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

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Incorporating TRQs in AGLINK

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ORGANISATION DE COOPÉRATION ET DE DEVELOPMENT ÉCONOMIQUES

Incorporating TRQs in AGLINK

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Presentation for USDA/ERS

EU MODELLING WORKSHOP

Peter Liapis

November 15-16, 2001

1

Directorate for Food, Agriculture, and Fisheries


PURPOSE

  • Describe methodology

  • Present preliminary results


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


Pt2d

ED1

Pt1d

Pt1w

t1

Pt2w

Mt2

Mt1

Figure 1.Introduction of Tariffs

P

Pa

ES

ED2

ED

Mf

Imports


Figure 2.Three Zones of Effectiveness

P

Pa

ES

PdMAX

PDMAX = PW*(1+t2)

PdMIN

PDMIN = PW*(1+t1)

PwMAX

ED1

t1

PwMIN

quota zone

t2

ED2

ED

t2 zone

t1 zone

MIN

total

imports

MAX

total

imports

Imports


Empirical ImplementationThree 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”


Empirical Implementation (cont): Case 1

  • Assume exports exogenous and imports are residual

  • No domestic policies to inhibit price transmission


Empirical implementation: Case 1 (cont)

Two Steps

Step 1: Solve for the price P_TRQ

QCd = f(P_TRQ, P2, …)

QPd = f(P_TRQ, P2, …)

P_TRQ = QC+EX+ST-QP-QT-ST(-1)


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(PD, P2, …)

QP = f(PD, P2, …)


Empirical implementation: Case 1 (cont)

Step 2:

Introduce IF statement to determine domestic price

PD = IF (P_TRQ >= PDMAX)

THEN PDMAX

ELSE IF (P_TRQ <= PDMIN)

THEN PDMIN

ELSE P_TRQ


Empirical implementation: Case 2 (EU)

  • Imports and exports are endogenous

  • WTO export constraints respected

  • No change in domestic price determination

    PD= QP+ST(-1)+IM-QC-EX-ST


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


Empirical implementation:Case 2 (cont.)

IM=

IF PD > PDMAX

THEN QUOTA*(PD/PDMAX)^n

ELSE IF PD < PDMIN

THEN QUOTA*(PD/PDMIN)^n

ELSE QUOTA


Case 3-The domestic support example:Butter in Canada


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


1)If PDMAX>=SP

Producers receive support price

Consumers pay support price

Fill rate is 100%

Imports are equal to the quota

2)If PDMAX < SP

Producer support price remains in place, production becomes exogenous

Consumers respond to lower price

Imports becomes endogenous and adjust to meet increased demand

Key Assumptions Case 3 (cont.)


Comparison between PDMAX and the Support price

Min(PDMAX, SP)

Implementation Step 1Case 3 (cont.)

  • Imports and production could either be exogenous or endogenous depending on price comparison.


Implementation Step 2a)Case 3 (cont.)

  • If SP<PDMAX, imports are exogenous and consumption respond to SP

  • IM= QUOTA

  • QC=QC(SP)

  • while production is residual


Implementation Step 2b)Case 3 (cont.)

  • If SP>PDMAX, imports are residualconsumption respond to PDMAX

  • IM=QC+EX+ST-ST(-1)-QP

  • QC=QC(PDMAX)

  • while production becomes exogenous


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

    • www.amad.org


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


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.


Changes in World Price ofSelected Commodities 2005


Main results for domestic markets


Regime SwitchesScenario 1: Quota Expansion

  • 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 SwitchesScenario 2: Quota Expansion and in-quota reduction

  • 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 SwitchesScenario 3: Out-of-quota tariff reduction

  • 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


Main results for domestic markets

  • 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

  • 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

  • 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

  • EU Coarse grains: Under-filled

    •  Reduction of in-quota tariffs increases market access

  • EU Beef: 100% fill

    •  Quota expansion increases market access


Main domestic price effects

  • 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


SUMMARY

  • 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


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