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Incorporating TRQs in AGLINK

ORGANISATION DE COOPÉRATION ET DE DEVELOPMENT ÉCONOMIQUES. Incorporating TRQs in AGLINK. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT. Presentation for USDA/ERS EU MODELLING WORKSHOP Peter Liapis. November 15-16, 2001. 1. Directorate for Food, Agriculture, and Fisheries.

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Incorporating TRQs in AGLINK

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  1. ORGANISATION DE COOPÉRATION ET DE DEVELOPMENT ÉCONOMIQUES Incorporating TRQs in AGLINK ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Presentation for USDA/ERS EU MODELLING WORKSHOP Peter Liapis November 15-16, 2001 1 Directorate for Food, Agriculture, and Fisheries

  2. PURPOSE • Describe methodology • Present preliminary results

  3. Key Assumptions • Homogeneous products • Perfectly competitive markets • Country is a net importer of the good • Law of one price • Perfect price transmission between world and domestic prices • Only border policies in place • TRQs administered efficiently

  4. Pt2d ED1 Pt1d Pt1w t1 Pt2w Mt2 Mt1 Figure 1.Introduction of Tariffs P Pa ES ED2 ED Mf Imports

  5. Figure 2.Three Zones of Effectiveness P Pa ES PdMAX PDMAX = PW*(1+t2) PdMIN PDMIN = PW*(1+t1) PwMAX ED1 t1 PwMIN quota zone t2 ED2 ED t2 zone t1 zone MIN total imports MAX total imports Imports

  6. Empirical ImplementationThree Ways TRQs are Introduced • Case 1: closely follows the analytical framework just laid out • Case 2: incorporates the fact that there are TRQs and export subsidies for same products • Case 3: incorporates the fact that there can be “Domestic Price Support”

  7. Empirical Implementation (cont): Case 1 • Assume exports exogenous and imports are residual • No domestic policies to inhibit price transmission

  8. Empirical implementation: Case 1 (cont) Two Steps Step 1: Solve for the price P_TRQ QCd = f(P_TRQ, P2, …) QPd = f(P_TRQ, P2, …) P_TRQ = QC+EX+ST-QP-QT-ST(-1)

  9. Empirical implementation: Case 1 (cont) Two Steps: Step 2: Make Imports residual that balance domestic market IM = QC+EX+ST-QP-ST(-1) Domestic Consumption and Production respond to model determined prices QC = f(PD, P2, …) QP = f(PD, P2, …)

  10. Empirical implementation: Case 1 (cont) Step 2: Introduce IF statement to determine domestic price PD = IF (P_TRQ >= PDMAX) THEN PDMAX ELSE IF (P_TRQ <= PDMIN) THEN PDMIN ELSE P_TRQ

  11. Empirical implementation: Case 2 (EU) • Imports and exports are endogenous • WTO export constraints respected • No change in domestic price determination PD= QP+ST(-1)+IM-QC-EX-ST

  12. Empirical implementation:Case 2 (cont.) • Imports depend on the relationship between domestic price and world price with the relevant tariff • Introduce IF statements to determine imports

  13. Empirical implementation:Case 2 (cont.) IM= IF PD > PDMAX THEN QUOTA*(PD/PDMAX)^n ELSE IF PD < PDMIN THEN QUOTA*(PD/PDMIN)^n ELSE QUOTA

  14. Case 3-The domestic support example:Butter in Canada

  15. Current situation Case 3 (cont.) • Quota for milk production • Quota volume is an estimate of demand • Producers receive support prices • The support prices are greater than world price • Out of quota import tariff is very high

  16. 1)If PDMAX>=SP Producers receive support price Consumers pay support price Fill rate is 100% Imports are equal to the quota 2)If PDMAX < SP Producer support price remains in place, production becomes exogenous Consumers respond to lower price Imports becomes endogenous and adjust to meet increased demand Key Assumptions Case 3 (cont.)

  17. Comparison between PDMAX and the Support price Min(PDMAX, SP) Implementation Step 1Case 3 (cont.) • Imports and production could either be exogenous or endogenous depending on price comparison.

  18. Implementation Step 2a)Case 3 (cont.) • If SP<PDMAX, imports are exogenous and consumption respond to SP • IM= QUOTA • QC=QC(SP) • while production is residual

  19. Implementation Step 2b)Case 3 (cont.) • If SP>PDMAX, imports are residualconsumption respond to PDMAX • IM=QC+EX+ST-ST(-1)-QP • QC=QC(PDMAX) • while production becomes exogenous

  20. Empirical Implementation • Agricultural Market Access Database (AMAD) • Co-operative effort by: • Agriculture and Agri-Food Canada • EU Commission-Agriculture Directorate-General • FAO • OECD • The World Bank • UNCTAD • USDA-Economic Research Service • www.amad.org

  21. Scenarios • 1) Gradual 50% expansion of the quota in equal annual increments • 2) Scenario 1 plus a gradual 36% reduction in in-quota tariff rates in equal annual increments • 3) Gradual 36% reduction in out-of-quota and non-quota tariff rates in equal annual increments • 4) Combine Scenarios 2 and 3

  22. Main results on world market • Small impact on world markets with quota expansion even when combined with in-quota tariff reduction. • Bigger price changes with combine out-of-quota and non-quota tariffs reduction.

  23. Changes in World Price ofSelected Commodities 2005

  24. Main results for domestic markets

  25. Regime SwitchesScenario 1: Quota Expansion • EU Butter: • Out-of-quota tariff to Quota • EU SMP • Quota to In-quota tariff • US Butter • Quota to Out-of-quota tariff to Quota • US Cheese • Quota to Out-of-quota tariff to Quota to Out-of quota tariff

  26. Regime SwitchesScenario 2: Quota Expansion and in-quota reduction • Similar to Scenario 1 • Except EU SMP • In this case, in-quota tariff reductions result in the Quota as the binding instrument through out projections period.

  27. Regime SwitchesScenario 3: Out-of-quota tariff reduction • EU Butter: • Out-of-Quota throughout projections period. No shift back to Quota as in previous scenarios • Japan Butter: • Shift to Out-of-quota in last projection year • US Butter: • Quota to Out-of-quota tariff but no shift back to Quota as in previous scenarios

  28. Main results for domestic markets • Butter and Cheese in Canada : Quota is binding and high out-of-quota tariff rate •  Quota expansion increases market access • Imports increase one for one as the quota expands • No change in domestic price •  Lowering in-quota rates affect quota rents •  Lowering out-of-quota rates have no effects • Domestic support price still determines price

  29. Main results for domestic markets • US SMP: Out-of-quota rate binding •  Reduction of out-of-quota tariffs increases market access • Quota expansion and in-quota tariff reduction had no effect • US Butter and Cheese: Quota binding some years, out-of-quota binding other years •  Reduction in out-of-quota rates result in greater increase in market access. • quota expansion had minimal effects most years • in-quota tariff reductions had no effect

  30. Main results for domestic markets • EU Cheese: Out-of-quota rate binding •  Reduction of out-of-quota tariffs increases market access • Quota expansion and in-quota tariff reduction had no effect • EU Butter: Quota binding some years, out-of-quota binding other years •  Reduction in out-of-quota rates result in greater increase in market access. • quota expansion had minimal effects most years • in-quota tariff reductions had no effect

  31. Main results for domestic markets • EU Coarse grains: Under-filled •  Reduction of in-quota tariffs increases market access • EU Beef: 100% fill •  Quota expansion increases market access

  32. Main domestic price effects • Effects of increasing market access on domestic prices depends: •  US dairy • No domestic policies preventing price transmission • increase market access lead to lower domestic prices •  Canada dairy • Domestic support prices prevent price transmission • increase market access no effects on domestic prices •  EU dairy, beef, and grain markets • Assumptions on domestic policy targets • increase market access lead to minimal price change •  Markets without TRQs • Minimal world price changes lead to minimal changes in domestic prices

  33. SUMMARY • Only one of the three instruments is binding at a time • The binding instrument differs between countries, commodities and over time • Liberalization of all three instruments would have biggest impact on market access • For the commodities and countries examined: • Increased liberalization leads to minimal price change

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