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• Comparative advantage. Because countries have different endowments of labor, land, and capital, they can become specialized. These differences give countries comparative advantages over others, allowing them to export items they specialize in and import items they do not specialize in.
• When domestic production outgrows domestic demand
• Climate and seasonality. Trade allows seasonal crops to be available to consumers year-round
• Consumer preferences. As consumer preferences and needs change, countries may choose to trade in new or different items

• The Harmonized System is an international 6-digit coding system that classifies products for customs and tariff purposes. Because importers use the same harmonized system, exporters can be sure that their products are classified the same way at every border.

• Countries will further disaggregate their imported products into HTS 8, 10 or even 12 digit levels for trade policy reasons.

• Examples of an HS6-digit product:

  • 0403.10: yogurt

  • 0708.10: peas

  • 0709.60: peppers

• Example of an HTS 10 digit product:

  • 0709.60.20.10: greenhouse chili peppers

  • 0709.60.40.15: certified organic greenhouse sweet bell peppers

• The seasonality of many agricultural products leads to a cyclical rise and fall of trade for specific products each year
• Tariffs and other trade barriers impact which goods flow in and out of markets
• The logistics of trading: the paperwork, shipping costs, and general red tape also impacts trade cycles and relationships

• A tariff is an additional tax that gets added at a country’s border. It increases the price consumers pay for an imported good, making the good  less competitive.

• There are two types of tariffs:

  • Specific tariffs. These tariffs are charged as a dollar amount per unit of good. Example: Paprika coming into the US faces a 3￠/kg tariff

Ad valorem tariffs. These tariffs are charged as a percentage of the value of the goods. Example: Flavored green tea coming in to the US faces a 6.4% tariff rate

• Non-tariff barriers (NTBs) are policies, besides tariffs, that interfere with trade.

• Tariff Rate Quotas (TRQs) are one example of a non-tariff barrier.  A low tariff applies to imports up to a certain quantity, after which the tariff rate usually increases to a much higher rate. The US has a system of tariff rate quotas for many products including beef, dairy, and sugar imports. For a complete list see: https://www.cbp.gov/trade/quota/guide-import-goods/commodities

• Another example of a non-tariff barrier is chlorine-washed chicken.  Chlorinated chicken simply means that the chicken cuts are washed in chlorinated water before being sold in retail markets. While this practice is common in the U.S., Canada, and many other countries, it is not accepted in most European nations and represents an important example of a non-tariff barrier to trade. 

• Free Trade Agreements (FTAs) are agreements made between countries that give countries within the agreement a more favorable status regarding trade barriers than those outside the agreement. FTAs can form a free trade area, where the participating countries adopt free trade (no barriers) among themselves, but do not necessarily change the barriers posed against the rest of the world.
  

• In recent years, the number of FTAs reported to the World Trade Organization (the international multilateral trade organization that promotes international trade and handles trade disputes between nations) has jumped. Since the U.S. left the Trans-Pacific Partnership agreement, there have been concerns that the U.S. is not signing enough FTAs to maintain strong export markets for its agricultural products and facing tariff disadvantages as a result.

  • An example is the U.S. beef industry’s tariff disadvantage exporting to Japan. Countries that are part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, including Mexico, Australia, and New Zealand, will see tariffs decrease overtime, while the U.S. still faces tariffs of 38.5-50% because it did not sign the original TPP agreement.

  Figure 1: Matrix of regional trade agreements between the U.S. and its top agricultural customers and competitors

  
  

  Source: WTO Participation in Regional Trade Agreements, FAS
  

• The trade balance is defined as the value of exports less the value of imports. A positive trade balance indicates a surplus, while a negative balance indicates a deficit.

• In figure 2, we illustrate total and agricultural trade balances for the U.S. and major partners, competitors, and groups thereof. The agricultural balance, shown in orange, is not always reflective of the total trade balance. For example, while the U.S. has a large total trade deficit with China, there is a surplus for agricultural trade. The opposite relationship is illustrated in U.S.-Mexico trade relations.

Figure 2.  Select Trade Balances for Major US Trading Partners

Source: FAS, 2017

A trade dispute is any disagreement between countries about trade or trade policy. They can be handled bilaterally (between two countries), or through the WTO. Trade disputes can potentially lead to a trade war.

• While there is no formal definition of what constitutes a “trade war,” they are often escalated trade disputes.

• They usually involve a series of tariffs and retaliatory tariffs, which result in tit-for-tat trade retaliations.

• In January 2018, the Trump administration released a report that found that China’s trade practices involving intellectual property and technology transfers were unfair. Trade imbalance was also a motivator.

  Source: U.S. Trade Representative. 2018. 2017 Report to Congress on China’s WTO Compliance. Washington, DC: Executive Office of the President of the United States, January.

Figure 3. Top 5 Virginia agricultural exports

Source: US Census Bureau, 2017

Table 1: Virginia at-risk exports

Figure 4. Top 10 U.S. agricultural export markets

Source: FAS, 2017

Figure 5. Top 10 U.S. agricultural exports

Source: FAS, 2017