US Dairy Product Trade: Modeling Approaches and the Impact of New Product Formulations

make verbatim copies of this document for non-commercial purposes by any means provided that this copyright notice appears on all such copies. Executive Summary Several domestic and international developments increased interest among the US dairy industry in world markets during the 1990s. One development was the passage of the NAFTA and Uruguay Round (URA) trade agreements in the mid-decade, and their successors, the current " Doha Round " of international trade negotiations now underway. Another development during the 1990s was additional (positive) experience gained by the US dairy industry in export markets. Much of this experience came about because increases in world market prices for butter and powder in 1995-96 made US exports more competitive. The Dairy Export Incentive Program (DEIP) is also credited with improving the ability of US exporters to move powders, butter and cheese into international markets. At the same time, there has been an increased level of concern about possible negative impacts of past and potential liberalization of dairy product trade. Rapid growth in imports of products designed to circumvent US tariffs on dairy products, such as milk protein concentrates (MPCs) have caused a great deal of concern about their impacts on US farm milk prices. Viewed in larger perspective, this issue demonstrates how much the US dairy trade policy environment had changed since the early 1990s. The NAFTA had placed the US on the road to something close to free trade in dairy products with Mexico, and the URA had committed the US to reductions in domestic support and export subsidies and increases in market access for dairy products. Importantly in light of the rapid pace of technological developments in dairy processing, these trade agreements also placed limits on the US' ability to modify tariff schedules to address new product formulations. As a result of these diverse developments, there is continued interest in understanding the world market for dairy products, the impacts of imports on the US dairy industry and the potential for growth in US exports. The overall objectives of this report are: 1) To review recent patterns of US dairy trade and changes in trade policies affecting US trade in dairy products; 2) To develop improved analytical frameworks for empirical economic analysis of the impacts of dairy product trade and trade liberalization on the US dairy industry; and 3) To implement an empirical model formulation to assess the impacts of imports of dairy …