Priorities for the Economics of International Agricultural Trade

Presentation at the C-FARE WorkshopSan Antonio, TexasNovember 6, 2003

Daniel A. Sumner

University of California Agricultural Issues Center and Department of Agricultural and Resource

Economics, UC Davis

Stakeholder priorities for competitiveness and profits

• Farmers and others have the priority to become more competitive and profitable.

• Competitiveness and profit involves technology, management, marketing and a host of issues to which economists can contribute research, teaching and outreach.

• International trade economics has some contribution to make on this goal, but is relevant also to other stakeholder goals.

• Thus, my title is broader than that assigned.

Priorities for the Economics of International Agricultural Trade

• Broader than contributing to competitiveness and profit in US agriculture.

• Competitiveness and profit are positive for farmers and other businesses and generally positive for the economy, but parts of US agriculture may be best served by learning to exit rather than attempting to compete.

• Furthermore some firms and industries may be maintained in “profitability” only through public investments or policies that are not “profitable” for the economy as a whole.

Public economic priority must remain on broad social benefits

• Most often using economics to contribute to competitiveness is consistent with general social benefits.

• In fact, economics can illuminate where this consistency holds and where it may not.

• From a broader perspective we can provide information that will help farmers and others shift resources to areas that are likely to competitive such that agriculture as a whole gains profitability and competitiveness.

• This may not satisfy each commodity constituency.

International issues are pervasive and interact with most other topics for which

economics is importantInternational dimensions apply to any economics that

also applies in other countries, which is most economics.

Food safety and nutrition issues,

Technology development and transfer,

Rural development, and

Environmental and resource issues

all have international components.

Priority topics for the economics of agricultural trade

A. International trade policy (this has long been the core topic for trade economists)

• Analysis for trade negotiations

• Analysis for trade dispute settlement

• Analysis for policy reform consistent with trade

B. Projections of agricultural competitive positions for different locations

• Cost comparisons

• Basis for economic advantages in different regions

C. Global competition policy

D. Foreign direct investment and trade flows

A: Trade policy economics has been used more fully every year

• Economics is used because it is useful for several phases of trade negotiations and trade disputes.

• Nonetheless, many economists are frustrated that economics is not more influential in the resolution of disputes and negotiations.

• But, is our analysis is ready to play an even larger role?

• How can we be more relevant and accurate to be more useful?

Uses of trade policy economics in negotiations

1. Set the general understanding of the benefits and costs of more open markets

2. Project outcomes of specific options and proposals

3. Provide ex post projections of actual negotiated agreements to guide understanding of what to expect

4. Assess the outcomes and effects of previous agreements or dispute settlement

Each of these requires different approaches and must not be confounded.

– All are difficult

General quantitative sense of impacts of reform

1. The idea is to give the flavor and rough idea of implications of various policy reforms

• Stylized policies and proposals• Estimates using retrospective counterfactuals• Aggregate summary results

Improvement on the gross misrepresentations of non-economic approaches and rhetoric

• Not detailed or specific enough to guide negotiations, but can motivate policy directions

CGE models and most academic studies

Detailed projections of specific options2. With sufficient policy detail, projections can guide

choice of negotiating options. • Often requires short turn-around and rapid

communication to negotiators. • Requires comprehensive understanding of policies,

markets and alternatives• Requires underlying research and models that can

be adapted quickly.• CGE models are not yet adaptable for this work• Academic-style research supplies data, parameters

and model development, usually not detailed projections relevant to negotiation process

Projections of impacts of negotiated policy reform

3. Can guide expectations and plans of market participants and may influence implementation

• Requires comprehensive understanding of policies, markets and alternatives

• Requires underlying research and models that can be adapted to the detailed specification of the actual agreement.

• Most academic-style research models do not have sufficient policy detail and are not adapted to specify complex policy changes.

Estimation of outcomes attributable to specific policy reform

4. Most reforms are partial and normal market flux makes isolating of policy reform complicated.

• Requires careful specification of expectations of real policy changes real changes

• Most expected market shifts are gradual and small relative to agricultural market variability

• Requires marshalling as much data as can be found• Econometrics must be developed carefully and

creatively• Can be useful for understanding of future policy

change

Empirical economics may be more used and useful in trade dispute settlement

Trade dispute resolution applies detailed economic analysis for proceeding at USITC, WTO and related forums

A high proportion deal with agriculture or NR

This will spread globally from North America

Already there is more economics in the WTO dispute settlement process than a few year ago

We need more development of standard tools and standards for how to evaluate the economics applied by staff and parties

Elements to improve applicability of empirical trade research

• Model approximations of policies and alternatives carefully– All models rely on approximations, but this is not the

place to cut corners for useful analysis

– Gross approximations of policy are helpful pedagogic tools, but may be more misleading than helpful for empirical trade policy research

– Seemingly small differences can have significant impacts

– Domestic support schemes in agriculture provide many examples

Elements to improved applicability of empirical trade research

• Understand details of commodity markets and relationships– Even definitions of commodities may not be obvious

– Is wheat wheat? (Is durum a different product? How closely related are HRS and HRW?

– When can indica and japonic rice be aggregated?

– Similar aggregation questions apply to markets, how integrated is India in the world dairy market?

These are research questions that can only be approached with a thorough empirical research

Econometric evidence is often lacking and difficult to develop

Elements to improve applicability of empirical trade research

• Parameter values drive model results – Model complexities may hide reliance of results on a few

supply or demand elasticities

– Yet, we continue to have problems conceptualizing appropriate parameters and how they might be defined and obtained

– Parameters depend on the specific market situation and policy question. E.g.. it makes no sense to ask what is the supply elasticity for wheat.

• Much econometric effort has not helped• These are basic questions to which we must devote

more systematic and careful thinking

Econometrics alone will not yield estimates of policy-relevant supply

response

Government programs and expectations about the programs affect the relevant supply response parameters. As policies change or when we investigate new policies, we must use parameter estimates that are structural and not functions of the policy in place.

Econometric estimates from the literature will seldom have this property.

Defining the counter-factual baseline projection may be crucial

• Even comparative results are not invariant to baseline projections under the alternatives

– Effects of TRQs and deficiency payments depend on projections of world and domestic prices

– This means investing more in baseline projections to understand impact of policy reforms

– ERS, FAPRI and very few others make these investments and few academic resources are devoted to the critique

T0T1

Pa

Pb

We may only attempt to project Pb - Pa, rather than Pb

itself. Still, relative impact of removing a, for example, deficiency payments (marketing loan or C-C payment) depends on the baseline. The same applies to the impact of removing a TRQ. When comparing different internal prices this implies that long term exchange rate projections are required!

Current policy

Projection

B: Projections of regional production patterns and competitive positions

• Which industries are on the competitive edge and what will keep them there?– This requires considering opportunity costs of resources

in each location.• The peach industry in California competes first with tomatoes

and almonds in California and then with the peach industry in Greece or China

• Assessments of cost of production in various regions can help, but these are dangerous and very difficult to get right.– Budget measures are fraught with error and a

problematic track record.

Projections of regional production patterns and competitive positions

• It is easy to miss advantages or linkages that give an industry an edge– Quality

– Reputation

– Existing business relationships

Economists have a difficult time analyzing these factors and others.

Must be careful not to oversell our capabilities to compare costs and assess competitiveness

C: Global competition policy

• The joint research in international trade and industrial organization is well underway– Practical findings and useful empirical or simulations are

more difficult to master

• Using countries as the unit of analysis is less interesting than considering firms

• Traditional questions of monopoly power and cross border analysis of mergers combines these sub-fields– With consolidation globally in both farm supply and

marketing these issues become more relevant

D: Firm relationships driving trade rather than governments driving trade

• When firms cross borders this may have important implications for choice of suppliers– Thus, foreign direct investment may affect trade in goods

and service• Perhaps a Wal-Mart produce supplier in the U.S. will also have

an advantage supplying produce to Wal-Mart in Mexico.

• Perhaps firm-based quality standards or firm-based rules will dominate government-based standards– COOL may become irrelevant, but not yet

Concluding commentsServices provided by economists will continue to be

demanded in international trade policy analysis– We have a long way to go to improve our performance

– Economics can inform parties of projected economic impacts, decisions are based on interests and economics can make these more transparent

Projections of competitiveness require detailed specific information and remain troublesome, with much capacity to mislead

Research linking trade with industrial organization may be growing in importance

The core demands for economics remain trade policy