Effects Of Farm Programs On Gains From Canada-U.S. Wheat Trade

This paper explores the implications of domestic distortions arising from farm programs for the size and distribution of gains from bilateral trade liberalization and illustrates the ideas using the case of Canada-U.S. trade in durum wheat following the 1989 Canadian-U.S. Free Trade Agreement (CUSTA). The CUSTA resulted in increased sales of Canadian grain to the United States and the escalating trade resulted in a legal trade dispute. The conflict centered on the trade effects of domestic farm policy, because Canada and the United States have significantly different farm programs for major field crops. This paper argues that while the existence of farm programs will modify the size and distribution of the gains from trade, dissimilar farm programs may still permit increased trade volume and mutual benefits from freer trade. While disparate programs make implementing a free trade agreement difficult, we demonstrate that in the presence of existing farm programs, both countries can still gain from freer trade. In the case of durum wheat, Canada is likely to gain because the U.S. export subsidy program raises U.S. domestic prices and this makes it attractive for Canada to sell into the United States, rather than to third markets. The United States is likely to gain, too, in part because its export subsidy program is less costly than it would be in the absence of imports from Canada.