Comparative advantage of United States agriculture and effects of policies on agricultural development and trade: Policy Analysis Matrix approach

Recent decades have brought a decline in U.S. agricultural market share, high commodity program costs to taxpayers, a large Federal budget deficit, and strained international trading relations. These problems prompted U.S. policy makers to look for alternative policies that are more flexible and less costly, at the same time assuring adequate income to farmers and improved international trading relations. One alternative is to encourage farmers to produce and trade based on the existing pattern of comparative advantage and use policy incentives over the longer run to strengthen and sustain that pattern of comparative advantage.; This dissertation determines comparative advantage of the major crops of the U.S. agricultural production system (corn, soybeans, wheat, sorghum, rice and cotton) across the major farming regions (Southeast, North Central, Central Plains, Southern Plains, Northern Plains, Delta, and California). The study also answers whether the current policies are consistent with the comparative advantage of U.S. agriculture. The Policy Analysis Matrix (PAM) used in this study estimates the values of inputs and outputs at market prices and opportunity costs to measure current competitiveness and potential comparative advantage of U.S. agriculture.; This study contributes to the applied theory of comparative advantage and PAM methodological framework. First, it is shown that failure of traditional trade models opens the door for a PAM framework as a practical method for measuring comparative advantage and policy effects. Second, efforts were made to trace the foundations of PAM analysis relative to microeconomic theory, macroeconomic theory and policy analysis. Using the theory of international trade and cost-benefit analysis, all the steps and assumptions of the PAM framework are explained in detail and measures of comparative advantage and policy effects used in PAM analyses are derived from applied economic theory explicitly. This detailed discussion is missed from other studies.; The PAM analysis shows that generally the production and trade of all the core crops are supported by policy incentives, except for soybeans. Most of the farming regions enjoy comparative advantage at least in some crops, but others have no such advantage. Farming regions that do not have comparative advantage should be discouraged by reducing incentives and regions that enjoy comparative advantage should be encouraged by policy incentives such as crop insurance and futures market opportunities to protect farmers against agricultural risk. Sensitivity analysis depicts that investment in technology to improve crop productivity (yields) and trade policies that boost international markets (product prices) are more important to sustaining comparative advantage than prices of other inputs. The policy implications that follow are that more market-oriented policy mix will not only increase farmers' and national income, but also will lead to welfare improvement.