3. Wto From the Standpoint of a Manager for a Us Beef Exporter to the Eu?
Introduction
1World Merchandise Organisation (WTO) members are now truly engaged in a new circular of multilateral trade negotiations, often referred as the Millenium Round (MR) or the Doha Development Agenda (DDA). The final consequence of the MR is at present highly uncertain, notably due to the excessive complexity of the agricultural dossier. Agronomical negotiations focus on three main areas : marketplace admission, domestic support and export competition. There exist many economical analyses showing that progress on the market access chapter may be difficult to obtain because farther liberalisation here may be detrimental for developing countries (mainly via lost benefits from preferential trade agreements) (for instance, Francois et al., 2003). In the same vein, available economic analyses tend to conclude that further liberalisation of "domestic support" instruments may atomic number 82 to very limited benefits, if any (for instance, Dimaranan et al., 2003). On the other hand, the negotiations on the tertiary area seem to be less hard to deport every bit there is only one major user of export subsidies (the European Spousal relationship, EU) and appropriately, impacts for each WTO member are more hands identified. Some observers then believe that these negotiations with the large number of players with diverse and conflicting interests are likely to evolve towards a small-scale issue characterised by but new house commitments on export subsidies (for instance, Vanzetti and Peters, 2003).
2According to their position papers, the vast majority of WTO members are calling for outright elimination of consign subsidies. Leading countries for the complete removal of these instruments include the members of the Cairns Group and the USA. Every bit expected, the Eu does not (officially) support this proposal. Instead, the EU position paper of January 2003 proposes an average 45% cut in the level of export subsidies and requests flexibility in the implementation of this constraint. The analysis of the development of Eu export subsidies may assist to understand this proposal. Since the showtime of the 1990s, one can observe a tendency towards the reduction of EU total consign subsidies. They decrease on boilerplate past nearly 10% annually, but this reduction is unequally distributed between agronomical products. Export subsidies on dairy and saccharide products have slightly decreased compared to export subsidies on abundant crops or meat products. The ii reforms of the Mutual Agricultural Policy (CAP) (the "MacSharry" reforms of 1992 and the "Agenda 2000" of 1999), with reductions of marketplace price support compensated past increasing direct payments, clearly have positively contributed to this miracle. It is still as well early to perceive the total effects of the last reform but it seems non unlikely that consign subsidies continue to prevail in the near future, at least on dairy and sugar products. In a general manner, economic assay of the Agenda 2000 CAP reform supports this view. For example, Van Meijl and Von Tongeren (2000) contend that there volition remain meaning export subsidies on dairy and sugar products accompanied by merely small export subsidies on other products after Agenda 2000. [2]They furthermore underline that further adjustments of the CAP are inevitable in example of new international commitments on export subsidies. The "45%" proposal of the EU may thus be viewed as a first negotiation position which minimizes CAP adjustments and still represents an offering at the WTO.
3Given this political context, we believe that a complete removal of European union consign subsidies on agronomical and food products is a likely scenario. In fact, several quantitative evaluations of such scenario take already been performed. They generally focus on the market effects of this policy experiment and rarely discuss effects on agents' welfare. TABLE 1 shows selected results from published studies. Almost of them find that the phasing out of European agricultural export subsidies, after the full implementation of the Agenda 2000 CAP reform, will lead to notable reductions of domestic prices and will have moderate impacts on world prices. The impacts on European union exports will all be negative, except for wheat due to cantankerous-market place effects. However, the magnitudes of these effects differ substantially beyond studies. An example is the reduction of the domestic toll of soft wheat ranges between 0% and eight.6%. It is well recognised that several modelling factors take a substantial bearing upon model outcomes. For example, the OECD and U.s.a. Section of Agronomics (USDA) analyses highlight the sensitive issue of exchange charge per unit assumptions. On the other hand, ane common feature of all these evaluations concerns the direction scheme of the removal of export subsidies. All assume that domestic prices are immune to adjust downwards in order to restore market equilibriums. Other things being equal, these price reductions stimulate domestic demands and reduce domestic supplies, and then that export supplies contract. Without any compensation in the guise of new or increased direct payments, this necessarily leads to a subtract of farmers' profits, an increase of the domestic consumer surplus and a reduction of public expenditures.
Table 1
Literature review on the impacts of the phasing out of agricultural consign subsidies
Literature review on the impacts of the phasing out of agricultural export subsidies
4Our master purpose in this paper is to contribute to this literature on the evaluation of the phasing out of agronomical export subsidies by comparing the impacts of two alternative management schemes. The first scheme, time to come referred equally the cost management scheme, assumes, like previous analyses, an aligning of domestic prices to restore market equilibriums. The levels of other CAP instruments are unchanged in this case. In contrast, the second scheme, hereafter referred as the quantity management scheme, relies on the strengthening of supply command instruments. The main Mutual Marketplace Organisations (CMOs) of the CAP involve instruments designed to regulate domestic supply of agricultural and food products. The most evident examples are the production quotas in the dairy and sugar CMOs. As far every bit the abundant crop CMO is concerned, 1 must exist enlightened that the land gear up-aside scheme restricts cultivated state and, past way of upshot, the domestic supply of arable crops. The beef CMO as well includes supply control measures, mainly through beast density limits for direct payments. Therefore, the political tools are already present to impose greater command on domestic supplies and thus to reduce export supplies, other than through price reductions.
5Evaluating the impacts of the quantity management scheme may at commencement sight appear as not relevant, given that the CAP had evolved since 1992 towards a re-instrumentation of income support in favour of direct payments and to the detriment of market place cost back up. Moreover, the concluding reform (the and then-called Mid Term Review (MTR)), while withal not completely divers, volition make this re-instrumentation more pronounced. Despite this evolution, we are of the opinion that a new evaluation is valuable for the post-obit reasons. Firstly, some EU members are actually reluctant apropos some MTR decisions, notably the reduction of dairy intervention prices and the increase of dairy quotas. Secondly, the master organisations representing interests of the EU farmers are also opposed to new toll reductions and furthermore they debate that supply management should be role of the future European union agricultural policy. Thirdly, the quantity management system may have the back up of some EU institutions, similar the European Courtroom of Auditors. Fourthly, this strategy may also favour net exporters in the Rest of the World (RoW), because information technology provides support to the earth cost of agricultural and food products (for instance, FAPRI, 2002 on the arable crop CMO). Finally, this system is widely applied both in agriculture (for instance, the milk sector in North American) and in non-agronomical sectors (eastward.g. rough oil). Consequently, at that place potentially be some supporters of the quantity management scheme and our comparative analysis tin can be viewed as a contribution to the debate most the future of the CAP.
6Our numerical assessment of the two management schemes is conducted with a recently built Computable General Equilibrium (CGE) model focused on the Eu food and agricultural sectors. This CGE model offers a detailed representation of CAP instruments and is therefore well designed for our objective in this paper. Moreover, past its very nature, this modelling framework allows us to evaluate the impacts of the 2 schemes on market place variables (supply, need, toll, export, etc. as well as on agents welfare (consumer surplus, farm profits, taxpayer contribution, etc.). Hence we tin can identify winners and losers in each case. Earlier embarking on this empirical analysis, we first turn to a review of the theoretical advantages and drawbacks of the 2 management schemes.
Price versus quantity management : a theoretical analysis
Analytical framework
7The main consequences of the two management schemes for the phasing out of agronomical export subsidies are set out with a graphical analysis (meet Effigy 1). To keep this analysis manageable, we first consider a partial equilibrium framework with only one agricultural market and where the world price (PW) is assumed to exist exogenous (small country assumption). This initial framework is very stylised but still permits some critical trade-offs to be identified.
Figure i
Market place impacts of two management schemes of the phasing out of export subsidies
Market impacts of ii management schemes of the phasing out of consign subsidies
8We assume that two agronomical policy instruments are initially in place : a market cost support organisation at price P 0 and a production quota arrangement at level 
. The market price support system is in practise ensured past the imposition of a tariff (at least equal to the difference betwixt the guaranteed price and the world price) which prevents imports and past the granting of export subsidies which allows excess domestic supply to be disposed on the world market. The production quota system is assumed to be active in this initial situation, as domestic producers want to produce more than than the quota level at the guaranteed price. Linked to this quantity constraint is the unit quota rent, divers by the difference between the guaranteed price and the shadow cost of the quota (i.e. the price that would induce farmers to produce freely at the quota level). This unit quota rent is given by the distance de in Figure i. In this initial situation, the domestic supply is greater than the domestic need (denoted by D 0) and the export level is given by the difference between these ii quantities. Consign subsidies and then corporeality to the area cdfg. Producer profit is equal to the surface area a P 0 de and consumer surplus to the area b P 0 c. Total welfare is normally measured equally the sum of these two welfare measures, less public expenditures. It is given hither by the difference between the expanse abcgj and the area jef. At this stage, one tin check that this initial welfare is lower than in the free merchandise instance, but greater than in the state of affairs with only a marketplace price support system. In other words, the production quota arrangement reduces the distortions in production due to the market toll support regime, merely is only a second-best solution.
9In this setting, let's showtime consider the cost direction scheme whereby policy-makers allow the domestic price to adjust downwards in social club to fit domestic supply to unsubsidised total demand. The resulting equilibrium is and so characterised by the new domestic toll P i which is lower than the initial guaranteed price. This toll reduction stimulates domestic demand to the level D 1 and, at the same time, reduces product incentives. We observe that, at the end of the mean solar day, domestic product is equal to domestic demand and that the quota level is no longer binding. In other words, the cost reduction is sufficient to set the quota rent at null. The production quota system is therefore non active, whereas the market price support system operates with a new guaranteed price, lower than the initial ane. There withal exists one tariff which prevents imports from entering into the domestic market. If there is no compensation in the form of direct payments, the producer's profit becomes equal to the surface area a P 1 h. It is therefore lower than the initial profit due to both toll and supply reductions ; the profit reduction is equal to the area P 1 P 0 deh. On the other paw, the consumer's surplus increases by the area P 1 P 0 ch, thanks to the price reduction and the consequent increment in domestic need. Finally, public expenditures become zero. Total welfare is so equal to the area abh and greater than the initial one past the expanse cgfeh. This welfare gain results from the reductions of distortions to domestic production and to domestic demand. The resulting welfare is still lower than in the free merchandise example, equally we assume that there remains one tariff which is at to the lowest degree equal to the difference between the new equilibrium cost and the unchanged globe price.
Welfare impacts of 2 direction schemes of the phasing out of export subsidies
Welfare impacts of ii management schemes of the phasing out of consign subsidies
10Let'south now consider the quantity direction scheme. The reduction of full demand post-obit the phasing out of consign subsidies may be accompanied by an exogenous reduction of domestic product. For simplicity, we assume that the policy-maker is able to fix the production quota at the initial level of domestic demand (D 0). Accordingly, the resulting equilibrium is given past an unchanged domestic price (P 0) and domestic supply equals domestic demand, so that exports are once again nil. The production quota system becomes more bounden, every bit suggested by the increased quota hire which reaches the ck distance on Effigy 1. The market price support system is besides active, insofar as tariffs are still required to foreclose imports. The welfare effects of the quantity management scheme are completely different from those obtained with the price scheme. Consumers surplus is stable relative to the initial situation, because the domestic toll is unchanged. Producers' profit decreases past the expanse cdek, due only to a book effect. Public expenditures are withal zero. As a whole, it is yet not possible to make up one's mind if in that location is a welfare gain or loss. Full welfare changes by the difference betwixt the area efj and gjk. This ambiguity can exist explained as follows. The distortions in domestic consumption are unchanged with the quantity management scheme. The distortions in domestic production are, on the one hand, reduced thanks to the book effect but, on the other hand, a new distortion appears. The shadow price at the new quota level is lower than the globe price. Accordingly, some producers non only desire to produce more given domestic cost but also want to produce more than given this world cost. The total effect on the distortions in domestic product is therefore ambiguous.
11We are now in a skillful position to compare the two direction schemes. This is done according to two criteria. We get-go examine their economic efficiency earlier discussing their acceptability at the WTO.
Economic efficiency
12In the static, partial equilibrium framework outlined in a higher place, there is no doubt that the toll management scheme is more than efficient than the quantity management scheme. The gain in total welfare is represented past the area chk. One tin can note at this phase that both schemes atomic number 82 to autarky and that this area corresponds to the welfare loss of imposing a product quota at level D 0, in a closed economy. There is also no doubt that the price direction scheme is preferred past consumers, their surplus gain being equivalent to the surface area P 0 P 1 hc. Both schemes remove consign subsidies ; thus taxpayers are indifferent between them. Every bit far every bit the interest of producers is concerned, we cannot provide a articulate-cut conclusion. The departure in turn a profit between the quantity and the price schemes is given by the surface area P 0 P ane ic, less the area ihk. The trade-off facing producers is therefore between the pair "loftier price ; low quantity" and the pair "low price ; high quantity". It mainly depends on the production technologies and the structure of product costs. For example, if the price elasticity of supply is very low, the positive book effect in the price scheme can be minor and thus the producer will adopt the quantity direction scheme. Therefore, if the political objective is to minimize the welfare loss of producers post-obit the phasing out of export subsidies, this start theoretical analysis cannot provide a definitive reply. It may be in the involvement of producers to strengthen the supply management instruments, equally indeed they by and large request.
13At this phase, some qualifications are in order. Firstly, our demonstration is very simplified and a much more rigorous presentation of the welfare effects of different agricultural policy instruments, under unlike price elasticities of supply and demand, is bachelor in Gardner (1983). Our contribution here is to arrange the general results detailed in this newspaper to our specific case of the removal of export subsidies. At the same time, we note that many papers have made use of Gardner's results. [3]For example, de Gorter and Meilke (1989) decide the optimal policy instrument in order to achieve a given welfare of Eu arable crop farmers and notice that a policy based on product quotas is mostly the nigh efficient. Secondly, our analysis is conducted assuming that but two policy instruments are bachelor : the market price support organization and the production quota. Extending this analysis by taking into business relationship direct payments to primary factors will naturally affect the result, for instance if we presume that compensation of turn a profit loss by new direct payments is possible. The disquisitional event is to know whether the back up of farm incomes by taxpayers is more than efficient than the support by consumers. If i rests on the static, perfect competition, fractional equilibrium framework used so far and considers that lump sum directly payments exist, and then the compensation for the loss of producer income is no longer a real issue, and the price management scheme is then amend for all economic agents than the quantity direction scheme.
14This last result depends on several assumptions that deserve, at the very to the lowest degree, further discussion. We successively consider, in a very brief and intuitive manner, some implications of 3, maintained hypotheses : static, perfect contest and fractional equilibrium. [iv]The introduction of dynamic elements makes the comparison between the two management schemes even more complex. On the one hand, it is well recognised that production quotas hamper structural changes and thus generate inefficiencies. Moreover, gains from technical changes are not transmitted to the "market", and thus make reforms more than difficult to finalise. On the other manus, farmers' expectations about output prices are not as critical in the quantity management scheme (with a binding level for the product quota) as they are in the price direction scheme. Secondly, perfect competition is a widely adopted assumption, mainly past convenience. Nonetheless, if 1 thinks that food processing and/or nutrient retailing industries are not perfectly competitive, and then the efficiency ranking of the two management schemes may once more be altered. For case, if scale economies are present and these industries adopt average pricing, the quantity direction scheme may therefore be less efficient, as information technology reduces the supply of raw materials for these industries. In contrast, if these industries as a whole have oligopsony power, then the price reductions resulting from the cost management schemes may not reach the final consumer, simply may issue in an increase of rents in these industries. Finally, the partial equilibrium analysis neglects the various effects in the remainder of the economy. On the one hand, information technology does not consider the induced effects on other agricultural and food markets. If the quantity management scheme is practical to merely one agronomical sector, there will be some reallocations of main factors to other production activities and consequently the upshot may only be displaced to another sector. On the other hand, this partial equilibrium analysis focuses on the market furnishings of the food and agriculture sectors and omits their not-marketplace effects. In other words, the multi-functional role of agriculture was ignored so far. The design of an optimal policy for promoting the positive roles of agronomical activities on rural development and the environment is very complex, notably due to the difficulty to evaluate the transaction costs. In that respect, product quotas may have a part as they allow some farmers to stay in activity in some less favourable regions.
15To sum upwards this discussion, the superiority of i direction scheme in terms of economic efficiency is very hard to institute theoretically. Excluding the traditional static, perfect competition, partial equilibrium belittling framework where lump sum transfers are assumed to be, it seems possible to always find theoretical arguments in favour of one management scheme.
WTO acceptability
16The comparison of the two management schemes in terms of acceptability at the WTO is much easier, considering the focus is on market furnishings (price, product, need, exports and imports) and non on the welfare effects discussed in the previous paragraph. The comparing of market effects is much less dependent of the analytical framework adopted (static/dynamic, etc.) insofar as the quantity management scheme will e'er lead to a higher domestic price than the price direction scheme. For simplicity, we return to our initial belittling framework to discuss this point.
17The acceptability of the two management schemes at the WTO is assessed in light of the iii main areas of the agricultural negotiations. As far as the export competition affiliate is concerned, both management schemes are designed such every bit to remove export subsidies and naturally they are both acceptable from WTO partners of the European union.
18On the domestic support dossier, we first recall the existing rules. Domestic support policies are henceforth placed in "boxes" according to their impact on international merchandise. Those policies that have "no, or at well-nigh minimal trade-distorting effects or effects on production" are placed in the green box and are non subjected to any constraint. There is a 2d box (the blue box) specifically designed to direct payments which are accompanied by programs aimed at limiting production. Finally, there is a third box (the amber box) which includes all policies that are accounted to be trade distorting. These "amber" policies are discipline to reductions which are applied on a Aggregate Measure out of Back up (AMS). The market toll support system presented in our analytical framework is clearly an amber policy and its contribution to the AMS is given past the product of the domestic supply multiplied by the difference between the domestic price and the earth cost. On the other mitt, the production quota system is non an bister policy but, by its impact on toll and production, it has some induced impacts on the contribution of the market price support system to the AMS. Returning to FIGURE 1, the initial AMS is given past the expanse P 0 PW fd. Information technology reduces to the surface area PW P ane hl in the toll direction scheme and to the expanse P 0 PW gc in the quantity direction scheme. [v] And so both management schemes lead to a reduction of the AMS, only information technology is theoretically impossible to decide which reduction is greater. At this stage, it must be articulate that both management schemes would not be WTO uniform if the AMS must be ready at aught.
19Finally, the negotiations on the market access affiliate are really circuitous due to the multiplicity of rules and instruments. We just stress hither that the enforcement of the quantity management scheme relies on a greater tariff (equal at to the lowest degree to the cg distance on Figure 1) than the cost direction scheme (equal at least to the ig distance on Effigy 1) in order to prevent a surge of imports. In other words, the maintenance of the community preference principle, which producers demand, is primal in the quantity management scheme.
20To sum upwards, the quantity management scheme is theoretically less sustainable at the WTO than the price management scheme, mainly on the market access dossier. In exercise, does information technology actually matter ? This is clearly an empirical issue that depends on many factors, notably the evolution of earth market place conditions and earth prices. Permit'south suppose for a while that the world toll in Figure 1 is equal to the equilibrium price. In this case, the price management scheme is fully WTO compatible while the quantity management scheme still needs to be negotiated. In the same vein, the effective impacts on welfare of the two management schemes discussed in the previous paragraph depend to a large extent on the world market place conditions. Thus we at present turn to the empirical office of our paper.
Toll versus quantity management : an empirical assay
Modelling framework
21Our empirical comparison of the two management schemes is performed with a CGE model. It is a static, single-land, multi-sector CGE model of the EU15 economy, benchmarked to data for 1995. The model highlights the food and agricultural sectors and can therefore be referred as a "sector-focused" model. The model is neo-classical, assuming perfect competition in all markets and without any adventure factors. Accordingly, this model adopts simplifying assumptions and therefore cannot provide a definitive reply to our purpose of comparing ii agricultural policies. [6]It nevertheless sheds low-cal for the first time on this topic, by considering simultaneously all agricultural sectors and moreover the whole food concatenation. We only stress beneath the nigh important characteristics of this model for the present analysis ; more details are available from Gohin and Meyers (2002).
22The outset originality of the version of the model used for this paper comes from the disaggregation of the European union economy into activities and commodities (run into TABLE 2). The model identifies 17 sectors and 54 products. Many sectors have multi-product technologies, and moreover, some bolt may be supplied by unlike sectors. Apropos agriculture, we consider one aggregate sector, xix sub-sectors and 23 commodities. At the food processing level, the electric current version identifies 6 sectors and 21 commodities. Finally, the 10 sectors of the rest of the economy are mono-product. This rather detailed level of disaggregation of the nutrient complex is motivated by three factors. Firstly, it allows us to capture the main forward and backward linkages among the various agricultural activities, as well as the linkages among these agricultural sectors and their economic environment (food processing, raw material suppliers). Secondly, it facilitates the specification of agricultural product applied science, where substitution amid intermediate inputs, and betwixt intermediate inputs and primary factors of production, plays a crucial role. Thirdly, it enables an accurate representation of the intricate workings of the main CAP instruments.
Table ii
Sectors and commodities correspondence
Sectors and commodities correspondence
23This modelling of the CAP instruments is the 2d originality of the model. In a general style, the main agricultural policy instruments are modelled explicitly and in a complementary manner. Explicit modelling of policy instruments means that they are represented as closely as possible to their bodily performance. Complementary modelling ways that regime switches are immune. Practically speaking, our CGE model provides a detailed treatment of the post-obit CMOs : arable crops, dairy, sugar, beef meat, sus scrofa meat and eggs and poultry, along with the post-obit policy measures : cost back up, supply control, trade and income support.
24The third originality we want to underline is the specification of price elasticities in this model. It is well-recognised (and quite obvious) that the specifications of production technologies and consumer preferences (or, equivalently, cost and income elasticities) are fundamental in all applied models, either of Partial Equilibrium (PE) or Full general Equilibrium nature. Despite this evidence, much CGE analysis (and fifty-fifty PE assay) is nonetheless performed with poor representations of substitution possibilities on the need and supply sides. This is not the case with our model, which uses regular-flexible functional forms for the specification of production technologies and consumer preferences. Our price and income elasticities are taken from available econometric results.
Experiment blueprint
25The parameters as well as the exogenous variables (in particular, the levels of policy instruments, the world marketplace prices) of our CGE model are calibrated using 1995 information. Appropriately, we first need to ascertain a benchmark situation before comparing the two management schemes. At to the lowest degree three points must be considered for the definition of the benchmark. Firstly, the European union adopted the Agenda 2000 CAP reform in 1999, and the MTR reform in 2003. Basically, these 2 CAP reforms extend the previous MacSharry reform by lowering price support instruments and increasing direct payment instruments. We introduce in our benchmark the Calendar 2000 CAP reform only do non consider the MTR for 2 reasons. One is that this reform is nonetheless non completely defined, for example regarding cross-compliance. The 2d is that the phasing out of export subsidies may occur before the full implementation of the MTR, as these consign subsidies are now illegal from a WTO viewpoint.
26Secondly, the mid-1990s were characterised by high world prices of agricultural products, reduced gaps between European and world prices and limited European consign subsidies. Using 1995 data as the benchmark is therefore likely to underestimate the impacts of consign subsidies. Since the late 1990s, earth prices have considerably decreased and European export subsidies accept risen again, at least for cereals. Using recent data for our policy evaluation is likely to atomic number 82 to stronger impacts of these consign subsidies. Simply many agricultural projections foresee favourable globe market developments and loftier globe prices for the forthcoming years of this decade. And then it is very difficult to define correct world market conditions. Then we volition perform a sensitivity analysis to the earth market conditions. In the base case, we assume that world marketplace conditions in the benchmark are similar to those that prevailed in 1995.
27Finally, we check that Uruguay Round Agreement on Agronomics (URAA) constraints, as defined in the domestic support and consign competition commitments, are satisfied in this benchmark. All other parameters and exogenous variables specified in our CGE model are left unchanged. In particular, the growth of population, the technical change, evolution of consumer tastes, etc., are not taken into account. As a consequence, our reference situation does not intend to represent a precise year in the 2000s.
28Endowed with our computed reference situation, we and so consider the two management schemes of a phasing out of European union export subsidies. We focus the analysis on the following products : soft wheat, barley, maize, beef meat, pig meat, eggs, poultry meat, butter, skimmed milk pulverisation, cheese, other dairy products, cereal processed products. The price management scenario is implemented past assuming that the domestic prices of all these products can subtract and that the supply control measures (land set-aside, dairy quotas, fauna density limits) are left at their Agenda 2000 levels. The quantity direction scenario differs from the price direction scenario by assuming that the milk quotas are reduced. We test 2 percentage reductions of the milk quota (–6% and –7.5% with respect to the Agenda 2000 level), every bit it is not obvious for policy-makers to anticipate the level of domestic demand in the reference state of affairs and the quantity that volition leave the domestic price unchanged. In this last scenario, the prices of all products are withal free to adjust, upwards or downwards. As already mentioned in the theoretical analysis, the quantity management scheme strongly relies on the supposition that the community preference principle tin can be preserved. Thus we presume in this scenario that new period of imports of whatever agricultural and food production cannot enter the EU market. In other words, we implicitly assume that the EU is able to prevent new imports with actual commitments on tariffs and/or new measures of protection.
29We recognize that our comparative analysis is very illustrative as we but focus on the dairy sector and exclude saccharide export subsidies (and quotas) from the assay. Only this offers the great advantage that analysis of results is simpler to present, compared to a "multiple stupor" scenario, and more understandable. Moreover, we believe that this is not completely irrelevant, in detail considering the reform of the saccharide CMO has been postponed several times and that in that location is actually significant opposition to an increase of dairy quotas.
Results and word
Brief description of the reference situation
30Selected results of the reference scenario are reported in TABLE 3. We provide the reference values of export subsidies, the ratios between earth and domestic prices and the shares of exports in domestic production. [seven]The nigh interesting characteristics of this reference situation are the following. Export subsidies on cereal products are nearly cypher. In fact, very few export subsidies remain on coarse grains (€2 million on barley). We also note that the domestic price of barley is slightly college than the world price, and that exports of barley represent a small share of domestic product. Appropriately, the removal of export subsidies on this cereal is probable to lead to very limited reductions of domestic price and/or domestic production. Consign subsidies on bovine meat are too cypher in the reference situation. In dissimilarity to the cereals' case, this comes from the fact that exports are nada. The domestic cost of bovine meat is far greater than the globe price and the preservation of significant market access instruments is clearly critical for the equilibrium of this domestic market place. This 100% reduction of subsidies for bovine meat exports mainly comes from the intervention toll reduction decided in the Agenda 2000 CAP reform and which stimulates domestic consumption. [eight]On the other hand, the domestic consumption of other meats is penalized by this measure and, every bit a result, there remain some export subsidies on poultry meat and squealer meat in this reference situation. It may be noted that, as a whole, export subsidies on all meats are significantly reduced compared to the mid 1990s. The differences betwixt domestic and world prices of the other meats are sizeable, also equally their export shares in total domestic productions. Finally, export subsidies on dairy products are still considerable in the reference situation. They amount to €1.8 billion, which represents a 20% reduction compared to 1995. The dairy quota increase, decided in the Agenda 2000 CAP reform, partly compensates the intervention-price reduction effect on dairy export supplies. Furthermore, it may be noted that the differences between prices are notwithstanding substantial, notably for butter and the aggregate of other dairy products (which includes whole milk pulverisation), and that export shares are likewise significant. In particular, exports of skimmed milk pulverization correspond 24% of domestic production. The phasing out of export subsidies will thus have huge impacts on the dairy sector. Generally speaking, these reference figures are in line with previous analysis (see introduction).
Tabular array 3
Export subsidies, price wedges and share of exports in the reference situation
Consign subsidies, toll wedges and share of exports in the reference state of affairs
Impacts of the price management scenario
31Market impacts of our three policy scenarios (i price management and two quantity managements) are reported in Tabular array iv and welfare impacts are displayed in Table five. Equally expected, the phasing out of export subsidies has limited impacts on the arable ingather markets. For instance, domestic supply of soft wheat decreases past only 0.4% relative to the benchmark ; its domestic consumption also decreases by 0.6%, exports increase slightly (+1.v%) and finally the domestic price decreases marginally (0.1%). Effects on coarse grains (notably barley) are a niggling more marked, every bit they do good from some export subsidies in the reference situation. Mostly, the observed furnishings in the arable crop markets come mainly on the domestic demand side. Domestic demand of cereals decreases due to a contraction of animal production only the cereal cost reduction does not compensate this first issue. Surprisingly, the reduction of cereals' production does not translate into an increment of oilseed production. For instance, rapeseed production decreases by i.8%. Here as well the demand side explains most of the results. Domestic demand of meals also decreases due to a wrinkle outcome in this derived demand, while the domestic need of oils decreases due to a substitution issue between fat products (including butter). As far equally the white meat markets are concerned, the results are as expected. Domestic product decreases and domestic demand increases, so that consign supplies contract. Despite nix export subsidies in the reference situation, the impact on the bovine meat market is pregnant. Domestic production even declines equally much as poultry meat production. Once again, this mainly comes from a demand result. Domestic demand of bovine meat declines every bit a result of the substitution betwixt all meats. Since this market is simply "domestically balanced" in the reference situation, the reduction of domestic demand directly translates into a reduction in domestic production. The meat price effects may at first sight appear surprising, in detail the increase of the bovine meat price. However, one must note that the development of meat prices ratio is fully consistent with the evolution of domestic consumption. As expected, the chief impacts of the phasing out of export subsidies are observed on the dairy markets. European union dairy products can hardly compete in world markets without export subsidies, due to the huge differences between prices in the reference situation. Accordingly, exports decline significantly. The virtually astringent reduction is for butter, which experiences a 92.6% reduction in exports. Domestic prices of dairy products significantly subtract but with a rather limited event on the domestic demand. For instance, domestic demand of butter "but" increases past 4.2%, when its price decreases by xix.3%. Merely butter exports represent 9.2% of domestic production in the reference situation. Thus domestic production decreases (by 4.half dozen%) to restore market place equilibrium. Price reductions of dairy products are translated into a huge decrease in the milk price. The latter is so loftier that the domestic production of raw milk is lower than the milk quota level. In other words, milk production quotas are no longer binding at the EU level. [9]The domestic product of raw milk decreases by iii.8% with respect to the reference state of affairs, which explains part of the reduction of bovine meat production. The main losers of this policy scenario are manifestly the milk farmers. The first column of TABLE 5 indicates that their value added decreases by almost €3.89 billion or by 23.5% with respect to the reference situation. This column likewise reveals that the arable crop growers and non-ruminant farmers lose under this scenario, just in much smaller proportions (respectively, €239 and €68 meg).
Table 4
Market place impacts of two management schemes of the phasing out of agricultural export subsidies
Market place impacts of 2 management schemes of the phasing out of agronomical export subsidies
Table five
Welfare impacts of two management schemes of the phasing out of agricultural export subsidies
Welfare impacts of two management schemes of the phasing out of agricultural export subsidies
32As a whole, the agricultural sector experiences a welfare loss of €three.93 billion, which represents 5.9% of its value added in the reference state of affairs. The food processing sectors are as well adversely affected by this scenario. As a whole, they lose €1.two billion of value added (2.viii% of their reference value added). The milk processing industry is the chief correspondent to this negative welfare upshot, mainly due to a wrinkle of production. Basically, with less raw milk available for processing, this sector creates less value added. The main winner of this policy scenario is evidently the domestic consumer, and as a whole European union welfare increases by €2.652 billion. [10]
The impacts of the quantity direction scenarios
33The same figures may assist to empathise the fearfulness of farmers (especially milk farmers) nearly the phasing out of export subsidies. Let'southward consider the quantity management scenario where it is assumed that policy makers decide to reduce the milk quota level past half dozen% with respect to the Agenda 2000 level (or by 3.8% with respect to the base year 1995). We first compare the market impacts of this scenario to those just described (encounter Tabular array 4). Milk production decreases by half dozen% with respect to the reference run or by 2.ii% with respect to the level obtained with the cost management scheme. This further reduction of domestic supply allows milk and dairy product prices to be kept very close to their reference levels. The milk cost decrease is limited to 1.8%, compared to the 17.3% obtained in the price management scheme. Compared to the price management results, the reduced supply is mainly supported by a reduction of domestic demands and to a lesser extent by exports. For instance, domestic demand of butter only increases by 0.5%, compared to 4.ii% in the price management scenario. The impacts of this scenario on the other sectors are qualitatively similar to the impacts of the toll management scenario. In particular, domestic production of cereals nonetheless decreases, by a slightly larger extent, considering the derived demand for creature feeding suffers from a greater contraction effect. On oilseed markets, we accept 2 competing furnishings. On the one hand, the derived demand of meals decreases a piddling more according to the same wrinkle consequence. On the other hand, the last need of oils decreases less than in the price management scenario, equally there is less competition from butter. Because the value of rapeseed mainly depends on its oil and to a bottom extent on its meal, the "oil" effect dominates the "meal" upshot, so that domestic production of rapeseed decreases less (0.5% compared to 1.8%). Finally, the main induced effects on the meat markets are a greater reduction of bovine meat product and a greater increment of its toll.
34It clearly appears that the welfare furnishings are at present very dissimilar. Milk farmers now gain by €394 meg and the value added of the whole agricultural sector increases by €522 1000000. But this comes at the expense of both the processing industries and domestic consumers. The value added of the food processing industries decreases past €1.603 billion. Nevertheless, the Eu economic system still gains by eliminating export subsidies, by €two.333 billion. Comparing the welfare effects of the outset 2 scenarios, nosotros find that the welfare proceeds of farmers is equal to €4.457 billion and the Eu welfare loss is equal to €319 million. We thus find that the milk quota instrument is rather efficient in transferring support to agricultural producers, and this is in line with many previous analyses relying on static and perfect competition modelling assumptions.
35It may be tempting to conclude hither that a product quota (and more than generally supply direction measures) are an advantageous policy musical instrument to support farm incomes. As already mentioned, our modelling framework is not sufficiently broad in scope to provide a definitive answer to this question. However, it makes it possible to show that a policy relying strongly on this instrument may be hard to ascertain. In this respect, the third scenario is helpful. This scenario considers a quantity management scheme in which the milk quota level is reduced by 7.5% with respect to the Agenda 2000 level. In a general way, the marketplace effects are qualitatively similar to those identified in the second scenario. The welfare effects have the same polarity but their magnitudes are dramatically changed. With the sole 1.5% change in the milk quota level, agricultural value added increases by nearly €3.v billion (5.3% of the reference value added) compared to €500 billion in the 2nd scenario. This huge difference simply reflects the inelasticity of food demand at the aggregate level. As we prevent new imports in this scenario, the reduction of domestic supply necessarily leads to a huge increase of domestic prices. Thus, we believe that the definition of the "good" level of supply control measures is not a footling matter.
Sensitivity assay
36The previous results obviously depend on many assumptions and in this paragraph we examine the sensitivity of welfare effects to the earth market weather condition. [11] TABLE 6 reports the results of this sensitivity assay. We test two alternative hypotheses. The first i assumes that world market conditions are ameliorate for all agricultural and nutrient products. Practically, we consider that the inverse consign need functions for all these products are 10% higher than previously assumed. The second alternative is symmetric (–10% with respect to the base). At this stage, 2 remarks are in order. Firstly, world prices are assumed, in our CGE model, to exist dependent of European union exports and imports and thus are endogenous. On the other hand, the impacts of other countries on these world prices are non explicitly specified, and the x% assumption indicates a modify of the net trade position of these other countries. Secondly, these alternative assumptions about globe marketplace atmospheric condition as well bear on the results of the reference scenario. Nosotros then compare two direction scenarios (price and quantity with a 6% reduction of the milk quota level) on different benchmark situations.
Table six
Sensitivity of welfare furnishings to world market place condition
Sensitivity of welfare effects to earth market condition
37Let's concentrate on the case of amend globe market atmospheric condition and compare it to the base of operations. First of all, we discover that the price management scenario leads to smaller EU welfare gains : €2.048 billion compared to €2.652 billion. This but reflects the fact that the difference between domestic and world prices is smaller than in the base and accordingly there are less export subsidies in the new reference situation. Simply the difference betwixt the two direction schemes is roughly independent of these world market conditions : €319 million in the base, or €353 million under the favourable conditions. The nigh interesting event concerns the development of the agricultural value added. The price management of the phasing out of agricultural export subsidies has roughly the same effect on this variable, under the two world market place conditions (reductions of €4.071 billion and €three.935 billion). This can be explained equally follows. On the i paw, arable crop farming besides as non-ruminant farming proceeds more because they are able to consign more on the globe market. On the other hand, animal feeds are more expensive and the price increase of bovine meat is more limited, so that ruminant farming and milk farming loose more. The sum of these two chief effects is slightly negative.
38In dissimilarity, the world price assumptions significantly affect the impact of the quantity direction scenario on the agricultural value added : +522 in the base of operations, +2406 in the favourable conditions. This results from the fact that the Eu relies less on subsidised exports, notably of skimmed milk powder, and consequently that the domestic supply reduction generates more price increases in the domestic market. This strengthens our previous finding concerning the extreme difficulty to determine "good" levels for supply control measures.
Final comments
39The present round of multilateral merchandise negotiations at the WTO is likely to put an end to straight European consign subsidies on nutrient and agricultural products. Available economic analyses, as well as negotiation positions of WTO members seem to converge on this outcome. This paper attempts to evaluate such a policy scenario in isolation from the other negotiating capacity (domestic support and market access), even if there are obviously some linkages. The chief contribution of this paper is to compare two direction schemes of this shock on the Eu economy. The beginning one (labelled the cost direction scheme) has confidence in the equilibrium role of market place prices, while the second one (labelled the quantity management scheme) favours a supply management approach. Afterward a theoretical analysis of advantages and drawbacks of both schemes, we conduct an empirical analysis using a CGE model focused on EU agricultural and food sectors. The main originalities of this applied model, which establish significant departures from other CGE models currently in utilise, are threefold : a detailed disaggregation of nutrient and agricultural sectors, a detailed representation of CAP instruments and a flexible, regular specification of production technologies and consumer preferences. Moreover, this modelling framework allows the winners and losers to be identified, in addition to evaluating market impacts of policy scenarios.
40Both direction schemes are evaluated confronting a common benchmark situation which assumes the full implementation of the Calendar 2000 CAP reform. In this reference situation, export subsidies on cereals and meat products are low, while nevertheless considerable on dairy products. In accordance with expectations, our empirical results testify that the phasing out of agricultural export subsidies volition take huge furnishings on the dairy sector and more limited impacts on abundant crops and the meat sectors, any is the management scheme. Our empirical assay likewise reveals that the choice of a management scheme has a substantial bearing on sectoral welfare furnishings. Agricultural value added greatly reduces with the price direction scheme and quite independently of assumptions regarding world market weather. In dissimilarity, this value added does non necessarily decrease with the quantity management scheme. We fifty-fifty observe that it can increase in case of strong supply management and/or favourable world market place conditions. But this is to the detriment of the "downstream agents" of the food chain (food processing and consumers). Every bit a whole, total welfare effects for the EU economy are rather like across management schemes, just however slightly more favourable in the price management scheme.
41Accordingly, our analysis once again illustrates the relative efficiency of an agricultural policy relying on effective supply management measures. Above all, its master contribution is to demonstrate that the precise definition of such a policy, in particular the levels of supply control measures, is exceptionally tricky. Supporters of an evolution of the CAP towards this direction must be aware of these consequences.
42A. Chiliad. & P. One thousand.
43Article received on May 14, 2004
44Accepted on November 22, 2004
Notes
- [1]
Corresponding author : Alexandre Gohin, Chargé de Recherches, INRA and Chercheur associé, CEPII (Alexandre. KGohin@ rennes. inra. fr) ;
Patrice Gautier, Chargé d'Étudedue south, INRA. - [2]
According to these authors, the consign subsidies on feed grains are heavily dependent on world market weather condition.
- [iii]
Many are quoted in Bullock and Salhofer (2003) and Alston and James (2003).
- [4]
More elements can be constitute in Gohin et al. (1999).
- [five]
It clearly appears within this discussion that the three areas of agricultural negotiations are not completely independent (run into de Gorter, 1999, for a comprehensive and useful give-and-take of this point).
- [6]
Our CGE model is static, i.e. we practice not specify dynamic behaviour of economic agents. That does not prevent the usual analysis of short run/long run impacts, which mainly refers to the caste of mobility of primary factors of production betwixt activities.
- [7]
Nosotros prefer in our CGE model the traditional Armington specification to model import need functions and export supply functions. Accordingly, there is no unique cost for the domestically produced skillful but a price which differs according to the destination. The ratios reported in Tabular array 6 are computed using the domestic cost of exported products.
- [8]
We in one case again stress that our reference state of affairs is built on simplifying assumptions, notably that the tastes of consumers for all food products are unchanged with respect to the base situation (1995).
- [nine]
Information technology should be recalled that we do not increment or introduce new direct payments in our policy scenarios.
- [10]
This welfare measure takes into account the loss of agronomical and food processing sectors and roughly corresponds to the area cgfeh on Effigy 1.
- [11]
Detailed results are available from the authors.
Source: https://www.cairn.info/revue-economie-internationale-2005-1-page-5.htm