Potential Impact Of Tpp Trade Agreement On U.S. Bilateral Agricultural Trade: Trade Creation Or Trade Diversion?

The Trans-Pacific Partnership (TPP) trade agreement is a trade agreement the U.S. is negotiating with 11 other countries in the Asia-Pacific region-namely Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam- to reduce or eliminate tariffs on U.S. products exported to the TPP countries. With TPP, the U.S. expects to expand its trade with members of the TPP partnership; resulting in growth in gross domestic product (GDP). However, there are enormous concerns related to the potential negative impact TPP will have on U.S. agricultural trade. This research study therefore examined the potential effect of the TPP agreement on U.S agricultural trade using panel vector autoregressive model (VAR) and impulse response function (IRF). A system of three VAR equations was developed for the three endogenous variables: agricultural trade, real exchange rate, and price ratio of imports to exports. In addition, the future pattern of trade was determined using the IRF. Results from the data analysis showed that U.S. is a net exporter of agricultural products to all TPP member countries with Japan, Mexico and Canada as U.S. main agricultural trading partners. The coefficients of the lagged agricultural trade volumes were significant in all three models, implying that current trade patterns are influenced by past volumes of trade. Also, the coefficient of the two year lagged price ratios was found to negatively influence current agricultural trade volumes as expected. Overall, the study found that a unit shock in price ratios as a result of the TPP trade agreement leads to a trade creation for U.S. in the shortrun but in the longrun leads to more trade diversion than trade creation