The Trade Effects of MERCOSUR and The Andean Community on U.S. Cotton Exports to CBI countries

Real GDP in the top eight cotton importing CBI countries has a positive and
significant effect on U.S. cotton exports. Thus, as income in these countries rises, so will
their imports of U.S. cotton. The income elasticity of CBI import demand is extremely
inelastic (0.0074), indicating that CBI cotton imports from the U.S. are also not sensitive
to importers’ income, i.e., a one percent increase in real GDP would result in only a 0.007
percent increase in CBI cotton imports. This inelastic demand can be explained by the
fact that cotton is used for apparel/clothing which is a necessity. Koo and Mattson (2001)
also concluded that U.S. agricultural exports to this hemisphere are positively influenced
by real GDP in the importing country.

The results also show that tariffs have a negative but insignificant effect on U.S.
cotton exports. These results were expected

The coefficient of the exchange rate variable in the model is negative and
significant. This result supports the theory that the appreciation of the U.S. dollar relative
to the currency of the importing country will have a negative effect on U.S. exports. In
other words, as the U.S. dollar appreciates relative to the importing country’s currency,
U.S. exports to these countries become more expensive. Consequently, the importing
country will be coerced to import less U.S. cotton. The exchange rate elasticity of CBI
import demand is very elastic (5.73), indicating that CBI imports are very sensitive to the
appreciation of the U.S. dollar; i.e., a one percent increase in the value of the U.S. dollar
will result in a 5.73 percent decrease in imports by CBI countries. Koo and Mattson
(2001) concurred and also concluded that U.S. agricultural exports are negatively
influenced by the strength of the U.S. dollar.

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