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«Yu Na Lee Department of Applied Economics, University of Minnesota. Email: leex5244 Nancy Chau Charles H. Dyson School of Applied Economics ...»

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The Trade Adjustment Assistance (TAA) Program for Farmers in the U.S.:

Role of Incentives in Program Participation

Yu Na Lee

Department of Applied Economics, University of Minnesota. Email: leex5244@umn.edu

Nancy Chau

Charles H. Dyson School of Applied Economics and Management, Cornell University. Email: hyc3@cornell.edu

David Just

Charles H. Dyson School of Applied Economics and Management, Cornell University. Email: drj3@cornell.edu

Selected Paper prepared for presentation at the Agricultural & Applied Economics Association’s 2014 AAEA Annual Meeting, Minneapolis, MN, July 27-29, 2014.

THE TRADE ADJUSTMENT ASSISTANCE (TAA) PROGRAM FOR FARMERS IN

THE U.S.: ROLE OF INCENTIVES IN PROGRAM PARTICIPATION

(Preliminary and incomplete. Please do not cite.) June 2014 By YU NA LEE NANCY CHAU†, & DAVID JUST‡ * The Trade Adjustment Assistance (TAA) program for farmers was established in 2002 to assist farmers adversely affected by import surges. Since its introduction, the program has been mostly underused by farmers, and the American Recovery and Reinvestment Act (ARRA) in 2009 eased the program rules to encourage more farmers to participate. Why has farmers’ participation in the program been so low? Have the relaxed criteria of the ARRA been effective in encouraging farmers’ participation? Based on a simple decision-making model and a uniquely constructed panel data set, we find that farmers’ incentive to make up for losses in other types of direct government payments as well as eligibility criteria explain farmers’ participation in the TAA program. Less time and efforts needed for participation, proxied by previously approved cases of the same or similar commodities, also seems to drive farmers’ participation. Results also confirm that the ARRA of 2009 was effective in increasing farmers’ participation.

* Lee: Department of Applied Economics, University of Minnesota, 337J Ruttan Hall, 1994 Buford Ave. Saint Paul, MN 55108, leex5244@umn.edu;

†Chau: Charles H. Dyson School of Applied Economics and Management, Cornell University, 201A Warren Hall, Cornell University, Ithaca, NY, 14853, hyc3@cornell.edu;

‡Just: Charles H. Dyson School of Applied Economics and Management, Cornell University, 109 Warren Hall, Cornell University, Ithaca, NY, 14853, drj3@cornell.edu Keywords: Trade Adjustment Assistance, TAA, American Recovery and Reinvestment Act, ARRA, Incentives, Participation JEL Codes: D81, F13, F68, Q17, Q18

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The value of agricultural imports to the U.S. doubled during the last decade. As a measure to assist farmers adversely affected by import competition via cash benefits and technical assistance, the Trade Adjustment Assistance (TAA) program for farmers was first established by the TAA Reform Act of 2002. TAA programs have been supported by two reasons: First, benefits of international trade are widely distributed whereas the costs are highly concentrated to the groups of farmers, workers, and firms that bear the high cost of competition (Rosen, 2008). Therefore, a targeted assistance is needed for groups affected by international trade.

Second, TAA could serve as a policy to support freer trade without using measures that might restrict imports and potentially create tensions among trade partners (Hornbeck and Rover, 2011).

Moreover, evidences show that TAA program for farmers have been effective:

Technical assistance has been helpful in assisting farmers and fishermen in improving productivity and diversifying their crops (Rosen, 2008); Cash benefits made to farmers in the program have shown the impacts that extend ‘well beyond the farm.’ (Kemper and Rainey, 2013). However, since its introduction in 2002, the TAA has been underused by farmers, as only about 10% of authorized funding was used during fiscal years (FY) 2003-08 (Jurenas, 2011). The American Recovery and Reinvestment Act (ARRA) of 2009 eased the eligibility criteria for TAA, but the program was still not actively used, spending about 64.5% of authorized funding during FY2009-11 (Jurenas, 2011). This paper focuses on the question of why farmers’ participation has been so low, even though the program provides cash benefits and technical assistance to eligible producers. We examine this issue of low participation in light of farmers’ incentives to participate in the TAA program – even though the TAA program could potentially provide farmers with cash benefits and technical assistance, farmers may lack incentive to actually go through the document preparation and administrative processes.

There have been only a few studies on the TAA program for farmers, most of which have focused on the issue of the eligibility criteria. Bacho and Goodwin (2008) reviews 69 complete petitions filed from 2002 to July 2007 among which 41 (59.4%) turned out to be ineligible for program benefits by the U.S. Department of Agriculture (USDA), and suggests relaxing the eligibility requirements. Another study conducted by the U.S. Government Accountability Office (GAO) (2006) also notes strict eligibility criteria as well as low cash 2 payments as potential factors that discourage farmers from participating in the program.

Jurenas (2011) and the GAO (2012) provide an update of the program—what commodities were certified and what proportion of applicants received payments after the reauthorization of the TAA for Farmers by the ARRA of 2009. According to the report, the USDA certified relatively few commodities after the reauthorization—5 out of 18 commodities – but once the commodities were certified, about 90 percent of the applicants who produced certified commodities were approved for TAA payments.





Unlike the existing studies on the TAA program for farmers that focus on program activities and eligibility criteria, this paper takes an integrative approach to explain farmers’ participation in the program by modeling farmers’ incentives for participation. More specifically, we focus on the role of exogenous factors – change in prices and imports that affect eligibility, revision of the TAA program, and time and efforts for participation – in affecting the farmers’ incentives to participate in the program. For empirical analysis, we use a panel data set encompassing the first and the second round of the TAA program. The results suggest that farmers have higher incentives to participate in the program and thus file more petitions: (i) if commodities satisfy eligibility criteria; (ii) if farmers have experienced a recent decrease in the receipt of direct government payments from other sources; and (iii) if there are previous cases of approval for TAA benefits for the same or similar commodities.

Another important issue related to the TAA program for farmers is the modification of the program rules under the ARRA of 2009, the major stimulus package enacted as a response to the financial crisis in 2007-08 and the economic downturn. Following suggestions of previous studies on the TAA program for farmers (Bacho and Goodwin, 2008; U.S. Government Accountability Office (GAO), 2006), the program was modified so that more farmers in need can participate in the program. Using the model of farmers’ incentives, we set up a hypothesis to test the effectiveness of this revision. Based on the empirical results, changes made in the TAA program in the ARRA of 2009 indeed were successful in increasing the cases of TAA petition. Additional empirical analysis on farmers’ participation before and after the ARRA suggests that there might have been a change in farmers’ motivation for participating in the TAA program for farmers: Before the ARRA, the TAA program mainly served as a means to mitigate the negative price risk and also as a way to make up for losses in other government farm support programs. After the ARRA, the TAA program has served its role as a training program for farmers to develop business plans to cope with import surges.

3 Several features differentiate this paper from previous studies. First, this study examines the role of farmers’ incentives to participate in the program, which has been ignored in the previous literature on the TAA program for farmers. Unlike previous studies on the TAA that focused mainly on eligibility criteria, we model farmers’ incentives to participate in the TAA program and address the issue of eligibility criteria as one of the factors that incentivizes farmers. By taking this comprehensive approach, we expect to contribute to better understanding and more effective use of the TAA policy as well as other related farm policies.

Second, this study could serve as a partial evaluation of the effectiveness of the ARRA, adding to the recent body of studies on the impact of the ARRA (Feyrer and Sacerdote, 2011;

Wilson, 2010; Cogan and Taylor, 2010), but with a particular focus on agriculture and trade.

Section 2 provides background on the TAA program for farmers before and after the ARRA.

Thereafter, we set up a simple model of farmer’s incentive to participate in the TAA program and derive hypotheses to explain farmers’ participation in Section 3. Sections 4 and 5 explain the data, definitions of variables, and the empirical strategy. Analysis of the results and discussions of the policy implications will follow in Sections 6 and 7, respectively.

–  –  –

The Trade Expansion Act of 1962 first established Trade Adjustment Assistance (TAA) programs for workers and firms dislocated by international trade liberalization, and the TAA program for farmers was established by the TAA Reform Act of 20021. The TAA for Farmers assists farmers adversely affected by import competition through cash benefits up to $10,000 per year and through technical assistance provided by the U.S. Department of Agriculture (USDA). In order for a group of farmers who has filed a TAA petition to be eligible for the cash benefits, the commodity should meet the following criteria: (i) the price of the commodity in a given marketing year should be less than 80% of the national average price in the 5 preceding marketing years; (ii) there needs to be an increase in imports of like or

1 P.L. 107-210, Sections 141-142, approved August 6, 2002, 116 Stat.946 (19 U.S.C. 2401 et seq.).

4 directly competitive products2 during the most recent 12 month period; and (iii) the increase in imports has demonstrably contributed to the price decline3. Once judged eligible by the Foreign Agricultural Service (FAS) at the USDA, cash payments will be made to producers who produced the commodity in the most recent year if: (iv) farmers’ net farm income4 for the most recent year is less than that of the year before; and (v) the farmers have met with Extension officers and received technical assistance. Hereafter, I call the criteria (i) and (ii) as the “price criteria” and the “import criteria,” respectively.5 The cash payments are given to

the eligible farmers according to the formula, up to a maximum of $10,000:

̅ ̃ (1)

Where ̃, ̅, and q are national average price of the agricultural commodity covered by the TAA for most recent marketing year, national average price for five years preceding the most recent marketing year, and the amount of the commodity sold in the most recent marketing year, respectively. For example, ̃ and ̅ could be denoted in $ per pound, and q could be denoted in pounds, so that the payment can be calculated in $’s. The amount of cash adjustment assistance given to the producers is thus half the difference between the current price and the 80% of the average price for the preceding five years, multiplied by the amount of commodity produced. Denote the price that the producer receives per unit of commodity sold by ̃ The TAA program could alleviate the risk of unfavorable price decline by According to Sec. 1580.102 of the 7 C.F.R. (Code of Federal Regulations), “like or directly competitive generally 2 means products falling under the same HTS number used to identify the agricultural commodity in the petition. A like product means substantially identical in inherent or intrinsic characteristics, and the term directly competitive means those articles which are substantially equivalent for commercial purposes, that is, are adapted to the same uses and are essentially interchangeable therefore.” According to Section 291 of the Trade Act of 2002 - 107 P.L. 210, “contributed importantly means a cause which is 3 important, but not necessarily more important than any other cause,” and is determined by the Secretary of Agriculture.

According to the USDA’s website, net farm income is “a value of production measure, indicating the farm operators' 4 share of the net value added to the national economy within a calendar year, independent of whether it is received in cash or a noncash form such as increases/decreases in inventories and imputed rental for the farm operator's dwelling.” It is also a “portion of the net value added by agriculture to the national economy earned by farm operators (i.e., the entrepreneurial earnings of those individuals who share in the risks of production and materially participate in the operation of the business).” 5 Since it is not easy both for the potential participants (producers of commodities) to address the causality between the surge in imports and decline in prices in the petition-filing stage and for me to come up with a measure for such causality, we do not include the criteria (iii) in the analysis.

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