greenhouse, feld, small tomatoes loose, and small tomatoes packaged. In ths 2

4 paper, we nvestgate the effects of the new Suspenson Agreement for three broad categores of tomatoes: greenhouse, feld, and small cherry & grape tomatoes. 3 As each category has dfferent mnmum mport prces, we look at the effects of the mnmum mport prce polcy on prces, supply, demand, trade, and welfare for each category of tomatoes n all three countres. Ths mnmum prce polcy can be understood as a voluntary export restrant VER 4 n that a the volume of Mexcan exports at ths set mnmum prce s fxed, smlar to an export quota under VER, and b n both polces, the quota revenues accrue to exporters. Consequently, the welfare results are dentcal to a voluntary export quota. Whle Canada s exempt from the mnmum prce, Canadan prces do ncrease as the Unted States mports less from Mexco but more from Canada. Whle many commodty groups lobby for trade barrers, commodtes facng greater competton from mports are often awarded the most protecton. Ths may be a result of a government s support for loss-avodance of a partcular producer group Freund and Ozden, For nstance, NAFTA ncreased overall U.S. welfare; however, ncreased tomato mports from Mexco lowered the prces and producton Guajardo and Elzondo, Ths can explan why tomato producers lobbed for and receved new trade barrers aganst mports from Mexco soon after the sgnng of NAFTA. However, other studes ndcate that the Mexcan peso devaluaton of 1995 was the prmary contrbutng factor for the ncrease n Mexcan exports, rather than NAFTA or dumpng Padlla-Bernal et al., Regardless of the reasons for the ncreased tomato mports, the Suspenson Agreement has sgnfcant effects on welfare. Despte ths, very lttle research has been conducted nto examnng the benefts and losses of ths agreement for producers and consumers. Jung 2009 estmated an nverse almost deal demand system IAIDS to quantfy the effects of the Suspenson Agreement on consumers. However, she dd not estmate changes n producer welfare but hypotheszed that producer surplus could declne f U.S. consumers substtute away from domestc tomatoes and toward Mexcan tomatoes as a result of the ncreased 3

5 prces caused by the prce floor. In contrast, our study analyzes the effects of the Suspenson Agreement on both consumer and producer welfare resultng from prce and quantty changes. For consumer welfare, we utlze equvalent varaton EV because we allow substtuton among the three categores of tomatoes, whch causes the prces of these tomatoes to change smultaneously. We also compute the quota revenue accrued to Mexcan producers. The rest of the paper s organzed as follows. Secton 2 develops a three-country theoretcal model of trade and ncorporates the mnmum mport prce polcy. Secton 3 descrbes the data and calbrates the parameters used n the emprcal analyss. Secton 4 presents the emprcal results. Secton 5 summarzes the paper and dscusses mportant mplcatons of the results. 2 Theoretcal Analyss The three types of tomatoes greenhouse, feld, and small cherry & grape tomatoes are denoted by ndex = 1, 2, 3, respectvely. The three countres ncluded n the model are Mexco M, Canada C, and the Unted States U. Ths secton formulates a theoretcal trade model wth demand and supply components for each category of tomato and country and presents the welfare analyss of the Suspenson Agreement. 2.1 Supply and Demand Snce ths study analyzes the short-run effects of the new Suspenson Agreement, we assume that producers cannot mmedately substtute one category of tomatoes for the other n the producton process. Ths s partcularly true for feld and greenhouse tomatoes, whch have dfferent land requrements, captal, and farmng practces. For supply, we consder smple lnear functons: S j = cj + dj pp,j, = 1, 2, 3, j = U, M, C, 1 where p p,j s the producer prce for the th tomato category n country j. 4

6 To allow for substtutons among the three categores of tomatoes, we consder a constant elastcty of substtuton CES demand functon for tomato category n country j: D j = [ 3 =1 σ p c,j yj δ j ], = 1, 2, 3, j = U, M, C, 2 δ j σ p c,j 1 σ where D j s the quantty of tomato category consumed n country j, p c,j s the consumer prce of tomato category n country j, y j s the spendng on all categores of tomatoes n country j, δ j s the share parameter of spendng on tomato category n country j, and σ s the elastcty of substtuton. 5 Under the Suspenson Agreement, the Unted States sets the mnmum mport prce at p p,u, for mports of th tomato category from Mexco. 6 The producer prce lnkage between Mexco and the Unted States s p p,u = p p,m T + t M,U, 3 where T s the prce wedge caused by the mnmum prce and t M,U s the transportaton cost from Mexco to the U.S. border. As dscussed n the ntroducton, ths prce wedge s the dfference n producer prces for tomatoes sold domestcally n Mexco and tomatoes sold for export n the Unted States. Ultmately, the goal of the mnmum prce s to equalze U.S. producer prces and Mexcan producer prces for exports sold n the Unted States. The producer prce lnkages for Canadan exports of greenhouse and cherry & grape tomatoes to the Unted States and for Canadan mports of feld tomatoes from Mexco are p p,u = p p,c + t C,U or p p,c = p p,u t C,U, = 1, 3 4 p p,c = p p,m T + t M,U t C,U, = 1, 3 5 5

7 p p,c = p p,m + t M,C, = 2. 6 The prce lnkage between the producer and consumer prce p c,j at the retal market n each country s p c,j = p p,j + m j, = 1, 2, 3; j = U, M, C, 7 where m j denotes the transport cost wthn the country and the market margn. The U.S. excess demand Q,ED U for the th category of tomato s the dfference between ts demand D U and supply S U : σ y U p c,u δ U Q U,ED = [ 3 =1 δ U ] σ 1 σ p c,u c U + d U p p,u, = 1, 2, 3. 8 Mexcan excess supply Q,ES M for the th category of tomato s the dfference between ts supply S M and demand D M : σ y M p c,m Q M,ES = c M + d M p p,m [ 3 =1 δ ], = 1, 2, σ δ σ p c,m Smlarly, Canadan excess supply of tomato categores = 1, 3 Q C,ES s the dfference between ts supply S C and demand D C whle excess demand Q C 2,ED of the feld tomato category = 2 s the dfference between ts demand D C 2 and supply S C 2 : 6

8 Q C,ES = c C + d C p p,c Q C 2,ED = [ 3 =1 y C p c,c δ [ 3 =1 σ ] 1 σ δ σ p c,c The regonal market-clearng condtons are σ y C p c,c δ ] = 1, 3, 10 1 σ δ σ p c,c c C + d C p p,c. Q U,ED = Q M,ES + Q C,ES, = 1, 3 11 Q U 2,ED + Q C 2,ED = Q M 2,ES. 12 Once all the prce lnkage equatons 3 and 4-6 are substtuted n the above marketclearng condton, we can solve the smultaneous equatons n 11 and 12 for Mexcan producer prce for the th category of tomatoes. p p,m 2.2 Welfare Effects To analyze the welfare effects of the mnmum-support prce polcy, we obtan producer surplus, quota revenues, and EV measures. The producer surplus s the area left of the supply curve between the free trade prce p p and new producer prce p p,j under the 2013 Suspenson Agreement. U.S. producer surplus s p p,u p p,u c U + d U p p,u dp p,u, = 1, 2,

9 In the Unted States, because of ths Suspenson Agreement, producers receve the hgher mnmum prce and ncrease ther producton. Consequently, the producer surplus s postve. p p,u P Wth the Suspenson Agreement, Mexcan producers face lower prces. However, they receve quota revenues for ther exports to the Unted States. Mexcan producer surplus and quota revenues are where QR M = p p,u p p,m p p,m p p,m c M + d M p p,m S M D M dp p,m + QR M, = 1, 2, 3, 14,.e., the prce dfference between the Unted States and Mexco tmes the quantty of Mexcan exports to the Unted States. The Suspenson Agreement polcy lowers the Mexcan producer prce from the free trade prce p p,m p p,m. As p p,m decreases, Mexcan producers supply less, and consequently producer surplus declnes. However, they receve export quota revenues whch are postve. The sum of producer surplus loss and export quota revenues could be a gan or loss, whch s an emprcal queston covered below n the emprcal analyss. Bredahl et al have shown that f two countres could cooperate and agree to a Voluntary Export Restrant, rents for producers n both countres could rse. That s, the mnmum prce under ths Suspenson Agreement to could be set such that both U.S. and Mexcan producers could gan. However, n realty the mnmum prce s not selected to maxmze the gan of both producers. As a result, the welfare gan of U.S. producers s postve, but gans to Mexcan producers could be postve or negatve. Because of ths Suspenson Agreement, for greenhouse and cherry & grape tomatoes, the Unted States mports less from Mexco, whch causes Canada to export more to the Unted States. As a result, the prce n Canada ncreases whch augments Canadan producer surplus: 8

10 p p,c p p c C + d C p p,c dp p,c, = 1, For feld tomatoes, Canada mports more from Mexco because Mexco dverts ts sales from the Unted States to Canada due to the U.S. mnmum mport prce polcy. Consequently, the feld tomato prce n Canada declnes and the producer surplus s p p p p,c c C + d C p p,c dp p,c, = We use equvalent varaton EV to measure the welfare of consumers because consumer prces of all three categores of tomatoes change as a result of ths Suspenson Agreement polcy. In addton, snce each category of tomatoes s a functon of all three prces, EV, rather than consumer surplus, s the approprate measure of consumer welfare. Next, to derve EV, we obtan the ndrect utlty and the expendture functons. Substtutng the demand functons 2 nto the utlty functon A.1, we get the ndrect utlty functon: u j p j 1, p j 2, p j 3, y j = y j 3 =1 δ j σ p j 1 1 σ σ 1, 17 The expendture functon s obtaned by mnmzng the budget constrant subject to the CES utlty functon: ep j 1, p j 2, p j 3, u j = u j [ 3 =1 δ j σ j1 σ p ] 1 1 σ 18 The equvalent varaton EV measures welfare change resultng from prce changes due to dfferent polcy regmes. The EV s the amount of compensaton that needs to be pad to the consumer whch wll enable the consumer to attan the fnal utlty level as the ntal prces. Mathematcally, EV = ep 0, u 1 ep 0, u 0 Devadoss and Stodck,

11 For our study, prces and utlty levels resultng from free trade p c,j, u j are our baselne polcy whle prces and utlty resultng from the 2014 Suspenson Agreement polcy p c,j, u j are our alternate scenaro. The equaton used to fnd EV s found below: EV = u j [ 3 =1 δ j σ j 1 σ p ] 1 1 σ u j [ 3 =1 δ j σ j 1 σ p ] 1 1 σ, j = U, M, C 19 3 Data and Calbraton To calbrate the model, we collected data from a varety of sources and cross-checked the data from dfferent sources to ensure the data was accurate. The model was calbrated usng 2012 data, whch was selected based on avalablty of all requred data and because t was the most representatve year wth no large supply shocks. For nstance, Mexcan supply n 2011 was 51% of 2012 s supply due to adverse weather condtons Servco de Informacon Agroalmentara y Pesquera SIAP, Below we explan n detal the data sources for all varables n the followng order: producton, mports/exports, consumpton, prces, and addtonal parameters for the Unted States, Mexco, and Canada. NASS 2012 combnes the producton data for U.S. greenhouse and feld tomatoes and reports t as a sngle category. We used the shppng and movement data from AMS 2015a to obtan the percentages of greenhouse and feld tomato producton and appled these percentages to the total producton data n NASS 2012 to dsaggregate producton data for greenhouse and feld tomatoes. The producton data for cherry & grape tomatoes are not drectly avalable from any sources. Consequently, we used shppng and movement nformaton from AMS 2015a to construct the producton data for cherry & grape tomatoes. 7,8 Mexco provdes a detaled set of data for varous types and varetes of tomatoes SIAP, We used ths data to construct the producton data for the three categores of tomatoes. Canada does not report data for greenhouse and feld tomatoes separately. How- 10

12 ever, for 2011 t does report the greenhouse tomato producton Statstcs-Canada, We used ths 2011 data for greenhouse tomato producton and the total tomato producton n 2012 to construct the greenhouse and feld tomato producton n 2012 Statstcs-Canada, Furthermore, Canada groups cherry & grape tomatoes along wth greenhouse tomatoes. To separate the cherry & grape tomato producton from greenhouse tomato producton, we used Canada s mports and exports of cherry & grape tomatoes. For U.S. mports and exports, we used nformaton from ERS 2015 whch separates data by greenhouse, roma, round, cherry, and grape tomatoes. To obtan estmates for feld tomatoes, we combned roma and round tomatoes. For Canada, we agan used Statstcs- Canada 2015 and Statstcs-Canada, 2013 to determne mport and export data, and for consstency we compared that data wth U.S. mports from Canada. Snce Mexco does not report trade data, we used the data for U.S. and Canadan tomato trade wth Mexco. Fnally, consumpton was determned as domestc producton plus mports mnus exports. We collected producer and retal prce data for each tomato category n all three countres. Greenhouse tomato prces were hgher than feld tomato prces. Examnaton of prce data from USITC 2015 ndcated that the mnmum prce was the same for all categores untl 2013 and generally non-bndng for Mexcan greenhouse exports to the Unted States. ERS 2015 does not report prce data for greenhouse tomatoes. Snce the mnmum prce was desgned to equalze prces for Mexcan exports and U.S. producers, we used the new 2014 greenhouse mnmum prce plus transportaton costs to determne the U.S. producer prce. For U.S. feld tomatoes, we utlzed the average producer prce from ERS Cherry & grape tomato prces were derved n a smlar fashon to greenhouse tomatoes as the 2008 Suspenson Agreement s prce mnmum was not bndng. For Mexcan producers, we had to determne both domestc and export prces. Mexcan producer prces for greenhouse tomatoes were determned n a smlar process to the Unted States by realzng that the prevous Suspenson Agreement was not bndng, mplyng that producers receved dentcal prces n the domestc and export markets, excludng 11

13 transport costs. Mexcan producer prces for feld tomatoes n the domestc market were obtaned from SIAP Mexcan prces reported n SIAP were lsted n terms of pesos but were converted to U.S. dollars usng the peso-dollar exchange rate. Mexcan export prces for feld tomatoes were collected from USITC In 2012, producers receved $0.17 for feld tomatoes sold domestcally and $0.22 the weghted average mnmum prce for both summer and wnter under the prevous Suspenson Agreement for feld tomatoes sold n the Unted States. Canadan prces are smlar to those n the Unted States for greenhouse tomatoes. Statstcs-Canada 2015 reports a prce of $0.52 per pound for greenhouse producers, though ths prce also ncludes hgher-prced cherry tomatoes. After dsaggregatng cherry & grape tomatoes from all greenhouse tomatoes, we estmated a producer prce of $0.50. Prces for feld and cherry & grape tomatoes were not readly avalable. As a result, we utlzed equatons 5 and 6 to estmate the feld and cherry & grape tomato prces. Consumer prces were readly avalable for the Unted States through AMS 2015b. However, these prces are reported by tomato type.e., vne-rpened, cherry, grape, plum, etc. and these types do not correspond perfectly wth the mnmum prce categores. Snce greenhouse tomatoes are largely vne-rpened tomatoes, we used ths prce as a proxy for all greenhouse tomatoes. We used a weghted average of plum, roma, and large tomato prces for feld tomato prces. Fnally, we used a weghted average of cherry & grape tomato prces. For Mexco, we assumed a smlar magntude prce dfference between greenhouse and feld tomatoes as n the Unted States snce drect prce nformaton was only avalable for feld tomatoes. Consumer prces for feld tomatoes were obtaned from Numbeo 2014 whch lsts average prces from grocery stores for tomatoes. Cherry & grape tomato prces were also dff cult to ascertan; consequently, prces found n Wal Mart n Mexco were used as a proxy Walmart, For Canada, we utlzed Numbeo 2014, whch lsts the average prce per pound for tomatoes. We used ths prce for feld tomatoes and assumed an equal magntude dfference n prce for greenhouse and cherry & grape tomatoes as n the Unted 12

14 States. Wth these consumer and producer prces, the n-country transport costs and retal margns were found by subtractng consumer prce p c,j from producer prce p p,j. The remanng parameters to estmate nclude spendng on tomatoes y j, the expendture share parameters for tomato categores δ j, prce wedges T, supply parameters c j and dj, and the elastcty of substtuton parameter σ. Expenses n each country was determned by multplyng retal prce tmes consumpton for each category of tomatoes and summng these expenses. Smlarly, the share parameter was found by dvdng the spendng on a partcular commodty by the total expenses. Table 1 presents ths data. Table 1: Income and Share Parameters y j δ j 1 δ j 2 δ j 3 j = U, M, C mllon $ share of budget Unted States Mexco Canada For the free trade scenaro, the prce wedges T were set to one, mplyng no prce dfference for Mexcan tomatoes sold wthn the country and those sold for export, excludng transport cost. For the 2013 mnmum prce polcy, we computed the prce wedges: T 1 = 1.10, T 2 = 1.37, and T 3 = These prce wedges were estmated by collectng the producer prce n Mexco and the export prce n the Unted States for each category of tomatoes. Feld tomatoes have the hghest prce wedge because ths category already faced a bndng mnmum prce before the new, hgher mnmum prce. The average transport cost from nteror Mexco to the U.S. border was estmated at $0.06 per pound n 2007 by t C,U Bayard et al We consdered a slghtly hgher value of $0.08 per pound for greenhouse and feld tomatoes n 2012 due to hgher gas prces. In addton, we estmated transportaton costs of $0.10 per pound for cherry & grape tomatoes due to packagng requrements. We used smlar estmates for transportaton costs from Canada to the U.S. border. 13 t C,U

15 Whle numerous studes have estmated elastcty of demand for aggregate tomatoes see Huang, 1985; Málaga et al., 2001, only one estmated the elastcty of supply for aggregate tomatoes Jung, We used the elastcty estmates from ths study as a bass to construct the supply elastcty of ε = The 2012 producton quanttes S j and producer prces p p,j are used to calbrate the coeff cents of the supply functons see equaton 1. tomato category. Table 2 reports the calbrated supply parameters for each country j and Table 2: Supply Parameters j = U, M, C c j 1 d j 1 c j 2 d j 2 c j 3 d j 3 Unted States Mexco , Canada Fnally, we consder an Armngton elastcty of substtuton, σ, equal to 1.10, whch s reported by Jung Results Ths secton presents the mpacts of the 2013 Suspenson Agreement s hgher mnmum prces on endogenous varables prces, supply, demand, and trade for all three categores of tomatoes and also welfare measures producer surplus and EV. Towards ths goal, we run two smulaton scenaros: baselne and alternate. The baselne scenaro s free trade, wth prce wedges set to one. The alternate scenaro s the 2013 Suspenson Agreement polcy, where the prce wedges are T 1 = 1.10, T 2 = 1.37, and T 3 = Mexcan producer prce for each tomato category s endogenously determned usng the market clearng condton 11 and 12, whch we use to fnd the remanng consumer and producer prces n each country j through the prce lnkage equatons 3, 4, 5, 6 and 7. Wth these prces, we compute the supply, demand, and trade for each category of tomatoes under the two 14

16 scenaros and also the percentage changes between the two scenaros to quantfy the mpacts of the Suspenson Agreement polcy. Table 3 presents these results. Table 3: Impact of Suspenson Agreement on Tomato Prces and Quanttes j = U, M, C Unted States Mexco Canada Varable Baselne % Baselne % Baselne % Greenhouse Producer Prce Supply Consumer Prce Demand Imports/Exports Feld Producer Prce Supply Consumer Prce Demand Imports/Exports Cherry & Grape Producer Prce Supply Consumer Prce Demand Imports/Exports Under the 2013 Suspenson Agreement, the mnmum mport prces for all three categores of tomatoes s hgher n the Unted States compared to those under free trade because these prces are bndng. For greenhouse tomatoes, U.S. producers see ther prce 15

17 ncrease by about 5.53% compared to that under free trade, whch leads to a rse n supply of 3.80%. In response to ths polcy, consumer prce rses by 1.54% and demand for greenhouse tomatoes falls by 1.53%. Snce we allow substtuton between tomato types n consumpton, the magntude of prce and quantty changes for consumers s less than that of producers. Wth hgher producer prce for greenhouse tomatoes, mports declne by 2.81%. Snce the mnmum mport prce reduces U.S. mport demand for Mexcan greenhouse tomatoes, prces n Mexco fall. Mexcan producer prces declne by 2.97%. In response to the fall n producer prce, Mexcan greenhouse tomato supply declnes by 3.02%. Because of the declne n exports of 5.76%, Mexcan consumer prces declne by 1.16% and the quantty of greenhouse tomatoes sold domestcally ncreases by 1.11%. The Suspenson Agreement nduces a trade dversonary effect,.e., Mexcan exports are dverted from the Unted States to Canada. Consequently, wth a hgher U.S. prce, Canada ncreases ts exports to the Unted States by 9.76%. As a result of the Canadan ncreased exports, the greenhouse tomato producer prce n Canada rses by 6.74% and the consumer prce by 1.60%. In response to hgher prces, supply ncreases by 6.75% whle demand declnes by 1.12%. It s worth pontng that, although the percentage changes are generally largest n Canada, snce Canada s quanttes are much smaller, changes n the volume are smaller compared to those of the Unted States and Mexco, ndcatng Canada s a relatvely small player n all three tomato markets. Feld tomatoes, whch already had a bndng mnmum prce even before the new 2013 Agreement, experence the largest magntude changes of all three tomato categores. The hgher the wedge between the free trade and the mnmum mport prce, the more dstortonary the effects. Snce the mnmum mport prce s substantally hgher than the free trade prce, U.S. mports from Mexco are sgnfcantly reduced, causng a greater ncrease n domestc prce. As a result of the polcy, U.S. feld tomato mports falls by 50.16%, whch leads to an ncrease n U.S. producer prce by 18.77%. Ths prce ncrease boosts U.S. supply by 18.78%. Wth ths reducton n mports, the consumer prce ncreases by 4.26% and 16

18 quantty demanded declnes by 4.23%. Once agan, the mpacts on producers outwegh the effects on consumers as a result of substtuton between tomato categores n consumpton. The mpacts of the Suspenson Agreement s hgher mnmum prce on Mexcan feld tomato market are substantal. Ths polcy sgnfcantly restrcts Mexcan exports of feld tomatoes to the Unted States by 15.89%. Consequently, Mexco sells more n the domestc market whch reduces the producer and consumer prce by 8.79% and 2.56%, respectvely. The lower prce leads to a 8.81% decrease n supply and a 3.97% ncrease n demand. Canada s an mporter of feld tomatoes. Snce Mexco exports less to the Unted States under the mnmum mport prce polcy, t dverts ts exports to Canada. Mexcan feld tomato exports to Canada rse by 40.47%. As a result of more mports comng nto Canada, feld tomato prces n Canada declne by 5.30% for producers, leadng to a supply declne of 5.34%. Because of substtuton among the three types of tomatoes, consumer prces for feld tomatoes fall by only 1.70%, resultng n a demand ncrease of 2.74%. The fnal category s cherry & grape tomatoes. Wth the smallest prce wedge between the free trade and mnmum prce, the mpacts on trade are smaller than those of the greenhouse and feld tomatoes. Mexcan cherry & grape tomato exports to the Unted States declne by 3.60%. Smlarly, the changes n prces and quanttes are also mnmal. For example, the producer prce n the Unted States only ncreases by 2.64%, a much smaller ncrease than those of greenhouse or feld tomatoes. Consumer prces rse by only 0.41%. Supply demand ncreases decreases by 2.60% 0.10%. Snce the mnmum prce s closer to the free trade prce, the domestc prce n Mexco for producers consumers only declnes by 2.58% 0.42%. These small mpacts lead to correspondngly mnor changes n supply demand of 2.60% 0.25%. Canada, as a net exporter of cherry & grape tomatoes, also experences only mnor changes. Canada s a very mnor player n the trade of cherry & grape tomatoes and the 13.78% ncrease n exports of cherry & grape tomatoes corresponds to an ncrease of only about one mllon pounds. Snce Canada augments ts exports to the Unted States, Canadan producer and 17

19 consumer prces ncrease by 3.26% and 0.45%, respectvely. Ths ncrease n prces leads to a supply ncrease of 2.13% and a demand decrease of 0.63%. In summary, the hgher mnmum prces beneft U.S. producers and hurts U.S. consumers. In contrast, Mexcan producers ncur producer surplus losses from the prce mnmum polcy compared to free trade, whle consumers gan. We quantfy these welfare changes usng producer surplus P S and EV. Producer surplus for the Unted States and Canada were determned through equatons 13 and 15. we compute producer surplus loss plus quota revenues see 14. For Mexcan producers, EV for each country s computed usng equaton 19, whch accounts for prce changes of all three categores of tomatoes. Table 4 reports the results of these welfare measures. Table 4: Producer and Consumer Welfare n Mllons of Dollars Unted States Mexco Canada Producer Welfare for Greenhouse Tomatoes Producer Welfare for Feld Tomatoes Producer Welfare for Cherry & Grape Tomatoes Equvalent Varaton for all categores For the Unted States, producer surplus s postve for each category because producers gan from hgher prces under the mnmum mport prces. Whle greenhouse tomato producers experence a moderate $8.17 mllon ncrease n producer surplus, feld tomato producers gan the most, by $ mllon. Cherry & grape tomatoes, whch saw the smallest prce ncrease and also represent the smallest tomato category, have the smallest ncrease n producer surplus of $1.44 mllon. Overall, U.S. tomato producer surplus ncreases by $ mllon for all three categores. The consumer welfare of $13.59 mllon takes nto account the substtuton among three categores resultng from smultaneous and relatve changes n all prces. Snce equvalent varaton and producer surplus are not drectly com- 18

20 parable, we cannot conclude that total welfare s postve for the Unted States by smply addng P S and EV. Suff ce t to say that U.S. producers gan and U.S. consumers lose. For Mexco, producer welfare ncludes both producer surplus loss and quota revenues. The greenhouse tomato category shows a net postve welfare gan of $27.35 mllon for Mexco producers, whch ncludes a loss of $30.99 mllon n domestc producer surplus resultng from lower prces and a gan of $58.34 mllon n quota revenues. Feld tomato producers also beneft substantally, wth a gan of $67.06 mllon whch conssts of a $78.94 mllon loss n producer surplus and a gan of $ n quota revenues. For cherry & grape tomatoes, producer welfare ncreases by $1.12 mllon, whch s comprsed of a producer surplus loss of $1.76 mllon and a quota revenue gan of $2.87 mllon. Summng the producer welfare of all three categores of tomatoes yelds a net ncrease of $95.53 mllon. Consumers gan from the lower prces and ther EV s $13.24 mllon. Canada, whch had prce ncreases n greenhouse and cherry & grape tomatoes and a prce decrease n feld tomatoes, has mxed welfare results. Greenhouse tomato producers experence a gan of $16.17 mllon whle feld tomato producers lose $21.61 mllon as mports from Mexco leads to prce declnes. Cherry & grape producers see a slght ncrease n surplus of $0.39 mllon. Total Canadan producer surplus for all three categores was a loss of $5.05 mllon. For consumers, the prce declne n feld tomatoes domnated over the prce ncreases n greenhouse and cherry & grape tomatoes. As a result, Canadan consumers gan $9.67 mllon. 5 Conclusons and Implcatons The tomato war between Mexcan and U.S. producers has lasted several decades, wth no end n sght. Ths war started n the 1960s when Mexco began exportng tomatoes to the Unted States. U.S. tomato producers are hurt by ncreased tomato mports from Mexco. However, those same mports ncrease the welfare of U.S. consumers through lower prces. Under the Suspenson Agreement, as wth any mport restrcton, producers gan 19

21 and consumers lose. In nsttutng the mnmum mport prce, the Unted States s prmarly concerned about the nterest of domestc producers. Ths preference for producers s lkely because of heavy lobbyng by the tomato producers to keep prces from fallng due to greater mports from Mexco. Furthermore, the U.S. government s less concerned about losses to consumers because these losses are neglgble to ndvdual consumers, makng them unlkely to lobby the government to oppose mport restrctons. The Suspenson Agreement wth Mexco s a prme example of such preference by the U.S. government snce U.S. producers experence a substantal gan, whle ndvdual U.S. consumer s losses are very small. Despte wdespread agreement by economsts that free trade ncreases net welfare, natons tend to mpose trade barrers because governments focus on loss to a partcular group rather than the overall net gan from free trade. In ths study, we fnd that producers generally gan. Even Mexcan producers experence gans n all three tomato categores due to quota revenues. However, those gans are unlkely to contnue f the Unted States ncreases the mnmum prces n the future. Untl ths most recent agreement, the trade n both greenhouse and cherry & grape tomatoes were not bndng snce the mnmum mport prce was too low to restrct trade. Now, however, the prces of these two categores are hgher, leadng to bndng trade restrctons whch causes the Unted States to dvert ts mports from Mexco to Canada. The category most mpacted by the new mnmum prce s feld tomatoes, whose prce was already bndng even before the 2013 agreement. Whle most U.S. consumers are unaware of the Suspenson Agreement, ths polcy does have aggregate adverse mpacts on consumers. Snce tomatoes are a commonly consumed produce, the overall effect of the Suspenson Agreement on consumer welfare s large, even though t only mnmally affects each ndvdual consumer. Wth the Unted States experencng hgher consumer prces, the EV declnes. In examnng the welfare effects of the 2013 Suspenson Agreement, ths study quantfes the effects of the 2013 Suspenson Agreement on both producers and consumers. Wthout beng able to drectly compare producer surplus and EV, we cannot ascertan whether ths polcy has a negatve or postve mpact 20

22 on each country or the regon as a whole. However, we can conclude that ths polcy has substantal dversonary and welfare effects. References AMS 2015a. Market News Portal, Movement. Agrcultural Marketng Servce, USDA, AMS 2015b. Market News Portal, Retal Prces. Agrcultural Marketng Servce, USDA, Bayard, B., L. Chen, and H. Thompson Free trade and a case of local tomato producton. Agrcultural Economcs Revew 82, 71. Bayls, K Dspatches from the tomato wars: The spllover effects of trade barrers. Paper presented at the Amercan Agrcultural Economcs Assocaton Annual Meetng, July Bayls, K. and J. M. Perloff Trade dverson from tomato suspenson agreements. Canadan Journal of Economcs/Revue canadenne d économque 431, Bredahl, M., A. Schmtz, and J. S. Hllman Rent seekng n nternatonal trade: The Great Tomato War. Amercan Journal of Agrcultural Economcs 691, Calvn, L. and V. Barros Marketng wnter vegetables from Mexco. Journal of Food Dstrbuton Research 30, Devadoss, S. and L. Stodck Compensatng and equvalent varatons for prce and ncome changes. Workng paper, Unversty of Idaho, Department of Agrcultural Economcs. ERS Vegetable and pulses data, tomatoes. 21

23 Freund, C. and C. Ozden Trade polcy and loss averson. The Amercan Economc Revew, Guajardo, R. G. and H. A. Elzondo North Amercan tomato market: a spatal equlbrum perspectve. Appled Economcs 353, Huang, K. S US demand for food: A complete system of prce and ncome effects. Number US Dept. of Agrculture, Economc Research Servce. Johnecheck, W. A., P. E. Wlde, and J. A. Caswell Market and welfare mpacts of COOL on the US-Mexcan tomato trade. Journal of Agrcultural and Resource Economcs, Jung, J Understandng the COMPAS model: Assumptons, structure, and elastcty of substtuton. Ph. D. thess, Unversty of Florda. Jung, J Effects of the Suspenson agreement: US-Mexco fresh tomatoes antdumpng case. Paper presented at the Amercan Agrcultural Economcs Assocaton Annual Meetng, July Málaga, J. E., G. W. Wllams, and S. W. Fuller US-Mexco fresh vegetable trade: the effects of trade lberalzaton and economc growth. Agrcultural Economcs 261, NASS Vegetables 2012 summary. U.S. Department of Agrculture. Numbeo Cost of lvng. Padlla-Bernal, L., D. Thlmany, et al Mexcan-US fresh tomato trade: An analyss of volume, prces and transacton costs. 22

24 SIAP Produccon agropecuara y pesquera, Produccon anual. Servco de Informacon Agroalmentara y Pesquera, Statstcs-Canada Greenhouse, sod and nursery ndustres. Statstcs-Canada Supply and dsposton of food n Canada. USDA Suspenson Agreement. Unted States Department of Agrculture, USDA Suspenson Agreement. Unted States Department of Agrculture, USITC Interactve tarff and trade DataWeb. Unted States Internatonal Trade Commsson, Walmart Frutas y verduras. Wngfeld, B. and N. Cattan U.S. to end Mexcan tomato pact, rasng rsk of trade war. Zahnser, S., D. Skully, and A. Somwaru NAFTA commodty supplement, WRS-99-1A. Techncal report, Economc Reseach Servce, U.S. Department of Agrculture. Notes 1 The leadng Mexcan export s beer. 2 After 1996, Suspenson Agreements were renewed n 2002 and 2008, along wth several amendments n other years. In 1996, the prce mnmum was $ per pound for all tomato 23

25 mports Zahnser et al., In 2008, the mnmum prces were $ and $0.172 per pound for wnter and summer tomato mports, respectvely USDA, Loose and packaged small tomatoes are combned nto small cherry & grape tomatoes. 4 Ths comparson holds only under perfect competton and no uncertanty. 5 We derved these demand functons usng utlty functon U = X α Q 1 α, where Q s the composte good and X s the aggregaton of the CES sub-utlty functon: σ σ 1 σ 1 σ 1 σ 1 δ σ σ σ 1D1 + δ 2 D2 + δ 3 D 3. A.1 The demand functon resultng from the sub-utlty functon s denoted D and the utlty level s u. 6 Ths mnmum mport prce s generally bndng; otherwse, there s no need for ths polcy. 7 We acknowledge Suzanne Thornsbury for helpng us to obtan ths data and also wth the process of constructng the producton data for cherry & grape tomatoes. 8 Snce the total shpment of greenhouse and feld tomatoes collected from AMS 2015a s smlar to the total producton data for these two categores of tomatoes reported n NASS 2012, we felt t was approprate to use the cherry and grape shppng data n AMS 2015a to construct the producton data for ths category of tomatoes. 24