Food trade balances and unit values: What can they reveal about price competition?

Abstract

AbstractPrice competition is a fundamental assumption in modeling trade. Empirical applications often use unit values as proxies for price. This is a problem if unit values cannot explain trade flows consistent with the price competition assumption. The paper determines whether this condition exists in food product trade. Trade balances by product are used to indicate successful competition in trade. Export and import unit values are used to determine if competition is dominated by price or nonprice competition. Trade flows are then categorized in four ways: successful price competition, unsuccessful price competition, successful nonprice competition, and unsuccessful nonprice competition. This categorization is applied to 372 food products using the Standard International Trade Classification. Nearly 40% of U.S. food exports could be characterized as dominated by nonprice competition. In those instances, we contend that unit values are not valid proxies for price, thereby limiting their usefulness in traditional import demand estimation and trade policy simulation models. © 2002 Wiley Periodicals, Inc.