GLOBAL EFFECT ON INTERNATIONAL PRICES OF EU- MEDITERRANEAN PARTNER COUNTRIES BILATERAL AGRICULTURAL LIBERALIZATION Rafael de Arce (UAM University) Ramón Mahía (UAM University) ERC / METU International Conference in Economics, Ankara 6 th September 2003

PRESENTATION -General framework of analysis: International Trade Evolution Impact on international trade conditions after liberalization processes Agricultural Trade Liberalization Process UE- MPC’s Countries -Two footnotes: Econometrical exercise Preliminary results of FEMISE project

PRESENTATION FEMISE Project Framework Agri-Trade Liberalisation UE - MPC’s Change in trade prices Change in trade flows Chain effects in the whole MPC’s economies (Dynamic TIO analysis)

CASE OF STUDY (Some details) -Interest on NET price changes after EU-MPC's agricultural liberalisation Agri-Trade Liberalisation UE - MPC’s Domestic Support Reduction in EU Import Tariff Cuts in MPC´s Trade prices DOWN Trade prices UP NET EFFECT?

CASE OF STUDY (Some details) -Interest on NET price changes after EU-MPC's agricultural liberalisation -Selection of countries and products (Comext, FADN, FAO, OECD databases )

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT I: Description -The model: Pit: International price logarithm of product “i” at time "t" PSE it: Producer Support Estimate of product “i” at time "t" EUP it: EU export price of product “i” at time "t" HPP it: Hodrick-Prescott filter series

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT I: Description -Relevant Comments: Equation working at 2 digits level of product PSE instead of TSE (CSE and GSSE rejected) Hodrick-Prescott filter series as a innovation to consider volatility in raw materials prices Export EU Price as exogenous (Poonyth, 2000), (Frandsen, 2003) Simple Partial Equilibrium Model

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT II: Results -Relevant Comments: Good Adjustment Variables significance Affordable mulcolinearity problems -General Empirical results: Negative relationship Prices - PSE proved Large connection between Prices and PSE in two cases: Cereals and Sugar

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT II: Results Coefficients and adjustment details (i)

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT II: Results Coefficients and adjustment details (ii)

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT III: Simulation -Scenarios: EU : 55% reduction in the Aggregate Measurement of Support (AMS) starting from the level of commitments made in the last round of negotiations. USA: reduction of trade-distorting support to 5 percent of a country’s total value of agriculture production (the 5 percent rule) over a 5-year period

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT III: Simulation -Simulation Results:

MODELLING THE EFFECT OF REDUCTION IN EU AGRICULTURAL SUPPORT III: Simulation -Simulation Results: Similar results in both scenarios Big impact on cereal prices Relevant changes in other agricultural goods prices but not unusual changes if we look at a secular price series for agricultural goods

EU-MPC'S TRADE PRICES AFTER SUPPRESION OF AGRICULTURAL SUPPORT AND TARIFFS -Main questions Can the EU maintain agricultural production without the domestic support implemented through the CAP? How much market share would the EU have with different prices?

EU-MPC'S TRADE PRICES AFTER SUPPRESION OF AGRICULTURAL SUPPORT AND TARIFFS -Can the EU maintain agricultural production without the domestic support implemented through the CAP? Exploitations bigger than 40 ESU receive 50% of domestic support / 59% of subventions are received by just 22% of agricultural exploitations.

EU-MPC'S TRADE PRICES AFTER SUPPRESION OF AGRICULTURAL SUPPORT AND TARIFFS -How much market share would the EU have with different prices? ?

COMPUTATION OF CHANGE IN BILATERAL PRICES AFTER A TARIFF ELIMINATION IN MPC’s -Measure of trade protection just using MFN ad-valorem tariff weighted averages: Non-tariff measures considered Average data considered Tariff peaks, tariff dispersion and tariff escalation ignored -High level of protection -Low movement in international trade prices -Final Net effect similar to the one linked with support reduction.

SUMMARY -Valuable tool for primary simulation of domestic support reduction -Empirical results shows a low effect of support reduction in agricultural world prices or production capacity in both scenarios (UE / USA)

SUMMARY -If trade liberalisation seems to be irrelevant for trade prices and production level, What´s the use of it? Rise in import capacity volume for MPC’s countries without increase in import yield Production system efficiency improved