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Challenges in Modeling the Effects of Trade Agreements on the Agricultural Sector

Challenges in Modeling the Effects of Trade Agreements on the Agricultural Sector. Pat Westhoff (Univ. of Missouri) Jacinto Fabiosa (Iowa State Univ.) John Beghin (Iowa State Univ.) William Meyers (Univ. of Missouri). Choices and questions. Type/scope of model Reference scenario

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Challenges in Modeling the Effects of Trade Agreements on the Agricultural Sector

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  1. Challenges in Modeling the Effects of Trade Agreements on the Agricultural Sector Pat Westhoff (Univ. of Missouri) Jacinto Fabiosa (Iowa State Univ.) John Beghin (Iowa State Univ.) William Meyers (Univ. of Missouri)

  2. Choices and questions • Type/scope of model • Reference scenario • Representation of the policy change • Extra-model information • Metric to measure reform impacts • Emerging issues • Non-tariff measures • Value-added

  3. Type/scope of model • Trade agreement may have economy-wide impacts • Argues for CGE-type approaches • Or at least ad-hoc incorporation in partial equilibrium models • But the fine print matters, too • Need models with market, policy detail • Trade-off between scope and detail

  4. Why detail matters: URAA effects on dairy markets • Uruguay Round agreements limits subsidized exports of butter, cheese, skim powder, “other dairy products” • EU main user of subsidized exports • But estimating effects on EU (and world) dairy markets requires understanding of nuances

  5. Nuances of EU dairy markets and export subsidy limits • Marketing quotas for milk • Subsidy limit binding for some products (cheese), not for others (butter) • “Cheese” includes subsidized bulk cheeses and unsubsidized specialty cheeses • Various policy responses possible if subsidized export limit reached

  6. Reference scenarios • Baselines matter, often a lot • Example 1: Hypothetical new WTO agreement that would • Cut amber box support 50% from current permitted level • Limit blue box to 5% of value of prod. • Likely impact on U.S., EU: minimal • Why?

  7. EU amber box support Note: EU reported figures for 1995-1999. FAPRI estimates for 2000-2008.

  8. EU blue box support Notes: EU reported figures for 1995-1999. FAPRI estimates for 2000-2008. EU reported value of production in 1999/2000: 233.7 billion euro. 5% of 233.7 billion euro is 11.7 billion euro.

  9. Why baselines matter, continued • Example 2: 1996 farm bill • Among causes: CBO’s 1995 baseline • Prepared before price run-up, so projected significant spending under 1990 bill provisions • AMTA payments lower than CBO baseline, but above late-1995 conventional wisdom • Commodity groups decided to “take the money” • And then prices collapsed in 1997, resulting in pressure for supplemental payments • See Orden, Paarlberg & Roe

  10. Response: stochastic analysis • FAPRI, CBO use stochastic approach to looking at impacts of U.S. policy changes • Tries to reduce sensitivity to a particular baseline • Very important where policies have asymmetric effects

  11. Current U.S. policy implications for returns Source: FAPRI Nov. 2003 preliminary baseline

  12. Representing policies • Well-known problems with distinction between bound, applied tariffs • Lack of (current/any) information about policies often major problem • All models have to simplify, but choices matter, often a lot • Representation of internal support measures critical

  13. Representing producer support policies • Modelers “know” how to handle price supports, coupled payments • But what about U.S. direct and counter-cyclical payments, EU single-farm payments? • Decoupled, or at least less coupled • Less effect than coupled payments • But not zero • No consensus on effects • Huge implications for analysis and policy

  14. Extra-model information • No model captures everything that’s important • Our clients want our best judgment, not just a mechanical model result • We use combination of approaches • Some equations are estimated • But many are synthetic or have calibration factors set using judgment or based on reviewer comments • See Just paper from 2001 AAEA meetings

  15. Metrics for evaluating impacts of policy changes • In DC, lots of interest in impacts on: • Prices, production, trade • Farm income, government costs • Producer groups and most U.S. policy makers seem less concerned with • Consumer effects • Traditional measures of welfare, efficiency

  16. Emerging issues • Non-tariff measures become more important as tariffs reduced • Value added post-farm gate large, growing • Arguably makes traditional focus on basic commodities out of date • But current U.S. price and income support policies are primarily aimed at these basic commodities

  17. Concluding comments • No model is appropriate for all questions • Mix of approaches healthy • Any model can be dangerous if limitations not understood

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