Modeling Agricultural Trade Liberalization. A Review.

The paper reviews the models used in the past 10 years or so to analyze the expected effects of liberalizing agricultural trade. The main aim of the paper it to provide the reader with an overview of models which have been used to assess, first, during the Uruguay Round, the implications of alternative hypothetical trade liberalization scenarios, then, the Agreement itself, and, more recently, the implications of further steps in liberalizing agricultural markets as a result of the on going WTO negotiations. The conclusion reached is that the efforts to model agricultural trade and trade policies, taken as a whole, are not fully satisfactory. Although several models offer accurate representations of international agricultural markets and trade policies, many others, including several developed and used by governments and relevant multilateral institutions, are structurally incapable of providing reliable answers to some of the policy questions they are asked to address. The final part of the paper identifies priorities for actions to be taken for improving modeling of trade policies and WTO commitments.International Relations/Trade,

MULTILATERAL NEGOTIATIONS, REGIONAL INTEGRATION PROCESSES AND THE CAP. WHAT'S AHEAD?

The focus of the paper is on the developments so far and the future of the negotiations on agriculture in the WTO Doha Development Agenda round from the perspective of the European Union. The first part of the paper discusses what happened in the two parallel processes, the domestic agricultural policy reform in the EU and the WTO negotiations, identifying the linkages between CAP reform decisions and developments in the EU negotiation positions. The second part of the paper discusses further changes expected in the relatively near future in the CAP and in regional trade agreements involving the EU, and the perspectives of the WTO negotiations. The main point made is that the changes in domestic agricultural policy which have occurred in the EU (mostly motivated by domestic concerns), while they have not removed farm support nor made the CAP effective and efficient, have had a significant effect in terms of reducing its distortionary effects on markets, though more on the domestic than on the international ones. Unlike in the Uruguay round negotiations (when the MacSharry reform was decided close to the end of the round), the timing and extent of these reforms have made it possible for the EU to be a credible actor in the DDA round and put forward sensible negotiating proposals. The CAP is expected to go through further significant changes in the near future which, regardless of what happens in the WTO negotiations, will bring a further market reorientation of EU agriculture and a reduction in trade distortions. Successful developments in preferential trade agreements involving the EU for which negotiations are already well under way may contribute to a significant increase in the opening of EU agro-food markets.International Relations/Trade,

Gains from trade liberalization with imperfectly competitive world markets. A note.

The paper shows how analyses assuming perfect competition can yield a distorted estimation of the expected effects of a trade liberalization when market imperfections exist. The analytical framework adopted is very simple and three extreme imperfect market structures are considered. In the first case, the exporting country maximizes its producer and consumer surplus by intervening in the world market. The second market imperfection considered is the existence of a private firm playing the role of "pure middleman" in the world market. Then the case of a producer-owned marketing board which is granted exclusive export authority is addressed. It is shown that estimates of the impact of a tariff reduction in terms of prices and volume traded obtained assuming perfect competition when this postulate does not hold, are distorted. When domestic demand and supply functions are assumed to be linear, the impact is overestimated; a ranking of the size of such distortions in the three cases analyzed is provided. When no restriction is imposed on the demand and supply functions, the error in the estimated impact of a tariff reduction involves the magnitude as well as the sign of the expected changes in prices and volume traded. Finally, it is proved that when a private firm exerts monopoly and monopsony power in the world market, both the importing and the exporting countries may well be better off if, rather than making a move towards trade liberalization, the importing country "compensates" the exporting country by means of a direct transfer. El artículo muestra cómo los análisis que incorporan el supuesto de competencia perfecta pueden proporcionar una estimación distorsionada de los efectos esperados de una liberación del comercio en presencia de imperfecciones de mercado . Adoptando un marco analítico muy sencillo, se consideran tres casos extremos de imperfecciones de mercado. En el primero, el país exportador maximiza los excedentes del productor y consumidor interviniendo en el mercado mundial. El segundo es el caso de una empresa privada que desempeña en el mercado mundial un papel de "intermediario puro". El último trata de una junta de comercialización, propiedad de productores que han conseguido derechos exclusivos de exportación. En este trabajo se demuestra la existencia de una desviación de las estimaciones del impacto de una reducción de aranceles sobre los precios y el volumen comercializado cuando en el análisis se supone competencia perfecta y dicho supuesto no se cumple. Además si las funciones de demanda y oferta domésticas son lineales, el impacto precedente queda sobreestimado. Asimismo, en el trabajo se presenta una ordenación de la magnitud de dichas desviaciones para cada uno de los tres casos analizados. Cuando no se impone ninguna restricción sobre las funciones de demanda y oferta, el error de estimación afecta tanto a la magnitud como al signo de los cambios esperados en precios y volumen comercializado, como consecuencia de una reducción de aranceles. Finalmente, se demuestra que, cuando una empresa privada ejerce un poder de monopolio y de monopsonio en el mercado mundial, tanto los países importadores como los exportadores pueden beneficiarse si, en lugar de inclinarse hacia la liberalización del comercio, el país importador "compensa" al país exportador mediante una transferencia directa. Palabras clave: liberalización del comercio; mercados imperfectos; monopolio; monopsonio; junta de comercialización.trade liberalization, imperfect markets, monopoly, monopsony, marketing board, International Relations/Trade, F12, F13, Q17, Q18,

Gains from Trade Liberalization with Imperfectly Competitive World Markets. A Note.

The paper shows how analyses assuming perfect competition can yield a distorted estimation of the expected effects of a trade liberalization when market imperfections exist. The analytical framework adopted is very simple and three extreme imperfect market structures are considered. In the first case, the exporting country maximizes its producer and consumer surplus by intervening in the world market. The second market imperfection considered is the existence of a private firm playing the role of "pure middleman" in the world market. Then the case of a producer-owned marketing board which is granted exclusive export authority is addressed. It is shown that under all three scenarios, if perfect competition is assumed when market imperfections exist, the impact of a tariff reduction on prices and volume traded is overestimated. A ranking of the size of such distortions in the three cases analyzed is provided. Finally, it is proved that when a private firm exerts monopoly and monopsony power in the world market, both the importing and the exporting countries may well be better off if, rather than making a move towards trade liberalization, the importing country "compensates" the exporting country by means of a direct transfer.trade liberalization, imperfect markets, monopoly, monopsony, marketing board, International Relations/Trade,

The 2006 Reform of the EU Domestic Policy Regime for Bananas. An Assessment of its Impact on Trade.

The paper provides a quantitative assessment of the possible market implications of the December 2006 reform of the EU domestic policy regime for bananas. It is shown that, depending on implementation choices to be made at the member country level, the impact of the domestic policy reform on trade can be of a larger order of magnitude than that of the controversial tariff-only regime the EU introduced earlier in the same year. The simulations presented in this paper show that, ceteris paribus, if France, Portugal and Spain decide to decouple payments to their banana producers EU imports will increase by 13% and MFN exports to the EU by 16%; if they decide for a 2005 Memorandum-like option, EU imports still increase by 9% and MFN exports to the EU by 11%.International Relations/Trade,

Consumers and sellers heterogeneity, search costs and spatial price dispersion in retail food markets

— Price dispersion, i.e. a homogeneous product sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side with large supermarkets. The extent of observed price dispersion is quite high, suggesting that, despite their large number, monopolistic competition prevails among sellers as a result of the heterogeneity of services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) have been compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition did not yield lower prices; quite the contrary, they were, on average, higher for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings associated to food shopping at supermarkets were extremely low. Finally, the results of the study suggest that sellers behave differently in their pricing decision strategies; these differences emerge both at the firm level and, for supermarkets, within the same chain. The fact that products considered were homogeneous, purchases frequently repeated, the number of sellers large, and search costs relatively low, did not suffice to keep price dispersion low. Based on the results presented in the paper, it is clear that more important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services rendered) and consumers (in terms of their propensity to search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retail stores to remain in business.Price dispersion, retail pricing, food markets., Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Food Consumption/Nutrition/Food Safety, Labor and Human Capital,

PUBLIC REGULATION AS A SUBSTITUTE FOR TRUST IN QUALITY FOOD MARKETS. WHAT IF THE TRUST SUBSTITUTE CANNOT BE FULLY TRUSTED?

Most food products can be classified as "credence" goods and regulations exist to provide consumers with a substitute for the lacking information and trust. The paper presents an analysis of the decisions of producers and consumers about a "credence" good in three institutional scenarios, which reflect different levels of credibility of the regulation. The first scenario is a reference scenario in which the regulation is fully credible. In the second case considered there is no regulation, or, if there is, it is totally ineffective. In the third scenario a regulation only partially credible provides consumers with an imperfect substitute for the information and trust they lack. Some of the producers of "low" quality goods share with the producers of "high" quality goods an interest in the introduction of a regulation as long as this is not fully credible. In addition, it may be the case that even producers of "low" quality goods who know they will not be able to sell their products labeling them as being of "high" quality may have an interest in supporting a not fully credible regulation. Finally, rather than having producers of "low" quality goods "block" the introduction of a fully credible regulation, producers of "high" quality goods are better off when a compromise is reached which leads to the approval of an imperfect regulation.Food Consumption/Nutrition/Food Safety,

PRICE DISPERSION, SEARCH COSTS AND CONSUMERS AND SELLERS HETEROGENEITY IN RETAIL FOOD MARKETS

Price dispersion, i.e. a homogeneous product sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side large supermarkets. The extent of observed price dispersion is quite high, suggesting that monopolistic competition prevails as a result of the heterogeneity of services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) have been compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition did not yield lower prices; quite the contrary, they were, on average, higher for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study suggest that sellers behave differently in their pricing strategies; these differences emerge both at the firm level, and for supermarkets within the same chain. The fact that products considered were homogeneous, purchases frequently repeated, the number of sellers large, and search costs relatively low, did not suffice to keep price dispersion low. From the results presented in the paper, it is clear that what is important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services) and consumers (in terms of search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retailers to remain in business.Price dispersion, Retail pricing, Food markets

Assessing the Impact of Trade Policy Changes: Does Market Structure Matter?

International Relations/Trade,

The 2006 Reform of the EU Domestic Policy Regime for Bananas. An Assessment of its Impact on Trade

Abstract The article provides a quantitative assessment of the possible market implications of the December 2006 reform of the EU domestic policy regime for bananas. It is shown that, depending on implementation choices made at the member country level, the impact on trade of the domestic policy reform can be of a larger order of magnitude than that of the controversial "tariff-only" regime the EU introduced earlier in the same year. The simulations presented in the article show that under the implementation choices made in August 2007 by France, Portugal and Spain EU imports in 2013 will increase by 9% and MFN exports to the EU by 11%. Should they decide to "decouple" payments to their banana producers, EU imports will increase by 13% and MFN exports to the EU by 16%