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Economists Say Free Trade Poses No Threat To U.S. Dairy Industry

Tom Cox, Yong Zhu and Jean-Paul Chavas of the Department of Agricultural and Applied Economics have recently released the final report to a three-year study looking at the how the GATT URA will affect the U.S. and world dairy sectors.

This research uses an economic model of the global dairy sector that simulates the world dairy market situation under various trade/domestic dairy policy changes and demand/supply shifts forecasted from other studies.

To build their model, the researchers first surveyed the world dairy situation, assessed GATT and other trade agreements for their effects on dairy markets, and analyzed supply/demand trends and other factors in the United States and major dairy producing/consuming and exporting/importing regions. With this information, they developed a world dairy trade model that included 21 regions and nine dairy product markets. Using this model, they evaluated the farm and wholesale impacts of several trade liberalization scenarios (especially the GATT URA and complete dairy trade liberalization), and how supply/demand growth conditions would affect the U.S. dairy sector.

“GATT is a wash,” says Cox. “The General Agreement on Trades and Tariffs” effects will be trivial in dairy, especially in the United States, Canada and Europe.” Supply and demand trends far outweigh the relative small GATT URA changes, Cox reports.

“I also don”t expect full trade liberalization to have much effect on the U.S. milk prices,” says Cox. “The U.S. can be expected to gain about as much as it gives up by the time you consider changes in both exports and imports. I do expect a shift in production away from butter and milk powder and toward cheese, so Wisconsin cheese producer may gain some, but it probably won”t be enough to affect the prices Wisconsin farms receive for their milk.”

Other results of the study include:

* International markets for dairy products will become more important to U.S. producers and consumers as more dairy products are imported and exported under trade liberalization.

* The supply/demand outlook for world markets in dairy products is good. This should lessen the adverse effects on milk prices received by the U.S. dairy industry due to freer trade and may enhance gains for those who do more exporting.

* The Uruguay Round Agreement will not affect other countries much either, but more drastic reductions in trade barriers could affect several countries. Among the losers are countries that heavily protect their dairy sectors including Canada, the countries of the European Union, and Japan. The big winners from full trade liberalization include Australia and New Zealand and the dairy exporting countries of South America (Argentina and Uruguay).

* The U.S. currently imports more cheese than it exports. Full liberalization of world dairy trade would reverse this situation, making the U.S. a net exporter of cheese.

* The effects of increased trade on most consumers worldwide will be positive, as they enjoy increased availability of lower-priced dairy products.

The full text of the report, A Spatial Equilibrium Analysis of Trade Liberalization and the U.S. Dairy Sector: Final Report on NRI Project #94-37400-0966 , can be downloaded in Adobe Acrobat format from http://aae.wisc.edu/GlobalMT/nri-gatt/index.html

Cox and Chavas are professors and Yong Zhu is a Ph.D. candidate in the Department of Agricultural and Applied Economics. Support for the study came from the USDA”s National Research Initiative and the UW-Madison”s College of Agricultural and Life Sciences.