Agricultural policy objectives Measurement of support Economics of Food Markets Lecture 6 Alan Matthews

Outline Tariffs as a measure of agricultural support Nominal and effective rates of protection Introduction to the OECD Producer Support Estimate (PSE) Examples of PSE trends Issues and criticisms of the PSE measure

Tariff levels in agriculture Concepts –Bound versus applied tariffs –MFN versus preferential tariffs –Specific, mixed and ad valorem tariffs Problem in converting specific/mixed to percentage tariffs requires estimates of trade unit values Weighting tariffs –Tariffs are established at HS8 or HS10 level for thousands of agricultural commodities, how to calculate an average tariff?

Incorporating non-tariff barriers Not all border protection takes the form of tariffs –E.g. quantitative restrictions, food safety barriers So just looking at formal tariff schedules can give misleading impression of level of protection Tariff equivalent of non-tariff barriers can be calculated by comparing level of domestic to world prices (adjusting for quality and transport differences)

Traditional measures of protection The Nominal Protection Coefficient –Defined as the ratio between the domestic and the world price –If domestic price is €150 per tonne, and the world price is €100 per tonne, the NPC is 1.5 –Also expressed as the Nominal Rate of Protection: difference between the domestic and world prices, expressed as percentage of the world price. In this case 50%.

Tariff levels in agriculture Weighting approaches –Simple average –Trade-weighted averages (equivalent to expressing collected tariff revenue to total import expenditure) –Equivalence measures What would be the equivalent uniform average tariff which would have the same impact (on what?) of the existing tariff structure Requires calculation of counterfactual based on explicit model and parameter assumptions

Producer Support Estimate Encompasses a broader range of supports to agriculture Market price support Budgetary support –Direct payments –Input subsidies –General services to agriculture Introduced by OECD in the mid-1980s as the Producer Subsidy Equivalent

Producer Support Estimate the PSE measures the value of the monetary transfers to producers from consumers of agricultural products and from taxpayers. An indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm- gate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income.

PSE indicators PSEs are expressed in a number of ways –total PSE: the total value of transfers to producers –percentage PSE: total value of transfers as a percentage of the total value of production (valued at domestic prices), adjusted to include direct payments and to exclude levies –unit PSE: the total value of transfers per tonne –PSE per farm or per labour unit

Other OECD indicators CSE Consumer Support Estimate – the value of monetary transfers from domestic consumers to producers and taxpayers Nominal Protection Coefficient – as defined earlier Nominal Assistance Coefficient – total value of production at farmgate prices plus budgetary support to the value of production at world prices General Services Support Estimate Total Support Estimate (PSE)

Magnitude of support Following slides show examples of the information provided by PSE indicators –Comparison of support levels across countries using percentage PSE –Comparison of support levels across commodities using percentage PSE –Trend in composition of PSE measure over time

Criticisms of PSE indicator Are PSE trends distorted by changes in border prices –But this captures an important element of domestic policy Are actual world prices a good reference point for PSE? Is the PSE an indicator of trade distortion impacts?

Reading OECD, Agricultural Support: How is it Measured and What Does It Mean?, OECD Policy Brief, Paris Tangermann, S., Is the concept of the Producer Support Estimate in need of revision? OECD Food, Agriculture and Fisheries Working Papers, No. 1, OECD Publishing. OECD, 2004, OECD Agricultural Policies 2004 At A Glance Legg, W., Agricultural subsidies: measurement and use in policy evaluation, Journal of Agricultural Economics