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This staff working paper, prepared at the request of the Senate Committee on the Budget, examines the causes of shifts in U. S. agricultural exports in the early 1980s. The paper outlines the nature of agricultural export markets and the international trade environment and assesses some potential consequences of export expansion policies based on subsidies.

The principal author is James Vertrees. The paper was prepared in the Natural Resources and Commerce Division under the direction of David L. Bodde. Johanna Zacharias edited the manuscript, and Kathryn Quattrone prepared it for transmittal. In keeping with CBO's mandate to provide objective analysis, the paper offers no recommendations.
 

Alice M. Rivlin
Director
June 1983
 
 

SUMMARY

SECTION I. AGRICULTURAL EXPORTS IN THE 1970s AND 1980--INTRODUCTION AND BACKGROUND

• Purpose and Plan of the Paper
• Forces Affecting Export Growth and Contraction
• U. S. Export Growth in the 1970s
• Export Declines in the Early 1980s
• Interpretation of Short-Term Changes
• Concluding Observations

SECTION II. THE AGRICULTURAL EXPORT ENVIRONMENT

• National Policies Influencing Trade
• Implications for the United States

SECTION III. EXPORT EXPANSION POLICIES

• Current Export Programs
• Export Subsidies
• Conclusions

APPENDIX. AGRICULTURAL POLICY IN THE EUROPEAN COMMUNITY
 

TABLES
1.	U. S. AGRICULTURAL EXPORTS BY COMMODITY, FISCAL YEARS 1970 AND 1980
2.	U. S. AGRICULTURAL EXPORTS BY IMPORTING REGION, FISCAL YEARS 1970 AND 1980
3.	U. S. AGRICULTURAL EXPORTS BY IMPORTING COUNTRY CLASSIFICATION, FISCAL YEARS 1970 AND 1980
4.	U. S. AGRICULTURAL EXPORTS BY COMMODITY, FISCAL YEARS 1981, 1982, AND 1983
5.	U. S. AGRICULTURAL EXPORTS BY IMPORTING REGION, FISCAL YEARS 1981, 1982, AND 1983
6.	U. S. AGRICULTURAL EXPORTS BY COUNTRY CLASSIFICATION, FISCAL YEARS 1981, 1982, AND 1983
7.	U. S. AGRICULTURAL EXPORTS FINANCED UNDER GOVERNMENT PROGRAMS, FISCAL YEAR 1983

SUMMARY

In recognition of the abrupt reversal in the early 1980s of rapid expansion of U.S. agricultural exports in the 1970s, the Congress is considering measures to stimulate overseas sales of U. S. farm products. Today, two of every five acres produce for world markets, making exports a critical part of U. S. agricultural sales. But the value of U. S. agricultural exports has declined nearly 20 percent since fiscal year 1981, a sharp downturn in the conditions of the previous decade, when exports grew at a rate of 20 percent a year. Export contraction and record U. S. crops have contributed to depressed farm incomes, record price support outlays this year of $21.1 billion, and a declining net agricultural trade balance. In response to these problems, the United States has put in place the largest acreage reduction program in history, while other exporting nations continue to increase output.

Weak export markets, as have been recorded during the last two years for most major crops, reduce farm income. Such declines, in turn, prompt pressures to alter U. S. trade policy. Policymakers therefore confront fundamental questions about how much legislative measures can help to halt the current decline in U. S. exports and which policies might be best suited to stimulating sales of U. S. farm products abroad. In particular, export subsidies are under consideration to help recover the share of world markets held by U. S. producers.
 

U. S. AGRICULTURE IN WORLD MARKETS

Study by agricultural analysts, including those at the Congressional Budget Office, concludes that trends in U. S. agricultural exports tend to follow the expansions and contractions of world markets. When world markets expand, as they did in the 1970s, the United States is typically in a position to capture the largest share of the increase because of its production capacity and large stocks. And conversely, when world markets contract, the United States has difficulty maintaining its relatively large market shares. Forces outside the agricultural sector exert the strongest influence on the U. S. position in world markets--worldwide economic and financial conditions, crop conditions, and the position of the U. S. dollar relative to other nations' currencies. International politics--most importantly, the interaction between the Soviet Union and the United States--have also exerted a strong force, first boosting U. S. grain sales in the 1970s, and since then, causing them to decline.

Other nations' trade policies also play a major part. Through direct export subsidies and the provision of favorable terms of trade, other exporters' act to sell their relatively much smaller agricultural surpluses at prices that undercut U. S. exports. Through protectionist policies, most importing nations cushion domestic producers and consumers from the impacts of fluctuations in world market prices. As a result, the United States, because of its relatively free (unmanipulative) trade practices, bears most of the burden of adjusting to changes in world trade.
 

CURRENT EXPORT ASSISTANCE POLICIES

In general, direct export subsidies have not been a large component of U. S. trade policy during the past decade, largely because of the substantial growth in world, and specifically, U. S. agricultural trade. The United States has encouraged liberal trade in those basic crops for which it has a comparative advantage in world markets--mainly wheat, feed grains, rice, soybeans, and upland cotton. It does, however, impose import quotas and other limits on imports of dairy products, sugar, and beef. The United States also provides limited export expansion programs, but to date, the direct subsidy component has been small. In fiscal year 1983, about 18 percent of the total value of U. S. agricultural exports will be financed under government programs--export credits, export credit guarantees, and P. L. 480 concessional sales and donations to low-income developing nations. This is about twice the average share of exports the government has financed since the mid-1970s. About one-fifth of government financing is food aid under P. L. 480. The direct subsidy cost of the remaining government export programs is less than 1 percent of the total value of agricultural exports.

Subsidies and U. S. Exports

Now, however, using export subsidies to promote agricultural exports has attracted widespread interest. There are two general approaches to export subsidies: uniform subsidies applied to every unit exported, or targeted subsidies applied to specific markets. The evidence is clear that targeted subsidies are more likely than uniform subsidies to generate a higher level of exports per dollar spent. Beyond this, however, it is uncertain whether any large-scale export subsidy program could lead to a net increase in agricultural exports. This is because large-scale subsidization could invite retaliation on the part of competing nations, the main source of uncertainty. Other exporting nations could take steps to increase sales of the subsidized products in other markets important to the United States, restrict their importation of other U. S. agricultural products, or perhaps alter their nonagricultural trade with the United States.

Besides these uncertainties, four other considerations bear mention:

• Export subsidies reduce the net cost to foreign buyers of U. S. agricultural products, in effect subsidizing foreign consumption at the expense of U. S. taxpayers. The magnitude and duration of such a subsidy should also be considered in the context of foreign policy and trade in non-agricultural products.
  
  
• The effects of export subsidies are likely to be quite small relative to the macroeconomic policies that affect economic growth, interest rates, and the value of the U. S. dollar.
  
  
• A limited export subsidy program could be designed in such a way as to achieve a small net budget reduction. This would occur if the cost of the subsidy were less than the savings achieved through reduced price support outlays. The amount of net saving is likely to be small, however--measured in tens of millions of dollars, in contrast with the fiscal year 1983 price support expenditures of $21.1 billion. Few past programs have accomplished such saving. Further, the success of the current acreage reduction program in drawing down government-owned grain stocks appears to reduce the opportunities for net savings.
  
  
• U. S. price support levels appear to be discouraging exports and encouraging grain production abroad. Under current conditions, a reduction in price support levels, which would lower the price for every bushel of grain exported, might be more effective than export subsidies in increasing U. S. exports.

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