GLOBAL EFFECT ON INTERNATIONAL PRICES OF EU-MEDITERRANEAN PARTNER COUNTRIES BILATERAL AGRICULTURAL LIBERALIZATION Rafael de Arce (UAM University)Ramn Maha (UAM University)

ERC / METU International Conference in Economics, Ankara 6th September 2003

PRESENTATIONGeneral framework of analysis: International Trade Evolution Impact on international trade conditions after liberalization processesAgricultural Trade Liberalization Process UE-MPCs CountriesTwo footnotes:Econometrical exercisePreliminary results of FEMISE project

PRESENTATIONFEMISE Project Framework Agri-Trade Liberalisation UE - MPCsChange in trade pricesChange in trade flowsChain effects in the whole MPCs economies (Dynamic TIO analysis)

CASE OF STUDY (Some details)Interest on NET price changes after EU-MPC's agricultural liberalisationAgri-Trade Liberalisation UE - MPCsDomestic Support Reduction in EUImport Tariff Cuts in MPCsTrade prices DOWNTrade prices UPNET EFFECT?

CASE OF STUDY (Some details)Interest on NET price changes after EU-MPC's agricultural liberalisation

Selection of countries and products (Comext, FADN, FAO, OECD databases )

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT I: DescriptionThe model:

Pit: International price logarithm of product i at time "t"PSE it: Producer Support Estimate of product i at time "t"EUP it: EU export price of product i at time "t"HPP it: Hodrick-Prescott filter series

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT I: DescriptionRelevant Comments:

Equation working at 2 digits level of productPSE instead of TSE (CSE and GSSE rejected)Hodrick-Prescott filter series as a innovation to consider volatility in raw materials pricesExport EU Price as exogenous (Poonyth, 2000), (Frandsen, 2003)Simple Partial Equilibrium Model

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT II: ResultsRelevant Comments:Good Adjustment Variables significanceAffordable mulcolinearity problemsGeneral Empirical results:Negative relationship Prices - PSE provedLarge connection between Prices and PSE in two cases: Cereals and Sugar

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT II: ResultsCoefficients and adjustment details (i)

Intercept

EUP

PSE

HPP

FIC

R2

DW

PAE(*)

Oats

0,72

1,02

-0,49

0,06

-0,36

0,91

2,03

5,7%

(0,97)

(0,17)

(0,014)

(0,014)

(0,13)

Barley

2,05

0,93

-0,15

-0,10

-

0,92

1,53

3,3%

(0,44)

(0,11)

(0,07)

(0,03)

-

Maize

2,21

0,57

-0,61

0,34

-

0,95

1,91

1,6%

(0,68)

(0,09)

(0,05)

(0,34)

-

Wheat

4,43

1,10

-0,22

-1,49

0,09

0,97

1,81

1,8%

(0,84)

(0,15)

(0,05)

(0,49)

0,02)

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT II: ResultsCoefficients and adjustment details (ii)

Intercept

EUP

PSE

HPP

FIC

R2

DW

PAE(*)

Soya bean Oil

-1,75

0,92

-0,04

0,55

-0,07

0,99

1,75

1,6%

(0,66)

(0,07)

(0,02)

(0,25)

(0,03)

Sugar

2,79

0,28

-0,38

0,04

-

0,87

2,00

5,4%

(0,78)

(0,11)

(0,13)

(0,001)

-

Eggs

1,08

0,71

-0,01

0,001

-

0,97

2,11

1,7%

(0,30)

(0,08)

(0,02)

(0,001)

Milk and Butter

-0,32

0,77

-0,12

0,48

-

0,99

1,66

1,7%

(0,15)

(0,06)

(0,06)

(0,06)

-

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT III: SimulationScenarios:EU : 55% reduction in the Aggregate Measurement of Support (AMS) starting from the level of commitments made in the last round of negotiations.USA: reduction of trade-distorting support to 5 percent of a countrys total value of agriculture production (the 5 percent rule) over a 5-year period

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT III: SimulationSimulation Results:

Products

SIMULATED PSE

PRICE INCREASE BY SCENARIO

EU scenario

USA scenario

EU scenario

USA scenario

Oats

22,6

5,0

7,5%

8,3%

Barley

22,6

5,0

10,5%

10,8%

Maize

16,5

5,0

19,7%

22,2%

Wheat

19,6

5,0

10,5%

11,0%

Soyabean Oil

17,8

5,0

3,1%

3,1%

Sugar

20,7

5,0

6,9%

7,5%

Milk & Butter

17,9

5,0

1,8%

1,9%

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT III: SimulationSimulation Results:

Similar results in both scenariosBig impact on cereal pricesRelevant changes in other agricultural goods prices but not unusual changes if we look at a secular price series for agricultural goods

EU-MPC'S TRADE PRICES AFTER SUPPRESION OF AGRICULTURAL SUPPORT AND TARIFFS Main questions

Can the EU maintain agricultural production without the domestic support implemented through the CAP?

How much market share would the EU have with different prices?

EU-MPC'S TRADE PRICES AFTER SUPPRESION OF AGRICULTURAL SUPPORT AND TARIFFSCan the EU maintain agricultural production without the domestic support implemented through the CAP?

Exploitations bigger than 40 ESU receive 50% of domestic support / 59% of subventions are received by just 22% of agricultural exploitations.

EU-MPC'S TRADE PRICES AFTER SUPPRESION OF AGRICULTURAL SUPPORT AND TARIFFSHow much market share would the EU have with different prices? ?

Weight / Prices

Rice

Oats

Sugar

Barley

Cereals

Maize

Potatoes

Wheat

Rice

-0,07

-0,03

-0,14

-0,21

-0,19

-0,08

-0,10

-0,18

Oats

-0,13

-0,24

-0,05

-0,42

-0,27

-0,04

-0,10

-0,19

Sugar

-0,14

-0,05

-0,12

-0,17

-0,28

-0,33

-0,09

-0,27

Barley

-0,09

-0,02

0,12

-0,25

-0,17

-0,15

-0,24

-0,06

Cereals (Gral)

-0,09

-0,04

-0,03

-0,22

-0,18

-0,13

-0,05

-0,13

Maize

0,01

0,02

0,07

-0,16

-0,05

-0,06

0,03

0,03

Potatoes

-0,04

0,03

0,00

-0,05

-0,11

-0,05

0,29

-0,11

Wheat

-0,15

-0,09

-0,05

-0,25

-0,25

-0,17

-0,01

-0,21

COMPUTATION OF CHANGE IN BILATERAL PRICES AFTER A TARIFF ELIMINATION IN MPCsMeasure of trade protection just using MFN ad-valorem tariff weighted averages: Non-tariff measures consideredAverage data consideredTariff peaks, tariff dispersion and tariff escalation ignoredHigh level of protectionLow movement in international trade pricesFinal Net effect similar to the one linked with support reduction.

SUMMARYValuable tool for primary simulation of domestic support reduction

Empirical results shows a low effect of support reduction in agricultural world prices or production capacity in both scenarios (UE / USA)

SUMMARYIf trade liberalisation seems to be irrelevant for trade prices and production level, Whats the use of it?

Rise in import capacity volume for MPCs countries without increase in import yield

Production system efficiency improved