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

III - Development of an Empirical Method

A CBI cotton import demand model was developed to estimate the effects of
macroeconomic factors on U.S. cotton exports to the top eight CBI importing countries:
Bahamas, Barbados, Costa Rica, Guyana, Haiti, Jamaica, Panama, and Trinidad and
Tobago. Trade creation and diversion effects are calculated using the estimated demand
elasticity with respect to import price.

CBI cotton imports are estimated as a function of real imported price of cotton;
real GDP of importing countries; real exchange rates between U.S. and importing
country; import tariff on cotton in importing country; and dummy variables for
MERCOSUR and The Andean Community. The CBI import demand model for U.S.
cotton is specified as:

QMit = f (Pt, RGDPit, RERit, TARit, DMER, DAND)                          (1)

Assuming a linear relationship between the dependent and independent variables,
the import demand model is estimated as follows:

QMt= α + β1Pt + β2RGDPit + β3 RERit + β4TARit + β5DMER + β6DAND       (2)

Where α = intercept term

β1-6 = partial effect of independent variables on QMt

QMt = quantity of imports of U.S. cotton by top eight CBI importers in time t

Pt = price of U.S. cotton in time t

RGDPit = real GDP in importing country i in time t

RERit = real exchange rate between the U.S. and importing country in time t

TARit = import tariffs on U.S. cotton in country i in time t

DMER = dummy variable for MERCOSUR countries

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