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The Next Step in Trade


by Kirby Moulton


I. Introduction

There are a lot of front burner issues confronting Western farmers and stockmen. They include how to reassert eroded property rights, how to change the severity and inflexibility of increased government regulation, and how to counter the increasing influence of non-agricultural groups in molding the policies that affect agriculture. These are heavy issues and deserve serious thought. Yet, in their day-today operations, farmers and stockmen are faced by a multitude of decisions about production and marketing that result, through a complex process, in success and failure.

Most of us are concerned about production-related issues; yet improved marketing decisions play an important role in profit making. This article examines just one facet of marketing decisions: those about international trade. Specifically, it examines the emerging debate about a free trade agreement with Chile. After years of negotiations to reach agreement on GATT and NAFTA, the U.S. government has set out to establish free trade agreements with Latin America under the Enterprise for the Americas Initiative (EAI). The initiative envisions a future of free trade with all of the Americas, with full recognition that the "big" players will be Brazil and Argentina.

Chile is the first country to be drawn into this large umbrella. It was chosen because of its political and economic reforms and the remarkable economic growth that accompanied these reforms. It is considered a model of development by some. The free trade agreement, in a sense, is a reward for democracy and stability rather than a means for gaining great economic benefit. Chile has a population of 13.5 million and one of the strongest economies in Latin America. The economy has expanded at an average rate of 5.5 percent for almost 10 years and the inflation rate has been relatively stable at about 9 percent. Unemployment is under 5 percent.

Chile is a net exporter with a trade surplus of about $600 million expected in 1995. Because it is relatively small as a producer and as a market, it poses little economic or political threat. However, an agreement with Chile may well set a precedent for agreements with Argentina and Brazil. Inclusion of these countries in a free trade agreement may well present important conflicts between market opportunities and increased competition for Western producers.

II. The Proposed Free Trade Agreement

The idea of a free trade agreement between the United States and Chile has been discussed, at least informally, since negotiations started for the North American Free Trade Agreement (NAFTA) and perhaps even earlier. Such an agreement has political appeal because of its anticipated positive effects on investment, economic development and political stability. The impact of a free trade agreement on agriculture in the two countries will vary according to the commodity considered. This is evident in the structure of production and trade, in the attitude of agricultural groups in each country, and in the results of rigorous economic analysis.

Chile's agricultural industry is divided between the traditional grain, sugar and livestock sectors that supply most but not all of the domestic supply, and a modern, export-oriented horticultural sector that has been the driving force behind the country's agricultural development since 1982. The traditional sector has been protected by various policies designed to maintain its small holder structure. The reduction of import barriers would lead to increased imports and reduced domestic production. U.S. tariffs for fresh products are relatively low while those for processed foods are considerably higher. Consequently an elimination of U.S. tariffs would have relatively little impact on fresh fruit imports but a significant impact on processed fruit and vegetable imports. Chilean processors can meet this increased demand because of diversification toward the processing sector and away from the fresh market where excess supplies have dampened export prices.

From a U.S. perspective, Chile represents a very small market for wheat, feed grains and vegetable oils and any gains from an elimination of trade barriers will be slight relative to exports to other markets. Competition between U.S. and Chilean producers of fresh fruits and vegetables is not an issue, with the exception of some overlap between early and late season grapes. There may be some small market gains for U.S. fresh produce in Chile's off-season market. Competition in processed fruits and vegetables, primarily peaches and tomato products, concerns U.S. growers and processors, because Chile is already a low-cost producer of these products, and will gain further cost advantages through an elimination of tariffs.

The attitude of Chilean producers toward a free trade agreement follows commodity lines, not surprisingly. l Basically, producers of grains, sugar, livestock and oil products are opposed to a free trade arrangement unless special considerations could be negotiated for them. Fresh fruit and vegetable producers seem lukewarm to the idea since there is little trade advantage to them. Their strong support might be enticed if U.S. market order restrictions were eliminated and if protection for some products was still available for the domestic market. Processors are strongly in favor of a free trade agreement since they have the most to gain in terms of market growth. Just as in the U.S., agricultural producers accept that there might be an overall benefit to Chile, but they are primarily concerned about its impacts within individual commodity sectors.

Economic analysis supports the contention of industry leaders. 2 Even though the United States is an important market for horticultural exports, it is also an existing or potential supplier of cereals, sugar, vegetable oil, beef and milk products. As Muchnik and Figueroa conclude:

"Although in principal an FTA with North America could provide new impetus to Chilean agricultural exports, it is suspected that the end result could instead harm the sector, notwithstanding a general net positive impact on the Chilean economy. ---- the prospects ... for the Chilean agricultural sector in terms of trade flows are not particularly bright at this point, and generate anxiety particularly among producers of traditional annual crops which still farm the largest portion of arable land in Chile."

Chilean imports from the United States of the so-called "importable" products such as cereals are projected to be $160 million more under a free trade agreement than would otherwise occur ($90 million). Chile's exports of fresh fruits and vegetables are projected to gain only $15 million over what they would otherwise have achieved ($289 million) in the U.S. market. Processed exports to the United States are projected to be $14 million over the base level of $49 million. Among the latter products, the projected gains are $6 million for tomato paste and $3 million for canned fruits and vegetables. Competitors such as Greece and South Africa would be expected to lower their prices in the U.S. market, thereby increasing U.S. imports by more than that projected for Chilean exports.

Total employment in Chilean agriculture is projected to increase as the result of a trade agreement because export commodities tend to be more labor intensive than the traditional crops facing import competition. Job losses in the latter sector are projected to be 7,709 persons while gains in agricultural and processed exportables are projected to be 10,499. However the new jobs are primarily located in different regions from those in which the losses will occur and they will demand different skills. Anticipation of these changes is likely to create social and political pressures for protection or other forms of assistance. Similar pressures may arise in the United States. Although the labor impact is likely to be small, the losses will occur in labor intensive production and processing industries while the gains will be in less labor intensive industries. Western grain and livestock producers may gain small benefits, but fruit and vegetable processors are likely to lose.

1 The following comments are based upon interviews by the U. S. Agricultural Technical Advisory Committee for Fruits and Vegetable with leaders of the National Society of Agriculture, individual processors and producers and their trade groups, and government officials in Chile during March 1994. The author of this report participated in the interviews.

2 The following statements are derived from a detailed analysis of the impact of a free trade agreement on Chile's agriculture presented in Muchnik, E. and E. Figueroa "Chilean Agriculture and Agroindustry in the Face of a Free Trade Agreement with USA" in Effects of Liberalized Trade on Agriculture in the Western Hemisphere, Agricultural Trade Policy Center, University of Maryland, 1994; pp. 219 - 251.

By Kirby Moulton, Economist, Western Extension Marketing Committee and University of California, Berkeley, CA.

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