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

2. 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?

3. 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.

4. 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.

5. 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,

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

7. Principles of the CAP Community preferences Market Unity
Financial Solidarity

8. 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

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

10. 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.

11. 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%

12. 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.

13. 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.

14. The function of the CAP

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

16. 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

17. 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

18. Amount of trade between US and UK
US UK
_____________________________
Wheat (bushels / man-hour)
Cloth (yards / man- hour)

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

20. 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

21. 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

22. 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.

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

24. Effects of subsidies Boing Produce Dont Prod.
______________________________
Airbus Prod , , 0
Dont Prod , , 0
________________________________

25. 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)

26. Impact of elasticity on S/D

27. Impact of intervention on cobweb

28. 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  

29. 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 

30. PSE for Exported products

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

32. 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

33. 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

34. 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

35. 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

36. Impact of the trariff on the Market

37. NTM: The market Price Support

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

39. Direct payments

40. The impact of direct payment on PSE

41. Impact of direct payments on PSE

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

43. Impact of Export Subsidy on PSE

44. Impact of Export subsidies

45. Impact on the Export subsidy world market

46. Import Quotas

47. Impact of Support Measures

48. 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,

49. ·        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,

50. 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,

51. ·        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