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Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 05-02
Title: The derived demand for imported cheese into Hong Kong
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Title: The derived demand for imported cheese into Hong Kong
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 05-02
Physical Description: Book
Language: English
Creator: Washington, Andrew A.
Kilmer, Richard L.
Ge, Jiaoju
Publisher: International Agricultural Trade and Policy Center, Institute of Food and Agricultural Sciences, University of Florida
Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2005
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Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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PBTC 05-02


I -ional Agricultural Trade and Policy Center



THE DERIVED DEMAND FOR IMPORTED CHEESE INTO
HONG KONG
By
Andrew A. Washington, Richard L. Kilmer & Jiaoju Ge

PBTC 05-02 May 2005


POLICY BRIEF SERIES


UNIVERSITY OF
FLORIDA


Institute of Food and Agricultural Sciences


i~i;i









INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


THE INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER
(IATPC)

The International Agricultural Trade and Policy Center (IATPC) was established in 1990
in the Institute of Food and Agriculture Sciences (IFAS) at the University of Florida
(UF). The mission of the Center is to conduct a multi-disciplinary research, education and
outreach program with a major focus on issues that influence competitiveness of specialty
crop agriculture in support of consumers, industry, resource owners and policy makers.
The Center facilitates collaborative research, education and outreach programs across
colleges of the university, with other universities and with state, national and
international organizations. The Center's objectives are to:

* Serve as the University-wide focal point for research on international trade,
domestic and foreign legal and policy issues influencing specialty crop agriculture.
* Support initiatives that enable a better understanding of state, U.S. and international
policy issues impacting the competitiveness of specialty crops locally, nationally,
and internationally.
* Serve as a nation-wide resource for research on public policy issues concerning
specialty crops.
* Disseminate research results to, and interact with, policymakers; research, business,
industry, and resource groups; and state, federal, and international agencies to
facilitate the policy debate on specialty crop issues.










The Derived Demand for Imported Cheese into Hong Kong


Andrew A. Washington, Richard L. Kilmer and Jiaoju Ge1


Abstract


The objective of this paper is to provide the U.S. dairy industry with empirical

estimates of Hong Kong's derived demand for imported cheese from the U.S. These

estimates were used to project the effects of the European Union (E.U.) subsidy

reductions on the U.S. share of Hong Kong cheese imports. Hong Kong cheese

imports from the U.S. were projected to increase by 16.96% if subsidy reductions

continue at the same pace as the 1994 GATT agreement and 33.92% if reductions

were twice the pace.


Introduction


Under the General Agreement on Tariffs and Trade (GATT), the European Union

(E.U.) export subsidy may be reduced by as much as 36%. Since an export subsidy is

a payment by a government to their exporters, this will allow the exporters to sell their

commodity to another country at a reduced price. If a government reduces it's

subsidies to its exporters, the exporters must increase the price they charge importers

for the exporter's commodity. Because the subsidizing country's exporters must

charge a higher price in order to cover expenses, their exports are reduced. At the

same time, exporters from other countries will experience an increase in their exports

as they are more price competitive with the previously subsidized exporters. This




1Andrew A. Washington is an assistant professor in the Department of Economics at Southern
University. Richard L. Kilmer is a professor in the Food and Resource Economics Department at the
University of Florida and a member of the International Agricultural Trade and Policy Center (IATPC)
at the University of Florida. Jiaoju Ge is a graduate student in the Food and Resource Economics
Department at the University of Florida.









change in E.U. policy will benefit the U.S. dairy industry because the U.S. cheese

price will be more competitive with the increased E.U. price.

In today's international trade market, people have become more aware of the

significance of export markets. The quantitative analysis of import demand

information for different countries and for individual dairy products is extremely

important to the U.S. dairy industry producers and processors. The information will

help the industry build export markets and capture market share from the potential

increase in import demand.

The objective of this paper is to provide the U.S. dairy industry with estimates of

the derived demand for imported cheese into Hong Kong, the sensitivity of the

quantity demanded for U.S. cheese exported to Hong Kong to price, and the effects of

export subsidy reductions on the derived demand for U.S. cheese imported into Hong

Kong.


Background of U.S. and Hong Kong cheese market


The U.S. Dairy Export Council (USDEC) has nine offices located in nine

countries around the world, including one office in Hong Kong. Among all

international markets investigated by USDEC, Hong Kong was identified as a

potential growth area for U.S. cheese. This potential growth is based on: (1) milk

product consumption per-capita in Hong Kong tended to be the highest in the Asian

market (USDEC, 1996), (2) per-capital milk consumption had grown by nearly 10%

annually since 1990 (FAO statistics, 1999), (3) Hong Kong had experienced economic

growth for the last two decades (Central Intelligence Agency, 1999), and (4) Hong

Kong is a major re-exporter to mainland China. Hong Kong is nearly 100% dependent

on dairy imports to satisfy its dairy demand. Hong Kong cheese imports grew by

6.1% annually from 1993 through 2003 (Table 1). The percentage change for the










World during the same period was 4.8%.


Table 1. Hong Kong and World Cheese Imports, 1993-2003.

Year Cheese Imported (Metric Tons)
Hong Kong % Change The Whole World % Change
1993 5,306 ~ 2,124,028 ~
1994 6,061 14.2% 2,356,235 10.9%
1995 5,946 -1.9% 2,344,965 -0.5%
1996 6,789 14.2% 2,497,340 6.5%
1997 7,718 13.7% 2,588,479 3.6%
1998 7,498 -2.9% 2,542,627 -1.8%
1999 7,860 4.8% 2,672,308 5.1%
2000 9,160 16.5% 2,822,849 5.6%
2001 9,452 3.2% 2,976,320 5.4%
2002 10,333 9.3% 3,103,112 4.3%
2003 9,247 -10.5% 3,376,223 8.8%
Average(1993-2003) 7,761 6.1% 2,673,135 4.8%


Source: FAOSTAT Database, 2005


For the period 1993 to 2003, U.S. cheese exports increased by an average of

12.0% per year (Table 2). This is higher than the yearly change in World cheese

exports (4.6%) for the same period. However, the percentage change in U.S. cheese

exports from 2000 to 2003 was 3.4%, which is lower than the 4.7% increase in World

cheese exports during the same period.


Dairy Trade Subsidies



In 2001, the E.U. was both the largest producer (21.3%) and the largest

consumer (21%) of cow's milk in the world, compared to 13.1% and 12% for the U.S.

(CEC). The E.U. provides more than $1 billion in dairy export subsidies which is

more than 100 times what the U.S. is allowed to spend (NMPF). From 2000 through

2002, U.S. dairy exports that were unsubsidized represented 81, 86, and 84 percent of










total U.S. dairy exports.

Table 2. U.S. and World Cheese Exports, 1993-2003.

Year Cheese Exported (Metric Tons)
U.S. % Change The Whole World % Change
1993 18,522 ~ 2,271,309
1994 24,761 33.7% 2,457,173 8.2%
1995 31,990 29.2% 2,461,299 0.2%
1996 35,845 12.1% 2,669,047 8.4%
1997 40,157 12.0% 2,756,654 3.3%
1998 40,592 1.1% 2,844,946 3.2%
1999 43,121 6.2% 2,898,246 1.9%
2000 49,865 15.6% 3,107,491 7.2%
2001 45,070 -9.6% 3,197,764 2.9%
2002 55,620 23.4% 3,237,710 1.2%
2003 53,700 -3.5% 3,557,143 9.9%
Average(1993-2003) 39,931 12.0% 2,859,889 4.6%
Average(1993-2000) 35,607 15.7% 2,683,271 4.6%
Average(2000-2003) 51,064 3.4%1 3,275,027 4.7%

Source: FAOSTAT Databases, 2005


Methodology


The differential factor allocation model is a derived demand model (i.e., not

consumer demand). The derived demand model is determined from the minimization

of the cost to obtain a predetermined level of output. The inputs are cheeses that come

from different countries. This formulation allows the competitive

advantage/disadvantage to be analyzed that each country experiences relative to other

countries. The sensitivity of the quantity demanded to a country's own price (price

elasticity of demand) as well as to the price of a competing country (cross price

elasticity of demand) is calculated from the derived demand equation. The price

elasticity of demand is used to determine the impact of export subsidy reduction on an

exporters' quantity of exports. The cross price elasticities of demand are used to









determine the level of competition between countries. The Divisia import elasticity

shows the percentage change in a country's exports that are imported into another

country given a one percent change in the importing country's imports.


Empirical Projection


The U.S. has the largest Divisia import elasticity among countries, which means

that if there is an increase in imports over time, U.S. cheese imports into Hong Kong

will increase by a larger percent than imports from the E.U., Oceania or ROW (Table

3). This indicates that if the total cheese imports into Hong Kong increase by 1.0%,

holding all prices constant, the cheese exports from the U.S., Oceania, and the E.U.

will increase by 1.284%, 1.013%, and 1.196%, respectively. Therefore, the U.S. is

the biggest beneficiary when total cheese imports into Hong Kong increase.


Table 3. Hong Kong Divisia and Price Elasticities of Derived Demand for Imported
Cheese.

Elasticities
Exporting Divisia Conditionala Conditionala Cross Price
country Import Own-Price U.S. Oceaniac E.U. ROWd

1.284b -1.546 0.323 0.761 0.462
U.S.
(0.373)e (0.195) (0.393) (0.391) (0.274)
Oc1.013 -0.304 0.046 0.387 -0.129
Oceaniac
(0.136) (0.183) (0.056) (0.163) (0.102)
1.196 -1.061 0.170 0.613 0.278
E.U.
(0.215) (0.339) (0.087) (0.257) (0.192)
0.459 -0.342 0.200 -0.394 0.537
ROW
(0.250) (0.344) (0.118) (0.311) (0.372)
a The elasticities are based on a predetermined level of output.
b Italics indicate that the elasticity was significant by at least 0.10 if not less.
' Australia and New Zealand aggregation
d ROW: rest of world
SAsymptotic standard errors are in parentheses which were obtained using the Delta
Method in TSP
Source: Washington and Kilmer
In addition, for the own-price elasticity, the U.S. elasticity (-1.546) and the E.U.









elasticity (-1.061) are both elastic, whereas the elasticity of Oceania (-0.304) is

inelastic (Table 3). The ROW (-0.342) is inelastic but not statistically different from

zero. This means that cheese from the U.S. and E.U. imported into Hong Kong is

more sensitive to a price change than cheese from Oceania and ROW. If the cheese

import price decreases by one percent, U.S. cheese exports to Hong Kong will

increase by 1.546% and the E.U. cheese exports to Hong Kong will increase by

1.061%. However, the cheese exports to Hong Kong for Oceania and ROW will

increase by 0.304% and zero percent. Therefore, the U.S. will realize the largest

change based on an own price change. This means that the U.S. quantity will decrease

the most if there is a U.S. price increase and the U.S. quantity will increase the most

with a U.S. price decrease.

The Cross-price elasticities indicate a substitution relationship (i.e., positive

relationship) between exporting sources except Oceania and ROW (i.e., negative or

complementary relationship) (Table 3). The U.S./ E.U. cross-elasticity is 0.761 and

the Oceania / E.U. cross-elasticity is 0.387, which says that if the price of the E.U.

cheese increases by 1%, the quantity demanded for U.S. cheese exported into Hong

Kong will increase by 0.761%, and the quantity demanded for Oceania cheese

exported into Hong Kong will increase by 0.387%. This suggests that U.S. will gain

more than Oceania when the E.U. cheese price increases due to a subsidy reduction.

A one percent reduction in E.U. subsidies will increase the price of E.U. cheese in

Hong Kong by 0.619% (Washington and Kilmer, p. 82). If the E.U. had reduced its

subsidy by 36% or 72% at the end of 2003, imports of U.S. cheese into Hong Kong

were projected to increase from 814.98 to 953.19 metric tons (Table 4), which is a









Table 4. Hong Kong Cheese Imports Given A 36% and 72% E.U. Export Subsidy
Reduction, 2003.
Year U.S. Oceania E.U. ROW
(Metric Tons)
20031 (Actual) 814.98 6773.44 1483.07 175.19
20032 (36% E.U. Cheese Subsidy Reduction) 953.19 7357.58 1132.42 175.19
20032 (72% E.U. Cheese Subsidy Reduction) 1091.39 7941.71 781.78 175.19
1 Source: United Nations Statistics Division
2 Projected. This projection uses the 2003 (Actual) quantity as a base and assumes that
the only cheese price change would have been an increase in the E.U. price of cheese
in Hong Kong which was caused by an E.U. cheese subsidy reduction.




16.96% increase. Over the same period, E.U. imports would decrease by 23.64%,

from 1483.07 to 1132.42 metric tons. If the export subsidy reductions were to double

(72%), imports of U.S. cheese into Hong Kong were projected to increase from

814.98 to 1091.39 metric tons (Table 4), which is a 33.92% increase compared to a

decrease of 47.29% of E.U. cheese imported into Hong Kong. ROW did not change

because the cross price elasticity is not statistically different from zero (Table 4).

Oceania imports would increase by 8.62% and 17.25% for a 36% and 72% export

subsidy reduction by the E.U. (Table 4).


Summary


The study provides the U.S. dairy industry with an empirical projection of the

potential increase in Hong Kong's derived demand for imported cheese from the U.S.

compared to other source countries, such as the E.U., Oceania and ROW. When total

cheese imports into Hong Kong change, U.S. cheese imports into Hong Kong will

change by a larger percent than that of other countries.

Based on E.U. export subsidy reduction, the E.U. cheese price will increase

which will make U.S cheese more competitive. This will increase the cheese quantity

demanded from the U.S. by Hong Kong. If the E.U. export subsidy reduction were









36%, the U.S. cheese exported to Hong Kong would increase by 16.96%. If the E.U.

subsidy reduction were 72%, the U.S. percentage increase would be 33.92%. If E.U.

subsidies were reduced, U.S. cheese could compete with the E.U. and ROW in the

Hong Kong cheese market and increase its market share. It will help the U.S. to

compete with Oceania if the characteristics of U.S. cheese products were

differentiated from Oceania.










References


Central Intelligence Agency (CIA). World Factbook 1999. Washington D.C., 1999.

www.odci.gov/publications/factbook.

Commission of the European Communities (CEC). Report on Milk Quotas SEC

(2002) 789 final, p. 5.

FAOSTAT DATABASE. (2005). "Cheese exported and imported by country".

http://faostat.fao.org/faostat/form?collection=Trade.CropsLivestockProducts&

Domain=Trade&servlet= &hasbulk=0&version=ext&language=EN, Visited

April 21, 2005.

Food and Agricultural Organization of the United Nations Statistics (FAO Statistics).

Rome, Italy, 1999. www.fao.org.

National Milk Producers Federation (NMPF). "Balanced Trade, Not Unilateral

Disarmament." http://www.usdec.org/files/pdfs/BalancedTradebooklet.pdf, Visited

April 21, 2005.

U.S. Dairy Export Council (USDEC) Comprehensive Reference Document on World

Dairy Trade Arlington, VA: USDEC, 1996.

United Nations Statistics Division. "Commodity Trade Statistics Database (UN

Comtrade). http://unstats.un.org/unsd/comtrade/, Visited April 25, 2005.

Washington, Andrew A. and Richard L. Kilmer. (2002). "The derived demand for

imported cheese in Hong Kong." International Food and Agribusiness

Management Review 5(2002): 75-86.




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