TRADE CREATION AND DIVERSION UNDER NAFTA: THE NORTH AMERICAN STRAWBERRY MARKET

Transcription

1 TRADE CREATION AND DIVERSION UNDER NAFTA: THE NORTH AMERICAN STRAWBERRY MARKET YOUNGJAE LEE Department of Agricultural Economics and Agribusiness Louisiana State University AgCenter 242A Martin D. Woodin Hall Baton Rouge, LA Phone: Fax: P.LYNN KENNEDY Department of Agricultural Economics and Agribusiness Louisiana State University AgCenter 8 Martin D. Woodin Hall Baton Rouge, LA Phone: Fax: LKennedy@agcenter.lsu.edu Selected Paper prepared for presentation at the 206 Agricultural & Applied Economics Association Annual Meeting, Boston, Massachusetts, July 3-August 2 Copyright 206 by Youngae Lee and P.Lynn Kennedy. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

2 Trade Creation and Diversion under NAFTA: The North American Strawberry Market Abstract: In order to identify the effect on trade creation and diversion of NAFTA in the North American strawberry market, this study conducts a partial equilibrium analysis by using the CES utility and production functions of Dixit and Stiglitz which provide necessary equations to estimate unobservable final prices of imported strawberries and non-tariff trade costs. Based on the results of this study, we could confirm that ) the effect on trade creation of NAFTA is greater than the effect on trade diversion, which leads to positive effect of NAFTA on the North American strawberry market, 2) the difference between the local price and the imported price might be due to high non-tariff trade costs that exist between borders, 3) market integration simulation shows trade creation of 453% and no trade diversion, and 4) market segregation simulation shows that trade volume in the regional market decreases by 26% and trade volume out of regional market increases by 045%. Key words: NAFTA, Trade Creation, Trade Diversion, Strawberries. The North American Free Trade Agreement (NAFTA) created one of the world s largest free trade areas (Barichello, et. al., 99; Birfoser, Robinso, and Thierfelder, 200; Gould. 998; Melton and Huffman, 993; Robins, 204; Rosson, et. al., 205; and William and Grennes, 994). Strawberry trade among NAFTA countries has grown since 994 when NAFTA was implemented. For example, trade volume of fresh strawberries among NAFTA countries has increased by 343% from 327 million pounds in 994 to,45 million pounds in In addition to eliminating tariff, NAFTA has helped to broaden the seasonal availability of fresh produce which has contributed to an increase in the regional trade (Zahniser and Crago, 2009 and Zahniser, et. al., 205). For instance, the U.S. strawberry industry has invested hundreds of millions dollars in Mexican farms under NAFTA

3 (Robbins, 204). That has helped create year-round supply and demand for the United States and Canadian strawberry markets. As a result, NAFTA has helped to increase the regional trade volume of strawberry, while decreased the non-regional trade volume of strawberry. Figures and 2 show the ranges of regional and out of regional strawberry trade volumes between pre-nafta and post-nafta. [Figure Approximately Here] [Figure 2 Approximately Here] However, strawberry prices in NAFTA countries are still significantly different. According to FAO data in 202, the U.S. strawberry producer price was $0.80 per pound, while the Canadian and Mexican strawberry prices were $.62 and $0.40 per pound, respectively, representing more than 4 times difference. Furthermore, trade data suggests that there might be a much greater difference between prices of imported and locally produced strawberries. In light of the current circumstances of the North American fresh produce market, this study is motivated ) to examine the effect of NAFTA on trade creation and diversion in the North American strawberry market, 2) to identify the net position of NAFTA for the North American strawberry market, 3) to examine the divergence in the strawberry prices of NAFTA countries under NAFTA, and 4) to examine the impact of non-tariff trade costs on price divergence. In order to achieve these goals, a partial equilibrium approach adopting three assumptions is used. First, fresh strawberry consumers have separable preferences; second, this study allows for product differentiation based on sourced origin; and third, fresh 2

4 strawberry consumers and producers have the CES utility and production functions of Dixit and Stiglitz, respectively. This study proceeds as follows. In the next section, the model in which this study defines market equilibrium condition to derive reduced form price equation is discussed. In section three, we briefly describe the strawberry trade of NAFTA countries. Data and estimated parameters are discussed in the fourth section. Empirical results are presented in the next section. In the final section, conclusions and recommendations for further research are provided. Theoretical Framework North American strawberry consumers can choose a variety of products supplied from different origins. As previous studies indicate (Armington, 969; Dixit and Stiglitz, 977; and Solow, 956) the use of consumer choice to maximize utility given separable preferences and product differentiation based on sourced origin is formulated by the Dixit and Stiglitz CES utility function as follows: () where n u i q i, q i represents the quantity of strawberry consumed in country i and * * produced in country and where is elasticity of substitution. The budget constraint of the strawberry consumer is: n (2) piqi M i, 3

5 where p i represents the price in country i of strawberries coming from country and M i represents the total expenditures of country i on strawberries. Trade data provide both q i, q ii, and p ii where i. However, a price of imported strawberries from country and consumed in country i is not provided. Therefore, p i must be obtained by an alternative manner. Given the utility function and the budget equation above, the Lagrangian method provides a way to calibrate p i as follows: qi (3) pi pii q, ii where q ii represents the quantity of strawberries consumed and produced in country i, and p ii represents the price of strawberries consumed and produced in country i, and q i represents the quantity of strawberries consumed in country i but produced in country. Rational consumers of strawberries in country i possess an import demand for strawberries produced in country as follows: (4) q i p i n M p i i. When strawberries move from country to country i, tariff and non-tariff trade costs occur. These trade costs can be described as: 4

6 (5) pi i, t p i where t i represents a value added tariff imposed by country i on strawberries from country, t if i but t if i i i. The variable i represents non-tariff trade costs associated with the transit from country to country i. The non-tariff trade costs represent those costs resulting from geographical and institutional distance between two different economies. The variable p is the exporting country s price. Therefore, pi p if i but pi p if i. By substituting equation (5) into equation (4), we obtain an imported demand equation defined by the tariff, non-tariff trade cost, exporter price, and importer expenditure as follows: (6) q i t p n i l i il il t p ll M i. Therefore, import demand in country i for strawberry produced in country will be determined by trade costs, exporter s productivity, and importer s preference. If the factor market is opened, the production technology of the North American strawberry producer can be formulated by the Dixit and Stiglitz CES production functions as follows: (7) n q k x, k 5

7 where represents total factor productivity in country, and factor used in country coming from country k, with 0. The production cost can be summarized as follows: K (8) C where k. as follows: k k r k x, k r is the factor price in country for input factor, k x represents input k x, produced in country Therefore, the profit of the strawberry producer in country is summarized n (9) pi siq k r k x, i K k where q is the total quantity of strawberries produced in country and s i represents the share of q sold in country i. In Hotelling s Lemma, profit maximizing strawberry producers in country exhibit supply behavior which can be represented by a supply equation defined by total factor productivity, production costs, and prices of input factors as follows: (0) q C K k k r follows: Then, the supply of strawberries to country i from country is defined as 6

8 7 () K k k i i r C s q s. Since country i s demand for strawberries produced in country is equal to country s strawberry supply to country i, exporting country s price can be derived by equating equations (6) and () as follows: (2) i K k k i i L l ll il il i M r t p t C s p. Substituting equation (2) into equation (5), we can obtain country i s unobservable price defined in terms of market share, productivity, production costs, tariff, non-tariff trade costs, exporter s price, factor prices, and expenditure as follows: (3) i K k k L l ll il il i i M r p t C s p. Given constant elasticity of substitution, equation (3) is used to identify the effects of NAFTA on prices of imported strawberries in NAFTA countries. Once this is accomplished, trade creation and diversion can be identified. Furthermore, equation (3) can be used to identify the effect of non-tariff trade costs on imported prices and quantities. We use the traditional measures of trade creation, shown by the equation

9 (4) 00%, where is quantity of strawberries imported by from, and and represents the United States, Canada, and Mexico, and trade diversion, shown by the equation (5) 00%, where is quantity of strawberries imported by from, and represent U.S. Canada, and Mexico, and k represents n number of non-nafta member countries. In addition to these measures, we also calculate a weighted trade diversion measure, as the ration of trade diversion to trade creation, to serve as a comparison of trade diversion relative to trade creation. It is calculated using the equation (6) North American Strawberry Trade 00%. In 986, 67% of U.S. fresh strawberry exports were conveyed to Canada and Mexico. Another 22% were shipped to Japan. And the remaining % were sold to 27 different countries. However, in 202, 9% of U.S. fresh strawberries exports were conveyed to Canada and Mexico. The other 9% were shipped to 43 different countries including Japan, France, United Arab Emirates, and China. During that time-period, U.S. fresh strawberry exports have grown tremendously. For instance, the total volume of U.S. fresh strawberry exports has increased by 4 fold from 22 million pounds in 986 to 34 million pounds in 202. In 986, 96% of Mexican 8

10 fresh strawberries exports were conveyed to the United States and Canada. Another 4% were shipped to 4 different countries. However, in 202, almost all of Mexican fresh strawberries exports were conveyed to the United States and Canada. During that time-period, Mexican fresh strawberry exports have significantly increased. Total volume of Mexican fresh strawberry exports have increased by 6 fold from 3 million pounds in 986 to 332 million pounds in 202. In 986, 86% of fresh strawberries imports into the U.S. market came from Canada and Mexico. Another 4% came from 4 different countries including New Zealand, Guatemala, Costa Rica, and Spain. However, in 202, almost all of fresh strawberry imports into the U.S. market came from Canada and Mexico. During that period of time, U.S. fresh strawberry imports grew 27 fold from 3 million pounds in 986 to 35 million pounds in 202. During that time-period, more than 99 percent of fresh strawberry imports into the Canadian market came from the United States and Mexico, and Canadian fresh strawberry imports grew 6 fold from 45 million pounds in 986 to 280 million pounds in 202. The prices of strawberries are largely different in North American strawberry market. At 203, the price of Canadian strawberry is the highest which is $.62 per pound and the price of Mexican strawberry is the lowest which is $0.39 per pound and the price of U.S. strawberry is in the middle point which is $0.85 per pound. This represents 4. times price difference in North American strawberry market. Such price difference may play as a direct force to drive strawberry trade among NAFTA countries. However, as shown in table, most of crossing border 9

11 costs may be much larger than the price difference. This may play as a resistance to integrate North American strawberry market. Unlike domestic transaction, crossing border requires additional procedures such as necessary import documentation, phyto-sanitary certificate, fumigation certificate, certificate of origin, sample test, and so on. Furthermore, if any of the imported products are found without following necessary norms of importing country, such imported products have to be destroyed or to be removed out of importing country. Such noncompliant imported products are also fined, apart from destruction or return to origin country. These additional requirements increase trade costs from exporters to importers. Strawberry prices are lower than those of substitutable blueberries and raspberries in U.S. and Mexican market, while higher in Canadian market. In U.S. market, the prices of raspberry and blueberry are $2.54 per pound and $.39 per pound, respectively. In Mexican market, the prices of raspberry and blueberry are $.25 per pound and $.63 per pound, respectively. In Canadian market, the prices of raspberry and blueberry are $0.76 per pound and $.0 per pound, respectively. Data and Parameter Estimation Data This study uses data obtained from outside sources but also data estimated through the model. This study obtains data of domestic strawberry production ( q or q i ), local producer price ( pii or p ), and imports ( q i ) from FAO (Food and Agriculture Organization). Because FAO provides the data from 986 to 202, this 0

12 study uses this time frame as research period which includes pre- and post-nafta period of years. The consumer prices of imported strawberries ( using equation (3) with. 78. p i ) are estimated The United States charged a tariff of $0.09 per cwt on imported strawberries during the period from June 5 to September 5 for countries with which normal trade relations are maintained. For strawberries imported at any other time of the year, the tariff is $0.50 per cwt. Tariffs are higher for trading partners that have had normal tariff status suspended by specific legislation. It amounts to $.27 per cwt for fresh strawberry imports at any time of the year. The tariffs for fresh strawberry shipment from Mexico into the United States, $0.8 and $0.77 per cwt depending on the season, were eliminated in 994. U.S. exports to Canada faced a tariff of $3.00 per cwt on fresh strawberry before the Canadian-U.S. Free Trade Agreement (CUSTA). Beginning in 989, those tariffs were reduced over ten years and reached zero in 998. Prior to NAFTA, Mexico charge a tariff of 20% on fresh strawberries, but the tariff was eliminated upon NAFTA s implementation in 994. NAFTA covers much more than tariffs. For instance, NAFTA serves to increase market integration in NAFTA countries. This market integration reduces trade costs among NAFTA countries as well. However, non-tariff trade costs, ( i ), cannot be observed. Furthermore, non-tariff trade costs cover a very broad range in both importing and exporting countries. Due to this complication in calculating non-tariff trade costs, previous studies estimated these unobservable trade costs based on a theoretical framework (Anderson and van Wincoop, 2004 and Eaton and

13 Kortum, 2002). In this study, we estimate the non-tariff trade costs using equations (3) and (5). Along with tariffs and other border measures, these non-tariff trade costs can serve to explain the difference between prices of domestic and imported strawberries. Furthermore, we can develop two counterfactual simulations with the estimated non-tariff trade costs which will be discussed in later section. This study uses labor as an index for input factors used in strawberry production. Furthermore, this study assumes that labor is immobile between countries so that each country uses its own labor in strawberry production. Hourly wages of NAFTA countries are obtained from the U.S. Department of Labor. This study uses yield as an index for total factor productivity ( ) and yield data are obtained from the FAO. Then, this study estimates the quantity of input factors used in production using equation (7) with θ = Estimated Parameter Values For empirical analyses, this study estimates the mean values and 95% confident intervals of the parameters in equation (3). Table shows the mean values and 95% confident intervals of the parameters. According to the purposes of this study, we estimate the mean values and 95% confident intervals of the parameters for the pre-nafta and post-nafta time periods. [Table Approximately Here] As table shows, export share parameters, s i, indicate that strawberry trade increased among NAFTA countries and decreased with non-member countries after NAFTA. For example, U.S. strawberry export shares increased from 5.4% in 2

14 Canada and 0.3% in Mexico in the pre-nafta period to 6.6% in Canada and.% in Mexico in the post-nafta period. Table also presents tariff rate, t i. As table shows, this study eliminates the tariff between NAFTA countries after NAFTA, while this study maintains tariff between NAFTA countries and non-member countries. As table shows, non-tariff trade costs, i, are much greater than is the tariff. As mentioned, non-tariff trade costs are estimated using the model which reflects quantity-based trade costs. This study uses equations (3) and (5) to estimate non-tariff trade costs. In equation (3), this study calibrates prices of imported strawberries by dividing imported volumes by domestic volumes which are multiplied by domestic prices and then the imported prices are used in equation (5) to estimate non-tariff trade costs. This method of estimation creates high non-tariff trade costs when the imported volume is small relative to domestic volume and low non-tariff trade costs when imported volume is similar to the domestic volume. Even though trade volume among NAFTA countries increases, the size of this increased volume is quite small relative to the increase in volume in the domestic market of each country. As a result, this study shows that non-tariff trade costs decreased little from the pre-nafta to post- NAFTA time period.. When As mentioned above, this study uses yield as an index for total productivity, is for the United States in the pre-nafta period, is 0.88 for Canada, for Mexico, and for the rest of the world. After NAFTA, 3

15 is.66 for the United States, for Canada, and for Mexico. When the U.S. wage rate, r, is in the pre-nafta period, the wage rate is. for Canada, 0. for Mexico, and 0.77 for the rest of the world. This wage rates increase to.49 for the United States,.3 for Canada, 0.7 for Mexico, and 0.99 for the rest of the world in the post-nafta period. Empirical Results This study employed a Monte Carlo simulation to cover the range of variation of parameter values at the 95% confidence interval. For example, this study determined the mean values of the parameters used in equation (3) and calculated 95% confidence intervals to reflect chance variation of each parameter for pre-nafta and post-nafta periods of time. To realize the values of the parameters between minimum and maximum values in the Monte Carlo simulation, 5000 random draws of parameters in table were generated using two-sided power probability distributions over the respective ranges of parameters. The drawn parameters were then used to calculate domestic and imported prices and trade creation and diversion generated between the pre-nafta and post-nafta time periods. Table 2 shows percentage changes in strawberry prices between pre-nafta and post- NAFTA. In the U.S. strawberry market, the domestic prices of U.S. strawberries increases by 42% between the pre- and post-nafta time periods. At the same time the imported prices of Canadian and Mexican strawberries increase by 29% and by 4%, respectively while the imported price of strawberries from the rest of the world increases by 44%. In the Canadian strawberry market, the domestic price of Canadian strawberries increases by 30% between the pre-nafta and post-nafta time periods. The corresponding change in Canadian import prices are as follows. The Canadian imported price of U.S. strawberries 4

16 is unchanged, while the imported price of Mexican strawberry decreases by 43%, and the imported price of strawberries from the rest of the world increases by 23%. In the Mexican market, the domestic price of Mexican strawberries does not change from the pre- to post- NAFTA time period. However, the imported price of U.S. strawberries decreases by 48%, the imported price of Canadian strawberries increases by 924%, and the imported price of strawberries from the rest of the world increases by 70%. These results are empirically consistent with the notion that NAFTA might has created price advantage for NAFTA countries and increased price competitiveness in NAFTA countries because, after NAFTA, prices of strawberry imported from non-nafta countries increase more than prices of strawberry imported from NAFTA countries and domestic prices increase more than prices imported from NAFTA member countries in the North American strawberry markets (see Table 2). [Table 2 Approximately Here] Table 3 presents the trade creation and diversion effects generated by NAFTA. NAFTA generated 92 million pounds of trade creation in the U.S. strawberry market, implying that U.S. import volume of strawberries from NAFTA member countries increased by 92 million pounds, representing a 309% increase from pre- NAFTA to post-nafta. At the same time, the U.S. strawberry market generated 2 million pounds of trade diversion, implying that U.S. import volume of strawberries from non-member countries decreased by 2 million pounds due to NAFTA, representing a 6% decrease in imports from pre-nafta to post- NAFTA. Table 3 also shows that NAFTA generated 73 million pound of trade 5

17 creation in Canada and 28 million pound of trade creation in Mexico, while NAFTA did not generate trade diversion in the Canadian and Mexican strawberry markets. As a result, weighted trade diversion of three member countries is -0.5%, implying that percentage of total trade diversion ( million pound) to total trade creation (82 million pound) is -0.5%. Based on these results, this study could confirm that the effect on trade creation of NAFTA might be much greater than its trade diversion effect. [Table 3 Approximately Here] Although previous studies stated that the North American horticulture market is highly integrated (Zahniser and Crago, 2009 and Zahniser, et. Al., 205), the strawberry price is still different in NAFTA countries. According to an examination of non-tariff trade costs, non-tariff trade costs still remain high even though NAFTA eliminates tariffs and other trade regulations. In order to determine the impact of these non-tariff trade costs on price levels and trade creation and diversion, this study develops two counterfactual simulations. In simulation, this study eliminates non-tariff trade costs in order to seek a change in price and trade creation and diversion (market integration simulation). In simulation 2, this study increases non-tariff trade costs in order to seek a change in price and trade creation and diversion (market segregation simulation). As mentioned above, this study estimated mean values and 95% confident intervals of non-tariff trade costs for pre-nafta and post-nafta time periods. And then we realized the values of the parameters between minimum and maximum values by using two-sided 6

18 power probability distributions over the respective ranges of the parameters. According to market integration scenario, we reduced the drawn parameter values of NAFTA countries to one to calculate the change in domestic and imported prices and trade creation and diversion. Table 4 presents the change in price due to the elimination of non-tariff trade costs. In NAFTA countries, domestic and imported prices decrease except for the Canadian imported price in the Mexican market, while most of prices in the rest of the world increase, with the exception of the Canadian imported price in the rest of the world. This result is consistent with conventional expectation because that as the North American strawberry market becomes perfectly integrated, the domestic and imported prices of NAFTA countries in the North American strawberry market might decrease, while the imported prices of non-nafta countries in the North American strawberry market and of NAFTA countries in the rest of world strawberry market might increase. [Table 4 Approximately Here] In simulation, this study models a market integration scenario in which the estimated non-tariff trade costs among NAFTA countries decrease to one. The market integration simulation would generate 92 million pound of trade creation for the United States, 52 million pound of trade creation for Canada, and 20 million pound of trade creation for Mexico, while trade diversion would decrease to less than million pounds for the United States with no trade diversion in Canada and Mexico. Based on these results, this study could confirm that the net position of NAFTA would be improved if the current non-tariff trade costs reduces further. [Table 5 Approximately Here] 7

19 In simulation 2, this study models a market segregation scenario in which the estimated non-tariff trade costs among NAFTA countries increase to the same level as non-member countries. According to the market segregation scenario, the United States trade volume from Canada and Mexico would decrease by 62 million pounds, while trade volume from non-member countries would increases by 2 million pounds. Canadian trade volume from the United States and Mexico would decrease by 89 million pounds while trade volume from non-member countries would increase by 2 million pounds in Canadian market. However, Mexican trade volume from the United States and Canadian markets would increases by 53 million pounds. At the same time, Mexican trade volume from non-member countries would increases by 23 million pounds. Based on these results, this study could confirm that the net position of NAFTA would depend on the level of non-tariff trade costs because the effect on trade creation of NAFTA might be decreased, while the effect on trade diversion of NAFTA might be increased when non-tariff trade costs increase. [Table 6 Approximately Here] Conclusion The main obective of this study was to describe the effect on trade creation and diversion of NAFTA in the North American strawberry market. In order to achieve this goal, this study uses a partial equilibrium approach. Through the use of Dixit and Stiglitz CES utility and production functions to derive a reduced form price equation in market equilibrium conditions, this study was able to estimate 8

20 unobservable trade data such as non-tariff trade costs and final consumer s price sourced from different origins in each market. By using observable trade data and derived unobservable trade data, this study estimates values of parameters for use in simulation analyses. Based on the results of this study, we confirm that the difference between prices of domestic and imported strawberries in each of the markets might be due in large part to high non-tariff trade costs which exist between the borders of the three member countries. NAFTA results in trade creation of 277% and weighted trade diversion of -0.5%, which implies that the effect on trade create of NAFTA is greater than the effect on trade diversion of NAFTA. As a result, we could confirm that the net position of NAFTA in the North American strawberry market is positive. In order to identify the role of non-tariff trade costs on trade creation and diversion, this study conducted two different simulation analyses. The market integration scenario increased trade creation effect of NAFTA to 453% and decreased trade diversion effect of NAFTA to zero percent. In contrast, the market segregation scenario decreased trade volume among NAFTA countries by 26% and trade volume with non-member countries increased by 045%. These results imply that a more highly integrated and coordinated North American market might enhance the efficiency and, thus, competitiveness of North American producers. This study confirmed that implementation of NAFTA would generate positive net position for the North American strawberry market. However, non-tariff trade costs were not significantly reduced after NAFTA. In the light of this finding, negative externalities 9

21 or inefficiency of North American strawberry market under NAFTA will be closely related with non-tariff trade costs. However, this study faces a limitation in describing what consists of non-tariff trade costs. Based on the findings of this study, the elimination or reduction of non-tariff trade costs will create efficiencies which contribute to welfare gains. Future research should examine these relationships between non-tariff trade cost reduction and trade creation and diversion. Given the potential gains that can accrue to society, for both producer and consumer alike, analyses that both identify and prescribe means to reduce these non-tariff trade costs will be beneficial to society as a whole.. 20

22 Footnotes Footnote. NAFTA eliminated tariffs on a number of agricultural products. U.S. imports of fresh strawberries, for instance, used to have a 9 cents per cwt tariff when they crossed the border during the period from June 5 to September 5. If imported at any other time of the year, the tariff was 50 cent per cwt. Elimination of tariffs means lower prices. NAFTA also encourages investment so that the U.S. strawberry industry has increased investment in Mexican farms, which has helped generate year-round supply and demand for U.S. strawberries consumers. Footnote 2. The data comes from the FAO statistics website ( 2

23 lb pre-nafta post-nafta Figure. Strawberry Trade Volume among NAFTA countries 22

24 lb 0 2,000 4,000 6,000 pre-nafta post-nafta Figure 2. Strawberry Trade Volume of NAFTA countries with non-member Countries 23

25 Table. Means and 95% Confident Intervals of Parameters between Pre and Post NAFTA Variables Pre NAFTA: Post NAFTA: Mean 95% Confident Interval Mean 95% Confident Interval S usus S caus S mcus S rwus S usca S caca S mcca S rwca S usmc S camc S mcmc S rwmc S ucrw * S carw * * S mcrw * * S rwrw B usus B caus B mcus B rwus B usca B caca B mcca B rwca B usmc B camc B mcmc B rwmc B usrw B carw B mcrw B rwrw α us α ca α mc α rw C us C ca C mc

26 C rw R us R ca..3 R mc R rw T usus T caus T mcus T rwus T usca T caca T mcca T rwca T usmc T camc T mcmc T rwmc T usrw T carw T mcrw T rwrw Astrik (*) indicates that the value is less than 0 4. The capital letters, S, B, C, R, and T represent export share, non tariff trade cost, production cost, labor wage, and tariff, respectively. The letter, α, is a total factor productivity. The subscripts, us, ca, mc, and rw represent the United States, Canada, Mexico, and the Rest of the World, respectively. The first two letters of the subscripts in S, B, and T represent an importing country, i. The last two letters of the subscripts in S, B, and T represent an exporting country,. 25

27 Table 2. Percentage Changes in Strawberry Prices between Pre-NAFTA and Post-NAFTA Percentage change in p i US i CANADA i MEXICO i ROW i US CANADA MEXICO ROW

28 Table 3. NAFTA's Trade Creation and Diversion at Benchmark Scenario s =NAFTA Countries Trade Creation Pre NAFTA Post NAFTA ) Δq i Δ% US i CANADA i MEXICO i TOTAL =ROW Trade Diversion Pre NAFTA Post NAFTA 2) Δq i Δq i % US i CANADA i MEXICO i TOTAL ( Δq i Δq ) 00, Weigted Trade Diversion US i 2.3 CANADA i 0.02 MEXICO i 5.80 TOTAL 0.5 ) Δq i > 0 means trade creation Δq i 0 means no trade creation 2) Δq i < 0 means trade diversion Δq i 0 means no trade diversion 27

29 Table 4. Percentage Changes in Strawberry Prices between Pre NAFTA and Post NAFTA Δ% in p i US i CANADA i MEXICO i ROW i US CANADA MEXICO ROW

30 Table 5. NAFTA's Trade Creation and Diversion at Market Integration Scenario s =NAFTA Countries Trade Creation Pre NAFTA Post NAFTA ) Δq i Δ% US i CANADA i MEXICO i TOTAL =ROW Trade Diversion Pre NAFTA Post NAFTA 2) Δq i Δq i % US i CANADA i MEXICO i TOTAL ( Δq i Δq ) 00, Weigted Trade Diversion US i 0.45 CANADA i 0.26 MEXICO i 4.52 TOTAL 0.2 ) Δq i > 0 means trade creation Δq i 0 means no trade creation 2) Δq i < 0 means trade diversion Δq i 0 means no trade diversion 29

31 Table 6. NAFTA's Trade Creation and Diversion at Market Segregation Scenario s =NAFTA Countries Trade Creation Pre NAFTA Post NAFTA ) Δq i Δ% US i CANADA i MEXICO i TOTAL =ROW Trade Diversion Pre NAFTA Post NAFTA 2) Δq i Δq i % US i CANADA i MEXICO i TOTAL ) Δq i > 0 means trade creation Δq i 0 means no trade creation 2) Δq i < 0 means trade diversion Δq i 0 means no trade diversion 30

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