Abstract
Trade is a major component of any economic strategy that is to be implemented in the liberal-economic model. In the last few decades, there has been added emphasis on trade, as many neo-classical economics and publications have that trade allows the economy to allocate its resources optimally. There is no statistical evidence for that; however, through very robust and profound theories, such as the theory of comparative advantage (Ricardian Concept), it has been tried to establish that comparative advantage is the basis of trade and comparative advantage must be the basis of trade. It has also been asserted that when the basis of trade is a comparative advantage, an economy produces at Production Possibility Curves. From the study of Tomatoes (fresh) trade between the United States and Canada, we have learned that neither comparative advantage is the basis of trade, nor does the comparative advantage explain the tomatoes trade between the United States and Canada, as both countries exports tomatoes to one another. In this academic exercise, we gathered empirical data to learn 1) whether the comparative advantage is the basis of trade, of tomatoes, between the United States and Canada, and 2) does NAFTA affects the trade of tomatoes between the two countries. After presenting the results in tabular form, we have discussed these results at great length.
Contemporary Economic System
After the collapse of the Soviet Union, many economies around the world introduced various kinds of economic reforms. These reforms aimed to improve the health of the overall economy and to the economic stability of a country. The rationale behind the extraordinary emphasis on economic reforms was that countries had begun to acknowledge that for political stability, economic stability is essential. During this period, employment and growth (economic) became prime priorities of governments. For instance, countries devised such policies that could increase the size of investment in an economy. It was perceived that increase in Foreign Direct Investment would bring in not only capital, but also technology and efficient management practices, which would have a direct and profound impact on the economy (Avnon & De-Shali, 2012).
Also, it was also acknowledged that markets should not be regulated, and they must be allowed to evolve on their own. The objective of this strategy was to allow and facilitate forces of demand and supply to determine prices and output. Neoclassical economists perpetually propagated that when demand and supply forces were allowed to interact without any artificial influence, they allocate resources optimally and keep producer and consumer’s surplus balanced.
From the methodical study of literature and empirical evidence, we have that in the early 90s the economies started to implement reforms and begun to open up. It was during this period; trade became a major component of the economic strategy. The relevance of trade can be understood by the fact that major economies around the world entered into various trade agreements, such as North Atlantic Free Trade Agreement, which aimed to increase the size of trade many folds. Almost all these trade agreements were based on notions of comparative advantage (a Ricardian concept) and free-trade (neo-classical thought). In addition to that, international organizations, such as the World Bank and IMF also devised policies and strategies that aimed to expand trade. The World Trade Organization, which is a consequence of such efforts, provides us an understanding regarding the concept/nature of modern trade and its objectives. However, to understand contemporary trade, its nature, and objectives, it is imperative to understand neo-classical economics (Helpman, 2011).
Neoclassical Economics
Liberal-economic model, which is the most preferred or implemented economic model, is, in fact, a product of neo-classical economics. Neoclassical economics are refined form or thought of classical economics, which discourages government interference (use of fiscal instrument) and advocates fewer regulations. It also asserts that trade, which is based on comparative advantage rather than on absolute advantage, benefits all trading parties or countries (Morgan, 2015).
These assertions, especially regarding trade, were based on the Ricardian model of comparative advantage, which was very simple in its form. David Ricardo asserted that countries do not trade by the absolute advantage of producing a good, but rather on comparative advantage. It implies that when a country would trade that product or good, it could produce at a lower opportunity cost. Therefore, the basis of trade is the opportunity cost.
Economists define opportunity cost as the alternative forgone to produce a particular good or service. The larger the size of opportunity costs, the greater the economic inefficiency. For instance, if a country is producing a good that has a very high opportunity cost, it will be considered that it is not allocating its resources optimally. When such an economic scenario develops, then a country is no more producing at its Production Possibility Frontier¸ rather it is produced inside its Production Possibility Frontier, which is not a desired or optimal production point. Also, when the production of a country is not on its Production Possibility Frontier, the health of that economy starts to deteriorate and in the various long-run kinds of challenges occur in that economy. Therefore, trade and trade based on comparative advantage are essential.
In fact, neo-classical economists subtly assert that without trade, it is almost impossible to allocate resources optimally. It is because trade brings in the play comparative advantage notion, which compels an economic system to identify the product or service, which has a minimum opportunity cost. As the opportunity cost reduces and production increases, the efficiency of the overall economic system increases. Also, the specialization in the production of a certain good or service also streamlines and improves the production processes, which brings down the cost of production and increases value to the product or service. Not all these assumptions were based on any empirical evidence, but rather they were based on theory and arithmetic related to that theory. Also, most of the concepts and assertions were inherently flawed as they ignored major economic factors.
US-Canada Trade
The United States is the world’s largest economy, which is very diverse and robust. For instance, the United States is today one of the largest producers of oil in the world. Simultaneously, it produces highly sophisticated technology-based products, which it sells in different markets of the world. The Agriculture and Dairy Industry, of the United States, is also very large and lucrative. Also, some sub-industries of agriculture are protected through policies and subsidies.
The monetary size of the agriculture industry is $2.4 trillion, which provides an understanding of how this industry expanded. The overall size of the American economy is$19. 42 (nominal) trillion and it have the workforce of 129.24 million, which is employed in various sectors of the American economy.
Canada, which is the northern neighbor of the United States, also has a large economy, which is still striving to exploit its potential. There are certain industries, which are very robust and mature, such as auto-manufacturing industries, whereas others are maturing. The monetary size of the Canadian economy is $1.53 trillion, and it has the workforce of 17, 990, 080, which is employed in different industries or sectors of the Canadian economy (Statistics Canada, 2016).
The trade relationship between both the neighboring countries is old and important. In the beginning, Canada was quite dependent on the United States, as the United States had a better capacity to produce various kinds of goods and services. This capacity allowed the American economy to influence various aspects of trades. However, as the Canadian economy matured and various sectors of its economy started to perform as per their potential, trade became more balance. In fact, it was the balance in trade, which pushed both Canada and the United States to enter into a tripartite trade agreement, North Atlantic Free Trade Agreement. The information suggests that when countries enter trade agreements, they consider various possible outcomes of trade. A full-scale study is a prerequisite of any major trade agreements that can affect the economy very profoundly.
NAFTA
North Atlantic Free Trade Agreement or NAFTA is a traded instrument rather than a trade agreement. The agreement, which has three signatories (the United States, Canada, and Mexico), allows the parties to sell goods and services in the other country’s market, without paying any tariffs or export duties. North Atlantic Free Trade Agreement facilitates the trade to grow many folds, as it eliminates tariffs and duties, which are the main hurdle in conducting free trade (United States Trade Representative, 2018).
The statistical evidence reveals that since the signing of the agreement, the trade between all the countries has been a signatory to the trade agreement have grown many times. This increase in trade has directly influenced the size of imports and exports (trade surplus and trade deficits), and indirectly it has affected employment, prices, and producer surplus. In addition to the changes, it brought to prices and employment, NAFTA strongly affects investment.
Since the implementation of the trade agreement, Canada, and the United States is exporting, to one another, various goods, and services. Some of the trading goods are similar products, which undermine the notion of comparative advantage and bring forth its contradictions. For instance, there are certain automobile types and classes, which both Canada and United States export to one another. There are several agriculture and dairy products, which both import from one another.
One of the major agriculture products, which is traded between Canada and the United States, is a tomato. The tomato is both finished and intermediary products, which implies that not only is tomato used as a final product, but also it is used to produce other products. Therefore, tomatoes, as an agricultural product, have a large market. From the size of the tomato trade, it is also apparent that it is a major export item, and it produces good revenue. However, it is also the fact that the market life of tomatoes is small, which adds an element of risk to the trade. Also, companies that are exporting tomatoes have to spend an extra – dollar to ensure that its market value (regarding freshness) remains intact.
Tomatoes Trade
It is apparent that tomatoes trade has swelled over the years and there are various factors about it, which we discuss in detail in a subsequent section. We also learn that the United States imports tomatoes in large quantities, not only from the NAFTA countries but also from other countries. For instance, in the year 2017, all the fresh tomato imports of the United States were $2.177 billion, whereas, in the year 2016, it was 4% higher. Regarding quantity, the United States imported around 1.78 million metric tons of tomatoes. In 2016, it imported tomatoes in similar quantities. We also learn that the United States imported $312.9 million worth of tomatoes from Canada, which is an increase of around 13% from the previous year. Regarding quantity or volume, the United States imported 165, 400 metric tons of fresh tomatoes from Canada, which is an increase of around 7%.
These statistics provide insight regarding the overall and specific imports of tomatoes by the United States. For instance, we learn that the United States, which economies more or less function on the principle of comparative advantage, do not have an advantage (comparative) in producing tomatoes. Therefore, it imports tomatoes in large quantities. However, must not imply that the United States do not produce tomatoes, as it has a comparative disadvantage in producing tomatoes. We learn that the United States’ agricultural industry produces tomatoes; however, 1) do not meet the demand and 2) probably the cost of production of producing them is high (opportunity cost). In fact, figures reveal that by the beginning of 2002, United States was exporting around 150, 640 metric tons of tomatoes, whereas it was producing around 1, 795, 684 metric tons of tomatoes. The ratio of imports to consumption was 34%. In the year 2006, the United States was producing 1,671,218 metric tons of fresh tomato and importing 992,339 metric tons: 39% ratio of imports to consumption.
| Year | Production | Exports | Imports | Apparent Consuption | Ratio |
| 2002 | 1,795,684 | 150,640 | 860,097 | 2,505,141 | 34 |
| 2003 | 1,613,793 | 142,461 | 939,257 | 2,410,589 | 39 |
| 2004 | 1,726,647 | 165,841 | 931,972 | 2,492,778 | 37 |
| 2005 | 1,735,809 | 147,951 | 951,786 | 2,539,644 | 37 |
| 2006 | 1,671,218 | 144,184 | 992,339 | 2,519,373 | 39 |
Data Analysis Section
Model
For this academic exercise, we have selected data of three variables: US imports, Canadian Imports, and Size of NAFTA-trade between these two countries. The data starts from the year 2005, and the last statistics evidence we have incorporated is from the year 2014 (United States Census Bureau, 2018). We intend to apply the simple regression model to understand how overall, NAFTA trade affects US and Canadian imports, of tomatoes (Lopez, 2016). We intend to learn, whether the imports of tomatoes, by the United States and Canada has a significant relationship with NAFTA trade or not?
For the analysis, we will use GRETL, which is statistical-analysis software, which is easy to operate. We had the option of using STATA or E-views for this simple statistical analysis; however, we opted for GRETL because of its simple usage and accurate findings.
DATA TABLE
| Year | NAFTA TRADE | US Imports | Canada Imports |
| 2005 | 221574.1 | 141,642 | 130,501 |
| 2006 | 242951.3 | 135,141 | 119,177 |
| 2007 | 246222.2 | 111,723 | 121,562 |
| 2008 | 255251.8 | 119,385 | 124,184 |
| 2009 | 184898.7 | 130,310 | 110,358 |
| 2010 | 231302.1 | 142,590 | 87,610 |
| 2011 | 255938.2 | 141,349 | 89,197 |
| 2012 | 274471.9 | 139,311 | 89,822 |
| 2013 | 280469.3 | 140,240 | 89,326 |
| 2014 | 278395.1 | 146,534 | 94,830 |
Statistical Information
Model 1: OLS, using observations 2004-2013 (T = 10)
Dependent variable: US Imports
| Coefficient | Std. Error | t-ratio | p-value | ||
| const | −9.81762 | 7.23522 | −1.357 | 0.2119 | |
| NAFTATRADE | 6.19777e-05 | 2.90904e-05 | 2.131 | 0.0657 | * |
| Mean dependent var | 5.500000 | S.D. dependent var | 3.027650 | |
| Sum squared resid | 52.63526 | S.E. of regression | 2.565036 | |
| R-squared | 0.361997 | Adjusted R-squared | 0.282246 | |
| F(1, 8) | 4.539124 | P-value(F) | 0.065740 | |
| Log-likelihood | −22.49339 | Akaike criterion | 48.98678 | |
| Schwarz criterion | 49.59195 | Hannan-Quinn | 48.32291 | |
| rho | 0.597497 | Durbin-Watson | 0.667909 |
Model 2: OLS, using observations 2004-2013 (T = 10)
Dependent variable: Canada Imports
| Coefficient | Std. Error | t-ratio | p-value | ||
| const | −9.81762 | 7.23522 | −1.357 | 0.2119 | |
| NAFTATRADE | 6.19777e-05 | 2.90904e-05 | 2.131 | 0.0657 | * |
| Mean dependent var | 5.500000 | S.D. dependent var | 3.027650 | |
| Sum squared resid | 52.63526 | S.E. of regression | 2.565036 | |
| R-squared | 0.361997 | Adjusted R-squared | 0.282246 | |
| F(1, 8) | 4.539124 | P-value(F) | 0.065740 | |
| Log-likelihood | −22.49339 | Akaike criterion | 48.98678 | |
| Schwarz criterion | 49.59195 | Hannan-Quinn | 48.32291 | |
| rho | 0.597497 | Durbin-Watson | 0.667909 |
Post-Analysis Test
| Breusch-Pagan test for heteroskedasticity | ||||||
| OLS, using observations 2004-2013 (T = 10) | ||||||
| Dependent variable: scaled uhat^2 | ||||||
| coefficient std. error t-ratio p-value | ||||||
| ———————————————————– | ||||||
| const 5.05494 1.69135 2.989 0.0174 ** | ||||||
| NAFTATRADE −1.64070e-05 6.80035e-06 −2.413 0.0423 ** | ||||||
| Explained sum of squares = 2.09288 | ||||||
| Test statistic: LM = 1.046440, | ||||||
| with p-value = P(Chi-square(1) > 1.046440) = 0.306328 | ||||||
Results and Discussion
After applying statistical tests, we get very interesting results. Before presenting the results, it is essential to say that we have experimented with data in some ways. For instance, we regressed both Canadian and US imports against the size of NAFTA-trade. After getting statistical results, we selected NAFTA-trade as the dependent variable, and we chose the US and Canadian imports as regressors or independent variables.
After applying statistical tests, we used post analysis tests to examine the validity of our tests. Before that, we analyzed the health of our data by getting statistics regarding the variable summary. It provided us with a good understanding of our data, such as some observations, tilt, and others. The objective was to understand our data profoundly.
Our data starts in 2005 and ends in 2014. The reason for picking this period was that during this period various economic developments had occurred and to this point, NAFTA had been implemented quite forcefully by economic and legal institutions of all member countries.
When we took US imports, of tomatoes, as the dependent variable, we learned that our model is not very explainable. We learned about the value of the Adjusted R – square, which was only 0.28. It implies that this statistical model explains the relationship between our variables by only 28%. Also, the value F-statistic is also not significant, which again questions our model.
When we study the value of P-statistic, we learn that the value of P-statistic is also not significant, 0.0657. When the robust analysis was used, the significant value jumped extraordinarily high. The value of the T – statistic is 2.131, and the value of beta or coefficient is 6.19, which means that with every unit change in the independent variable, the dependent variable will change almost 6.19 units (positive relationship).
The statistical results, of Canadian Imports, we learn that the devised model has been explained by only 28%. We also learn that value F-statistics, for Canadian import model, is not more significant; more than 5%. These primary statics provide information regarding our model, which seems to be faulty and hard to explain (statistically). The p-value of the second model is also insignificant. The T-statistic is identical to the previous model, which is 2,131 and the value of beta is also identical.
It is quite apparent from the results that data which we have collected is not healthy and it is not able to provide statistical understanding to us. It seems that from our statistical or empirical analysis, we will not be able to draw authentic conclusions regarding the tomatoes trade between the United States and Canada; however, from the given evidence, we will be to draw a non-empirical analysis.
Comparative Advantage and Canada-US tomatoes trade
As per the theory of comparative advantage, a country or economy must not produce that product, in which it does not have a comparative advantage. However, in the case of United States-Canada trade, we learn that both countries are producing tomatoes, and both are exporting tomatoes to one another. It suggests that comparative advantage is not a perfect concept, which can explain trade between two countries. It is quite apparent that Ricardo’s model of comparative advantage does not full consider demand and it ignores preference or taste. With the Heckscher-Ohlin Model, which is an improvement of the Ricardian Comparative Advantage Model, it’s hard to explain tomatoes trade between the two countries. However, as the Heckscher-Ohlin Model is based on the endowment of factors; therefore, it can explain the trade between the US and Canada.
Conclusion
In the end, it is quite apparent that NAFTA has opened various economic and trade opportunities for all the countries that are a signatory to that agreement. It is also evident that trade of tomatoes has also been affected. However, with the selected data, we are unable to identify the type of impact NAFTA has on the trade of tomatoes. However, from the systematic study of the evidence, we have learned that the Ricardian concept of trade fails to explain the pattern of trade of tomatoes between the United States and Canada. We have learned that Canada and United States export tomatoes to one another, which is against the Ricardian concept of comparative advantage.
References
Avnon, D., & De-Shali, A. (2012). Liberalism and its Practice. Routledge.
Helpman, E. (2011 ). Understanding Global Trade. Harvard University Press.
Lopez, J. A. (2016). A Case Study of US Fresh Tomato Trade among NAFTA Countries. 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas. Southern Agricultural Economics Association.
Morgan, J. (2015). What is Neoclassical Economics? Debating the origins, meaning and significance. Routledge.
Statistics Canada. (2016, December 1). Portrait of Canada’s Labour Force. Retrieved from https://www12.statcan.gc.ca/nhs-enm/2011/as-sa/99-012-x/99-012-x2011002-eng.cfm
United States Census Bureau. (2018, January 1). Trade in Goods with NAFTA with Canada (Consump). Retrieved from https://www.census.gov/foreign-trade/balance/c0006.html
United States Trade Representative. (2018, January 31). North American Free Trade Agreement (NAFTA). Retrieved from https://ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta
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