Trade Pressured by Evolving Global Supply Chains

Anita Regmi and Mark Gehlhar

ECONOMIC RESEARCH SERVICE/USDA   AMBER WAVES  VOLUME 3 ISSUE 1

The slow growth in trade of processed food products has often been attributed to existing multilateral trade rules that favor trade in raw commodities at the expense of processed products. But trade policy is not the whole story-many other factors affect the choice of locations to produce and sell food products. Patterns of food trade are strongly influenced by the changing nature of competition in the global food industry-from shifting consumer preferences to the growth in multinational food retailers and the ways they manage their global supply chains. Consumer-driven changes are increasingly pushing food suppliers to meet consumer demand and preferences at a local level, even as the food industry becomes more global. Local processing allows manufacturers to strategically tailor both manufacturing and packaging to suit local tastes, preferences, and retailer needs. The result of this trend has been an acceleration of foreign direct investment (FDI), often at the expense of trade. As a case in point, U.S. food companies sell five times ($150 billion) more through FDI sales than through U.S. export sales ($30 billion).

he last three decades have seen tremendous growth in sales of processed food-sales now total $3.2 trillion, or about three-fourths of the total world food sales. But, contrary to initial expectations, this phenomenon has not led to significant growth in global trade-only 6 percent of processed food sales are traded compared with 16 percent of major bulk agricultural commodities. Although consumer demand for processed foods continues to grow globally, growth in trade has generally stalled since the mid-1990s. Global trade in processed food grew rapidly during the 1970s and 1980s, as consumers in high-income countries demanded more foreign food products. Through the mid-1990s, these products accounted for a bigger share of growth in U.S. agricultural exports, with expanding exports to Japan, Canada, and Mexico. However, since the mid-1990s, growth in both global and U.S. processed food trade has slowed, and bulk agricultural commodities account for more of the recent growth in U.S. agricultural exports.

The slow growth in trade of processed food products has often been attributed to existing multilateral trade rules that favor trade in raw commodities at the expense of processed products. But trade policy is not the whole story-many other factors affect the choice of locations to produce and sell food products. Patterns of food trade are strongly influenced by the changing nature of competition in the global food industry-from shifting consumer preferences to the growth in multinational food retailers and the ways they manage their global supply chains. Consumer-driven changes are increasingly pushing food suppliers to meet consumer demand and preferences at a local level, even as the food industry becomes more global. Local processing allows manufacturers to strategically tailor both manufacturing and packaging to suit local tastes, preferences, and retailer needs. The result of this trend has been an acceleration of foreign direct investment (FDI), often at the expense of trade. As a case in point, U.S. food companies sell five times ($150 billion) more through FDI sales than through U.S. export sales ($30 billion).

Full articel available at http://www.ers.usda.gov/AmberWaves/February05/Features/ProcessedFood.htm