The advent of the AfCFTA: new possibilities and implications for the African land-water-climate-food nexus

The African Continental Free Trade Area (AfCFTA) was signed in 2018, and came into effect in 2019. Still in an early phase, there is much to expect from the AfCFTA’s implementation over the coming decades. While the major expectations for AfCFTA are for increased inter-regional trade and overall levels of economic integration, there will doubtlessly be implications for the Land-Water-Climate-Food nexus in a continent where agriculture is estimated to contribute 15 percent of GDP (Mzali 2019) and employ over 60 percent of the active population (ILO, 2019), continent-wide. One important effect of the implementation of the AfCFTA will be the reduction of tariff barriers to inter-regional trade which is expected to have an impact on the agricultural and food system. Reduced tariffs will lead to lower food prices which will affect food and nutrition access. At the same time, as the access to regional markets are anticipated to open up, farmers may be drawn to change the crops they grow as well as the intensity of irrigation and fertilizer used or to expand production into land previously unused in agriculture. These changes will have an impact on the land and water systems as well as the greenhouse gas emissions resulting from agricultural activity

The impact of the implementation of the African Continental Free Trade Area (AfCFTA) on virtual water trade flows

Through the network of international trade in agricultural goods, water resources are virtually transferred from the country of production to the country of consumption. The volume of agricultural products traded on the global market, and the water embedded in them, has grown rapidly, marking the importance of food security and (other) issues related to this trade in goods. Introduced in 2019, the African Continental Free Trade Area (AfCFTA) is expected to increase trade within the African continent, improving its capacity to ensure food and nutrition security. This project aims to study the effects of AfCFTA implementation on virtual water trade involving the African continent, using the MAGNET computable general equilibrium (CGE) model. We calibrate the baseline with the virtual water trade matrices developed within the CWASI project, and then develop an AfCFTA scenario under the assumption of continent-wide tariff liberalization as well as other complementary measures, including investment in interregional infrastructure. The following paper reports on the first phase of our project: the study of virtual water flow trends both on a global scale and in detail for the state of Burkina Faso and West Africa, as a region subject to strong water-related climate events. Historical trends in Burkina Faso's virtual water fluxes reveal a significant increase in water exchanged through primary agricultural products. However, this increase is not due to an increased demand for water by crops but is the result of an intensification of the trade network over time and an increase in the quantities of products traded

Essays on Global Supply Chains: Methodological Developments, Policy Implications, and Distributional Effects

In this thesis, I present a new multi-regional input-output (MRIO) database with bilaterally differentiated tariffs by agent. To construct the MRIO, I apply the Broad Economic Categories (BEC) system of concordances to detailed trade and tariff data from the Tariff Analytical and Simulation Tool for Economists (TASTE) Database version 9 to obtain measures of trade and tariff revenues by end-use. I use this trade data by end use to expand the GTAP Data Base version 9.2, thus incorporating direct linkages from foreign suppliers to domestic producers, investors, and consumers. Further, the new database comprises distinct composite tariff rates for producers, investors, and consumers. I use a constrained optimization procedure to ensure MRIO trade flows aggregate to the original GTAP Data Base. Through illustrative simulations, I demonstrate the effect of (1) new cross-border trade linkages and (2) tariff escalation for trade policy analysis. I further demonstrate how the addition of the tariff revenues into the MRIO enhances policy analysis beyond preceding versions. Finally, I examine the distributional effects of trade on differentiated workers in the U.S. economy, analyzing how policy changes reverberate through global supply chains

Improving the Representation of the U.S. in the MyGTAP Model with the Disaggregation of Labor and Households

The Global Trade Analysis Project (GTAP) modelling framework consists of a global database (Narayanan, Aguiar and McDougall, 2012) used in conjunction with a global applied general equilibrium model (Hertel, 1997). The GTAP model and database have been widely used for the analysis of global policy issues, such as free trade agreements. A limitation of the model is that it assumes just one regional household that captures both the government and private households. Those wishing to examine the impact of a global policy on multiple households in a particular country, while still retaining the rest of the world, are somewhat limited. The aim of this paper is to include additional detail for the U.S economy into the GTAP framework, thereby allowing for more detailed analysis of U.S. households. The starting point for this paper is the newly developed MyGTAP data program and model (Minor and Walmsley, 2013), which was specifically designed for this purpose. Additional data are gathered for the U.S. to incorporate 22 labor categories and 13 households, and modifications are also made to the MyGTAP model to better accommodate alternative demand structures within value added. We illustrate the use of this model by applying it to investigate the economic effects of the TransPacific Partnership (TPP) on U.S. households. The TPP agreement is quite extensive, covering a large portion of world trade and the removal of both tariff and non-tariff barriers. We find that the agreement has considerable potential to increase U.S. real GDP and incomes. Moreover, while all households in the U.S. gain as a result of rising employment/wages and falling prices, it is the low income households that gain most

Calibrating relative wages induced by changed skill rates in long run projections

Wages are a critical signal in CGE models, determining employment by sector and providing a main source of income for private households. Wage and changes in sectoral employment are also critical for policy decisions and evaluations, thus warranting close attention. CGE wages result from an interplay of model assumptions on (1) labour supply (labour endowments by type, supply by market segments); (2) labour demand (substitutability by sector, structural change); and (3) labour market functioning (assumptions on employment and wage adjustment possibilities). As better capturing long run changes in skilled and unskilled labour ratios is critical for food security and distributional consequences of policies, we focus on developing an empirical approach to judge (and calibrate) skilled to unskilled wage developments in CGE projections. Building Jones’ human capital accounting framework we derive a wage equation linking skilled to unskilled wage ratios to real output per worker (a proxy of human capital) and shares of unskilled to skilled labour. We add the parametrized Jones wage equation to the MAGNET global CGE model providing us a measure to judge endogenous MAGNET wage developments, and different means to adjust MAGNET projections. To link with literature we add a decomposition of the average wage change by skill into sectoral productivity increase and structural change driven by employment changes by sector. Using 6 scenarios varying in labour endowment projections (3 variants), labour supply substitution elasticity (2 variants) and targeting of the projected Jones wage ratios (1 variant) we explore the impact of different model assumptions on wage developments. Specifically we compare TFP, employment weighed labour substitution elasticities, wages by skill, skilled to unskilled wage ratio, and the relative contributions of sectoral productivity versus structural change to average wage developments

Calibrating relative wages induced by changed skill rates in long run projections

Wages are a critical signal in CGE models, determining employment by sector and providing a main source of income for private households. Wage and changes in sectoral employment are also critical for policy decisions and evaluations, thus warranting close attention. CGE wages result from an interplay of model assumptions on (1) labour supply (labour endowments by type, supply by market segments); (2) labour demand (substitutability by sector, structural change); and (3) labour market functioning (assumptions on employment and wage adjustment possibilities). As better capturing long run changes in skilled and unskilled labour ratios is critical for food security and distributional consequences of policies, we focus on developing an empirical approach to judge (and calibrate) skilled to unskilled wage developments in CGE projections. Building Jones’ human capital accounting framework we derive a wage equation linking skilled to unskilled wage ratios to real output per worker (a proxy of human capital) and shares of unskilled to skilled labour. We add the parametrized Jones wage equation to the MAGNET global CGE model providing us a measure to judge endogenous MAGNET wage developments, and different means to adjust MAGNET projections. To link with literature we add a decomposition of the average wage change by skill into sectoral productivity increase and structural change driven by employment changes by sector. Using 6 scenarios varying in labour endowment projections (3 variants), labour supply substitution elasticity (2 variants) and targeting of the projected Jones wage ratios (1 variant) we explore the impact of different model assumptions on wage developments. Specifically we compare TFP, employment weighed labour substitution elasticities, wages by skill, skilled to unskilled wage ratio, and the relative contributions of sectoral productivity versus structural change to average wage developments

Labor Composition of Fixed Costs, Heterogeneous Firms, and the US Labor Market

Recent advances in theoretical and empirical trade literature on heterogeneous firms confirm that regulatory (fixed) costs can prevent firms with low-productivity levels from producing and exporting. Majority of firms struggle to survive particularly in industries where these costs are high,potentially leading to substantial effects on the labor market. This paper investigates the effect of reductions in fixed costs on the US labor market based on a firm-heterogeneity extension of the Global Trade Analysis Project (GTAP-HET), Computable General Equilibrium (CGE) model, where the US labor data are expanded to 22 occupations. This extension enriches the labor market analysis and provides an avenue to investigate the factors determining fixed costs. Particularly, we distinguish between the labor types that are employed to cover fixed costs as opposed to those that cover variable costs

Does the Labor Composition of Fixed Business Costs Matter?

Fixed business costs affect firm participation in domestic and export markets. Recent advances in theoretical and empirical trade literature on heterogeneous firms confirm that fixed costs can prevent firms with low productivity levels to produce and export. Particularly, in industries where these costs are high, the majority of firms struggle to survive, leading to potential substantial effects on the labor market. This paper investigates the effect of reductions in fixed costs on the U.S. labor market using the GTAP firm heterogeneity model, where the U.S. labor data are expanded to twenty two occupations. This extension enriches the labor market analysis as well as provides a venue to investigate the factors determining fixed costs. Particularly, we distinguish between the labor types that are employed to cover fixed costs and variable costs

Modelling Trade Growth for Long-Run Economic Prospects: Improving Trade to Income Elasticity Calibration in Baselines

As a measure of global economic performance, the world trade to income elasticity (a ratio of trade growth to GDP growth) has been estimated to be 1.5 for merchandise trade from 1950 through 2017. Following the recession, this elasticity fell to 1.1 for 2011-2013 as global trade growth stalled, illustrating its importance in reflecting global conditions. In ex-ante research on long-run economic prospects, the projected trade to income elasticity serves as an important indicator for future anticipated global prosperity; however, even in the long-run, model mechanisms deliver an elasticity below 1, much lower than expected. In this paper, we provide a new approach to calibrating the trade to income elasticity to a ratio above 1, as implemented in a new version of the MAGNET (Modular Applied GeNeral Equilibrium Tool) model. As standard in the literature, we take as exogenous GDP growth projections; thus, in our approach we focus on trade growth calibration. Specifically, we allow the model to directly adjust trade flows across sectors, in contrast to the sector-specific targeting for transportation and oil in the literature. Further, while the current state-of the-art calibration methods target the Armington equation, we implement a cost-neutral preference shift, which greatly improves long-run production pathways in the calibrated baseline. Finally, we consider growth in both merchandise trade as well as trade in services, the latter being especially important to capture in long-run ex-ante studies where we anticipate services to play an increasingly important role in the global economy as cross-border digital services become pervasive