EXPORT SUBSIDIES AND THE GAINS FROM TRADE LIBERALIZATION: THE CASE OF CANADA-U.S. DURUM WHEAT TRADE

Following the 1989 Canadian-U.S. Free Trade Agreement sales of Canadian wheat to the United States have grown rapidly, resulting in political confrontations and several trade disputes. The economic basis of the conflicts has revolved around the trade effects of other farm policies. The existence of other farm policies modifies the size and distribution of the gains from trade, and makes implementing a free trade agreement difficult, but may still permit increased trade volume and mutual benefits from freer trade. In the case of durum wheat, Canada is likely to gain from increased access to the U.S. market, especially because the U.S. export subsidy program raises U.S. domestic prices and this makes it attractive for Canada to sell into the United States, rather than to third markets. In theory, given its export subsidy policy and internal farm programs, the United States might gain or lose from more imports. An empirical analysis suggests that, given the U.S. policy of subsidizing durum exports to third countries, the United States would be better off as a result of restricting durum wheat imports from Canada in a normal year. However, in a year such as 1993/94, where weather-damaged U.S. durum is a poor substitute for Canadian durum, closing the border would result in U.S. welfare losses overall