Incorporating strategic government policy behavior and product differentiation into an international burley tobacco trade model

Most classical trade theory deals within a perfectly competitive framework that assumes homogeneous goods, many buyers and sellers with no market power, and no governmental intervention. However, many commodities are traded in an imperfectly competitive market. The objective of this economic note is to present a conceptual framework that analyzes the effects of strategic government policy intervention and product differentiation on an internationally traded commodity. The world burley tobacco market is utilized to rest the model. Burley tobacco is considered to be a differentiated good whose demand is influenced by the implicit value cigarette manufacturers place on certain quality characteristics. Thus, buyers are willing to pay price differentials for various burley tobaccos based upon percieved quality differentials. Governments distort these price differentials by implementing policy tools to support domestic farm incomes or to improve their tobacco's competitive position. The United States has historically produced the highest quality burley tobacco in the world. The United States is also the largest producer and exporter of burley tobacco, although its export share has declined in recent years. Malawi, Italy, and Brazil have joined the United States as major players in the world burley market. given the United States' dominant role int the world burley market and its comprehensive tobacco program, it is logical to suspect that changes in U.S. burley policies influence foreign burley policies. These strategic foreign policy responses affect world tobacco production and trade patterns. Because U.S. burley exports are included in qouta calculations and indirectly influence price supports, these strategic foreign policy responses may ultimately affect U.S. burley qoutas and price supports in following years. Therefore, this study investigates whether countries react to U.S. burley policies and whether the United States incorporates this reaction into its policy fromation.