Presented by Ergin Akalpler THE IMPACT OF PRICE SUPPORT SYSTEM ON COMMON AGRICULTURAL POLICY OF THE EUROPEAN UNION Presented by Ergin Akalpler

Crucial Question What is the impact of the price support system of the CAP on free trade? Which support instrument (such as export subsidies import levies etc.) better fits into the CAP to reduce the trade distortion and destabilizing effects on the market with respect to the welfare of consumers and to distribution effect?

What is researched: The impact of the price support system of the CAP for cereal products are taken into consideration as sample products in EU-15. The impact of the support measures on cereals are researched.

Method:Producer Subsidy Estimate is used to estimate the impact of support measures and Supply demand curve is used to illustrate the effects of support measures in the CAP. Theoretical and empirical researches are considered. Time series and linear regression technique are used for better forecasting.

The CAP In 1968, 11 Years after the foundation of the EU CAP came into effect 1987 single European ACT removed Technical fiscal and Physical barreirs 1993 Maastricht agreement: Economic and Politic Union, Monetary Union, EU citizenship,

Objectives of the CAP (Article 39) Increasing productivity Fair living standards for producers. Market stability Reasonable price for consumers and Maintenance of employment

Principles of the CAP Community preferences Market Unity Financial Solidarity

Protection in the CAP Strong Protection %75 external protection with intervention (cereals, butter, milk, beef, some fruit and vegetables Weak protection %25 external protection without intervention Egg polutry wine, flowers some fruit and vegetables

Support measures of the CAP -Tariff Measures -Non tariff measures: Export import subsidies and quotas, Monetary compensatory payment, production quotas, interventions

Reforms of the CAP Mansholt Plan in 1968 Replaced 5 million small scale producer with large scale producers 1988 Reforms, radical measures: Introduced set aside measures, early retirement of age 55, extensification of production type.

1992 Mac Sharry reforms: Direct payments instead of support measures Support prices for cerelas and cattle reduced 15% Beef support prices reduced 29% Set aside reduced 15%

1994 Uruguay round agricultural support would be reduced 20% over a 6 year period. A reduction of 36% in budget spending on export subsidies 21% cut in the quantity of subsidized export.

Agenda 2000 , A new policy for rural development The integration of the environment The involvement of local people The creation of different development programs to assist farm sectors in CEEC Further reduction in prices.

The function of the CAP

The theoretical perspective of International trade Ricardo Smith model Heckshir Ohlin Model Intra Industry trade model Strategic trade Model

The Smith Ricardo Model Smith based on Absolute costs- threats labor only factor-countries with lower REAL cost of production has advantage on trade. Ricardo based on Comparative cost-countries with lower RELATIVE costs has the advantage on trade

Ricardo based his theory on a number of assumptions -two nations and - two commodities - free trade, -   perfect mobility of labour within each nation, but immobility between the two nations, - constant cost of production, - no transportation cost, - the labour theory of value

Amount of trade between US and UK US UK _____________________________ Wheat (bushels / man-hour) 6 1   Cloth (yards / man- hour) 4 2

Price of trade between US and UK US UK _______________________________________ Price of 1 bushels of Wheat $1.00 $2.00 Price of 1 yard of cloth 1.50 1.00 ________________________________________

The H- O-Samuelson model HO focus on international differences in factor endowment. Comparative advantages is explained by the abundance of factors-countries with abundance factors will export, with scarce will import. Inter industry trade depend on different type of products trade

Intra Industry Trade IIT entails lower income of factor and market adjustment than Inter ind. Trade. Horizontal IIT- vertical IIT IIT beneficial it increase competition, Firms grow rapidly IIT similar product trade create preasure on price reduction

Strategic trade In imperfectly competitive market trade policy promote firms with unilateral protection such as: Indirect export promotion Export subsidies to deter competitors entering market.

Ex: aircraft ind. in political interest Boing Produce Dont Prod. ______________________________ Airbus Prod. -5, -5 100, 0 Dont Prod 0, 100 0, 0 ________________________________

Effects of subsidies Boing Produce Dont Prod. ______________________________ Airbus Prod. 20, -5 125, 0 Dont Prod 0, 100 0, 0 ________________________________

PSS and Cobweb theorem Simplest model to illustrate the danger of price fluctuation in econ. Demand decreasing function of current price Supply increasing function of last year (Time leg behind)

Impact of elasticity on S/D

Impact of intervention on cobweb

Methodology of PSE in the CAP PSE = Q (Pp –Pr.X) + D + I   Where; Q = quantity produced Pp = producer price in domestic currency units. Pr = world price in world currency unit X = exchange conversion factor D = Direct government payments I = Indirect transfers through policies  

Estimation of MPS for PSE MPS = (Pp-Pr). Q The unit PSE is the total PSE per tonne or unit of production.   Unit PSE= PSE/ Q Percentage PSE= PSE/ Q.Pp +D 

PSE for Exported products

Tariff-Non Tariff Trade Measures Price Support system Direct payments Intervention Export Subsidies Export/ Import Quotas VER

Tariff Trade Measure Specific tariff is a fixed charge per unit of import P = P1+ t Advalorem percentage of estimated market value of good is taxed   P= (1+t) P1= P1+ t P1

Impact of Tariff on input /output nominal rate of protection (NRP) NRP = P1+ P1. t - P1/ P1  Thus NRP = t effective rate of protection (ERP) ERP = t P1– Σ tj .Pj.Xj / V

Three cases of ERP on input 1-inputs subject less tariff than output ERP> NRP 2- inputs subject equal tariff as output ERP= NRP 3- inputs subject more tariff than output ERP>NRP

Tariff Escalation May be present when tariffs on input more than final products because ERP calculation is higher than the NRP- This increase the profit of producer or reduce tariff expenditure

Impact of the trariff on the Market

NTM: The market Price Support

CAP Payments -Based on Limited area Set aside aid per Hectare -Based on Unlimited area Direct payments Intervention

Direct payments

The impact of direct payment on PSE

Impact of direct payments on PSE

Impact of the Export subsidy The Export subsidy amount for cereal products in EU (Euro mn /t)  

Impact of Export Subsidy on PSE

Impact of Export subsidies

Impact on the Export subsidy world market

Import Quotas

Impact of Support Measures

Impact of Support Measures Positive effects; ·        Subsidy protect producers and rural welfare, ·        Support insufficient producers to maintain their production, ·        Subvention redistributes income from domestic consumer who pays a higher price to domestic producers of the commodity (who receives the higher price) ·        Price support or intervention price, prevent the fluctuation in the market,

·        Increase competition change of domestic producers, ·        Subsidies is a trade creation between member countries, ·        Subsidies contribute indirectly imported product amount where there is a less output, ·        Increase producer surplus, ·        Subsidy is more preferable than tariff, subsidy is a direct form of aid ·        Increase export of commodity,

Negative effects, ·        Subsidy cause an over-production, ·        Because of subvention some efficient production of exportable commodity in the third country replaced by the insufficient production in the EU, ·        Subsidy is a trade distortion for non-member countries, and reduce the welfare of the world economics, ·        Subsidies cause an unfair competition and it is inconsistent with the comparative advantages theory,

·        Subsidies reduce the welfare of the consumer if there is an over-production, ·        It is difficult to estimate which producer get subvention, and once it is given it is difficult to remove, (protective tariffs may have the same effect) ·        Reduce consumer surplus or cost, ·        Increase product price, ·        Subsidies cause a producer and consumer cost or deadweight, ·        Reduce competition of third country producers, Subsidy is used for political purposes, such as work place guarantee