Journal of Agricultural and Applied Economics, 47, 2 ( 2015): 175–191

C 2015 The Author(s). This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence
(http://creativecommons.org/licenses/by/3.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided
the original work is properly cited. doi:10.1017/aae.2015.4

STRATEGIC TRADE ANALYSIS OF U.S. AND

CHINESE APPLE JUICE MARKET
∗
JEFF LUCKSTEAD
Assistant Professor, Agricultural Economics and Agribusiness, University of Arkansas, Fayetteville, Arkansas.
∗∗ ∗∗∗
STEPHEN DEVADOSS AND MAHALINGAM DHAMODHARAN
Professor and Graduate Student, Department of Agricultural Economics, University of Idaho, Moscow, Idaho.

Abstract. Because of high competition from Chinese apple juice processors, the
United States imposed an antidumping duty on apple juice imports from China to
protect the domestic processors. This trade policy benefited U.S. processors but
negatively impacted Chinese processors as well as consumers in the United States.
Because of the economic reforms, foreign direct investment, and technological
spillover, Chinese apple processors have increased their productivity. Under
oligopolistic competition with endogenous firm entry and exit, this article
analyzes how the changes in U.S. tariff policy and Chinese productivity impact the
market structure in the United States and China, as well as prices, quantities, and
U.S. and Chinese welfare. Trade liberalization and an increase in Chinese
productivity help U.S. consumers and Chinese processors. However, U.S. tariff
removal adversely affects U.S. apple juice processors.
Keywords. apple juice, oligopolistic competition, productivity, trade policies
JEL Classifications: L13, F12, F13

1. Introduction

Although the U.S. apple juice supply has been declining for more than a decade,
the Chinese apple juice industry has experienced rapid growth since the late
1990s due to several factors. In the early 1980s, the Chinese government
promoted apple production in the underdeveloped highlands of the Loess plateau
in the northwest and the highlands of the southwest to improve the livelihood
of local farmers. The government provided subsidies for inputs such as apple
saplings, fertilizer, and pesticides and loans to augment apple production (Zai-
Long, 1999). Due to a favorable climate, high yields, and government support,

∗ Email:[email protected]
∗∗ Email: [email protected]
∗∗∗ Email: [email protected]

We appreciate the comments of the anonymous reviewers and the coeditor Krishna Paudel. This work
was supported by the U.S. Department of Agriculture, National Institute of Food and Agriculture, Hatch
project BDH508.

175

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 176 JEFF LUCKSTEAD ET AL.

Figure 1.

apple acreage and production have expanded by 4.2 and 7.5 times, respectively,
in the last two decades. As a result, apple supply outpaced domestic demand. In
1990, to alleviate the excess apple supply, the Chinese government encouraged
investment in the apple processing industry. Since 1992, through investment of
multinational firms and the Chinese government, the industry rapidly expanded
apple juice production, and given the very low domestic consumption of juice,
the government aggressively promoted exports. Currently, there are five major
apple juice processors who control 72% of the total Chinese apple juice exports
(Gale, Huang, and Gu, 2010). Due to cheaper labor and apples and conducive
government policies, the Chinese share of the world apple juice market has
increased from 0% in 1991 to 49% in 2009. This led to a geographic shift in the
concentration of the apple juice industry.
China has become the largest producer of apple juice, followed by the United
States and Poland. With low domestic demand, Chinese apple juice processors
export more than 90% of their production. China exported 40% of its total
exports to the United States and 20% to the European Union (EU) during 2007–
2009 (Gale, Huang, and Gu, 2010). The United States also exports 33 million
single strength equivalent (SSE) gallons to countries such as Canada, South
Korea, and Japan (United Nations, 2014).
The United States started importing more from China because of the low
Chinese juice price, which displaced imports from other countries such as Chile,
Argentina, Mexico, and the EU. This has also led to a 47% decline in U.S.
production since 1992 (see Figure 1). Consumption in the United States has

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 Strategic Trade in Apple Juice 177

increased from 350 million SSE gallons in 1986 to approximately 667 million SSE
gallons in 2009. Consequently, the share of U.S. production in U.S. consumption
declined from 37% in 1986 to 15% in 2009. With consolidation of the industry
as a result of increased competition and market saturation, only five major apple
juice processors are operating in the United States (Apple Processors Association,
2014).
Cheaper imports and intense competition from Chinese exporters have put
downward pressure on U.S. apple juice production, as shown in Figure 1.
Specifically, Chinese apple juice exports to the United States increased from
20.71 million SSE gallons in 1997 to 451.35 million SSE gallons in 2009.
During this period, U.S. apple juice production steadily declined from 168.6
million SSE gallons to 100.3 million SSE gallons, affecting the profitability
of both processors and apple growers. This prompted the U.S. government
to impose an antidumping duty of 4.91 cents per SSE gallon in 1999 (World
Trade Organization [WTO], 2014). However, imports from China continued to
increase, contributing about two-thirds of total supply during the period 2007–
2009.
Furthermore, the U.S. apple juice industry has been dominated by a small
number of processors in both the United Sates and China. This concentration
has likely led to oligopolistic competition in the U.S. apple juice industry among
U.S. and Chinese processors.
Past studies have analyzed the U.S. and Chinese apple juice industry and trade
under the assumption of perfect competition. For example, van Voorthuizen et al.
(2001) analyzed the impact of the U.S. antidumping duty on Chinese apple juice
on Washington state apple juice processors’ revenues. They also estimated the
demand for apple juice and intermediate input demand for apples. Rowles (2001)
studied the U.S. processed apple markets and found that growers and processors
face numerous challenges owing to changing market conditions. Rowles also
concluded that only low-cost and productive firms will survive in the industry
and less competitive firms will exit the industry. Fonsah and Muhammad (2008)
analyzed the demand for imported apple juice in the United States and concluded
that U.S. imports from Argentina, Chile, and the rest of the world were highly
sensitive to Chinese apple juice prices. Similarly, Chinese exports to the United
States were impacted by prices in Argentina, Chile, and the rest of the world.
However, the responsiveness of U.S. imports from China to apple juice prices in
these countries was relatively smaller than the responsiveness of imports from
these countries to the Chinese price. Mekonnen and Fonsah (2011) estimated
the U.S. import demand for apple juice using the restricted source differentiated
almost ideal demand system model and found that U.S. demand for apple juice
from China is inelastic and the expenditure elasticity is relatively high.
Devadoss, Ridley, and Sridharan (2012) constructed a spatial equilibrium
model of world apple and apple juice markets to quantify the effects of tariff
removal on these markets. Their results showed that trade liberalization had a

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 178 JEFF LUCKSTEAD ET AL.

considerably higher impact on the apple trade than the juice trade. They also
found that exporting countries such as the United States, Poland, and China and
importing countries such as India and Russia gain from this trade liberalization.
Luckstead, Devadoss, and Mittelhammer (2014b) utilized new trade theory
(NTT) and new empirical industrial organization methods to examine the degree
of market power of U.S. and Chinese apple traders in Association of Southeast
Asian Nations (ASEAN) markets under differentiated products. The results of
their simulation analysis show that the ASEAN-Chinese free-trade agreement
adversely impacts U.S. exports to ASEAN countries.
The current study advances the literature on the apple juice industry by
analyzing the imperfect competition among U.S. and Chinese apple juice
processors, examining the impact of trade policies and productivity changes
on the apple juice markets, and endogenizing the market structure through
endogenous firm entry and exit.
The objectives of this study are to (1) construct a strategic trade model of U.S.
and Chinese apple juice industries; (2) theoretically examine the effects of U.S.
tariff reduction and Chinese productivity increases on the apple juice markets in
the United States and China; and (3) simulate the effect of exogenous changes in
U.S. tariffs and an increase in Chinese apple juice productivity on prices, trade,
and welfare in the United States and China.

2. Theoretical Model and Analysis

NTT purports that trade between countries having similar endowments and
technology takes place because of economies of scale, distorted market structure,
and differentiated goods (Krugman, 1992). For instance, Krugman (1979) found
that due to differences in economies of scale, distorted market structure exists.
He also established that trade and gains from trade will occur between countries
with similar tastes and preferences, technology, and factor endowments. Later
studies (Brander and Krugman, 1983; Dixit and Norman, 1980; Helpman,
1981; Krugman, 1980) incorporated oligopolistic competition and monopolistic
competition into trade models to analyze reciprocal dumping and intraindustry
trade. Studies by Venables (1985) and Horstmann and Markusen (1986) showed
that strategic trade models under free entry and exit generate results that are
different from those of models with a fixed number of firms. This point is also
highlighted by Markusen and Venables (1988).1 Thus, it is important to analyze
the apple juice trade by accounting for changes in market structure by allowing
endogenous entry and exit of firms.

1Lahiri and Ono (1998), Markusen and Stähler (2011), and Etro (2014) extend the literature by
covering strategic trade and foreign direct investment with an endognous number of firms in the home
and host country.

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 Strategic Trade in Apple Juice 179

Melitz (2003) showed that productivity differences among firms lead to

trade, and highly productive firms engage more in trade. He also found that
trade barriers buffer the less productive firms and elimination of such barriers
results in welfare gain. Melitz and Ottaviano (2008) developed a monopolistic
competition trade model with firm heterogeneity and endogenous market
structure to analyze how market structure changes in different markets that
are not perfectly integrated through trade. This led to development of new NTT,
which emphasizes patterns of trade and welfare due to firm-level differences in
productivity (Ayumu, 2010).
Few studies have examined imperfect competition under trade protection and
expansionary policies in agricultural commodity markets. Luckstead, Devadoss,
and Mittelhammer (2014a) analyzed imperfect competition between U.S. and
Chinese apple exports to ASEAN using homogenous products and strategic
trade theory. Luckstead, Devadoss, and Mittelhammer (2015) have also applied
strategic trade theory to study the U.S. and Brazil orange juice markets.
We develop a strategic trade model with zero-profit conditions for U.S. and
Chinese apple juice markets based on the market structure outlined in the
previous section. The firm-level profit function of U.S. apple juice processors
is given by
     
π U S = p U S QU D + QCU q U D + p R QU R q U R − C U q U D + q U R ; ωU − f U ,
(1)
 
where p U S is the price of apple juice in the U.S. market, p U S QU D + QCU is
the U.S. inverse demand function, QU D is the quantity of apple juice sold by
U.S. processors in the United States, QCU is the quantity of apple juice sold by
UD
Chinese processors in the United States,
 U R q is the firm-level output, p R is the
R
export price of U.S. apple juice, p Q is the inverse demand function for U.S.
exports, Q is total U.S. exports, q is firm-level exports, C U q U D + q U R ; ωU
UR UR

is the variable cost function, ωU is the productivity parameter associated with

apple juice production, and f U is the fixed cost.
The Chinese firm-level profit function is given by
 
 US UD   CU p E QCE CE  
π = p Q +Q
C CU
−τ q + 
U
 q − C C q CU + q CE ; ωC
1+τ E

−t U q CU − t E q E − f C , (2)

where τ U is the specific tariff imposed by the United States, q CU is the firm-level
output soldin the United States, p E is the price of Chinese apple juice exports to
the EU, p E QCE is the EU inverse demand function for Chineseapple juice, q CE
is the firm-level output sold by Chinese processors in the EU, C C q CU + q CE ; ωC
is the variable cost function, ωC is the firm-level productivity parameter in apple
juice production, t U is the transport cost of shipments from China to the United

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 180 JEFF LUCKSTEAD ET AL.

States, t E is the transport cost of shipments from China to the EU, and f C is the
fixed cost.
We obtain the first-order conditions by differentiating the profit functions
(equation 1) with respect to q U D and q U R and (equation 2) with respect to q CU
and q CE :
 UD 
U D ∂p
US
Q + QCU   ∂C U (·)
πq U D = q
US
  + p U S QU D + QCU − =0 (3)
∂ QU D + QCU ∂q U D
 UR UR  UR
U R ∂p
R
Q q ∂ Q  U R  ∂C U (·)
πqUUSR =q   + p R
Q − =0 (4)
∂ QU R ∂q U R ∂q U R
 
∂p U S QU D + QCU     ∂C C (·)
πqCCU =q CU   + p U S QU D + QCU − τ U − − tU = 0
∂ QU D + QCU ∂q CU
(5)
  CE  
1 CE ∂p
E
Q  CE  ∂C C (·)
πqCCE =  q + p E
Q − − t E = 0. (6)
1 + τE ∂Q CE ∂q CE

To endogenize the number of firms, we include the zero-profit conditions by

incorporating the number of processors and rewriting the aggregate quantities
as firm-level quantity times the number of processors (QU D = N U q U D , QU R =
N U q U R , QCU = N C q CU , and QCE = N C q CE ), where N U and N C are the number
of U.S. and Chinese processors, respectively:
   
π OU S = p U S N U q U D + N C q CU q U D + p R N U q U R q U R − C U (·) − f U = 0
(7)
 
 US  U UD   CU p E N C q CE CE
π OC
= p N q +N q
C CU
−τ q + 
U
 q − C C (·)
1 + τE
−t U q CU − t E q CE − f C = 0. (8)
Because the demand functions are downward sloping and the cost function is
convex, the reaction functions will yield a solution because the profit functions
are globally concave implying the second-order conditions for a maximum are
satisfied. With specific functional forms for demand and cost functions, we can
solve equations (3) to (8) simultaneously for six endogenous variables: q U D , q U R ,
q CU , q CE , N U , and N C .

2.1. Comparative Statics

In this section, we analyze the impact of a reduction in the U.S. tariff (τ U )
and changes in productivities (i.e., changes in ωC relative to ωU ) on quantities
and number of firms. The general functional forms used in the previous section

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 Strategic Trade in Apple Juice 181

do not lend themselves to comparative static analytical solutions. However, we

can ascertain the sign of the comparative statics using linear demand and cost
functions that are commonly found in the literature (Markusen and Venables,
1988). These solutions are too long to report, and thus we provide only the
interpretation of the comparative static results.
In response to U.S. tariff reduction, China will export more apple juice to
CU
the United States dq dτ U
< 0 , leading to lower U.S. price and firm-level profits.
 UD 
As a result, U.S. firm-level quantity will decline dq dτ U
> 0 , but it will export
 UR   UD 
dq U R
more dq dτ U
< 0 . The total U.S. firm-level sales will be lower dq
dτ U
+ dτ U
> 0
because the direct effect (first term) is larger than the indirect effect (second term).
With lower
 prices and firm-level sales, some firms will incur loss and exit the
dN U
industry dτ U > 0 . The reduction in the U.S. tariff will cause the price received
by Chinese firms to increase. With higher
 exports  and price, revenue will increase,
dN C
causing more Chinese firms to enter dτ U < 0 . Because it is more lucrative to
 CE 
export to the United States, China will divert its exports from the EU dq dτ U
> 0
to the United States. Similar comparative static results and interpretations for
productivity changes are also possible.

2.2. Welfare Analysis

In this section, we examine the impacts of a reduction in the U.S. tariff and
productivity changes on U.S. and Chinese welfare. U.S. welfare comprises
consumer surplus, producer surplus, and tariff revenues:

   
W =US
p U S QU S dq U S − p U S QU S QU S + N U f U + τ U QCU , (9)
 
 PS TR
CS

where total U.S. consumption is given by QU S = QU D + QCU . Consumer surplus

(CS) is the area under the demand curve minus the expenditure. Firm-level
producer surplus (PS) is total revenue minus variable cost, which is equal to
total fixed cost given that profits are zero under free entry and exit. Then, 
industry-level producer surplus is the number of firms times fixed cost N U f U .
Tariff revenue (TR) is per unit tariff times volume of imports.
Because consumer surplus is zero as there is no domestic consumption, Chinese
welfare comprises only producer surplus:
W C = f CNC.

PS

As in the case of U.S. producer surplus, the industry-level Chinese producer

surplus is the number of firms times the fixed cost.

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 182 JEFF LUCKSTEAD ET AL.

2.2.1. Welfare Analysis of Reduction in U.S. Tariff

We totally differentiate equation (9) with respect to τ U to determine the effects
of a reduction in the U.S. tariff on U.S. welfare. The change in U.S. welfare is
given by
 
dW U S ∂p U S ∂QU S U S U ∂N
U
∂QCU τ U
= − Q + f + Q CU
1 + . (10)
dτ U ∂QU S ∂τ U ∂τ U ∂τ U QCU
 
CS(−) PS(+) TR(?)

Chinese exports to the United States increase due to a reduction in the U.S. import
tariff, resulting in a lower U.S. apple juice price. Due to this lower price, U.S.
consumption rises, leading to a gain in consumer surplus. However, this lower
price reduces profitability of U.S. apple juice processors, causing firms to exit
and resulting in producer surplus loss. As imports increase, the change in tariff
revenues could be positive or negative depending on whether the import demand
curve is inelastic or elastic. Hence, the net welfare effect is ambiguous. However,
because the United States is a net importing country, the gain in consumer surplus
will most likely outweigh the losses in producer surplus and tariff revenues, if
any, and U.S. welfare is likely to increase.
Because of higher exports, profitability of Chinese firms goes up, which results
in entry of more firms into the Chinese apple processing industry. Thus, the
change in Chinese welfare is
dW C C ∂N
C
= f < 0.
dτ U ∂τ U
(−)

Because a reduction in U.S. tariff increases the number of firms in China, Chinese
welfare will rise.

2.2.2. Welfare Analysis of a Change in Chinese Productivity

Due to economic reforms and foreign direct investment in food processing,
Chinese firms acquire modern processing technology, leading to an increase
in apple juice production. The effect of this increase in Chinese productivity on
U.S. welfare is
dW U S ∂p U S ∂QU S U S U ∂N
U
U ∂Q
CU
= − Q + f + τ . (11)
dωC ∂QU S ∂ωC ∂ωC ∂ωC 

CS(+) PS(−) TR(+)

With higher output, Chinese processors augment their exports to the United
States, which lowers the U.S. apple juice price, leading to higher U.S.
consumption and hence a gain in consumer surplus. As a result of imports
from China, the sales of U.S. processors decline and their profits go down. This
results in the exit of U.S. firms from the apple juice industry and causes producer
surplus to decline. As imports rise, tariff revenue accrued to the U.S. government

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 Strategic Trade in Apple Juice 183

increases. Because the United States is a net importer, the net change in U.S.
welfare is likely to be positive as the gain in consumer surplus and tariff revenues
will offset the producer surplus loss.
With an increase in exports due to higher production, more firms enter the
Chinese industry. The change in Chinese aggregate producer surplus due to a
rise in productivity is given by
∂P S C C ∂N
C
= f > 0.
∂ωC ∂ωC
(+)

We can also analyze the effect of tariff and productivity changes on U.S. apple
juice importing countries’ and EU welfare. However, due to space limitation, we
are not reporting these analytical results, but we do provide the empirical results
in the next section.

3. Empirical Model and Analysis

In this section, we derive the empirical model from the theoretical results, discuss
data and sources, calibrate the parameters, and present simulation analysis and
results.

3.1. Empirical Model

Because China exports to the United States and EU, and the United States sells
in the domestic market and exports, the four supply relations for the empirical
model are specified by rewriting the first-order conditions (equations 3–6) as
∂C U (·)
pU S = + ψ U S ξ U S pU S (12)
∂q U D

∂C U (·)
pR = + ψ U R ξ U R pR (13)
∂q U R

∂C C (·)
pU S = + t U + ψ CU ξ U S p U S + τ U (14)
∂q CU

 
  ∂C C (·)
pE = 1 + τ E + t E
+ ψ CE ξ EU p E , (15)
∂q EU
∂ (QU D +QCU ) qUD
where ψ i is the firm-level conjectural elasticity (e.g., ψ U S = ∂q U D (QU D +QCU )
for a U.S. domestic firm), ξ i is the flexibility of demand in the ith market
∂pU S (QU D +QCU ) (QU D +QCU )
(e.g., ξ U S = − ∂ QU D +QCU pU S QU D +QCU for the U.S. market). The conjectural
( ) ( )

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 184 JEFF LUCKSTEAD ET AL.

elasticities vary from zero to one. Markup (ψ i ξ U S p U S , i = U S, CU ) depends on

conjectural elasticities, demand flexibility, and price.
We specify demand and cost functions and consider the conjectural elasticities
to derive supply relations. The marginal cost functions for U.S. and Chinese
processors are given by
 UD 
∂C U D ∂C U λU0 D UD q + qUR
= U R = U S + λ1  2 , (16)
∂q U D ∂q ω ωU S
 CU 
∂C C ∂C C λC0 C q + q CE
= CE = C + λ1  2 , (17)
∂q CU ∂q ω ωC
where λs are marginal cost coefficients and ωs are productivity parameters. Next,
we specify the U.S. demand function
 
p U S = μU0 S − μU1 S QU D + QCU , (18)
the demand for U.S. apple juice exports
p R = μR0 − μR1 QU R , (19)
and the European demand for Chinese apple juice
 
p E QCE = μE 0 − μ1 Q
E CE
, (20)
where μs are demand coefficients.
Using the redefined first-order conditions (equations 12–15), marginal cost
functions (equations 16 and 17), demand functions (equations 18–20), and
conjectural elasticities, the system of four supply relations and two zero-profit
conditions can be written as follows:
Supply relations:
  λU D qUD + qUR
πqUUSD = μU0 S − μU1 S N U q U D + N C q CU − μU1 S q U D − 0U S − λU1 D  2 = 0
ω ωU S

λU0 D UD q
UD
+ qUR
πqUUSR = μR0 − μR1 N U q U R − μR1 q U R − − λ 1  2 = 0
ωU S ωU S

    λC
πqCCU = −μU1 S q CU + μU0 S − μU1 S N U q U D + N C q CU − τ U − 0C
ω
q CU + q CE
−λC1  2 − t = 0
U
ωC

1   λC0 Cq
CU
+ q CE
πqCCE =   μE
0 − μE C CE
1 N q − μE CE
1 q − − λ 1  2 − t = 0
E
1 + τE ωC ωC

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 Strategic Trade in Apple Juice 185

Zero-profit equations:
    
π OU S = μU0 S − μU1 S N U q U D + N C q CU + QU SO q U D + μR0 − μR1 N U q U R q U R
 2
UD q
UD
+ qUR λU1 D q U D + q U R
−λ0 − − fU = 0
ωU S 2 ωU S

 E 
  U UD   CU μ0 − μE 1N q
C CE
π OC
= −
μU0 S μU1 S
N q +N q C CU
−τ q +
U
  q CE
1 + τE
 CU   2
C q + q CE λC1 q CU + q CE
−λ0 − − t U q CU − t E q CE − f C = 0.
ωC 2 ωC
Using the previous system of six equations, we solve for six unknowns (q U D ,
q U R , q CU , q CE , N U , and N C ) simultaneously using simulation analysis. Once we
solve for these six endogenous variables, we can obtain the aggregate quantity
by multiplying the firm-level quantity times the number of firms and prices by
substituting the aggregate quantities into the demand functions.

3.2. Calibration and Data

For the simulation analysis, coefficients of the supply relations and demand
functions are parameterized using prices, quantities, tariff, and transport cost
data and demand, supply, and conjectural elasticities. For the calibration, all
data are averaged over the five year period: 2005–2009. We assume Cournot
∂ (QU D +QCU )
competition at the industry level, which implies that ∂Qi
= 1, and thus
i
the conjectural elasticities are given by market shares ψ i = QU DQ+QCU .
U.S. apple juice production, total consumption, import, and export data were
collected from U.S. Department of Agriculture, National Agricultural Statistics
Service (2014) and the U.S. Census Bureau (2014). The United States exports
apple juice to Canada, Mexico, and Japan. Chinese exports to the United States
and EU were collected from FAOSTAT (Food and Agriculture Organization
of the United Nations, 2014).2 U.S. price data for apple juice concentrate were
obtained from the Apple Processors Association (2014). The prices in the EU and
U.S. apple juice importing countries are calculated as the unit values (i.e., value
of imports divided by quantity of imports). The U.S. antidumping duty on China
was imposed in 1999 at 4.9 cents per gallon (WTO, 2014). The transportation
cost data were calculated as the difference between free on board values and
cost, freight, and insurance values of Chinese exports to the United States and
the EU.
The conjectural elasticities for U.S. and Chinese firms’ sales in the United
States are calibrated based on average market shares and are 0.22 and 0.71,

2 The data for apple juice concentrate were converted from tons to SSE gallons.

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 186 JEFF LUCKSTEAD ET AL.

Table 1. Impacts of Tariff Elimination and Productivity Changes

50% Reduction 10% Increase

Variables in τ U in ωC

U.S. price p U (% change) − 19.00 − 2.53

European Union (EU) price p E (% change) − 19.48 − 5.67
U.S. firm-level domestic sales q U D (% change) − 32.22 − 4.65
U.S. firm-level exports q U R (% change) 31.95 5.87
Chinese firm-level exports to U.S. q CU (% change) 9.99 3.52
Chinese firm-level exports to EU q CE (% change) − 13.20 − 0.24
U.S. aggregate domestic sales QU D (% change) − 61.71 − 14.48
U.S. aggregate exports QU R (% change) − 25.46 − 5.05
Chinese aggregate exports to U.S. QCU (% change) 42.78 7.60
Chinese aggregate exports to EU QCE (% change) 12.66 3.69
Number of firms in U.S. N U (% change) − 43.51 − 10.31
Number of firms in China N C (% change) 29.80 3.94
Change in total U.S. welfare ($ m) 53.60 17.30
Change in U.S. consumer surplus ($ m) 96.32 12.05
Change in U.S. producer surplus ($ m) − 30.79 − 7.30
Change in tariff revenue ($ m) − 11.93 12.55
Change in Chinese welfare (producer surplus) ($ m) 45.77 6.05

respectively. The supply flexibilities of U.S. domestic supply and Chinese exports
to United States are assumed at 1.00. Based on the conjectural elasticities, supply
flexibilities, and price and quantity data, the slope and intercept parameters for
the marginal cost function for U.S. processors are calculated as 0.004 and 0.07,
and Chinese processors as 0.0006 and 0.06.
Mekonnen and Fonsah (2011) estimated the U.S. import demand elasticity
of apple juice as −0.63 (flexibility of −1.58). Similarly Andreyeva, Long, and
Brownell (2010) found that the demand elasticity for fruit juices is more elastic
and ranges from −0.70 to −0.82 (flexibility of −1.43 to −1.23). Using these
elasticity estimates as a basis, and along with price and quantity data, we
compute the intercept and slope parameters of U.S. demand function as 1.99 and
−0.002, respectively. Similarly, we construct demand function for U.S. exports
with intercept 2.46 and slope −0.047, and EU demand function with intercept
2.48 and slope −0.01.

3.3. Simulation
We analyze the impact of U.S. tariff reduction and an increase in Chinese
productivity relative to U.S. productivity on prices, production, trade, market
structure, and welfare through simulation analysis. Table 1 reports the
simulation results.
U.S. Tariff Reduction: For this analysis, we run two scenarios: baseline with
the U.S. tariff in place and an alternate scenario with a 50% reduction of the
U.S. tariff. We compare the results of the alternate scenario with the baseline

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 Strategic Trade in Apple Juice 187

scenario to analyze the impacts of this trade policy. Removal of the tariff by the
United States causes China to increase its exports to the United States. With the
increase in imports, U.S. apple juice price declines by 19.00%. Due to cheaper
imports, the profitability of U.S. processors is affected, U.S. firm-level sales in
the United States fall by 32.22%, and the number of firms declines by 43.51%.
As U.S. firms face competition in the domestic market, they divert their sales
to foreign countries. U.S. firm-level exports increase by 31.95%. However, the
aggregate U.S. exports decline by 25.60% because of the fall in the number of
firms. As a result, the sum of domestic and export sales falls. With a lower price,
consumption in the United States increases, and hence consumer surplus goes
up $96.32 million. Because the number of U.S. firms declines, the total producer
surplus loss is $30.79 million. Due to reduction of the tariff, tariff revenues fall
by $11.93 million. This results in a net welfare gain of $53.60 million.
As China finds it more profitable to sell in the U.S. market, Chinese firms
reallocate their exports from the EU to the United States. In addition, the number
of Chinese firms goes up by 29.80%. Consequently, Chinese aggregate apple juice
exports to the United States increase by 42.78%. Even though firm-level exports
to the EU decline, the aggregate exports to the EU rise by 12.66%. As more firms
enter Chinese apple juice production, the aggregate producer surplus in China
rises by $45.77 million.

Increase in Chinese Productivity: For this analysis, we consider two simulation

scenarios: baseline with no changes in productivity and an alternate scenario with
a 10% increase in Chinese processors’ productivity relative to U.S. processors’
productivity. We compare the results of the alternate scenario with the baseline
scenario to analyze the impact of a Chinese productivity increase. China increases
its apple juice production and hence exports more to the United States. Chinese
firm-level and aggregate exports to the United States rise by 3.52% and 7.60%,
respectively. Because of the higher exports from China, the price of apple juice in
the United States decreases by 2.53%, which reduces the profit of U.S. processors.
This affects the sales of domestic processors in the United States, and firm-level
supply declines by 4.65%. As a result, U.S. aggregate domestic sales fall by
14.48%, which causes the number of U.S. firms to decline by 10.31%. Due to
the loss in market share in the United States, U.S. firms augment their exports by
5.87%. However, aggregate exports fall by 5.05% because of the lower number
of U.S. firms (10.31%).
Consumption in the United States increases as a result of the lower price,
leading to a gain in consumer surplus of $12.05 million. Because of the additional
Chinese exports, U.S. producers lose $7.30 million. With higher imports, tariff
revenues increase by $12.55 million. Because the United States experiences a gain
in both consumer surplus and tariff revenues, the total welfare gain is $17.30
million.

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 188 JEFF LUCKSTEAD ET AL.

Table 2. Sensitivity Analysis for U.S. and European Union (EU) Demand Elasticities

20% Increase in 20% Decrease in

Demand Elasticities Demand Elasticities

Variables τU ωC τU ωC

U.S. price p U (% change) − 18.99 − 3.64 − 18.87 − 0.50

EU price p E (% change) − 17.25 − 7.13 − 22.51 − 1.46
U.S. firm-level domestic sales q U D (% change) − 32.71 − 6.75 − 31.24 − 0.90
U.S. firm-level exports q U R (% change) 31.74 8.13 32.06 1.23
Chinese firm-level exports to U.S. q CU (% change) 11.02 5.91 8.93 0.42
Chinese firm-level exports to EU q CE (% change) − 14.61 0.29 − 11.73 − 0.29
U.S. aggregate domestic sales QU D (% change) − 61.47 − 19.64 − 61.78 − 3.18
U.S. aggregate exports QU R (% change) − 24.57 − 6.82 − 26.59 − 1.10
Chinese aggregate exports to U.S. QCU (% change) 47.50 11.48 37.85 1.47
Chinese aggregate exports to EU QCE (% change) 13.45 5.57 11.71 0.76
Number of firms in U.S. N U (% change) − 42.74 − 13.82 − 44.41 − 2.30
Number of firms in China N C (% change) 32.86 5.26 26.55 1.05
Change in total U.S. welfare ($ m) 63.94 26.84 41.66 3.09
Change in U.S. consumer surplus ($ m) 97.63 17.43 94.24 2.35
Change in U.S. producer surplus ($ m) − 29.56 − 9.56 − 32.51 − 1.69
Change in tariff revenue ($ m) − 4.13 18.97 − 20.07 2.43
Change in Chinese welfare (producer surplus) ($ m) 36.80 5.89 57.33 2.26

Because Chinese processors find it profitable to produce and export, the total
exports to the United States rise, and new firms also enter the industry (3.94%).
Because of the productivity increases, Chinese total exports to the EU also rise
by 3.69%. The aggregate producer surplus in China increases by $6.05 million.
These results corroborate the comparative static theoretical results of the welfare
analysis.
Sensitivity Analysis: Table 2 reports the results for a 20% increase and a 20%
decrease in the demand elasticities for both tariff and productivity simulation
scenarios. The results show that changes in demand elasticities do not alter the
simulation results significantly. For instance, changes in the U.S. price range from
−18.87% to −18.99% in the tariff scenarios. U.S. firm-level domestic sales also
range from −31.24% to −32.71%. For the productivity scenarios, the results
are also fairly stable. For instance, the U.S. price change ranges from −0.50%
to −3.64%. In general, the lower demand elasticity values slightly dampen the
impacts.

4. Conclusions
The United States is one of the leading consumers of apple juice in the world
accounting for about 36% of total world apple juice imports in 2009. In recent
years, the U.S. apple juice industry has consolidated its production, and fewer
processors produce apple juice. Due to government support and foreign direct

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 Strategic Trade in Apple Juice 189

investments, the apple juice industry in China has experienced rapid growth,
resulting in a geographic shift in the concentration of the apple juice industry.
This has led to oligopolistic competition with a few firms exerting market power
over sales and prices. The United States is a leading importer of apple juice from
China and has imposed an antidumping duty on apple juice imports from China.
We formulate a strategic trade model of the U.S. and Chinese apple juice
markets based on NTT. We endogenize firm entry and exit by incorporating zero-
profit conditions for U.S. and Chinese apple juice processors. We theoretically
analyze the effects of changes in the U.S. tariff and a productivity shock on
the apple juice market. From the theoretical results, we derive an empirical
model for U.S. demand, U.S. domestic and export supply relations, and Chinese
export supply relations. Using past studies, we calibrate the parameters of
demand functions and supply relations and calculate U.S. demand flexibilities
and conjectural elasticities of U.S. and Chinese processors. We also incorporate
two zero-profit conditions to endogenize the number of firms. Using the system of
six simultaneous equations, we solve for six endogenous variables: U.S. domestic
supply, U.S. export supply, Chinese exports to the United States, Chinese exports
to the EU, and the number of U.S. processors and Chinese processors.
We conduct two simulation analyses: U.S. tariff reduction and Chinese
productivity increase. The results show that reduction of the U.S. tariff leads
to more Chinese exports to the United States, resulting in a decrease in the U.S.
price, profitability, supply, and firm exits. U.S. tariff removal causes more firms
to enter in China and an increase in production. Higher Chinese apple juice
productivity results in entry of firms, production, and exports to the United
States, which augments both consumer surplus and tariff revenues but lowers
producer surplus. However, because the United States is a net importer, the net
welfare rises. Productivity improvements benefit Chinese firms, which increases
their exports and market share in the United States.
Given the free-trade agreements and negotiations such as the Doha Round
agreement, U.S. apple juice processors need to increase their productivity.
Similarly, U.S. apple growers should also enhance their productivity to increase
apple production because apples are the single most important intermediate input
in juice production. Also, U.S. apple juice processors should invest in advanced
processing technologies to increase their competitiveness and hence profitability.

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