trade, vegetable, free trade agreement, tariff, habits, NAFTA, Andean Trade Preference Act, Agricultural and Food Policy, Demand and Price Analysis, International Relations/Trade,

Ferrier, Peyton Michael

Zhen, Chen

English

Research Papers in Economics

 
 
“Habit Effects and Producer Welfare In the Fresh Vegetable Trade” 
Peyton Ferrier, USDA-Economic Research Service, and Chen Zhen, Research Triangle Institute 
Preliminary Poster Material  
Agricultural and Applied Economics Association Summer Meeting,  
July 24-26, 2011, Pittsburgh, PA 
 
Disclaimer: The views and opinions expressed here are those of the authors and do not reflect 
those of the United States Department of Agriculture or the Economic Research Service.  
 
Background 
In recent years, bilateral free trade agreements have lead to increased importation of fresh 
agricultural commodities.  For instance, between 2005 and 2008, the U.S. imported more asparagus 
than it produced from Mexico and Peru each whereas between 1985 and 1988, the U.S. imported 
only negligible volumes.  This growth is attributed, in large part, to the enactment of the North 
American Free Trade Agreement (NAFTA) of 1994 and the Andean Trade Promotion and Drug 
Eradication Act (Andean Agreement) of 1991 (and its successors) which eliminated tariffs on fresh 
produce.   
  The conventional wisdom is that trade liberalization that increases imports harms domestic 
producers but benefits domestic consumers.  The 2008 U.S. farm bill, for instance, provided $15 
Million in market loss assistance payments to “producers of the 2007 crop of asparagus for market 
losses resulting from imports during the 2004 to 2007 crop years.”  While NAFTA does not require 
regular renewal, the Andean Agreement and other FTAs have faced re-occurring political scrutiny 
surrounding their extensions which, since 2002, have generally lasted only one to two years.   
This research considers two factors that may mitigate the harm to U.S. producers of fresh 
produce from trade liberalization.  First, imports may be counter-seasonal, arriving on the U.S. fresh 
market when domestic production is out of season.  Asparagus imports, for example, are greatest 
when the U.S. is not producing (see Figure 1).  Second, increased consumption may create habits 
for the good that increases demand in the future (Stigler and Becker 1977).  Using monthly data on 
vegetable disappearance, we estimate a monthly demand system for four fresh vegetables 
(asparagus, broccoli, carrots, and cauliflower) and one composite frozen vegetable that explicitly 
controls for habit effects.   
 
{Insert Figure 1 Here}  
 
To evaluate how habit formation can alter the effects of trade liberalization as conventionally 
measured, we examine counterfactual scenarios (in which the tariffs on asparagus that were 
eliminated under NAFTA and the Andean Agreement revert to MFN levels) when consumer 
demand in one period depends on demand decisions in other periods.  Figure 2 shows both the 
trade-competition and habit effect of a tariff.  Our simulations re-impose the most favored nation 
tariff (MFN) rate of 21.3% between December and August and 5% between September and 
November.  We ignore other import sources which comprise less than 5% of the market.  Through 
the trade-competition effect, the tariff raises both prices and U.S. producer welfare.  However, as a 
higher price reduces consumption, it also reduces the stock of consumption capital that maintains 
habits for asparagus.  This habit effect decreases demand and the price, reducing U.S. producer 
welfare and offsets some of the benefit of then trade competition effect.  We draw from available 
supply elasticity estimates to simulate the welfare effects of returning tariff levels to the pre-
NAFTA and Andean Agreement levels and find that habits mitigate about 40% of the increase in  
 
U.S. domestic producer welfare from a tariff increase.          
 
{Insert Figure 2 Here}  
 
The Demand Model  
Our demand system is estimated using data from the Agricultural Marketing Service for fresh 
asparagus, broccoli, carrots and cauliflower and the National Agricultural Statistics Service for a 
composite frozen good consisting of asparagus, broccoli, carrots, cauliflower, corn, peas, and beans.   
Figure 3 provides summary statistics and elasticity estimates.   
 
{Insert Figure 3 Here}  
 
We use the TransLog (TL) demand system in our estimation and incorporate monthly and control 
variables and a lagged consumption variable that controls for habits.  Equations (1), (2), and (3) 
provide the specific fitted equations.   We fit the budget share equation in (1) using a seemingly 
unrelated regression with frozen goods as our omitted share.   Note that in equation (3), the habit 
term, ￿￿￿ ￿￿, depends on consumption in the prior 12 months.  While other lag lengths (24 and 36 
months) were tested, this specification was significant and had the best fit (i.e. highest ￿￿.)  Our d 
estimate of 0.71 suggests that memory of past consumption is relatively short, decaying nearly 
entirely within a year.   
 
The share equations: 
        ￿￿ ￿ ￿ ￿￿￿￿ ￿ ￿￿￿￿ ￿ ∑ ￿￿￿￿￿￿￿￿￿ ￿
￿￿￿ ￿           (1) 
 
Monthly, Trend and Lagged Consumption Controls  
  ￿￿￿ ￿ ￿￿,￿ ￿ ∑ ￿￿,￿￿￿ ￿￿￿ ￿￿￿￿ ￿ ￿￿,￿￿ ￿ ∑ ￿￿, !"#$￿￿￿￿￿ ￿       (2) 
 
Lagged Consumption Controls 
  ￿￿￿￿￿ ￿ ∑ %￿&￿￿￿,￿&￿
￿￿
￿               (3) 
 
The TL demand system is flexible and parsimonious (Christensen, Jorgenson et al. 1975). 
Compared to the almost ideal demand system, it shares the same number of parameters (in its basic 
form) and has been shown to generate similar elasticity estimates and goodness of fit measures in 
empirical applications (Wang, Halbrendt et al. 1996; Piggott 2003; Holt and Goodwin 2009).  We 
impose symmetry, equality and additivity restrictions.      
 
Welfare Estimates  
We develop our simulation results from the following partial equilibrium condition.   
 
  '()*,￿￿￿ ￿+ ￿ ',,-￿* . )1 ￿ ￿-+￿0- ￿ 0          (4)   
 
'( and ', are row vectors of length I, the number of goods in the demand system.  For a particular 
good, '(, the quantity demanded depend on P, the price of all other goods, and, lag q, the 
consumption stock that defines the habit.   ',,-, the supply of the good from country k, depends on 
prices and the tariff on goods from k, ￿-.  The 0- term is a row vector to sum the k supplies.   U.S. 
domestic demand minus supplies equals zero.  Total differentiation of (4) shows the marginal effect  
 
of a change in lagged consumption and the tariff rate.  Equation (5) shows these marginal effects in 
a form that allows them to be considered as elasticities.    
   
3
456
47
7
56 ￿ 0-8
459,:
47
7
59,:
59,:
56 ;
47
7 ￿
456
4 !"#
 !"#
56
4 !"#
 !"# ￿ 0-8
459,<
47
7
59,<
59,<
56 =￿> ￿ 0    (5) 
 
Let ￿￿
- be the share of consumption of good 1 from country k or ',,- '( ⁄ .   The terms @A
(, @ !" #
(  and 
@A
, are the demand elasticity with respect to price, the demand elasticity with respect to the lag q, 
and the supply elasticity with respect to price.  Make these substitutions:  
 
B ￿ C
@AD
(D ￿ 0-8@AD
,D,>￿￿
- … @AF
(D
G H G
@AD
(F … @AF
(F ￿ 0-8@AF
,,>￿I
-
J          K ￿ L
@ !"D
(D … @ !"F
(D
G H G
@ !"￿
(F … @ !"F
(F
M 
N ￿ C
0-8@AD
,D,>￿￿
- … 0
G H G
0 … 0-8@AD
,D,>￿￿
-
J                             ￿ ￿ C
@AD
(D … @AF
(D
G H G
@AD
(F … @AF
(F
J 
 
A, B, C, and D are O . O in size.  For simplicity, in A and C, cross-commodity supply elasticities are 
assumed to be zero.    
 
  B
47
7 ￿ K
4 !"#
 !"# ￿ )0>+8)N+=￿> ￿ 0              (6) 
 
We set =￿￿￿￿￿ ￿￿￿￿￿ ⁄  equal to ∑ %￿&￿)=￿￿&￿ ￿￿&￿ ⁄ + ￿￿
￿ ￿￿&￿, where ￿￿ is the average monthly share of 
annual consumption.  In our simulations, we assume that the elasticity of supply is 0.4 for each 
region in each month.  We first simulate the reduction in consumption from a tariff assuming no 
change in lag q.  We then assume that the reduction in consumption from our first step immediately 
feeds back into habits contemporaneously.  From (6), we can derive the following formulas for 
developing welfare and tariff revenue estimates for simulations regarding the re-imposition of MFN 
tariffs.     
 
{Insert Figure 4 Here}  
 
Table (5) shows that the trade-competition effect of a tariff increase, following the revoking of 
concessions under NAFTA, the Andean Agreement and both agreements, reduces the consumer 
surplus by 2.5, 2.1 and 4.6 percent of total spending respectively.  At the same time, the U.S. 
producer surplus increases by 1.7, 0.8, and 2.5 percent of total spending while other trade partners 
have mixed effects consistent with theory (i.e. Mexican producers are harmed and Peruvian helped 
by a repeal of NAFTA.)   
 
{Insert Figure 5 Here} 
 
Table (6) shows that, in each case, the benefit to domestic producers from the tariff increases is 
dissipated by the habit effect about 40 percent.   Specifically, once the habit effect is included, the 
U.S. producer surplus increases from a tariff to 1.1, 0.4 and 1.5 %.  Similarly, increase in tariff 
revenue is slightly smaller.    
 
 
{Insert Figure 6 Here} 
 
Conclusion 
We find that habit effects are significant in the fresh vegetable market, which includes asparagus.   
For seasonal crops that are difficult to store, counter-seasonal imports may have a relatively small 
impact on domestic producer welfare.   Trade liberalization may be of less concern to domestic 
producer groups if it involves tropical or Southern hemisphere production regions.  Orchard crops, 
such as fresh grapes, cherries or peaches, may fit this framework.   In the case of asparagus, we find 
that the habit effect offsets about 40% of the fall in producer welfare caused by the trade-
competition effect of liberalization.     
  
 
Figure 1. – Counter-Seasonality of Asparagus Imports to U.S. Production  
 
 Source:  U.S.D.A. Agricultural Marketing Service Movement Report Data (2005-08) 
0
50
100
150
200
250
300
350
400
450
500
P
o
u
n
d
s
 
 
x
 
1
0
0
,
0
0
0
U.S. Production and Foreign Imports of Fresh Asparagus
U.S. PERU MEXICO AOC (w/o Peru and Mexico) 
 
 
Figure 2 –Trade-Competition and Habit Effects of a Tariff Change for the U.S. and Trade Partner    
 
 
 
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
￿8 
￿88 
'(
P, 
',
P, 
'(
7Q 
'7Q
P, 
￿RR ￿ ￿ 
Trade Effect:  A 
Tariff increases the 
price and domestic 
producer welfare.   
￿88 
 
￿888
OS￿88  Exp 
OS￿888 
Habit Effect:  Reduced 
Consumption Causes Demand 
To Fall Over Time 
￿RRR ￿ ￿ 
t 
t 
'(
P, 
'(
P, 
',
P, 
'(
7Q 
'7Q
P, 
United States  U.S. Trade 
Partner 
OS￿8  TU￿8 
TU￿88 
United States 
U.S. Trade 
Partner 
OS￿88  TU￿88 
TU￿888 
￿RR ￿ ￿  
 
Figure (3) – Summary Statistics and Elasticity Estimates  
  Asparagus  Broccoli  Carrots  Cauliflower  Frozen 
Prices  
Mean  1.431  0.302  0.17  0.333  0.059 
Std  0.451  0.088  0.038  0.102  0.003 
Quantities  
Mean  0.798  2.755  3.985  1.371  1.657 
Std  0.485  0.451  1.076  0.301  0.941 
Shares 
Mean  0.321  0.273  0.221  0.149  0.035 
Std  0.114  0.058  0.056  0.038  0.027 
R-squared  84.50%  87.70%  86.80%  83.60%   
           
Figure (3) (Continued) – Elasticity Estimates  
  Asparagus  Broccoli  Carrots  Cauliflower  Frozen 
Asparagus (demand)  -0.638  0.231  0.245  0.139  0.023 
Broccoli (demand)  0.247  -0.628  0.204  0.111  0.065 
Carrot (demand)  0.330  0.257  -0.734  0.074  0.073 
Cauliflower (demand)  0.276  0.208  0.109  -0.566  -0.027 
Frozen (demand)  0.046  0.121  0.108  -0.027  0.025 
Lag Aspar. (demand)  -0.638  0.231  0.245  0.139  0.023 
Lag Broc. (demand)  0.247  -0.628  0.204  0.112  0.065 
Lag Carrot (demand)  0.330  0.257  -0.734  0.074  0.073 
Lag Caulifl. (demand)  0.276  0.208  0.109  -0.566  -0.027 
Lag Frozen (demand)   0.046  0.121  0.108  -0.027  0.025 
 
  
 
 
Figure (4) – Equations Used in Simulations 
  Price Effect  Quantity Effect 
Trade Comp. 
Effect  
=*
*
￿ ￿B&￿)0>+′)N+=￿ 
='
'
￿ ￿
=*
*
 
Habit Effect  
=*
*
￿ ￿B&￿K
=￿￿￿'
￿￿￿'
 
='
'
￿ N
=*
*
 
Welfare and Tariff Revenue Equations  
Cons. Surplus 
V NW ￿ X ￿(
7D
7Y
)*+%* 
V NW Z ￿=* [
￿
￿￿￿(
′′ ￿ ￿(
′ ￿\ 
V NW
* . '
Z ￿[
=*
*
\31 ￿ 0.5
45
5 ; 
Prod. Surplus 
V *W ￿ X ^ ￿>
,￿* . )1 ￿ ￿-+￿%*
>
7Y
7D
 
V *W Z ^ )=*)1 ￿ ￿-+ ￿ =￿-*+
￿
￿3￿,
>′′
￿ ￿,
>′
;
-
 
V *W
* . '
Z ^ 3
47
7
&￿:;￿> [1 ￿ 0.5@,
> 3
47
7 ;\
-
 
Tariff Revenue   
V _￿
* . '
￿ ^ ￿-￿> [1 ￿ 0.5@,
> 3
47
7 ;\
-
 
 
    
 
 
Figure (5) – Price and Quantity Effects of reverting to MFN tariffs (Assuming No Habit Effect) 
tariff  =￿/￿   =￿/￿ 
NAFTA  ANDEAN  NAFTA  ANDEA
N 
Both  NAFTA  ANDE
AN 
Both 
Jan  
0% → 21.3%  0% → 21.3% 
4.9%  2.8%  7.7%  -3.1%  -1.8%  -4.9% 
Feb   6.6%  0.6%  7.2%  -4.2%  -0.4%  -4.6% 
Mar  4.1%  0.3%  4.5%  -2.6%  -0.2%  -2.9% 
Apr  0.5%  0.6%  1.2%  -0.3%  -0.4%  -0.7% 
May  0.0%  0.8%  0.8%  0.0%  -0.5%  -0.5% 
June  1.6%  2.2%  3.8%  -1.0%  -1.4%  -2.4% 
July   3.8%  4.2%  8.0%  -2.4%  -2.7%  -5.1% 
Aug  2.9%  5.2%  8.1%  -1.9%  -3.3%  -5.2% 
Sept 
0% → 5.0%  0% → 5.0% 
0.2%  1.7%  1.9%  -0.1%  -1.1%  -1.2% 
Oct  0.2%  1.7%  1.9%  -0.1%  -1.1%  -1.2% 
Nov  0.3%  1.6%  1.9%  -0.2%  -1.0%  -1.2% 
Dec  0% → 21.3%  0% → 21.3%  0.7%  7.4%  8.1%  -0.4%  -4.7%  -5.2% 
 
Figure (5) (Continued) – Welfare and Revenue Effects from U.S. Tariff Increases (Assuming No Habit Effect) 
 
 
Producer Surplus Change  
(Revenue Weighted Sum of 
Monthly Effects)     
Cons. Surplus Change  Mex.  U.S.  Peru  Total  Tariff Rev.  Total Welf. Effect  
NAFTA  -2.5%  -15.2%  1.7%  1.5%  -3.9%  6.4%  0.0% 
ANDEAN  -2.1%  1.7%  0.8%  -10.3%  -3.3%  5.3%  -0.1% 
Both  -4.6%  -13.7%  2.5%  -8.9%  -7.2%  11.7%  -0.1% 
 
    
 
 
 
 
Figure (6) – Welfare and Revenue Effects from a U.S. tariff Increase: Trade Competition and Habit Effects  
%￿￿￿/￿￿￿  (d =0.71)  %￿/￿ (Equation 21)  %￿/￿ (Equation 21) 
NAFTA ANDEAN  Both  NAFTA ANDEAN  Both  NAFTA ANDEAN  Both 
Jan  -1.5%  -5.7%  -7.2%  -0.2%  -0.7%  -0.9%  -0.1%  -0.3%  -0.36% 
Feb  -3.2%  -5.3%  -8.5%  -0.4%  -0. 7%  -1.1%  -0.2%  -0.3%  -0.43% 
Mar  -5.2%  -4.0%  -9.3%  -0.7%  -0.5%  -1.2%  -0.3%  -0.2%  -0.47% 
Apr  -5.6%  -3.0%  -8.6%  -0.7%  -0.4%  -1.1%  -0.3%  -0.2%  -0.43% 
May  -4.2%  -2.4%  -6.6%  -0.5%  -0.3%  -0.8%  -0.2%  -0.1%  -0.33% 
June  -3.0%  -2.1%  -5.1%  -0.4%  -0.3%  -0.7%  -0.2%  -0.1%  -0.25% 
July  -2.8%  -2.4%  -5.3%  -0.4%  -0.3%  -0.7%  -0.1%  -0.1%  -0.26% 
Aug  -3.7%  -3.6%  -7.3%  -0.5%  -0.5%  -0.9%  -0.2%  -0.2%  -0.37% 
Sept  -3.9%  -4.9%  -8.8%  -0.5%  -0.6%  -1.1%  -0.2%  -0.3%  -0.44% 
Oct  -2.9%  -4.2%  -7.1%  -0.4%  -0.6%  -0.9%  -0.1%  -0.2%  -0.35% 
Nov  -2.1%  -3.7%  -5.9%  -0.3%  -0.5%  -0.8%  -0.1%  -0.2%  -0.29% 
Dec  -1.6%  -3.4%  -5.0%  -0.2%  -0.4%  -0.6%  -0.1%  -0.2%  -0.25% 
  
 
Figure (6) (Continued) – Welfare and Revenue Effects from a U.S. Tariff Increase: Trade Competition and Habit Effects 
Producer Surplus Change  
(Revenue Weighted Sum of Monthly Effects)   
Mexico  U.S.  Peru  Total  Tariff Revenue 
NAFTA  -15.7%  1.1%  1.1%  -4.3%  6.3% 
ANDEAN  1.1%  0.4%  -10.8%  -3.7%  5.2% 
Both  -14.7%  1.5%  -9.8%  -8.2%  11.3% 
 
 
  
 
References 
Christensen, L. R., D. W. Jorgenson, et al. (1975). "Transcendental Logarithmic Utility Functions." The 
American Economic Review 65(3): 367-383. 
Holt, M. T. and B. K. Goodwin (2009). The Almost Ideal and Translog Demand Systems. 
Piggott, N. E. (2003). "The Nested PIGLOG Model: An Application to U.S. Food Demand." American Journal of 
Agricultural Economics 85(1): 1-15. 
Stigler, G. J. and G. S. Becker (1977). "De Gustibus Non Est Disputandum." The American Economic Review 
67(2): 76-90. 
Wang, Q., C. Halbrendt, et al. (1996). "A non-nested test of the AIDS vs. the translog demand system." 
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Habit Effects and Producer Welfare in the Fresh Vegetable Trade

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