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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
Emilio Pagoulatos, J. Scott Shonkwiler
and Robert L. Degner
Staff Report 10
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
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.
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
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
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
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
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,
A key assumption of the model is that imports are perfect substitutes
for domestic production. Thus, the import demand for limes is specified
(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
(4) M = Md
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:
(5) QFt = h( Z PFt PPFti FWt, QFt, TIME)
t i-l t-i t TIME)
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
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
(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
To complete the specification of the Florida lime market we require
(7) QFs = QFd
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
= -20.13 + 38.73 PXt -15.04 YMEXt
(10.31)a (15.67) (4.64)
+ 71.89 PXt_
= -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 +
43.61 PFt_2 + 29.07 PFt_3
+ 14.54 PFt_4 + 2.55 PPFt_1 6.95 PPFt_2
- 10.54 PPFt_3 8.23 PPFt_4 80.38 FWt + .862 QFt_1
(2.32) (1.99) (25.68) (.152)
+ 28.12 TIMEt
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_
a Asymptotic standard errors in parentheses.
Table 2. Definition of 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.)
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.
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
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
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)
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
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.
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
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.
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.
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.
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
Goldstein, M., and M. S. Khan. "The Supply and Demand for Exports: A
Simultaneous Approach", Review of Economics and Statistics 60(1978):
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.