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

Directorate for Food, Agriculture, and Fisheries 2 PURPOSE Describe methodology Present preliminary results

Directorate for Food, Agriculture, and Fisheries 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

Directorate for Food, Agriculture, and Fisheries 4 Figure 1.  Introduction of Tariffs ED ES P Imports PaPa ED 2 MfMf M t1 P t1 w P t1 d M t2 P t2 w P t2 d ED 1 t1t1

Directorate for Food, Agriculture, and Fisheries 5 Figure 2.  Three Zones of Effectiveness ED ES P Imports PaPa ED 1 t2 t2 ED 2 MIN total imports MAX total imports P w MIN P w MAX t 2 zone quota zone t 1 zone P d MA X P d MIN t1t1 P D MAX = P W *(1+t 2 ) P D MIN = P W *(1+t 1 )

Directorate for Food, Agriculture, and Fisheries 6 Empirical Implementation Three 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”

Directorate for Food, Agriculture, and Fisheries 7 Empirical Implementation (cont): Case 1 Assume exports exogenous and imports are residual No domestic policies to inhibit price transmission

Directorate for Food, Agriculture, and Fisheries 8 Empirical implementation: Case 1 (cont) Two Steps Step 1: Solve for the price P_TRQ QC d = f(P_TRQ, P 2, …) QP d = f(P_TRQ, P 2, …) P_TRQ = QC+EX+ST-QP-QT-ST(-1)

Directorate for Food, Agriculture, and Fisheries 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(P D, P 2, …) QP = f(P D, P 2, …)

Directorate for Food, Agriculture, and Fisheries 1010 Empirical implementation: Case 1 (cont) Step 2: Introduce IF statement to determine domestic price P D = IF (P_TRQ >= P D MAX ) THEN P D MAX ELSE IF (P_TRQ <= P D MIN ) THEN P D MIN ELSE P_TRQ

Directorate for Food, Agriculture, and Fisheries 1 Empirical implementation: Case 2 (EU) Imports and exports are endogenous WTO export constraints respected No change in domestic price determination P D = QP+ST(-1)+IM-QC-EX-ST

Directorate for Food, Agriculture, and Fisheries 1212 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

Directorate for Food, Agriculture, and Fisheries 1313 Empirical implementation: Case 2 (cont.) IM= IF P D > P D MAX THEN QUOTA*(P D /P D MAX ) ^n ELSE IF P D < P D MIN THEN QUOTA*(P D /P D MIN ) ^n ELSE QUOTA

Directorate for Food, Agriculture, and Fisheries 1414 Case 3-The domestic support example: Butter in Canada

Directorate for Food, Agriculture, and Fisheries 1515 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

Directorate for Food, Agriculture, and Fisheries 1616 Key Assumptions Case 3 (cont.) 1)If P D MAX >=SP Producers receive support price Consumers pay support price Fill rate is 100% Imports are equal to the quota 2)If P D MAX < SP Producer support price remains in place, production becomes exogenous Consumers respond to lower price Imports becomes endogenous and adjust to meet increased demand

Directorate for Food, Agriculture, and Fisheries 1717 Implementation Step 1 Case 3 (cont.) Comparison between P D MAX and the Support price Min(P D MAX, SP) Imports and production could either be exogenous or endogenous depending on price comparison.

Directorate for Food, Agriculture, and Fisheries 1818 Implementation Step 2 a) Case 3 (cont.) <If SP <P D MAX, imports are exogenous and consumption respond to SP IM= QUOTA QC=QC(SP) while production is residual

Directorate for Food, Agriculture, and Fisheries 1919 Implementation Step 2 b) Case 3 (cont.) >If SP >P D MAX, imports are residual consumption respond to P D MAX IM=QC+EX+ST-ST (-1 ) - QP QC=QC(P D MAX ) while production becomes exogenous

Directorate for Food, Agriculture, and Fisheries 2020 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 –

Directorate for Food, Agriculture, and Fisheries 2121 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

Directorate for Food, Agriculture, and Fisheries 2 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.

Directorate for Food, Agriculture, and Fisheries 2323 Changes in World Price of Selected Commodities 2005

Directorate for Food, Agriculture, and Fisheries 2424 Main results for domestic markets

Directorate for Food, Agriculture, and Fisheries 2525 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 Regime Switches Scenario 1: Quota Expansion

Directorate for Food, Agriculture, and Fisheries 2626 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. Regime Switches Scenario 2: Quota Expansion and in-quota reduction

Directorate for Food, Agriculture, and Fisheries 2727 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 Regime Switches Scenario 3: Out-of-quota tariff reduction

Directorate for Food, Agriculture, and Fisheries 2828 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 Main results for domestic markets

Directorate for Food, Agriculture, and Fisheries 2929 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 Main results for domestic markets

Directorate for Food, Agriculture, and Fisheries 3030 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 Main results for domestic markets

Directorate for Food, Agriculture, and Fisheries 3131 EU Coarse grains: Under-filled –  Reduction of in-quota tariffs increases market access EU Beef: 100% fill –  Quota expansion increases market access Main results for domestic markets

Directorate for Food, Agriculture, and Fisheries 3232 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 Main domestic price effects

Directorate for Food, Agriculture, and Fisheries 3 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 SUMMARY