Unbalancing Act: Strategies for Trade in Manufactures and Agricultural Trade Impacts

Global trade tensions have risen due to bilateral trade imbalances, principally in manufactures. For example, recent US policy debate has emphasized methods to reduce US bilateral trade deficits with Japan and the EC. Changes in the level of bilateral protection of trade in manufactures can affect agricultural trade through exchange-rate, price, and income effects. This analysis focuses on how different policies on trade in manufactures would affect US agricultural exports. The analysis uses a static equilibrium world model, which includes endogenous exchange rates, income, sectoral prices, and traded quantities. The model contains disaggregated agriculture, aggregated Armingtontype manufactures, and aggregated nontraded goods. Two different trade policies are analyzed: foreign liberalization of trade in manufactures and increased US protection of trade in manufactures. The results indicate that these strategies to reduce bilateral trade deficits have negative effects on US agriculture, with significantly worse effects occurring when US protection of trade in manufacrures is raised. When foreign countries liberalize trade in manufactures, the dollar appreciates, but some of its negative effects on US agricultural trade are mitigated by a rise in foreign income. By contrast. when US protection of trade in manufacrures is increased, the dollar appreciates and foreign income falls, exacerbating the negative effects on US agricultural trade