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Staff Report

FLORIDA

AGRICULTURAL MARKET RESEARCH CENTER

FOOD AND RESOURCE ECONOMICS DEPARTMENT
Institute of Food and Agricultural Sciences
University of Florida
Gainesville, Florida 32611

EFFECTS OF FOREIGN COMPETITION AND TRADE POLICY
ON THE FLORIDA LIME INDUSTRY

By

Emilio Pagoulatos, J. Scott Shonkwiler
and Robert L. Degner

Staff Report 10

November 1980

Staff Reports are circulated without formal
review by the Food and Resource Economics
Department. Content is the sole responsi-
bility of the author.

Food and Resource Economics Department
Institute of Food and Agricultural Sciences
University of Florida
Gainesville, Florida 32611

The Florida Agricultural Market Research Center is
a service of
the Food and Resource Economics Department
of the
Institute of Food and Agricultural Sciences

The purpose of this Center is to provide timely, applied research

on current and emerging marketing problems affecting Florida's agri-

cultural and marine industries. The Center seeks to provide research

and information to production,'marketing, and processing firms, groups

and organizations concerned with improving and expanding markets for

Florida agricultural and marine products.

The Center is staffed by a basic group of economists trained in

agriculture and marketing. In addition, cooperating personnel from

other IFAS units provide a wide range of expertise which can be applied

as determined by the requirements of individual projects.

Abstract

Effects of Foreign Competition and Trade Policy
on the Florida Lime Industry

The purpose of this paper is to estimate the effects of import

competition and alternative trade policies on the Florida fresh lime

industry. An econometric model of the Florida lime and U.S. trade sectors

is specified and the estimated multipliers are used to measure the impact

of four hypothetical U.S. trade policies. The free trade alternative

would inverse imports and reduce Florida's output without affecting Florida

prices. Increases in the U.S. specific tariff level would decrease imports

and stimulate production in Florida, but would have only a very limited

impact on prices. Finally, the imposition of a fixed import quota would

provide a considerable stimulus for increasing Florida's output while, at

the same time, raising Florida prices.

TABLE OF CONTENTS
Page
List of Tables . . . . . . iv

Introduction . . . .. . . 1

Florida's Fresh Lime Industry .. ... .. . . 1
The Economic Model . . . . 2
The Estimated Model . ... . . . 6
Model Validation . . . . . 9
Trade Policy Simulations .. . . . 10

Conclusions . . . . . . 12

Footnotes . . . ... . . 14

References . . .. . . . . 15

LIST OF TABLES
Table Page

1 3SLS Structural Equation Estimates of Model for Limes ..... 7

2 Definition of Variables . . . . 8

3 Simulated Values for Lime Imports, Florida Production and Price
under Alternative Trade Policies, 1970-1978 .. . 11

Effects of Foreign Competition and Trade Policy
on the Florida Lime Industry

The Florida fresh lime industry has recently faced increasing com-

petition from imports, particularly from Mexico. Concern about increased

lime imports began in the mid-1970's and has focused on their potentially

adverse effect on Florida prices and production. In order to evaluate

the potential threat of foreign competition on Florida's lime industry,

and the trade policy alternatives, quantitative estimates are needed of

the impact of imports on the industry.

The purpose of this study is to estimate the effects of import

competition and alternative trade policies on the Florida lime industry./

The methodology employed is to specify and estimate an econometric model

of the Florida lime and U.S. trade sectors. A set of reduced form equations

is derived from the simultaneous equation model; and the estimated multi-

pliers are used to measure the impacts of alternative U.S. tariff and quota

policies on lime imports, Florida lime production,and prices.

Florida's Fresh Lime Industry

Florida and California are the only two states in the United States

producing limes commercially.- Since the early 1970's, Florida has

accounted for about 90 percent of the domestic acreage and California

the remaining 10 percent. As recently as the 1972-73 season, Florida

produced 90 percent of the total U.S. supply of fresh limes. California's

production, which is relatively small but stable, has typically accounted

for 5 to 8 percent of the U.S. supply in recent years.

Imports have increased steadily since 1972-73 when imports constitut-

ed only 4 percent of U.S. fresh lime supplies. By 1976-77, however, imports

accounted for about 15 percent. In the 1977-78 season, imports represent-

ed approximately one-third of the U.S. fresh lime supplies, and in the

1979-80 season, over 37 percent. Fresh limes are protected in the U.S. by

a specific tariff (TSUS item No. 147.22) of one cent per pound. In recent

years the ad valorem equivalent of this tariff has been about 7 percent.

Although a number of Caribbean countries export fresh limes to the

U.S., Mexico is the dominant source. In recent years, from 95.to 97 percent

of lime imports have come from Mexico. Mexico has the potential to become

an even greater competitive threat to the Florida lime industry. Mexico

has almost 112,000 acres of limes in production, compared with Florida's

4,600. Although a very high proportion of Mexico's acreage consists of

the seeded 'Mexican' lime used for the production of essential oil, there

is increasing production of 'Persian' limes, the preferred fresh market

variety grown by Florida producers.

The Economic Model

The main components of the model are the foreign trade sector and

the Florida market for limes. This system allows the simultaneous deter-

mination of import and export prices, import levels, and the quantity and

price of Florida limes.

Following Magee and Goldstein and Khan, we specify the foreign

trade sector to include the supply of lime exports from Mexico (MS), the

3

U.S. demand for lime imports (Md), and the relative price equation

linking the U.S. import price (PM) with the Mexican export price for

limes (PX).

In the absence of export tariffs, we specify the supply of limes

from Mexico as a function of the export price (in pesos), the real income

level in the exporting country (YMEX), and the lagged price of exports:

(1) Mt = f(PXt, YMEXt, PXtl)

It is expected that current and lagged export prices are positively

related to the level of exports. As export prices rise, production for

export becomes more profitable, and allocation of the product to the

export market increases. However, as domestic income rises in the export-

ing country, domestic demand for the product rises and, ceteris paribus,

exports decline.

A key assumption of the model is that imports are perfect substitutes

for domestic production. Thus, the import demand for limes is specified

as follows:

(2) Mt = g(PMt, QFt, YUSt, CPIt)

where PM is the import price (in dollars), QF is the quantity of limes

marketed by Florida producers, YUS is the U.S. income level, and CPI is

the U.S. consumer price index. It is hypothesized that the U.S. demand

for imported limes is negatively related to import price, and positively

related to consumer income. In addition, under the assumption of perfect

substitutability, Florida marketing should exert a negative influence

on imports (Leamer and Stern). Equation (2) also embodies the hypothesis

that as the price of all other consumer goods (CPI) rises, ceteris paribus,

the demand for imports increases.

Finally, the following identities complete the specification of the

foreign trade sector:

(3) PMt -I PX + T
rt

and

(4) M = Md
t t

Expression (3) relates the dollar-valued import price (PM) to the peso-

valued export price received by Mexican suppliers. This identity ex-

plicitly introduces the foreign exchange rate (r = pesos/dollar) and the

U.S. specific tariff rate (T = $.01/lb.). Expression (4) imposes a

market clearing solution on the trade side of the model.

With regard to the domestic side of the model, the specification of

the Florida lime supply function is given by:

n m
(5) QFt = h( Z PFt PPFti FWt, QFt, TIME)
t i-l t-i t TIME)
i=l i=l

where PF is the Florida lime price, PPF represents prices paid by growers

for the purchase of production inputs, FW is a variable denoting unfavorable

Florida weather conditions, and TIME is an annual trend term.

The lag structures on product and input prices account for the influence

of expected prices and costs on supply, due to the lag between planting

and output. As measures of expected levels of profitability, prices should

exert a positive impact on supply, while prices paid by farmers should

5

negatively affect supply. Lagged lime output was included in the

specification to capture partial production adjustments and it is

expected that 0 < Mh/QFt-l
represent the effects of omitted variables, such as technological

change, that may have exerted systematic effects over time.

The quantity demanded of Florida limes is postulated to depend

upon the price of Florida limes (PF), the U.S. income level (YUS), the

overall price level (CPI), and the levels of current and lagged

imports (M):

(6) QF = i(PFt, YUSt, CPIt, Mt, Mt)

Own price and consumer income are expected to enter the equation

with negative and positive signs, respectively. Prices of all other

commodities should be negatively related to demand. In addition to

such traditional variables, the quantity of limes demanded depends on the

availability of imported limes as well. Increased quantities of the import-

ed substitute should erode demand for the domestic product. The sustained

increase in lime imports, as evidence that foreign competitors are gaining

market share, should further negatively influence the demand for Florida

limes.

To complete the specification of the Florida lime market we require

that:

(7) QFs = QFd
t t

to assure a market-clearing equilibrium.

The Estimated Model

The economic model discussed in the previous section consists of

a system of four behavioral equations and three identities. The parameters

of the behavioral equations were estimated simultaneously via three-stage

least squares (3SLS) using annual observations for the period 1957 through

1978. The estimated equations are reported in Table 1, along with their

corresponding structural R2's and measures of the degree of first-order

residual autocorrelation. Table 2 presents the variable definitions.

All four equations exhibit good structural fits as evidenced by

the high structural R2's and the overall significance of the estimated

parameters. In no case is the test of autocorrelation rejected, while

the test is inconclusive for the import supply and Florida demand equations.

Parameter signs conform closely to theoretical expectations. All var-

variables enter the import supply equation with their expected

signs at high levels of significance. In the import demand equation the

variable PM exhibits'the postulated sign, but is only very marginally

significant. The income measure, YUS, also has the postulated sign but

is not significant, perhaps due to its high degree of correlation with

the CPI variable. The most important explanatory variable in the import

demand equation is Florida lime production, which confirms the hypothesis

of perfect substitutability between domestic and imported limes.

In the Florida supply equation, polynomial distributed lag forms

were imposed on the lagged price and cost series. Prices were assumed

to follow a four-period first order polynomial distributed lag, whereas

production costs were allowed to follow a four-period second order

distributed lag. In both cases all parameters are of the expected sign

and highly significant, except for the parameter on PPFt_-. The large

Table 1. 3SLS Structural Equation Estimates of Model for Limes

Estimated Equations R2 D.W. h

Import supply

Import demand

= -20.13 + 38.73 PXt -15.04 YMEXt
(10.31)a (15.67) (4.64)

d
t

+ 71.89 PXt_
(17.17)

= -86.67 4.26 PMt .126 QFt + .0018 YUSt+ 2.65 CPIt
(44.27) (3.34) (.022) (.0081) (1.17)

Florida supply QFt = 1,044.3 + 58.15 PFt_1 +
(172.49) (11.43)

43.61 PFt_2 + 29.07 PFt_3
(8.57) (5.72)

+ 14.54 PFt_4 + 2.55 PPFt_1 6.95 PPFt_2

(2.86)

(2.36)

(1.12)

- 10.54 PPFt_3 8.23 PPFt_4 80.38 FWt + .862 QFt_1
(2.32) (1.99) (25.68) (.152)

+ 28.12 TIMEt
(7.05)

Florida demand =
Florida demand QF =

224.12 40.90 PFt + .156 YUSt 2.21 CPIt 1.09 Mt
(157.69) (10.16) (.029) (3.50) (.712)

- 2.13 M t_
(.340)

a Asymptotic standard errors in parentheses.

.897

.936

1.49

1.74

.935

1.83

.968

1.48

Table 2. Definition of Variables

Endogenous Variables

Mt = U.S. imports of limes at year t (million Ibs.)

PXt = Mexican lime export price at year t (pesos/lb.)

PMt = U.S. lime import price at year t ($/lb.)

QFt = Florida lime production at year t (million Ibs.)

PFt = Florida wholesale lime price at year t (cents/lb.)

Exogenous Variables

YMEX= Real Mexican gross domestic product (deflated by Mexican wholesale price index)
(billions of pesos)

YUS = U.S. disposable personal income (billions of dollars)

CPI = U.S. consumer non-durable goods price index (1972 = 100)

PPFt= U.S. index of prices paid by farmers at year t (1967 = 100)

FW = Florida weather dummy variable [FW = 1 for years with unfavorable weather conditions
(due to freezes or hurricanes), and FW = 0 in remaining years]

TIME= Annual trend term, 1957-58 season is year 1

NOTE: Data were obtained from standard USDA, IMF and other governmental publications.

coefficient on QFt_- reflects the substantial inertia which dominates the

supply side of the Florida market. Finally, the Durbin h statistic

provides an appropriate test for residual autocorrelation in this equation,

because of the presence of a lagged dependent variable.

The estimated Florida demand equation also conforms closely to the

hypothesized relation. The Florida price of limes and the domestic income

level appear to influence the demand for Florida limes to a considerable

extent. The estimated price and income elasticities of demand are -.0.64

and 2.00, respectively. In this equation, the CPI variable has the proper

sign but is not statistically significant, due perhaps to its rather high

degree of correlation with YUS. Current imports are a marginally signi-

ficant determinant of Florida demand. Lagged imports, however, appear to

have a very significant effect. This result supports the hypothesis that

sustained increases in imports have an adverse effect on the demand for

Florida fresh limes.

Model Validation

The generally good fit of the structural model and its conformity to

a priori theoretical notions suggest its appropriateness as a simulation

tool. The reduced form equations were derived and the model was, thus,

simulated over the sample period in order to evaluate its forecasting

performance. Both static and dynamic simulations were performed using

the estimated or base model. Unlike the static simulation which uses

actual values for lagged endogenous variables, the dynamic simulation

employs, instead, previously solved values of the endogenous variables.

In order to assess the model's ability to track historically, the

squared correlations between actual and simulated values of the

endogenous variables were calculated. The following results were

obtained:

Simulation Endogenuous Variable
M PM PX FQ PF
Static .942 .715 .928 .935 .957

Dynamic .947 .758 .924 .890 .857

The reduced form solution of the model under the two simulation

strategies appears acceptable for all variables except the U.S. import

price (PM). But because this variable has little impact on lime import

levels (M) in the structural model, lime imports are simulated quite

accurately.

Trade Policy Simulations

This section examines the implications of possible changes in trade

policy on Florida's fresh lime industry. Imports, Florida output, and

Florida prices are simulated over the 1970 to 1978 period under the

current U.S. tariff policy (base value). Next, four alternative tariff

and quota policies are inforporated into the model, and the simulation

results for the 1970-78 period are compared to the base solution values.

The hypothetical trade policies considered in this study are: (a) a

no tariff or free trade policy, requiring the elimination of the $.01/lb.

specific tariff on limes; (b) the doubling of the current tariff to

$.02/1b.; (c) a further increase in the tariff to a level of $.05/lb.;

and (d) the imposition of a fixed import quota of 5 million pounds of

limes per year.3/ Table 3 shows the values of imports, Florida output

and prices over the simulation period.

Endogenous Trade Year Mean % Change from
Variable Policy 1970 1971 1972 1973 1974 1975 1976 1977 1978 1970-78 Base Value

Lime imports Base value 3.35 4.47 4.03 7.18 7.27 8.99 15.3 21.2 20.5 10.25
(million Ibs.) (actual tariff)

No tariff 3.76 4.99 4.42 7.69 7.67 9.50 15.8 22.0 21.2 10.78 + 5.2%

Tariff = $.02/1b. 2.95 3.94 3.64 6.67 6.86 8.47 14.7 20.4 19.8 9.71 5.3%

Tariff = $.05/1b. 1.75 2.37 2.46 5.13 5.64 6.93 13.1 17.9 17.7 8.11 -20.9%

Florida lime Base value 73.7 77.9 76.8 69.3 99.8 96.8 68.6 42.1 59.6 73.8
production (actual tariff)
(million Ibs.)
No tariff 72.2 76.4 75.5 67.9 98.4 95.3 67.2 40.5 57.3 72.3 2.0%

Tariff = $.02/1b. 75.1 79.4 78.1 70.7 101.2 98.3 70.0 43.7 61.9 75.4 + 2.2%

Tariff = $.05/1b. 79.6 83.8 82.0 72.0 105.5 102.7 74.0 48.6 68.9 79.7 + 8.0%

Imports quota 73.8 78.4 79.7 72.7 102.0 104.6 81.7 67.4 111.3 85.7 +16.1%
(M<5 mill. Ibs)

Florida lime Base value 4.79 6.51 8.36 13.00 6.14 9.74 17.50 23.40 21.50 12.30
price (cents/lb.) (actual tariff)

No tariff 4.77 6.52 8.30 13.00 6.11 9.75 17.40 23.30 21.50 12.30 0.0%

Tariff = $.02/1b. 4.81 6.50 8.41 12.90 6.16 9.72 17.60 23.50 21.60 12.40 + 0.8%

Tariff = $.05/1b. 4.87 6.46 8.59 12.90 6.24 9.68 17.80 23.80 21.70 12.40 + 0.8%

Import quota 5.12 6.70 8.17 12.80 7.32 10.10 19.10 26.90 21.40 13.10 + 6.5%
(M<5 mill. 1bs)

Table 3. Simulated ValiiPe fnr Iime imnnrts.

Flnri~n PmrliiFfinn and Prira Iinrl~r ~~tern~tiv~ fr~A~ Pn~irise ~97n-107R

The result of the free trade alternative would imply an average

increase as compared to base levels in lime imports of 5.2 percent over

the simulation period. Under the same policy, Florida production declines

by an average of 2 percent per year with no appreciable effect on Florida

prices.

Doubling the existing U.S. specific tariff results in a moderate

(2.2 percent) increase in Florida's output and a more substantial decline

of yearly imports. Florida prices exhibit a negligible increase of .08

percent per year. The further increase of the tariff to a rate of $.05/lb.

results in a similar pattern. Both the stimulation of Florida's production

and the discouragement of imports is now more pronounced than under the

previous alternative. Again, no appreciable effect is found on Florida

prices, which indicates the noninflationary impact of specific tariff

increases in the case of Florida fresh limes.

Finally, the imposition of a fixed import quota of 5 million pounds

of limes per year implies a decline of over 50 percent in imports during

the 1970-78 period. This considerable decrease in imports would have

increased Florida output an average of 16.1 percent per year, and prices

an average of 6.5 percent annually. This later alternative is undoubtedly

the most inflationary among the hypothetical policies considered. Thus,

only increases in the U.S. specific tariff could benefit Florida growers

without at the same time increasing the cost borne by U.S. consumers.

Conclusions

On the basis of the above results, obtained from a model of Florida's

fresh lime sector and the U.S. import sector, it appears that increased

import competition, particularly from Mexico, has had an adverse effect

13

effect on Florida's market. Simulation of the model under alternative

U.S. trade policies yields some interesting results. The free trade

alternative would increase imports and reduce Florida's output without

affecting Florida prices. Increases in the U.S. specific tariff level

would decrease imports and stimulate production in Florida, but would

have only a very limited positive impact on prices. Limiting imports to

pre-1973 levels, via the imposition of a fixed import quota, would provide

a considerable stimulus for increasing Florida's output while, at the same

time, raising Florida prices.

Footnotes

1. A number of other studies (Andrew, DeBoon and McPherson, Freebairn
and Rausser, NovaKovic and Thompson, and Salathe, Dobson and Peter-
son) have investigated the role of imports and protection on agri-
cultural commodity markets.

2. For a detailed description of the Florida fresh lime industry see
Degner and Rooks, and Degner, Shonkwiler and Cubenas.

3. Examining the implications of a hypothetical fixed import quota policy
required the exogenization of the foreign trade sector. The hypo-
thetical import quota of 5 million lbs./year was chosen because it
represents the approximate level of imports that prevailed prior to
the intensification of import competition in 1973.

References

Andrew, C. 0., T. DeBoon, and W. W. McPherson. "Effects of Trade
Policies on Competition Between Florida and Mexico in the U.S.
Winter Cucumber Market", Southern Journal of Agricultural Econ-
omics 7 (1975): 197-204.

Degner, R. L. and M. G. Rooks. "Lime Production in Florida: Projections
and Economic Implications for 1971-82", Proc. Fla. State Hort. Soc.
91(1978): 194-197.

Degner, R. L., J. S. Shonkwiler and G. J. Cubenas. "Economic Outlook
for Limes Production in Florida" Staff Report Nc. 8., Florida
Agricultural Market Research Center, Food and Resource Economics
Department, University of Florida, Gainesville, Florida, December 1979.

Freebairn, J. W. and G. C. Rausser. "Effects of Changes in the Level
of U.S. Beef Imports", American Journal of Agricultural Economics
57(1975): 676-678.

Goldstein, M., and M. S. Khan. "The Supply and Demand for Exports: A
Simultaneous Approach", Review of Economics and Statistics 60(1978):
275-286.

Leamer, E. E., and R. M. Stern. Quantitative International Economics.
Chicago: Aldine Publishing Co., 1970.

Magee, S. P. "Prices, Incomes, and Foreign Trade". International Trade
and Finance: Frontiers for Research, ed. Peter B. Kenen, pp. 175-252.
Cambridge: Cambridge University Press, 1975.

Novakovic, A. M. and R. L. Thompson. "The Impact of Imports of Manu-
factured Milk Products on the U.S. Dairy Industry", American Journal
of Agricultural Economics 59(1977): 507-519.

Salathe, L., W. D. Dobson and G. A. Peterson. "Analysis of the Impact
of Alternative U.S. Dairy Import Policies", American Jouranl of
Agricultural Economics 59(1977: 496-506.