Assessing impact of better foreign market accessibility on crop production and farm economy

Abstract

The interplay between international trade and agricultural policy is crucial to understanding current agricultural issues surrounding global agricultural markets. Understanding these dynamics is essential for addressing the challenges and opportunities the agricultural sector faces, which has been increasingly interconnected with international markets. U.S. agriculture has been experiencing increases in imports and exports of agricultural commodities over the last three decades with its trade liberalization. In particular, North American Free Trade Agreement (NAFTA) boosted agricultural trade among the United States, Canada, and Mexico by reducing trade barriers within those three countries. With better accessibility to foreign markets, U.S. agriculture may gain or lose from trade, and the impact of trade can be heterogeneous across regional or individual agricultural backgrounds. The potential benefits are particularly pronounced for exporters who experience significant reductions in tariffs on products that they produce as a result of trade liberalization. On the other hand, if individual farm operators lose their competitiveness in producing and exporting, it would impact farm business decisions on input use, crop choice, or exit from the market at worst. Hence, it becomes important to understand the impact of trade exposure on agricultural production and farm economy with a keen focus on identifying the heterogeneous effects across regions or individuals. The first study examines how U.S. crop acreage and yield respond to better foreign market accessibility caused by NAFTA focusing on the heterogeneous effects across regions with different export competitiveness and agricultural backgrounds. Focusing on the major field crops, corn, soybeans, and wheat, we compute the localized trade exposure and examine the effect of localized trade exposure on U.S. crop acreage and yield. Using a comprehensive dataset on crop production and bilateral trade data from 1991 to 2022, and localized trade exposure, we find that trade shocks from NAFTA have negative impacts on crop acreages but positive impacts on crop yield for corn and soybeans. In addition, the effects are heterogeneous by crops and different stages of NAFTA implementations. The second study estimates how the farm-level trade exposures from NAFTA affect the profitability of farms and, as a result, how changes in the profitability after the implementation of NAFTA impact the survival of farms. We estimate the effects of trade exposure on farm profit using a farm-level panel data and trade data from 1991 to 2022. We also employ a duration model to investigate the effects of trade exposure on farm exit. The findings of this study are mixed depending on how trade exposure is measured. When trade exposure is quantified by the U.S. revealed comparative advantage (RCA) in exports, trade exposure is positively associated with farm profitability and the likelihood of farm survival. However, when trade exposure is measured by the U.S. market share in NAFTA countries, the results suggest a positive impact of trade exposure on profitability, but a negative association between trade exposure and farm survival. The third study investigates effects of a free trade agreement from an importing country's perspective. Using farm-level panel data and bilateral trade data from 2003 to 2007, we directly estimate the impacts of the Korea-Chile Free Trade Agreements (FTA) on the revenue of farms in South Korea that faced greater imports – agricultural producers as the FTA induced greater imports of fruits and vegetables from Chile to South Korea. As expected, we find the negative effect of the increased imports on the total crop revenue and profit of the farms. We model and examine the differential impacts and find that the negative effects are greater for high-revenue farms. We document the evidence on the lack of immediate adjustment as a response to the negative shocks from the trade agreement.