An Analysis of the Impact of European Union and United States Dairy Policies on EU-U.S. Trade in Milk Protein Concentrate

During 1996-2000, U.S. imports of milk protein concentrate (MPC) increased rapidly. At the same time, Commodity Credit Corporation (CCC) stocks of non-fat dry milk (NFDM) went from nothing to more than 500 million pounds. Consequently, U.S. milk producers attributed low milk prices and dairy farmer income during this period to the increased imports of MPC. U.S. milk producers were especially concerned with MPC imports for two reasons. First, MPC between 40 and 90 percent protein had been classified in subheading 0404.90.10 of the Harmonized Tariff Schedule of the United States (HTS). Thus, MPC was not subject to the tariff-rate quotas applied to many other dairy products. Second, MPC produced in the European Union (EU) and exported to the United States was eligible for production and export subsidies. Along with the high U.S. internal milk protein prices maintained by the Dairy Price Support Program, and volatile world prices of NFDM, these policies created economic rents for trade in MPC between the European Union and the United States. To test the relationship between these policies and U.S. imports of MPC, these economic rents, which were not directly observable, were estimated by combing a set of identifiable variables: (1) the CCC purchase price, (2) the EU export refund, (3) EU casein production aid, and (4) the world price of NFDM as expressed by the Western Europe export price. A vector autoregression model was then estimated using monthly U.S. imports of MPC and the estimate of economic rents. This estimation showed that nearly 40 percent of the variability in U.S. MPC imports was attributable to the estimate of economic rents. These results demonstrate that U.S. and EU policies can not be analyzed in isolation when evaluating the impact of dairy policies on U.S. MPC imports.