Weersink, Alfons

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Research Papers in Economics

-DISCUSSION-
ANALYSING  THE POTENTIAL FOR INCREASED  TRADE
Alfons  Weersink
International  trade  of dairy products  has  been  approximately  7  percent  of world
production over the last decade (Stillman  et al.,  1996).  Canada and the United States have
not been major players in this small international dairy market with imports and exports  of
dairy products  representing less than  3 percent of total milk production in both countries.
However,  domestic dairy policies in these  countries and  others which  have curtailed past
movement  of dairy  products  are  now  under  pressure  to  change  externally  from  trade
agreements  such  as  NAFTA  and  internally  from  government  fiscal  constraints.  The
possibility of liberalized  trade and subsequent change  in the  status quo creates excitement
and  anxiety  over the  new set of rules  facing  the dairy  sector.  American  producers  and
processors view an open Canadian market as 'ripe for product infiltration'  for manufactured
and even fluid dairy products (Howard,  1995).  Such optimism  is buoyed by reports such as
Bromfield et al who predict free trade would result in U.S. imports of dairy products meeting
20 percent of Canadian domestic consumption.  The two papers in this session also examine
how  trade  flows  between  Canada  and  the  United  States  would change  in  the  event  of
increased trade.
The  purpose  of this  discussion  is  to  compare  the  papers  by  Doyon,  Pratt  and
Novakovic  (DPN)  and Meilke,  Sarker  and  LeRoy  (MSL).  Similarities  and  differences
between the two papers are examined for the purpose or scope of  analysis, methods used, and
results  obtained  along  with  suggestions  for  extension  of the  analysis.  The  discussion
concludes with a brief synopsis  of Victor Fuchs' tofu triangle  and its relationship  for the
participants  of  the policy debate surrounding the dairy sector.Proceedings
PAPER COMPARISON
Purpose
The purpose of the paper by Doyon, Pratt and Novakovic (DPN) is to determine the
movement of milk and dairy products  with existing supply and demand conditions under two
scenarios.  The first assumes the United States is able to unilaterally export yogurt and frozen
desserts to Canada and the second assumes total  free trade between the two countries.  The
paper  by  Meilke,  Sarker  and  LeRoy  (MSL)  also  examines  trade  flow  but  at  a  more
aggregated  level  and  with  a  focus  on  identifying  the  key  economic  forces  which  will
determine the extent of such trade.
Methods
The two papers represent contrasting forms of  analysis.  DPN use a spatial equilibrium
model that minimizes the cost of processing and transporting raw milk from its supply points
to  its  final product form  at given  demand  locations.  Thus,  the  model  is  consistent  with
physical  realities  in the sense that  the milk  going into  a plant must be balanced  with the
components of the products coming out.  The strength of the model  is its disaggregation  and
detail particularly  at the  processing sector which tends to  be given  less emphasis  than the
farm sector in most models of the dairy industry.  Data on actual processing plant locations
and costs  and transport costs  are incorporated  into most models as marketing  margins but
have been labouriously obtained by DPN.  However,  since supply and demand relationships
are not  considered, the  model  is able  to examine  only  market organization  and  not price
equilibrium  conditions.
In contrast, Meilke, Sarker and LeRoy (MSL) develop a simple synthetic trade model
at  an  aggregate  level for  two  dairy products  where  trade flows  are  the result of a price
equilibrium.  Products move  on the basis of relative prices  and costs along with the degree
of responsiveness  to those rather than on the basis of fixed processing cost differentials  as
in DPN.  MSL have taken the raw data presented  by Barichello and Romain the next step to
allow  for players  in the  sector to  respond to those prices.  While the model  is admittedly
simple,  it does capture the basic elements of the system and the authors subject the model to
a series of sensitivity tests to assess  the importance  of alternative factors.
Results
Despite  the  differences  in  approach,  both  models  come  up  with  two  similar
conclusions;  (a) net  trade flows between the  two countries  will be relatively  small under
deregulation;  and (b) these flows are insensitive  to processing costs.  The results of DPN are
intuitive given the type of model used.  Under free trade,  a large amount of cheddar cheese
276Weersink
moves from Quebec to the northeastern United States due to the large amount of industrial
milk supplied by this province.  The model is able to identify specific products that move and
to where.  These  movements  tend  to  be local  but DPN  note the results  are  sensitive  to
distribution and assembly costs.  Consequently, technology that lowers transportation rates
could extend the degree and range of product movement.
The major finding of MSL is the importance of marginal cost of producing milk on
possible  trade  flows.  Actual  marginal  cost  is  difficult  to  determine  and  has not  been
adequately  captured  in  most previous  studies  of Canadian  dairy  farmers.  There  is  no
relationship  between  price  received  and  amount  supplied  under  supply  management.
Consequently,  a decrease in farm milk price as would occur under deregulation could very
well  result  in  an increase  in Canadian  milk  supply if farmers were  no  longer subject  to
production controls.  Highlighting this apparent paradox alone makes the paper a worthy one
as the failure to differentiate between marginal cost and price at existing supplies can explain
the large detrimental  effects to Canadian dairy producers predicted by some previous studies.
Two other effects are not part of the sensitivity analysis by MSL but will also likely
have major impacts on trade flow; (a) transportation costs and (b) exchange rate.  Lowering
transportation costs would lower the U.S. landed price and thus shrink the band of Canadian
prices for which there is no net trade between the two countries.  Rather than changing the
size of  the price band with no net trade, exchange rate movements change the position of the
band.  A lowering of the Canadian dollar relative to the American  dollar would enhance  the
competitive position of the Canadian  industry by increasing the price at which U.S.  imports
would enter.
Extensions
An obvious extension to the work by DPN is to allow supply and demand to vary with
prices rather than  remain  fixed.  However,  I think it more  fruitful  to  extend the detailed
analysis  to other  regions  while acknowledging  the  model's inability to account  for price
response.  The model  is  designed to  determine  the  location  of processing  sites and  how
changes in assembly costs or quantitative restrictions will affect the movement of milk and
its products within the sector.  Allowing the levels of those variables to change with prices
would require  a great deal of effort which would best be spent building upon the model's
strength.  The important issues regarding price would then be left to be analysed with models
such as the one presented earlier by Cox and Sumner.  In conjunction, the approaches  could
provide  much of the information required to make policy choices.
Incorporating  the Canadian information of MSL  into the model by Cox would be a
means to extend the analysis provided by both parties.  Their approaches are complimentary
but there is little overlap in coverage at the present time as MSL focus on the Canadian dairy
sector while  Cox ignores  that  sector  completely.  A joint effort  would result  in a  more
complete  analysis than if each was to proceed individually.  Hopefully,  such an extension
will result and serve as a compliment to the efforts by DPN.
277Proceedings
THE 'TOFU' TRIANGLE
MSL conclude that while net trade flows  of dairy products  between Canada and the
United States are likely to be small  under deregulation,  the loss in quota value by  Canadian
farmers  poses  a  significant  policy  question  regarding  compensation.  The equity  issues
surrounding this policy choice and the role of economists  in the debate around such choices
are clarified  in a recent article entitled  "The 'Tofu' Triangle"  by Victor Fuchs who  is past
president of the American Economic Association and an expert  in health economics.  The
article is based on his new book Individual  and Social  Responsibility. Child Care, Education,
Medical Care, and  Long Term Care in America.
Fuchs begins  by  noting that  all policy choices,  including  ones on the dairy  sector
which we are discussing in this conference,  require  knowledge about the consequences of
alternative  actions.  Economists  can  play  a  fundamental  role  in  the  policy  debate  by
identifying the trade-offs among different policies.  The papers just presented provide results
on price  and quantity  changes  in response  to  deregulation.  This  is the type of objective
information  that  can  be  generated  by  economists  and  are  necessary  for  effective  policy
debate.  However,  Fuchs  claims the  role of economists  in the debate  is diminished  when
particular  alternatives  are  promoted  without  making  clear  the  values  behind  the
recommendations.  Public perception that economists can never agree  is due to economists
becoming involved in the political  process without clarifying the influence of personal values
in the policy choices they advocate.  Since values differ,  so will the conclusions  advanced
by economists.
The main value issues  centre around government's role in income redistribution.  To
illustrate  his  assertion  that  differences  in  the  positions  of  economists  largely  reflect
differences  in their values regarding the government's role in the economy rather than in how
the economy works, Fuchs presents results of a survey of leading health economists.  There
was wide agreement among the group on value-free questions dealing with how health care
markets  work  and  the  economic  determinants  of  health.  However,  the  economists'
assessment  of alternative health care polices varied  significantly with their opinions highly
correlated  to  their  view  of the  choice  between  efficiency  and justice.  This  choice  of
individual  responsibility versus  social responsibility  has no right or wrong answer.  Both are
necessary  for  a  good  society  with  the  ultimate  weighting  in  a  particular  public policy
depending upon society's values.
When  economists  enter  into  the political  process  of deciding  upon policy choice
without indicating the values behind their recommendations,  they form part of Fuchs' 'tofu'
triangle.  The  other  elements  are journalists  and  politicians  or  stake-holders.  As  with
economists, journalists have  an ideological  bias that can be reflected  in their reporting  of
issues surrounding the debate.  Journalists  can further hinder the ability to reach consensus
by featuring  extreme views that grab the spotlight rather than on areas of agreement.  While
economists and journalists provide  information,  final decisions rest with politicians.  Since
these choices involve values, a prerequisite  for sound decisions is the need for politicians and
278Weersink
stake-holders to indicate what values they stand for.  However, changes  in farm structure are
making it more difficult for producers to agree on the values they wish their organizations
to be based upon.  The conflict between what is best for the individual versus the collective
is at the heart of the tumultuous times for organizations  such as the Canadian Wheat Board
and the Ontario Pork Producers Marketing Board.  If stake-holder groups are unable to reach
agreement on the values that define the group, politicians have an even more difficult time
selecting the right policy choice.  The combination of compliant  or exploited economists,
jaded journalists  and  poll-directed  politicians  together  form  Fuchs'  'tofu'  triangle;  an
intellectually  soft and squishy foundation that generates shallow and inconclusive  debates
on policy choices.
Since  policy choices  involve  values,  differences  between  choices  by  members  of
society will never disappear.  However, the 'tofu' triangle can be solidified  and thereby aid
in the reconciliation  of differences when the triangle  elements clarify how facts and values
enter into their policy choices.  Journalists  should report on  solid factual  information  on
issues behind alternative choices.  Politicians and stake-holders  need to be candid about the
values  they  seek to promote.  Finally,  economists  must make  their values  explicit when
recommending  a particular policy and make their research accessible  to a wide audience.  It
with the latter that I issue a concluding challenge to the authors.  Deregulation  in the dairy
sector has  generated  heated controversy  partly  on the basis of predictions  for large  U.S.
imports.  The studies  in this session both disagree with that forecast.  The results of their
analysis  along  with  the  assumptions  behind  it  are  necessary  information  for  interested
participants.  With this information,  the effectiveness  of the debate  on legislation  for the
dairy sectors in both countries will be improved and thus the chances of reaching a policy
choice that best reflects the values of all society.
REFERENCES
Bromfield,  Geoff, Robert Jenness, and Martha Justus.  1995.  NAFTA  TRA Panel  -Economic
Impact Analysis.  Informetrica Limited, Ottawa, October.
Fuchs, V. R.  1996.  Individual and Social Responsibility: Child Care, Education, Medical
Care, and Long Term Care in America.  (editor)  The University of Chicago Press:
Chicago.
Howard, F.  1995.  "The  1995 Farm Bill: Implications and Impacts, The Second Invitational
Workshop  for Dairy Economists and Policy Analysts."  Dairy Markets  and Policy-
Issues and Options,  Cornell University, November.
Stillman, R., T. Crawford, D. Blaney, and J. Miller.  1996.  "The U.S. Dairy Industry."  ERS,
USDA, January.
279280  ProceedingsTHEME: POLICY DEVELOPMENT AND  PROGRAM  ASSESSMENT  NEEDS,
DAIRY POLICY RESEARCH NEEDS
OBJECTIVE
To provide industry  and government perspective  on the analytic, data and research
needs  for future policy development  and program evaluation.  Alfons Weersink received
participant  comments, synthesized them and reported them to the workshop.282  Proceedings

DISCUSSION: ANALYSING THE POTENTIAL FOR INCREASED TRADE

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