Environmentally adjusted measures of gains from trade liberalization: The case of United States corn production

Abstract

Most studies of the impact of trade liberalization focus on conventional efficiency gains without including the link between production and the environment. This study attempts to estimate welfare effects of subsidy reduction including both the economic and the environmental impacts of U.S. corn production.

Comparative statics approach is applied to estimate welfare change due to subsidy reduction. Seemingly Unrelated Regression technique is applied to estimated corn supply, input demand, and corn demand through translog profit function and LA/AIDS model. Once this system is estimated, the elasticities can be used in a comparative static framework to assess the impact of trade liberalization on production, input demand, and excess supply. However, before estimating, testing for stationarity of the data was performed to prevent the spurious model.

Nebraska was used as a representative for environmental impact due to the difficulty to aggregate the dissolved nitrogen in groundwater which corresponding fertilizer applications from the site-specific. The value of nitrogen fertilizer is estimated from the shadow price of the producer, and consumer's willingness to pay, adopted from separated study.

The model is used to simulate the evolution of U.S. and world corn markets to the year 2000. Baseline projections are compared with projections based on the assumption that subsidies are reduced 20 percent in line with the Uruguay Round, and an increase in world corn demand by 2 and 5 percent. The results indicate that the environment impact in terms of a reduction in nitrate contamination in groundwater of trade liberalization is small as compared to the efficiency gains from the subsidy reduction. Nevertheless, these results are lower-bound estimates because other environmental impacts, i.e. pesticides, soil erosion, wetland loss have not been included. Moreover, nitrogen fertilizer used for corn production is not the only source of nitrate contamination of groundwater.

Therefore, it reinforces the conceptual argument that trade policy may not be an effective tool for environmental protection. Using trade policy to correct a negative environmental externality may not be efficient. To account for the externality problem, measures which directly correct the source of the problem seem preferable.