Agribusiness, International Relations/Trade,

Brian, Hilbun

Kennedy, P. Lynn

Lee, Young-Jae

English

Research Papers in Economics

1
The Impact of Microeconomic Structure Adjustment and Macroeconomic Variables under NAFTA on U.S. Agriculture
Youngjae Lee Youngjae Lee
Assistant Professor/Research
Department of Agricultural Economics and Agribusiness
117 Martin D. Wooding Hall, Louisiana State University, Baton Rouge, LA 70803
Ylee@agcenter.lsu.edu
P. Lynn Kennedy
Crescent City TigersAlumni Professor Crescent City Tigers Alumni Professor
Department of Agricultural Economics and Agribusiness
181 Martin D. Wooding Hall, Louisiana State University, Baton Rouge, LA 70803
LKennedy@agcenter.lsu.edu
Brian M. Hilbun
Research Associate
Department ofAgricultural Economics andAgribusiness Department of Agricultural Economics and Agribusiness
181 Martin D. Wooding Hall, Louisiana State University, Baton Rouge, LA 70803
BHilbun@agcenter.lsu.edu
Poster prepared for presentation at the Agricultural & Applied Economics Association’s 2011
AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, July 24-26, 2011
Copyright 2011 by Youngjae Lee P Lynn Kennedy and Brian M Hilbun All rights reserved Copyright 2011 by Youngjae Lee, P. Lynn Kennedy and Brian M. Hilbun. All rights reserved.
Readers may make verbatim copies of this document for non-commercial purposes by any means, 
provided that this copyright notice appears on all such copies2
The Impact of Microeconomic Structure Adjustment and Macroeconomic Variables under NAFTA on U.S. Agriculture
Youngjae Lee, P. Lynn Kennedy, & Brian Hilbun
Department of Agricultural Economics and Agribusiness, Louisiana State University
The Impact of Microeconomic Structure Adjustment and Macroeconomic Variables under NAFTA on U.S. Agriculture
Youngjae Lee, P. Lynn Kennedy, & Brian Hilbun
Department of Agricultural Economics and Agribusiness, Louisiana State University
BACKGROUND
On January 1, 2008, the last transitional agricultural trade
restrictions established by North American Free Trade
Agreement (NAFTA) were removed, marking an end to a 14-
year process in which Canada, Mexico, and the United States -
the three members of NAFTA - gradually removed thousands
of tariff and non-tariff barriers to regional agricultural trade.
ANALYTICAL FRAMEWORK
Price at World Market Equilibrium
The interaction in country i for agricultural product j can be
simply expressed as:
(1) , and
(2)
EMPIRICALEXAMPLE
Figure 1 shows U.S. annual corn price movements before and
after NAFTA. As shown, average U.S. corn price increased
after NAFTA. However, variance of price also increased after
NAFTA, indicating that some of the prices after NAFTA were
lower than the average price of before NAFTA. In actuality,
U.S. corn prices are lower than those before NAFTA except for
t ti l id il d i th bii f
MONTE CARLO SIMULATION
Using U.S. corn industry, this study conducts Monte Carlo
simulation covering the range of variation of parameter values
at 95% confident intervals. For example, this study estimates
passive parameters by using restricted SUR regression based
on equations (9). And then we determine benchmark values of
these parameters and calculate 95% confident intervals of the
benchmark values by using t distribution The prices obtained
j
i i
j
i
j
i
j
i
j
i c Y b Q a P + + − =
j j j j d Q P + g g
As a result, the NAFTA countries’ agricultural economies are
increasingly behaving as one market (Zahniser and Crago,
2009).
Therefore, this market integration of agricultural economies
might have enforced structure adjustment in member countries.
According to recent research of the USDA, changes in
agricultural commodity prices are felt across international
borders as market integration opens new sales territories for
producers, sometimes enabling further exploitation of
economies of scale. It gives producers access to potentially
cheaper inputs and creates new opportunities for Foreign
Direct Investment (FDI). However, market integration also
exposes producers to new competition from other producers in
(2) ,
where P is market price, Q is quantity demanded (or supplied),
Y is income, a, b, c, and d represent passive parameters.
By using these passive parameters, quantities demanded and
supplied are expressed as:
(3) , and
(4) .
The effect on agricultural product j of NAFTAcan be expressed
as:
two exceptional periods including the beginning year of
NAFTA and bio-ethanol booming years of the later 2000s.
benchmark values by using t-distribution. The prices obtained
by Monte Carlo simulation are a little higher than those
obtained at benchmark values.
Table 1. NAFTA Effect on US Corn Price at Benchmark Values of Parameters
NAFTA Effect
Structural Adjustment Effect Tariff and Income Effect
US MC JK Sum Price Elasticity Income Elasticity
Tariff
Income Effect
US MC JK Sum US MC JK Sum US MC JK Sum
1)PUS
corn 4.76
2)PUS
corn 5.24 4.78 4.48 4.94 4.62 4.75 4.77 4.63 4.88 5.28 4.77 4.76 5.29 6.18 4.96 4.52 5.94
ΔPUS
corn 0.48 0.02 -0.28 0.18 -0.14 -0.01 0.01 -0.13 0.12 0.52 0.01 0.00 0.53 1.42 0.20 -0.24 1.18
(%) 10.08 0.42 -5.88 3.78 -2.94 -0.21 0.21 -2.73 2.52 10.92 0.21 0.00 11.13 29.83 4.20 -5.04 24.79
PUS
corn is log corn price
1)PUS
cornis log corn price before NAFTA
2)PUS
corn is log corn price calculated by reflecting NAFTA effect
Table 2. Simulation of NAFTA Effect on US Corn Price
NAFTA Effect
Structural Adjustment Effect Tariff and Income Effect
j
i
j
i
j
i
j
i d Q a P + =
j
i
j
i
i j
i
j
i j
i j
i
j
i
D
a
c
Y
a
b
P
a
Q + + − =
1
j
i
j
i j
i j
i
j
i
S
a
d
P
a
Q − =
1
p p p p
formerly isolated locations. For consumers, market integration
provides access to new varieties of food products and
offseason supplies of fresh fruit and vegetables and may lead
to faster income growth. Greater competition is also likely to
make food more affordable, thereby expanding consumer
purchasing power (Zahniser and Crago, 2009).
OBJECTIVES
Much studies have analyzed the effect of NAFTA on U.S.
agriculture before and during the implementation period of
NAFTA. These studies have provided a valuable guide for
policy makers to drive U.S. agriculture in the right direction
(5) , and
(6) ,
where D is dummy variable (D = 1 after NAFTA and D =0
before NAFTA).
If NAFTA changes price and income responsiveness in demand
and supply sides of involved trading countries, the two
equations will hold. In the case, excess supply (or excess
demand) after NAFTA would be affected by depending upon
how NAFTA influences price and income responsiveness in
involved trading countries. This can be expressed as:
Therefore, it is reasonable to think about a possibility of
structural change of economies during the implementation of
NAFTA in involved trading countries. For example, if price
i i th U S il t l ktb
IMPLICATION
NAFTA has dismantled numerous barriers to regional
agricultural trade. During the implementation period, the
agricultural sectors of North American countries have become
much more integrated, which might have influenced market
structure. Using partial equilibrium trade theory, we can obtain
the equilibrium price of U.S. agricultural products in an open
economic condition. The equilibrium price is a function of five
impact factors which will represent the new market
US MC JK Sum Price Elasticity Income Elasticity Tarif
f
Income Effect
US MC JK Sum US MC JK Sum US MC JK Sum
1)PUS
corn 5.34
2)PUS
corn 5.88 5.37 5.05 5.56 5.22 5.34 5.36 5.23 5.49 5.93 5.36 5.36 5.95 7.16 5.88 5.06 6.94
ΔPUS
corn 0.54 0.03 -0.29 0.22 -0.12 0.00 0.02 -0.11 0.15 0.59 0.02 0.02 0.61 1.82 0.54 -0.28 1.60
(%) 10.11 0.56 -5.43 4.12 -2.25 0.00 0.37 -2.06 2.81 11.05 0.37 0.37 11.42 34.08 10.11 -5.24 29.96
() () D Y D P D
a
c
Y
a
b
P
a
Q i
j
i
j
i
j
i
j
i j
i
j
i
i j
i
j
i j
i j
i
j
i
D × + × + + + + − = ζ ξ ς
1
() D P D
a
d
P
a
Q
j
i
j
i
j
i j
i
j
i j
i j
i
j
i
S × + + − = ϕ φ
1
d b
j j j 2 po cy aesto dv e U.S. ag cu tu e te gtd ect o
given the open economic circumstance.
In addition to these studies, this study tried to identify
structural adjustment under NAFTA. This effort is not limited
to member countries but also includes the third trading
partners to distinguish trade creation and diversion being
generated by NAFTA. We adopt partial equilibrium theory to
link the price of U.S. agricultural products to 1) tariff, 2) the
third exporting rivals, 3) policy variables, and 4) structural
adjustment in microeconomic level. This linkage is because
NAFTA is the biggest regional market in the world.
(7) , and
(8) .
At world market equilibrium, excess supply is equal to excess
demand. Therefore, US price of agricultural product j is
determined as:
(9)
responsiveness in the U.S.a g r icultural market became more
elastic after NAFTA, aggregate quantity demanded would
decrease by price change leading to excess supply increases
which press the price. In contrast, if price responsiveness of
supply in Canada and Mexico became more elastic after
NAFTA, aggregate quantity supplied would decrease slightly
in price causing excess demand to increase, which would
encourage U.S. price. Therefore, the effect of NAFTA on U.S.
price will be affected by structural adjustment in member
countries. In addition, if there are other exporters to Canada
and Mexico and importers from the U.S., these countries might
also effect U.S. price.
impact factors which will represent the new market
circumstance created by NAFTA. This study shows that if
agricultural product j is a normal good in country i (while an
inferior good in country k), market integration leads country i
to produce agricultural product j more because the price of
agricultural product j increases more in the country i than
before market integration. In contrast, country k produces
agricultural product j less because the price of agricultural
product j decreases more in the country k than before market
integration. Therefore, market integration might accelerate
specialization in the agricultural sector of each country through
consumer preference.
() () D Y D P D
a
c d
Y
a
b
P
a
ES i
j
i
j
i
j
i
j
i
j
i
j
i j
i
j
i
j
i
i j
i
j
i j
i j
i
j
i ζ ξ ϕ ς φ − − + − +
−
+ − =
2
( ) ( ) D D P D
a
c d
Y
a
b
P
a
ED
j
i
j
i
j
i
j
i
j
i
j
i j
i
j
i
j
i
i j
i
j
i j
i j
i
j
i ζ ξ ϕ ς φ + − − − −
−
− + − =
2
() ( ) ()
4 4 4 4 4 4 4 4 48 4 4 4 4 4 4 4 4 47 6
pact
Tariff
US
j
i
US j
i
US j
i
j
i
j
i P
j
i
US j
i
j
i
US j
US t a E a t A P
Im
1
, , | , , |
−
+ = α ξ ϕ α ()
⎜
⎜
⎜
⎜
⎜
⎝
⎛
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4 4 48 4 4 47 6
pact
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j
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K j
i
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j
i
K a P t K
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arg
, | , α
()
4 4 48 4 4 47 6
pactt
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Smalls
j
i
N j
i
j
N
j
i
N a P t N
Im
, | , α + ()
8 7 6
pactt
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i Y G
Im
+
}
Term
t Cons
C
tan
+ ()
⎟
⎟
⎟
⎟
⎟
⎠
⎞
+
4 4 4 4 4 4 48 4 4 4 4 4 4 47 6
pact
Adjustment
Structure
i
j
N
j
K
j
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i Y P P t E
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, , , , | , , , , α ϕ φ ζ ξ ς

The Impact of Microeconomic Structure Adjustment and Macroeconomic Variables under NAFTA on U.S. Agriculture

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