International Relations/Trade, Resource /Energy Economics and Policy,

Agyeman, Osei Yeboah

Quaicoe, Obed

Shaik, Saleem

English

Research Papers in Economics

U.S. Potential Biofuel Trade: A 
Worldwide Country-Pair 
 
Osei Yeboah Agyemana, Saleem Shaikb  
and Obed Quaicoea 
aNorth Carolina A&T State University, bNorth Dakota 
State University 
AAEA Annual Meetings, Denver Colorado, July 25-27, 2010 Background 
 
 Biofuels are known to be one of the best preferences to 
lead the transition away from petroleum fuels in the near-
term.  
 
 Global biofuel production (2007) accounted for 1.8 % of 
total global transport fuel consumption in energy terms.  
 
 Brazil and U.S. together account for almost three-quarters 
of global supply. 
 
 The two chief biofuels that are currently used are ethanol 
and biodiesel (Osei Yeboah and Shaik, 2009).  Background Cont’d 
 
 Brazil has been by far the largest exporter of ethanol in 
recent years. 
 
 The E.U. and U.S. jointly account for over 95 % of the 
global biofuel demand. 
 
 The primary goal of this paper is to analyze the potential 
for U.S. bilateral trade in biofuels with over 200 countries 
worldwide using country-pair analysis. Literature Review: Country Pair Analysis 
 Country-pair analysis is popular in analyzing bilateral trade 
between countries. It explains better the cross country 
variation (Calderón, 2007; Hertel, 2007; Helpman, 2008). 
 
 Country-pair analysis usually employs gravity model 
(Tzouvelekas, 2007; Westerlund and Wilhelmsson, 2007).  
 
 The problem with gravity model is the prevalence of zero 
bilateral trade (Hummels and Klenow, 2005; Santos Silva 
and Tenreyro, 2006; Bikker, 2007; Hillbery and Hummels, 
2008).    Literature Review: Country Pair Analysis 
Cont’d 
 Zero trade flows are undefined when converted into 
logarithms for estimation using log-linear gravity model 
(Eaton and Kortum, 2002; Hallak, 2006; Baldwin and 
Harrigan, 2007; Helpman et al 2008).  
 
 The most common response to the problem of zero trade 
is to truncate the sample by deleting the observations with 
zero trade.  
 
 Truncation, in principle, is inefficient, since it ignores the 
information in the limit observations. 
 Literature Review: Country Pair Analysis 
Cont’d 
 
 Also, when data are censored, values of the dependent 
variable that could in principle be observed are masked. 
 
 To avoid the problem of zero trade values researchers 
often use Limited Dependent Variable Models-(Egger and 
Larch, 2008; Head, Cameron and Trivedi, 2009; Mayer 
and Ries, 2010).  Literature Review: Limited Dependent 
Variable Model 
 
 Limited Dependent Variable Model is an approach of 
estimation that systematically takes into account the 
information in the limit observations.  
 
 In general, the natural method to handle data generated by 
a limited-dependent variable process is the Tobit model.  
 
 Tobit model accounts for country-pairs with zero trade. 
 Literature Review: Limited Dependent 
Variable Model Cont’d 
 
 Tobit is a maximum likelihood procedure that looks at the 
limit observations where the dependent variable is equal to 
zero and the non limit observations where the dependent 
variable is greater than zero.  
 
 
 Tobit incorporates the zeros and is usually preferred over the 
traditional gravity model (Egger and Larch, 2008; Head, 
Cameron and Trivedi, 2009; Mayer and Ries, 2010).  Standard Tobit Model 
 The standard tobit model can be defined as 
 Standard Tobit Model 
 The log-likelihood function of the standard 
tobit model is 
 
 Table 1: Summary of Descriptive Results 
Variables  U.S. Exporting other Countries  Other countries exporting to U.S. 
Mean Standard  Deviation  Mean   Standard Deviation 
BIOFUELE 
($’1000) 
 
AGGDPOC 
($’1000) 
 
REXRATEO 
(Per $) 
 
POPOC (‘1000) 
 
DISTANCE 
(miles) 
102.394 
 
 
1129.69 
 
 
0.29471E+08 
 
 
369737 
 
42691.4 
213.853 
 
 
2750.48 
 
 
0.280989E+09 
 
 
0.573121E+07 
 
107623 
153.048 
 
 
180.654 
 
 
0.511576E+07 
 
 
85366.2 
 
21443.6 
255.904 
 
 
461.985 
 
 
0.196399E+08 
 
 
245153 
 
102542 Summary of Descriptive Results 
 A summary of the descriptive results are presented in table 
1. 
 
 Over the period (2000-2008), U.S. biofuel export to other 
countries is $ 102, 000 on the average whereas its imports 
from other countries is $ 153, 000 on the average. 
 
 Thus, in the net, U.S. is an importer of biofuel.  
 Table 2: Tobit Model results of U.S Exporting 
to other Countries 
Variable  Coefficient  Marginal Effect  b / St.Er.  Mean of X 
 
Constant 
 
AGGDPOC 
 
REXRATEO 
 
POPOC 
 
DISTANCE 
 
-21.6726 
 
-0.82802*** 
 
-0.00013*** 
 
0.00035*** 
 
-0.00306 
 
-0.00217 
 
-0.0001*** 
 
-0.12776D-07*** 
 
0.34685D-07*** 
 
-0.30621D-06 
 
-0.590 
 
-3.551 
 
-10.195 
 
3.644 
 
-0.568 
 
 
 
1127.88 
 
0.295D+08 
 
369737 
 
42098.5 
Lhs=BIOFUELE 
Note: *** = Significance at 1 % level 
Note: nnnnn.D-xx   or   D+xx → multiply by 10 to  –xx  or  +xx.  Tobit Model results of U.S Exporting to Other 
Countries 
 The empirical results of U.S. as an origin country of biofuel are 
presented in table 2. 
 
 The size of agricultural GDP (AGGDP) of U.S. is significant at 1 
% and exerts a negative effect on biofuel export. 
 
 Real Exchange Rate of the foreign currency to the dollar  is also 
significant at 1 % and shows a negative effect on biofuel export.  
 
 U.S. population is significant at 1 % and has a positive effect on 
biofuel export. 
 
 Distance between U.S. capital and capital cities of other 
countries  serves as a proxy for transportation cost.  Marginal Effects: U.S Exporting to Other 
Countries 
 Marginal effects were computed at the means of the 
explanatory variables for all observations (with zeros) and 
are also presented in table 2. 
 
 This accounts for the fact that a country pair that has not 
traded in the past may choose to trade if conditions 
change. 
 
 The negative marginal effect of -0.0001 AGGDP implies a 
1 % increase in AGGDP would potentially generate 
0.0001 % less of  biofuel export from the U.S. Marginal Effects: U.S Exporting to Other 
Countries Cont’d. 
 
 The marginal effect of -0.000000013 for exchange rate 
means a 1% depreciation of the foreign currency will reduce 
U.S. biofuel exports  by less than 1 percent. 
 
 The  positive marginal effect of 0.000000035 implies that 1 % 
increase in U.S. population would mean an expected increase in 
U.S. biofuel export by less than 1 percent. 
 
 
 Table 3: Tobit Model results of Other 
Countries Exporting to U.S. (U.S. Imports) 
Variable  Coefficient  Marginal Effect  b / St.Er.  Mean of X 
 
Constant 
 
AGGDPOC 
 
REXRATEO 
 
POPOC 
 
DISTANCE 
 
-11.9836 
 
6.86335*** 
 
-0.00359*** 
 
-0.00046** 
 
0.02542** 
 
-0.00120 
 
0.0007*** 
 
-0.35910D-06*** 
 
-0.45538D-07** 
 
-0.25423D-05** 
 
-0.177 
 
4.272 
 
-8.675 
 
-2.116 
 
-2.105 
 
 
 
180.654 
 
0.512D+07 
 
85366.2 
 
20868.2 
Lhs=BIOFUELE 
Note: ***, ** = Significance at 1 %, 5 % level 
Note: nnnnn.D-xx   or   D+xx → multiply by 10 to  –xx  or  +xx.  Tobit Model results of Other Countries 
Exporting to U.S 
 The empirical results of other countries as an origin countries of 
biofuel are presented in table 3. 
 
 The size of agricultural GDP (AGGDP) in other countries is 
significant at 1 % and exerts a positive effect on biofuel export as 
expected. 
 
 Real Exchange Rate of the foreign currency to the dollar  is also 
significant at 1 % and shows a negative effect on biofuel export.  
 
 Other countries’ population is also significant at 5 % and has a 
negative effect on biofuel export. 
 
 Distance between capital cities of other countries and U.S. 
capital is significant at 5 % and exerts a negative effect. Marginal Effects: Other Countries Exporting 
to U.S 
 The marginal effects are also presented in table 3. 
 
 The positive marginal effect of 0.0007 AGGDP implies that 
a 1 % increase in AGGDP would potentially generate 
0.0007 % more of  biofuel export from other countries to 
the U.S. 
 
 The marginal effect of -0.00000036 for exchange rate 
means a 1% depreciation of the dollar will reduce other 
countries biofuel exports  to the U.S. by less than 1 
percent. 
 
 
 Marginal Effects: Other Countries Exporting 
to U.S Cont’d. 
 
 The  negative marginal effect of -0.000000046 implies that 
a1 % increase in foreign countries population would mean 
an expected decrease in their biofuel export to U.S. by 
less than 1 percent. 
 
 It is assumed that the larger the population, the less the 
country will export. This is because, that exporting country 
will want to make sure it provides for its growing 
population. 
 Marginal Effects: Other Countries Exporting 
to U.S Cont’d. 
 
 The negative marginal effect of -0.0000025 implies that a 
1 % increase in the distance between other countries and 
the U.S. in terms of biofuel export, will result in an 
expected decrease in the biofuel exports of these 
countries to the U.S. by less than 1 percent. 
 
 This means that the greater the distance between two 
countries, the lower the level of trade between them.  
 Conclusions 
 This paper extends the traditional gravity 
model to analyze the potential for U.S. 
bilateral trade in biofuels with over 200 
countries worldwide using country-pair Tobit 
analysis. 
 The above results are consistent but provide 
differential output with and without the 
inclusion of country-pairwise data. 
 

U.S. Potential Biofuel Trade: A Worldwide Country-Pair

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