Files
Abstract
During the negotiations on the Australia–US free trade agreement (AUSFTA), the
US dairy industry vigorously opposed opening the US market to imports of Australian
dairy products on the grounds that the US industry would be devastated. Subsequently,
the agreement signed in February 2004 made an exception for dairy, providing for
only limited quota expansion and no free trade, even at the end of the long implementation
period. This paper presents a simulation model of world dairy markets,
represented by supply and demand equations for fat and non-fat components of milk
and manufactured dairy products. We use the model to analyse the effects on US milk
markets of both a hypothetical agreement, allowing free bilateral trade in dairy
products, and the actual AUSFTA. An important contribution to the literature is
the derivation of explicit supply and demand relationships for milk components.
The components model allows an analysis of long-term production, consumption,
and trade patterns that is not tied to specific, fungible products. Simulations indicate
that increased imports from Australia resulting from bilateral trade liberalisation
would have resulted in small reductions in US milk prices and production. The much
smaller increases in Australian access to the US market under the actual AUSFTA
will have even smaller, almost negligible, impacts.