General:

1. General: • Products:40 • Regions : 18 trade blocks (EU15, EU10, USA, CAN, ANZ, ACP, LDC, ROW, Mediterranean and Mercosur broken down to in single countries) • EU regions broken down in Member States • Policy variables: tariff rate quotas (global), subsidised exports, sales to intervention stocks, Minimum import prices (EU25)

2. Two Stage Armington Demand (Arm1) =Human consumption + Feed Use + Processing Domestic Sales(DSales) Imports (Arm2) Streams(R,R1,XX) Streams(R,Rn,XX) ....

3. Policy instruments:What kind of tariffs in CAPRI? • During runs bi-lateral “applied” rates, either specific (fixed duty per quantity, “STARIFF”) or ad-valorem (percentage of import prices, “ATARIFF”) • The applied rates fall in one of the following 3 categories: • Fixed, defined as the minimum of the bound rate (maximum tariff allowed according to WTO, so-called “Most favorite Nation” or MFN rates) and the applied rate ex-post • Fixed to zero, based on preferences (e.g. North-American free trade zone, EU15  EU10, Cotonou, Everything but arms) • Endogenous: • Under TRQs • and/or under Minimum Import Price regimes

4. Endogenous policy instruments • Globally: • Tariffs as functions of import quantities in case of a Tariff Rate Quota (TRQ) • EU specific: • Flexible levies, i.e. tariffs under a minimal import price regime • Subsidized exports under WTO value commitments Intervention purchases and releases from intervention stocks CAPRI market model: Endogenous Policy

5. Exogenous Endogenous tariffs MFNrates Preferentialagreements AllocatedTRQs GlobalTRQs Minimum importprices Function For subsidizedexports Administrative price Policy instruments impactingdirectly on import prices Import prices = Market Price x Exchange Rate x (1 + bilateral ad valorem tariff) + bilateral specific tariff - export subsidy

6. Tariff Rate Quota, regimes and rents • Two tiered tariff: • In quota tariff up to a certain quantity • MFN (Most Favorite Nation) rate for over-quota imports • Possible regimes: • TRQ not filled • lower in quota tariff applied  marginal willingness to pay equal to border price plus in quota tariff • No rents • Over quota imports • higher over quota tariff applied  marginal willingness to play equal to border price plus over quota tariff • Economic rents for imports up to quota: difference between tariffs times quota • Binding quota • In quota tariff applied  marginal willingness to pay in between border prices plus in quota tariffs and border price plus over quota tariff • Rent as difference between marginal willingness and border prices plus in quota tariffs times quota CAPRI market model: TRQs

7. Tariff Rate Quota, regimes and rents Over quota tariff Import price= BorderPrice + tariff In quota tariff BorderPrice Imports Quota CAPRI market model: TRQs

8. Regime I: underfilled TRQ Import demand Over quota tariff Import price= BorderPrice + tariff In quota tariff BorderPrice Imports Quota Imports CAPRI market model: TRQs

9. Regime III: over quota imports Import demand Pricepaid for imports Economic rent Over quota tariff Import price= BorderPrice + tariff In quota tariff BorderPrice Imports Imports=Quota Imports CAPRI market model: Endogenous Policy

10. Regime II: binding TRQ Import demand Pricepaid for imports Economic rent Difference between marginal willingnessto pay and import price Import price= BorderPrice + tariff In quota tariff BorderPrice Imports Imports=Quota CAPRI market model: TRQs

11. Why are TRQs important? • In countries with high MFN rates as the EU, larger share of imports occur under TRQs • Realistic simulations of effect of changes in border protection only possible if TRQs taken into account: • A change in the in-quota or over-quota (MFN) tariff may not provoke any changes in import quantities or prices • WTO proposes to expand binding TRQs • Preference erosion: • Reducing the MFN tariff reduces rents • In many cases, (L)LDC “own” quotas and thus loose income

12. What are the problems with TRQs? • In many cases, TRQ relate to specific tariff lines which are more dis-aggregated as the model’s product  aggregated product is mix of TRQ and tariff only regime • Depending on quota administration, the observed fill rate may not be an indicator for the regime • Quota may be allocated to single countries or even firms, but the information may be not available • “Kinked” functional relationship leads to dis-continous derivatives of the Langrangian  not suitable for gradient based solvers => “fudging” function

13. “Kinked” policy instruments • Solution either by “Mixed-Complementary Programming” • + Complementary slackness conditions defined explicitly • - Require specific solvers • Or by “fudging functions” which smooth out kinks • + no switch of solver necessary • + no 0/I solution by behavioural functions for policy agent • - steep derivatives can render solution difficultly CAPRI market model: Endogenous Policy

14. Sigmoid(x) 1 0.5 x + + 0 A “fudging” function • Sigmoid function: • Symmetric S-shaped form • Overall differentiable • Between 0 (if x = -) and 1 (if x = +), • Sigmoid(0) = 0.5

15. How are TRQs modelled in CAPRI? • Two types: • Bi-laterally allocated TRQs: open only for specific trading partners (TRQREG) • TRQs open to everybody who has no bi-lateral TRQ (TRQWOR) • What data are stored: • TRQNT: the quota quantity • TsMFN: specific tariff MFN (over quota tariff) • TaMFN: ad valorem tariff MFN (over quota tariff) • TsPref: preferential specific tariff (in quota tariff) • TaPref: preferential ad valorem tariff (in quota tariff) CAPRI market model: TRQs

16. 1) Who is benefiting from preference? 4) What is the value ofthe economic rents? 2) What is the maximal quantitybenefiting from the preferences? 5) What is rent perton imported underpreferences? 3) How much is importedtotal?/with preferences? Preferential rates = in quota tariffs MFN-rates = Over quota tariffs Where can I find the results on TRQs?

17. Import price= Border prices + tariff Border price= 45 degree line Applied tariff(flexible levy) Applied tariff at: Import price ip: Max>at>0 ip=mip at=max ip<mip Flexible levy or minimum import prices Applied tariffs which are adjusted so that a minimum import price is guaranteed. They may be upper bounded by the WTO bound rate. Minimalimport price(mip) Maximumtariff (max) at=0 ip>mip

18. Why are flexible levies important • In the typical range where the applied rate is above zero, but below the bound rate, the price transmission from border to market is zero: only the tariff is adjusted when the border price changes • A change in the bound rate may not provoke changes in import prices (specific case of “water under the tariffs”) • Used in important EU markets (some coarse grains, sugar, vegetables) • Simply using the bound rate overestimates import prices and effects of trade liberalization

19. Subsidised exports for EU • Instrument to increase competitiveness of EU exports in international markets • Increase import demand for EU products • Stimulates exports • Decreases market pressure in EU markets • Increase EU market prices • So-called market comities decide in regular intervals upon amount of subsidy, but decision criteria defined in CMOs are vague • Quantities and values of subsidized exports are upper bounded since the WTO Uruguay round,so-called commitment CAPRI market model: Endogenous Policy

20. Data on subsidised exports for EU • FEOGA budget delivers yearly budget outlays • EU notifies to WTO quantities, budget outlays and commitments CAPRI market model: Endogenous Policy

21. Modelling subsidised exports for EU • The model cannot make a distinction between subsidized and non-subsidized exports to a specific destination • In the base period, a mix subsidized and non-subsidized exports takes place • We don’t possess data to distinguish the subsidy by destination • All exports receive the same subsidy • Value limits are integrated in the model,as the observed mix of export with and without subsidies cannot be modeled CAPRI market model: Endogenous Policy

22. Function for subsidised exports PMrk PADM  PADM EXPSVAL 50% FEOE_MAX FEOE_MAX EXPSVALi value of subsidies paid FEOE_maxi WTO commitment on subsidies paid  defines steepness of function  percentage of administrative price PADMiat which EXPSVALi is 50% of FEOE_MAXi CAPRI market model: Endogenous Policy

23. Modelling subsidised exports for EU • Assumption to define parameters of function: • Function depends on EU market prices and administrative ones: the lower the market price relative to the administrative one, the higher the value of the subsidies • Two parameters: • Steepness of response to prices changes • Mid point of function • Function recovers values of subsidized exports for the base year period • one degree of freedom left • a second point is constructed by assuming that only 5% of commitment is used at 125% of administrative price • Rather rapid response to price changes CAPRI market model: Endogenous Policy

24. Value of subsidies Where to find results on subsidised exports? Table: FEGOA CAPRI market model: Endogenous Policy

25. Intervention purchases • Instrument to stabilize market prices: • If certain trigger prices are undercut, public purchases into intervention stocks take place=> additional demand, price drops are softened • At higher market prices, stocks will be released, increase supply and dampen price increases • Problems for modeling: • Intervention may react to short-time price fluctuations • Complex legislation defining the trigger prices depending on short time price notations

26. How are intervention stocks modeled • Three variables: • Intervention purchases: probability of market prices to undercut administrative ones times maximum intervention purchases • Intervention releases: (1-probability of market prices to undercut administrative ones) times probability of market price to exceed unit value exports without subsidies times times intervention stock size • Intervention stock size: start size + purchases - releases

27. How are intervention stocks modeled Assumed normal distributionaround current EU market price Exportunit value Administrativeprice Probabilityto exceedunit value exportswithout subsidies Probabilityto undercutadministrative price Endogenousmarket price

28. Where to find results on intervention stocks? Financial costs= (Size in base year x base year price + simulated final size x final price)/2 x 4% Depreciation= (Market prices – unit value exports) x final size Other= Purchases x Admin. Price – releases x unit value export Technical costs= (Size in base year + simulated final size)/2x costs per ton Table: FEGOA STOCKS Changes = Purchases - releases Final stock size = start size + purchases - releases

29. Training with the market model • Run on Member State level with 3 iterations one of the following simulations • (1) abolish EU15 subsidized exports for wheat (policy file policy\01NOSUPX.gms) • (2) Close EU15 tariff rate quota for wheat(policy file policy\01NOTRQ.gms While the model runs understand the policy files

30. $include pol_input\mtrstd.gms • **** policy changes • DATA("EU015000","FEOE_max",XX,SIMY) = eps;