AIC Issues Brief

No. 3, October 1997

International Trade and California Agriculture

Colin A. Carter and Daniel A. Sumner*

International trade, long important to California agriculture, is becoming increasingly central to the state’s agricultural economy. There are crucial opportunities and challenges for the state’s farm-related industries in world markets. The current debate over a “fast track” for new trade agreements highlights some of the important policy issues. Meanwhile, major forces are shaping international markets and the future of California agricultural trade. (See box for global trends.)

One quarter of the more than 250 agricultural commodities produced in this state are exported. Six of California’s top 10 commodities in terms of value of production also rank in the state’s top 10 exports. As a result, California not only leads the US in farm production, but also is the nation’s largest exporter of agricultural products. California exports more food and fiber than most countries, including such major exporters as Australia and Canada (1995 data).

MAJOR EXPORT PRODUCTS

California’s exports, including bulk commodities as well as consumer-ready foods, reflect the highly diversified nature of its agriculture. Table 1 lists the value of important export commodities and the 1992-95 growth rate in exports. Of the commodities listed, the largest rates of export growth were experienced by dairy (22.1%), grapes (10.4%) and almonds (9.6%).

All the commodities listed have a long history of exporting, but the nature of those exports differs. Most California cotton is exported—mainly in the form of raw cotton that is milled and further processed overseas, especially in Asia. The almond industry also ships the majority of its output to foreign markets, especially to Europe.

For other products, the domestic market remains larger than exports. California oranges are sold fresh to Asia and Canada, but the largest market is in the US. Grapes are sold fresh, as raisins, and as grape juice and wine. Exports in all these forms have been increasing, but the domestic market remains larger.

California’s Main Agricultural Exports

1995 export value
($ million)
1992-95 annual
growth rate
Beef 993 0.4%
Cotton 780 2.0%
Almonds 799 9.6%
Grapes 674 10.4%
Oranges 335 -0.9%
Dairy 236 22.1%
Total (1-6) $3,817 4.4%
California Total $11,506 4.5%
Source: California Agricultural Resource Directory, CDFA, 1995.
a) CDFA value for almonds was $488,439 and was considered to be inaccurate. More than 99 percent of U.S. almonds are grown in California. The almond value used was obtained from the USDA’s FATUS.
b) Grapes includes table grapes, wine, and raisins.
c) The California total uses the USDA’s FATUS for the almond data and excludes fish and timber.
d) The choice of the time period for the annual growth rate was dictated by the 1992 change in the way state export statistics were reported.

As measured by farm sales, the dairy industry is the largest single agricultural industry in California. Farm value of milk was $3.1 billion in 1995 and the processed value, including fresh milk, is several times larger. Therefore, even though less than 8 percent of dairy output is exported, the total value of exports was well over $200 million in 1995. Dairy exports have been aided by the US Dairy Export Incentive Program (DEIP), which is being curtailed as a result of the Uruguay Round Trade Agreement.

Beef is often listed among the top exports from California agriculture and the beef industry, including pasture-based and feedlot operations, remains a major part of agriculture in the state. However, the way export data are collected makes it difficult to determine whether the meat products originated from California farms or were simply processed and shipped from here. Thus, both beef and pork export figures attributed to California seem implausibly high. For beef, the 1995 data indicate exports of almost $1 billion. (See Data Issues section at end of Brief.)

MAJOR EXPORT MARKETS

California tends to specialize in commodities that are usually sold to high income countries. The top six destinations, shown in Figure 1, are Japan, Canada, European Union (EU), South Korea, Hong Kong, and Mexico. (Unofficial trade sources indicate that somewhere between 10 to 60 percent of agricultural exports to Hong Kong may be re-exported to mainland China. If accurate data were available, China might well replace Hong Kong as one of the top six California markets.)

In order to highlight some of the trade issues that California faces, market developments in important receiving nations are briefly discussed below.

JAPAN

Japan has a highly protected market in some important commodities, but is also the world’s largest importer of agricultural products. Japan is California’s largest export market for agricultural products, with beef, cotton, and oranges ranking among the top commodities. The US accounts for roughly one-third of Japan’s agricultural imports and about 20 percent of that amount originates in California.

Rice is the focus of Japanese agricultural policy and the stated goals are to enhance food security and raise farm incomes. In the recent Uruguay Round Trade Agreement, however, Japan pledged to gradually increase the import share of its domestic rice consumption from 4 to 8 percent over six years. In 1996, Japan imported about 500,000 tons, or about 5% of domestic use. Of this total, about half came from California. In addition, tariffs are being significantly lowered for beef, oranges, grapefruit, certain dairy products, peaches, wine and vegetable oils.

CANADA

The implementation of the Canada-United States Free Trade Agreement (CUSTA) in 1989 followed by NAFTA in 1994, has led to expanded agricultural trade between the two nations. Between 1989 and 1995, US exports to Canada grew about 60%, from $3.6 billion to $5.74 billion, while imports from Canada increased about 90%, from $2.9 billion to $5.56 billion. Fruits and vegetables account for more than one-third of Canada’s agricultural imports from the US and thus California plays an important role in this north-south trade.

Trade disputes seem to be a byproduct of increased farm trade on the North American continent. A continual and contentious disagreement has focused on increased Canadian exports of wheat and barley to the United States, some of which makes its way into California. In 1997, with wheat imports rising again, there are renewed US complaints, many focused on the Canadian Wheat Board.

In 1995, the United States complained formally about Canada’s high tariffs on dairy, poultry, and egg products. The US argued that these tariffs, which replace import quotas as a part of the Uruguay Round trade agreement, conflict with Canada’s NAFTA commitments. In 1996, a NAFTA dispute settlement panel unanimously supported Canada. (But, this result did not satisfy most US dairy industry advocates.)

EUROPEAN UNION

The wealthy nations of Western Europe have been a traditional market for US agricultural exports. Although high trade barriers and other rules limit its imports of grains, meat and many other products, the EU remains a key destination for US and California exports. In the case of California, the EU is a major buyer of almonds and other nuts, as well as wine and raisins.

California agriculture is also affected by EU export subsidies. These policies depress the world market prices for many items including beef and dairy products.

SOUTH KOREA

South Korea imports significant amounts of beef, cotton, and hides from California. South Korea is also a growing market for horticultural products.

Although the overall economy continues to grow rapidly, Korean agriculture is under serious economic pressure. Under the Uruguay Round Agreement, South Korea has committed to trade liberalization. Like Japan, it agreed to import a small but growing share of its domestic rice consumption. (In exchange for limits on its rice liberalization requirements, South Korea agreed to substantially lower citrus and other fruit and nut tariffs, and substantially open beef markets.) Most observers agree that South Korean imports of rice will likely exceed their minimum commitment and imports of California rice seem likely in the near future.

HONG KONG AND CHINA

Hong Kong’s population is only 6.3 million, compared with China’s 1.2 billion. However, Hong Kong’s GDP is equivalent to 21 percent of China’s and its income per head, nearly $24,000, is higher than in most Western countries. Hong Kong is highly dependent on the rest of the world for food.

The California farmer plays an important role in supplying this market and Hong Kong is a rapidly growing market for California’s agricultural commodities. There are no import tariffs on food. Non-tariff barriers, such as phytosanitary or plant quarantine regulations, are almost nonexistent.

On July 1, 1997, China regained sovereignty over Hong Kong. China pledged, however, that Hong Kong will retain its status of a free port, and that Hong Kong’s free trade structure will remain in effect.

China was an original member of General Agreements on Tariffs and Trade (GATT), but withdrew in 1949, and has been trying to rejoin since 1986. Entry into the World Trade Organization (WTO), which now enforces GATT, would mean better and increased food imports. However, the US has maintained that to enter the WTO, China must pledge to comply with basic international standards of trade.

Currently, China bans the importation of most fruits for consumption in China. (Table grapes recently became one exception to this rule.) However, fruit imports are permitted if the products are subsequently re-exported after further processing. This system is open to abuse and some produce likely remains in China.

China has the long-term potential to export high-quality food to Hong Kong, Japan or Korea. The hurdles are lack of incentives and inadequate infrastructure. Hong Kong entrepreneurs may now produce higher quality food products in China for sale in Hong Kong and other markets. This could affect California’s competitiveness in the Hong Kong market and perhaps elsewhere.

MEXICO

Mexican agricultural trade is highly dependent on its two NAFTA partners. Under NAFTA, US and Mexican agricultural tariffs and non-tariff barriers will be phased out over time periods up to 15 years.

However, it remains difficult to assess the impact of NAFTA on Mexico or on agricultural trade. Beginning with the devaluation of the peso in late 1994 and early 1995, the Mexican economy experienced a two-year economic crisis that halted the expansion of trade and the economic growth that was expected to result from the January 1994 implementation of NAFTA. The peso went from 3.4 per dollar in 1994 to 7.9 per dollar in 1996. Inflation in Mexico went from single digits in the early 1990s to over 50 percent in 1995. This crisis had a huge impact on Mexico’s trade in agricultural products. Imports dropped dramatically due to the declining real incomes in Mexico. At the same time, Mexican exports of agricultural products benefited from the peso devaluation. Mexico’s key exports are tomatoes, orange juice, coffee, fruits, cattle, beer, and grapes.

In 1996, the US partially opened its market to Mexican avocados for the first time in 82 years. Prior to this ruling, phytosanitary rules banned unprocessed Mexican avocado imports and provided protection to California growers. The US decision to import avocados into selected markets indicates a US commitment to rules-based trade which will probably help in alleviating US-Mexican trade tensions over peaches, nectarines and cherries.

Unlike Florida, many of the labor-intensive crops grown in California do not compete directly with Mexican produce. In the case of fresh tomatoes, for example, the major market periods of Mexican and Californian tomatoes do not overlap. Still, with lower labor costs and improving conditions for infrastructure, management and technology, Mexico is likely to be a formidable competitor in the future. Of course, as the Mexican economy improves, Mexico will also become an even more important export destination.

CONCLUSION

For the foreseeable future, growth in trade of agricultural products is expected to be most vigorous in the Pacific Rim. As a major food exporter, California is well situated to participate in this growing market. California agriculture is highly diversified and produces a range of high-valued food products destined for sale in relatively high income countries. Thus California is likely to experience continued growth in profitable agricultural exports.

 

FIVE GLOBAL TRENDS
ARE SHAPING AGRICULTURAL MARKETS

  • First, income growth, especially in the Pacific Rim, is driving increased demand for food and fiber. In poor countries, income growth results in more food purchased and improved diet quality. In middle income countries, income growth encourages a shift to fresher produce, more meat and poultry and higher quality products in general. In the strong economies of East Asia, agricultural imports have grown dramatically during the 1990s.
  • Second, international agreements and unilateral actions are gradually opening more foreign markets to California exports. Improved market access is occurring for many products, but this phenomenon is not universal and is certainly not complete. The North American Free Trade Agreement (NAFTA), and the Uruguay Round Trade Agreement, are already having significant impacts on California agriculture.
  • Third, US import barriers are also falling, which allows foreign products better access to US markets. This means domestic competition facing California products is stronger.
  • Fourth, technical trade barriers based on animal and plant health, food safety and related concerns must now be based on scientific evidence that satisfies international review. Barriers are not required to be standardized or harmonized, but they are subject to international challenge in the World Trade Organization, or before bilateral dispute resolution committees.
  • Fifth, investments by multinational firms, joint ventures, and trade in highly processed products or ingredients are changing the very meaning and substance of international agricultural trade. As California firms invest overseas and foreign firms invest in and source raw materials from California, we must broaden our concept of international commerce beyond the traditional exchange of commodities across national boundaries.

DATA ISSUES

Information on international trade of agricultural commodities and products is reported for the US as a whole by the USDA in a series of publications known as Foreign Agricultural Trade of the United States (FATUS). However, consistent data on the export value of agricultural products by state of production are simply not available and may be approximated only with varying degrees of confidence. The Agricultural Issues Center and the California Department of Food and Agriculture are initiating a study to assess the uses of and improve the accuracy of state agricultural trade statistics.

This Issues Brief presents export figures for 1995 based upon information from the California Department of Food and Agriculture, FATUS, and industry sources. Similar information for 1996 is not available. The major points we make in this Brief are unaffected by the approximate nature of the trade data.


*Carter is a professor in the Department of Agricultural and Resource Economics at the University of California, Davis, and an Associate Director of the Agricultural Issues Center. Sumner is the Frank H. Buck, Jr., Professor in the Department of Agricultural and Resource Economics at UC Davis, and the Director of the Center. The authors thank Ray Coppock of AIC for editing.