USDA PUTS A PRICE TAG ON SANCTIONS

by Gregg Doud

Vice President, Information Services

World Perspectives Inc.

Washington, DC

For several months, U.S. policymakers had been asking the U.S. Department of Agriculture (USDA) to quantify the impact of U.S. sanctions on U.S. agricultural trade. The department has responded that U.S. sanctions on six particular countries cost the U.S. $500 million dollars in lost agricultural trade in 1996 alone. WPI credits USDA for its analysis but thinks the figure could be significantly higher.

Certainly one of the hottest topics in U.S. agricultural trade today is the affect that U.S. sanctions policies are having on U.S. agricultural exports. Even before India and Pakistan began testing nuclear weapons, U.S. policymakers had been asking USDA to quantify the impact of U.S. sanctions on U.S. agricultural trade.

President Clinton recently suggested that all food should be considered humanitarian and, as such, exempt from sanctions policies. The tables at the end of this article are what USDA recently put forth on this subject to illustrate the dollar amount of trade the U.S. is losing.

The simple explanation of the impact of U.S. sanctions on U.S. agricultural trade is that the six countries listed in the USDA tables at the end of this article imported $6.315 billion worth of agricultural products in 1996. Since the U.S. has an average 20.6 percent market share of world trade in these products, the U.S. may have lost about $1.3 billion in agricultural trade with those six countries in 1996. Total U.S. agricultural exports in 1996 were $60 billion and for Fiscal Year 1998 it is projected at $55 billion.

USDA logically deduced that if the U.S. increased its amount of exports to these six countries, it would displace U.S. agricultural exports in other markets as it would drive U.S. competitors into these other markets. As a result, USDA estimated that U.S. agricultural trade would only increase by a net $500 million per year if a normal trade relationship were developed with these six countries. Please refer to the tables at the end of the article. What this says is that

USDA's "swag" on these straightforward numbers is that lifting sanctions would not increase U.S. agricultural trade by $1.3 billion, but probably somewhere between $433 and $650 million. Thus, there is the "official" department line that sanctions on these six countries cost the U.S. $500 billion in lost agricultural trade in 1996 alone.

WPI would highlight some interesting markets the U.S. is currently keeping itself out of:

• Wheat to Iran. There has been 3 to 7 million metric tons (mmt) of wheat sold to Iran in recent years out of just under 100 mmt in total international trade. Iran used to be the largest importer of U.S. soft white wheat.

• Vegetable (soybean) Oil to Iran. This is a huge market (1 mmt out of 28 mmt in global vegetable and marine oil trade) that involves about 40 percent soy oil, 40 percent sunflower oil and 10 percent palm oil. If the U.S. split the soy oil market with Brazil, that is about $130 million (200,000 mt) in lost U.S. soy oil sales alone! Using the USDA methodology, this would be (multiplying 0.4 mmt by a 7.3 percent market share multiplied by 0.5) 14,600 mt or $9.5 million. The real answer probably lies somewhere between these $9.5 and $130 million "swags."

• The Iranian sugar market is also quite large but the U.S. sugar market dynamics limit any opportunity since the U.S. is not cost competitive on the world whites market. (The U.S. has only a 3.2 percent world market share)
• The Iranian meat, milk, cheese, and butter imports are a $312 million annual market with standard-of-living increases suggesting that this may be a booming area. The bottom line on Iran is that it's a $2.74 billion agricultural market which the U.S. cannot touch simply because of its own policies.

Summary

This sanctions analysis might have been a very difficult undertaking for analysts at FAS except for the FAO database, which anyone can access. Turning this into something meaningful for policymakers is very different and more difficult, however. In other words, the U.S. has undertaken what can only be described as a self-defeating sanctions policy but the nature of the markets affected is such that any analyst would have an extraordinarily difficult time trying to quantify how absurd this policy actually is. The FAS effort is about as straightforward as it gets.

This analysis doesn't address the issue of lost opportunity costs to U.S. agriculture as a result of sanctions. The tables only show what products these six countries actually purchased in 1996 without access to all the high-value agricultural products or possibly more price-competitive products in the U.S. that may have increased overall consumption of some products.

A very valid point that FAS officials make, however, is that relaxing sanctions on U.S. agricultural products, by itself, may not necessarily create the opportunity of increasing trade with the U.S. and consumption. Normalization of investment flows and the ability to get foreign investment into these six countries, especially Cuba, would go a very long way toward expanding consumption and, along with this, imports of U.S. agricultural products.

FAS admittedly says this $5 million per year figure is a very subjective and conservative estimate. Remember that before the Soviets stopped trading with Cuba its agricultural imports were at $2 billion per year. Also, Iraq's agricultural imports were $2.5 billion in 1989 to $2.7 billion in 1988 (roughly the same as Iran) before the Gulf War. In other words, with normalized trade and investment with these six countries, agricultural imports by these six countries could easily be $10 billion per year from all sources.

USDA's analysis puts the impact of Cuba's sanctions at only $50-$70 million per year. The potential of at least $2 billion in Cuban agricultural imports, considering both the end of Soviet trade subsidies and Cuba's proximity to the U.S., suggests that annual losses in U.S. agricultural trade due to sanctions on Cuba alone are at least $1 billion per year.

Beyond the numbers, however, there is still the issue of building trading relationships, some of which (North Korea and Cuba) have been interrupted for two generations. The U.S. trading relationship with these countries will not develop in one year's time. However, the climate is right to at least begin these endeavors. WPI applauds USDA for its efforts in developing a straightforward way of assessing the impact of self-imposed sanctions on trade. Regardless of how one looks at the situation, this issue is definitely one of biggest problems confronting U.S. agricultural markets.

SANCTIONS TABLE 1 -- total imports in million U.S. dollars
Commodities	Cuba	Iran	Iraq	North Korea	Libya	Sudan	Six Country Total1
Wheat and Flour	182	430	165	51	294	98	1,220
Corn	51	269	0	15	45	0	380
Feeds & Fodders (including meal)	57	130	13	3	150	1	354
Rice	60	193	76	150	44	11	534
Vegetable Oils	55	672	192	28	158	49	1,154
Misc. Processed Foods	19	42	231	0	6	11	309
Fruit & Vegetable Products	57	69	45	3	124	16	314
Meat & Products	52	183	7	4	13	0	259
Soybeans	3	5	0	11	49	0	68
Sugar & Honey	0	313	109	20	91	1	534
Animal Fats	10	7	2	0	0	2	21
Coffee, Tea, Cocoa, & Spices	5	51	28	8	42	47	181
Cotton	10	0	20	8	1	0	39
Crude Materials	35	20	1	0	8	1	65
Milk (fresh, dry, & condensed)	56	21	16	0	80	6	179
Beverages	15	0	4	5	10	1	35
Cheese	5	49	3	0	22	0	79
Butter	3	59	4	1	5	1	73
Hides & Skins	0	2	0	0	0	0	2
Other Ag. Products	16	225	79	19	147	29	515
TOTAL	691	2,740	995	326	1,289	274	6,315
Source: USDA

 

SANCTIONS TABLE 2 -- in million U.S. dollars
	WORLD TRADE		U.S. EXPORTS
Commodities	Total Value2	% Closed to U.S.3	U.S. Share of World Trade4 (in %)	Loss from Sanctions (Gross)5
Wheat and Flour	20,825	5.9	34.2	417.24
Corn	12,588	3.0	79.0	300.20
Feeds & Fodders (including meal)	17,185	2.1	28.3	100.18
Rice	7,496	7.1	16.5	88.11
Vegetable Oils	18,517	6.2	7.3	84.24
Misc. Processed Foods	10,845	2.8	21.7	67.05
Fruit & Vegetable Products	52,167	0.6	17.1	53.69
Meat & Products	28,399	0.9	24.9	64.49
Soybeans	9,895	0.7	76.0	51.68
Sugar & Honey	16,714	3.2	3.7	19.76
Animal Fats	1,166	1.8	54.5	11.45
Coffee, Tea, Cocoa, & Spices	25,193	0.7	3.6	6.52
Cotton	11,240	0.3	27.5	10.73
Crude Materials	13,070	0.5	12.3	8.00
Milk (fresh, dry, & condensed)	7,565	2.4	3.7	6.62
Beverages	1,8736	0.2	7.0	2.45
Cheese	3,670	2.2	3.1	2.45
Butter	1,433	5.1	2.5	1.83
Hides & Skins	6,107	0.0	29.0	0.58
Other Ag. Products	55,693	0.9	13.5	69.53
TOTAL	338,504	1.9	20.6	1300.89
Source: USDA

1 The 6 Country Total represents the total dollar value of imports of the 6 sanctioned countries for which U.S. exporters are currently excluded due to U.S. trade sanctions.

2 Total Value of World Trade is the 1996 dollar value of global trade for the specified commodity.

3 Share of World Trade Closed to.U.S. is calculated by dividing the 6 Country Total by the Total Value of World Trade and represents the share of world trade that is "off limits" to U.S. exporters in 1996 due to U.S. sanctions.

4 U.S. Share of World Trade is the U.S. share of world exports of the specified commodity in 1996.

5 Gross U.S. Export Losses Due to Sanctions is calculated by multiplying the 6 Country Total by the U.S. Share of World Trade. This estimate assumes U.S. exporters could capture a share of the closed 6 country market equal to our share of world trade if it were open to them. It is a gross estimate in that it assumes no trade diversion to third country markets from displaced competitor sales resulting from U.S. exports to sanctioned countries.

The Food and Agriculture Organization (FAO) database is built upon data that is self-reported, which presents problems anytime FAO data is used, but it is particularly troublesome when it involves countries such as the six listed here. WPI also points to the $16 million in milk trade listed for Iraq. While this number may be correct,

WPI sources indicate that this trade (under the United Nations food-for-oil deal) is in excess of $100 million today.

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