The Role of Income and Non-homothetic Preferences in Trading Differentiated Food and Beverages. The Case of Canada, the United States, and Selected EU Countries

This study investigates the role of income in determining the agrifood exports of selected EU countries, Canada, and the United States (U.S.) by estimating per capita bilateral trade flows for 10 commodity groups across 52 countries for the period 1990–2000. About 43 percent of the total observations of bilateral trade-flows for the selected regions and commodities are zero. Therefore, the fixed-effects Heckman two-step estimation procedure is used to account for the zero observations instead of ignoring or truncating the zeros. A number of hypotheses are tested to highlight the role of income in determining agrifood exports of differentiated agrifood products. The results show that the three regions (selected EU countries, Canada, United States) face statistically significant, positive and relatively elastic expenditure elasticities from the developing countries as compared to developed countries. Middle income developing countries, among developing countries, are the growth market of the future as growth in their expenditure on agrifood imports outpaces growth in their per capita income. However, all U.S. agrifood exports face statistically significant expenditure elasticities as compared to only a few for Canadian and EU commodities. The study also finds that Canadian exports face homothetic preferences, U.S. exports face homothetic preferences for more than one-half of the commodities, and the selected EU countries’ exports face non-homothetic preferences for nine commodity groups. The study concludes that income plays an important role in agrifood trade; however, further investigation is needed to help us understand the forces that determine the divergent results..........................................................................Revised and published as: Haq, Zahoor and Karl Meilke. 2009. “The Role of Income in Trading-Differentiated Agri-Food Products: The Case of Canada, the United States, and Selected EU Countries.” Canadian Journal of Agricultural Economics 57(3):343-363.