International Economics the Imported Tea in the US Term Paper

  • Length: 4 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #89197019

Excerpt from Term Paper :

Demand for Imported Tea in the United States

According to basic economic theory, the level of demand for the import of any good for consumption is determined by the following factors, though their relative importance may vary from country to country: the real prices of the good; the real prices of its substitute or complementary good; the real income; the size of the population, its composition, and its rate of growth; price elasticity of demand; income elasticity of demand; cross elasticity of demand; shift in the consumers' preference or habits; the availability of foreign exchange; and changes in the trade policies of exporting and importing countries and other non-price factors. The complementary product for tea is coffee.

As far as tea is concerned, as is generally believed, it sets its own prices, using prices of its close substitute i.e. coffee, real income, population, price elasticity, income elasticity, cross elasticity, change in the consumer's preferences or habits do more determine the level of demand for its imports in any country. Based on the above proposition, the study will build appropriate import demand models for analyzing the pattern of imports of tea for consumption in the United States. Since tea imports constitute an insignificant share in the total imports of the United States, the variable "the availability of Foreign exchange" has been deliberately excluded from the model. I would surmise that the Import Expenditures would rise as GDP rose and prices fell.

An important reason for the fluctuations in exports is reflected by changes in the value of the dollar relative to foreign currencies. The dollar lost value against foreign currencies in the1970s, making U.S. agricultural products less expensive in the importing countries and, predictably, sales increased. In the early 1980s the dollar gained strength, making U.S. exports more expensive to foreign buyers, and exports declined. The dollar then weakened again and exports recovered somewhat. These trends had the inverse effect on imports (U.S. Census Bureau, 2002).

There are Federal laws, which attempt to control quality of imported tea. The U.S. Department of Agriculture is responsible for accepting or rejecting tea at customs. The Tea Importation Act has provisions to destroy inferior product if it should arrive in the United States. Tea (thea sinensis) is subject to the Federal Food, Drug, and Cosmetic Act and the Tea Importation Act. Under the latter law, tea offered for entry must meet the standards of purity, quality, and fitness for consumption prescribed under 21 CFR 1220. Beverages brewed from the leaves of other plants may be labeled as "____ tea" as long as the blank is filled in with the name of a specific plant material. The name placed in the blank must clearly differentiate the product from traditional "tea," or "flavored tea" (e.g., "lemon tea" or "raspberry tea") both of which contain Thea sinensis (FDA bluebook). This research project will be limited to only those products containing 100% thea sinensis. Thea sinensis, Camellia, will not grown in most areas of the United States (Firstgov, 2002). As a result the U.S. imports 100% of its tea consumption (FATUS, 1996

The UN food agency said there is an increasing weight of scientific evidence that black and green tea can be an important contributor to a healthy lifestyle for people all over the world. The FAO Tea Mark was designed for use in marketing or communication programs to promote the potential benefits of black tea. The Tea Mark was developed with financial assistance from the Common Fund for Commodities and the trade in major producing and consuming countries. Food Agriculture Organization documents prepared for the Intergovernmental Group (IGG) on Tea, which opened a three-day session in Ottawa, Canada today, reported that the UN agency "seeks to encourage the tea industry to adopt this new campaign because it has the potential to increase overall tea consumption for the benefit of both producer and consuming nations." (FAO, 1996)

FAO documents said that world tea production is set to increase from the 1993-95 average of 1.97 million tonnes to 2.7 million tonnes in 2005, an annual average growth rate of 2.8%. Production in India is estimated at 1.02 million tonnes in 2005, an average annual growth of 2.8% from the 1993-95 base.

Economic reforms and the national plan to expand tea production in Sri Lanka could boost production in that Indian Ocean nation to 285,000 tonnes, compared to 240,000 tonnes during 1993-95, an annual growth rate of 1.6%. FAO says other major tea-producing countries, including China and Indonesia, should also see significant grow in production, while in Bangladesh production is forecast to grow less rapidly. Increases in both yields and planted area are likely to continue to support strong growth in tea production in African countries where Kenyan output is expected to increase at an average annual rate of 2.8%. These measures by the FAO will increase tea consumption.

Section I Data and Methodology

The present study is limited to the period of 1961 to 2000 and is based on secondary data. The following functional relationship has been identified for analyzing the pattern of tea consumption in the United States. It = f (P, Y, PO) where It = Import volume of tea; P = Real price of tea in U.S. dollars; Y = Real Gross Domestic Product in U.S. dollar; PO = Population.

Linear Regression was used in combination with time analysis to track the changes over time. Multiple R, R Square, Adjusted R. Square, Standard Error, and qualitative observations were used to validate sample data.

Results and Observations

By comparing these factors it is noted that the import price rose significantly in relation to the import demand. The Import Demand per capita rose in proportion to the tea demand from the early 1960s through the late 1970s. Then the Demand per capita leveled off and even began to drop in the late 1980s even though the GDP per capita continued to rise at a consistent rate. This would leave one to believe that the two factors are not proportional and tea demand is not proportional to a rise is not directly related to how much money people have. In addition price rose proportional to Import per capita. The rise in import per capita is driven by some other factor than price or personal income level. Import tea expenditures did rise proportional to GDP per capita. It can also be noted that price and demand are closely related as well. This would lead us to believe that some other outside force drives tea demand and prices.

During the 1970s the U.S. dollar lost value against most foreign currencies. It is during this time that we see an increase in per capita import. During the 1980s the U.S. dollar began to regain strength against foreign currencies. This is the period where the import per capita began to level off and then decline. It would appear that the value of the U.S. dollar against foreign currency has a direct effect on the import per capita of tea. It may be noted that the price continued to rise at a steady, but volatile pace during this time. A high price spike occurred in 1978, which was directly followed by a downward spike in consumption. Another price spike occurred in 1983/1984, however this time an upward spike in consumption occurred. In the early 1990s another small price spike occurred, again followed by a downward spike in consumption. It would seem from these observations that when the U.S. dollar loses strength against foreign currencies, the export position is favorable to the exporter and therefore he is willing to export more. This, coupled with high prices makes this an attractive seller's market. It may be noted that these price spikes are short lived and that the price and consumption quickly return to normal. It would appear that the increase in tea imports to the United States is linked closely to the value of the U.S. dollar against foreign currency. This same effect can be seen in the coffee import market as well (USDA, 2002). According to this report it would seem as if the tea's complementary product, coffee are experiencing the same fluctuations due to the strength of the U.S. dollar.

It is clear that another factor other than an increasing GDP per capita or rising price alone are responsible for the increase in imports. In the coffee market, import per capita is effected by quality issues. However, the tea market has laws in place to prevent that from happening. Inferior quality tea simply is not allowed to enter the United States under the Tea Import Act.

Tea expenditures closely track price. If price had an effect on the import of tea, we would see expenditures decrease as price increases. They would then be expected to be inversely proportional. This is not the case, however, and the price and expenditures closely track each other. This would indicate that price does not directly effect total tea expenditures per capita.

The chart which plots U.S.…

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