Positioning for Trade Liberalization: Structure of Earnings, Comparative and Competitive Advantage of Agricultural Households in the United States and Canada

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  • Change in the earnings structure of agricultural households in North America is an important concern of policy makers in Canada and the United States. Earning structure reveals the strengths and weaknesses of households in the climate and policy change, competition and predation associated with trade liberalization. Earnings structure can be broken down into source and composition structures. The source structure of earnings contains information about where household income is derived: market income, off-farm income, direct agricultural subsidies, social safety nets, and other income. The composition structure of earnings expresses returns in terms of wages, capital, and rents according to the form of property right underlying production. Earnings structure is measured for each of six regions in North America: Western and Eastern Canada, Northwest and Northeast United States, and Southwest and Southeast United States. The regional comparisons are examined in a north-south direction on both the west and east sides of the continent. The earnings structure is measured for size classes of agricultural households for two periods, 1987-88 and 1990-91. Two North-South patterns predominate in the source structure of earnings in both the East and West halves of the continent. The first is the greater volume of agricultural sales for comparable commercial agricultural households as one moves south. The second is that the proportion of agricultural households accounting for 75% of the output of agricultural commodities diminishes dramatically from North to South. The proportion in western Canada is 43% diminishing to 10% in the Southwest. In eastern Canada the proportion is 38% diminishing to 10% in the Southeast. The pattern of the composition structure of earnings is similar in each of the six regions as household agricultural sales increase. The wage share of the earnings declines. The share of capital earnings is constant, while the share of economic rent increases. The wage share of earnings is highest for western Canada compared to the western States. The proportion of earnings accounted for by the return to capital is highest in Canada apparently reflecting higher levels of capital, not including land, in the inputs structure. The proportions of rents are higher in the western U.S. regions than in western Canada. The implications of the harmonization of trade rules is also analyzed. Comparative and competitive advantage analysis reveals the implications of integrating the Canadian and United States agricultural markets. Comparative advantage analysis provides clues as to which commodities realize advantages when fixed resources dedicated to the commodities incur the least opportunity cost relative to all other uses. Competitive advantage measures the outcome of all policies, business alliances, and market conditions, which enable a commodity landed in another trade jurisdiction to contribute to the economic rent in the place of origin. Comparative and competitive advantage analysis is used to measure and interpret trade advantages across North America. Western Canada appears to hold the advantage for gain. The comparative advantage for western Canadian grain suggests that a level playing field would offer new opportunities. It is not clear what effect price pooling in Canada has on these measures of advantage. However, some kind of entitlement advantage appears to favour the inputs side of larger grain operations in Canada because competitive advantage increases with size while comparative advantage remains the same across farm sizes. The majority of the size classes of beef producing households in western Canada appear to hold a competitive advantage over eastern Canada. The Northeast United States also seems to hold the competitive advantage in beef production over eastern Canada for the majority of households. The evidence is inconclusive for trade among the western regions. Both the Northeast United States and Eastern Canada hold comparative advantages in grains. Eastern Canada holds a competitive advantage over the Northeast United States in grain production for the majority of households. Source structures of earnings suggest that the east and west halves of the continent stand to be affected in opposite ways by subsidy roll-backs and redefinition of eligibility criteria for income support, that is, entitlements. The difference between eastern and western Canada is that the support programs in the East are both taxpayer and consumer financed within supply management programs. They are primarily taxpayer financed in the West. The degree of consumer financing shows up in the much larger share of market-based earnings in the East, attributable to supply management. The differences for the east and west United States lie in the greater dependence of the West on taxpayer support. The Eastern agricultural households are largely self financing at all levels of importance to the National interest, measured in terms of commodity output. This comparative study of earnings reveals that there are many national differences which interfere with the trade harmonization process. The vision of each country's agricultural and rural systems must be looked at closely to understand how each country shares the costs of food, shares the cost of countryside amenities, deals with sustainability and plans on handling farm adjustment among agricultural households, taxpayers and consumers. Each National dynamic is viewed differently from each country. Regional differences seem to exist on property rights and entitlements. Evidence suggests the choice of policy measures to be harmonized retains strong roots in the fundamentally different regional rural worlds of the United States and Canada.

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    Attribution-NonCommercial-NoDerivatives 3.0 International