Preliminary results indicate a reduction in agricultural trade barriers offers some benefits to poorer nations at the expense of some richer nations. A positive externality if trade liberalization is a decrease in coal combustion and a slight decrease in global CO2 emissions.Environmental Economics and Policy, International Relations/Trade,

Lee, Donna J.

Zhang, J.

English

Research Papers in Economics

 
Estimating Global Environmental Implications of 
Agricultural Trade Liberalization: A Computable 
General Equilibrium Analysis 
 
 
Donna LEE 
J. ZHANG 
 
 
 
 
 
 
 
Poster paper prepared for presentation at the 
International Association of Agricultural Economists Conference, 
Gold Coast, Australia, August 12-18, 2006 
 
 
 
 
 
 
 
Copyright 2006 by Donna LEE and J. ZHANG. All rights reserved. Readers may make 
verbatim copies of this document for non-commercial purposes by any means, provided 
that this copyright notice appears on all such copies. 
  
1
Estimating Global Environmental Implications of Agricultural Trade 
Liberalization: A Computable General Equilibrium Analysis 
 
Abstract 
Preliminary results indicate a reduction in agricultural trade barriers offers some benefits 
to poorer nations at the expense of some richer nations. A positive externality if trade 
liberalization is a decrease in coal combustion and a slight decrease in global CO2 
emissions.   
2
Estimating Global Environmental Implications of Agricultural Trade Liberalization: A 
Computable General Equilibrium Analysis 
 
Introduction 
In the last decade, agricultural reform in the European Union (EU) has taken great strides 
first with the Common Agriculture Policy (CAP), followed by the Uruguay and Doha 
Rounds. Progress has met with dissent and disagreements abound on the issues of export 
subsidies, export credits, domestic support, and market access. A dominant concern 
among nations is the effect on national welfare. In an analysis of the Uruguay Round, 
Harrison et al. (1997) ascertained an overall gain in long term welfare at the expense of 
short term losses in several developing countries. In the Doha Round, developed nations 
argued against reform citing the potential for large welfare transfers to developing 
nations. Francois et al. (2005) found that developing countries could reap substantial 
gains from the Doha Round outcomes but  were contingent on details in the final 
negotiation. Poor choices or badly negotiated arrangements could render negligible gains 
to developing nations. Bouët et al. (2004) determined that multilateral trade liberalization 
involving the EU and the USA would not result in welfare losses to the EU or the USA. 
Elbehri (2004) demonstrated that many factors influence the magnitude and direction of 
welfare transfers notably: volume of trade, terms of trade, resource allocation, 
accumulation, and scale.  
3
Study overview  
A multi-sector, multi-region, computable general equilibrium global trade with a flexible 
market structure is modeled with imperfect competition in some sectors (agriculture and 
energy) and perfect competition in the remaining sectors. Scale elements (size of firms 
and number of firms per sector) are endogenous. The model is parameterized and applied 
to analyze the effect of agricultural  trade liberalization on  domestic welfare, global 
welfare, energy use, and CO2 emissions. 
General equilibrium trade model 
GTAP is a static general equilibrium model of the world economy with multiple regions 
and multiple sectors parameterized with a global database. Substitution elasticities are 
from the literature. The model was developed in 1992 and continues to evolve through 
the work of the GTAP team at Purdue. 
Burniaux and Truong (2002) developed a version called GTAP-E that makes energy use 
more explicit by taking energy inputs are taken out of the intermediate input set, 
combining it with capital to form a capital-energy composite input in production. CO2 
emissions could then be captured as a function energy use by fuel type. 
Berrittella, et. al, (2004) describe an extension of GTAP-E named GTAP-EF that further 
disaggregates industry by adding several energy specific industry sectors. In GTAP-EF 
allows modifications to model imperfect competition.  
4
Regions 
In GTAP, the world economy is divided into a number of geographical regions (1,..., r) 
each comprised of one or more nations. This model specifies 16 regions: USA, Canada, 
Western Europe, Japan & Korea, Australia & New Zealand, Eastern Europe, Former 
Soviet Union, Middle East, Central America, South America, South East Asia, China, 
North Africa, South Saharan, and the Rest of the world 
Sectors 
All final goods and intermediate goods are aggregated into 17 production sectors (1,..., j): 
Rice, Wheat, Cereal Crops, Vegetables and Fruits, Animals, Forestry, Fishing, Coal, Oil, 
Gas, Oil Products, Electricity,  Water,  Energy Intensive Industries, Other Industries, 
Manufacturing Services, and Non-manufacturing Services 
Production 
Each industry is modeled through a representative firm which minimizes costs given unit 
input costs. Output price is determined by average production cost. Production is 
specified through a multi-level series of nested CES functions Factor inputs are 
substitutable and may be purchased from domestic and foreign sources. Like products 
from different regions are modeled as heterogeneous using an “Armington assumption”. 
The capital-energy input is a composite of capital inputs and energy inputs. The energy 
input is a composite of non-electric and electric energy inputs. The non-electric energy  
5
input is a composite of coal and non-coal fuels. And the non-coal fuels are a composite of 
gas, oil, and petroleum fuels. All inputs may be purchased from domestic or foreign 
sources. A representation of the production model structure is shown in Figure 1.   
Primary factors 
Primary factors include Natural Resources, Land, Labor, and Capital-Energy. Natural 
Resources and Land are assumed to be industry specific and therefore immobile across 
industries and regions. Households provide labor in return for income. Labor resources 
are free to move among industries but are immobile across regions. Capital resources can 
move across industries but are immobile across regions.  
6
Output 
Value-Added Energy  All other inputs 
Natural Resources  Land  Labor  Capital-Energy 
Composite 
Foreign  Domestic 
Region r  Region 2  ￿￿
￿ 
Unskilled  Skilled 
Energy Composite  Capital 
Non-electric  Electric 
Non-Coal-CO2  Coal-CO2 
Oil  Petroleum  Gas 
Region 2  Region r 
Domestic 
Region 2 
Foreign 
Region r  Domestic  Foreign 
Domestic  Foreign  Region 2  Region r 
Non-Coal  CO2  CO2  Coal 
Figure 1. Structure of GTAP-E Nested Production Function Adapted from Burniaux and 
Truong (2002)  
7
Consumption 
Consumption in each region is represented by an aggregate household. The household 
consumer provides labor and earns income. Income is allocated to household 
consumption, public (government) consumption, and savings to maximize regional 
welfare. Welfare is Cobb-Douglas thus share of income to each of the three expenditures 
classes is constant.  
Private consumption of j commodities is specified through a multi-level series of nested 
Cobb-Douglas function Private consumption is composed of “Armington aggregates” 
using a non-homothetic, a constant difference in elasticities form.  A representation of the 
nested private consumption structure is shown in Figure 2. 
Public consumption is Cobb-Douglas  in j commodities with the bulk of  public 
consumption is in the form of “Non-manufacturing Service” goods. 
Savings from all regions are accumulated in a world “bank” which allocates fiscal 
resources to investments to balance current and future the rate of return. Saving and 
investment is balanced globally, but not regionally. Regional imbalances between saving 
and investment are interpreted as a trade deficits and trade surpluses.  
8
Private Demand for goods 
Energy Composite 
Oil  Coal 
Domestic 
Region 2 
Foreign 
Region r 
Non-energy 2 
Region 2 
Foreign 
Region r 
Domestic  Gas  Petroleum 
Non-energy j 
Figure 2.  Structure of GTAP-E Nested Private Demand Function Adapted from Burniaux 
and Truong (2002)  
9
Policy Scenarios 
Three scenarios were constructed to examine the impact of trade liberalization on 
regional welfare and CO2 emissions. Simulated reductions in import taxes, output taxes 
and combined taxes are imposed on each region based on the development status of the 
region. Developed regions are USA, Canada, Western Europe, Japan and Korea, 
Australia and New Zealand, Eastern Europe, Former Soviet Union.  Developing regions 
are: Middle East, Central America, South America, South Asia, South East Asia, China, 
and the Rest of the World. Least developed regions are: South Asia, North Africa, and 
South Saharan Africa. 
Scenario “C” simulates a reduction in import taxes, output taxes, and combined taxes that 
are staggered, with developing countries enduring the largest cuts (-60%), developing 
countries the next largest reductions (-40%) and the least developed countries facing the 
smallest cuts (-20%). Scenario “A” simulates an across the board elimination of import 
taxes, output taxes, and combined taxes (-100%). Scenario “B” simulates a reduction in 
import taxes, output taxes, and combined taxes that are staggered, with developing 
countries enduring the largest cuts (-60%), developing countries the next largest 
reductions (-40%) and the least developed countries facing no cuts (-0%). 
Table 1. Policy scenarios – tariff reduction (%) 
Scenario  Developed  Developing  Least developed 
C  -60%  -40%  -20% 
A  -100%  -100%  -100% 
B  -60%  -40%  -0%  
10 
Selected Results (Preliminary) 
Welfare effects based on estimated changes in equivalent variation indicate that Japan 
and Korea, Middle Eastern nations, and to a lesser extent African nations gain the most 
from unilateral and staggered agricultural trade liberalization. Gains ranges from $1 
billion to more than $3 billion.  Losers are USA, South America, and China. Losses 
ranged from $0.5 billion to $1.5 billion. 
Energy prices for fossil fuels are mixed. The price of coal is expected to decrease in most 
countries up to -1.2%. The price of oil will rise 1% to 2% and the price of gas  will 
increase up to 1%. 
Energy production of fossil fuels is mixed. The output of coal will fall in most countries 
by up to -0.7%. Output of oil will rise in most countries up to 0.9%. The production of 
gas in the USA will drop by up to 2% and rise in Western Europe by up to more than 2% 
and rise in the rest of the world by up to 1.5%. 
Production of consumer goods, agriculture, and forestry Change in the production of 
consumer goods is most notable in the Middle East with a project increase of 3-4% as a 
result of agricultural trade liberalization. A reduction in wheat production in the USA and 
Canada of 20% is expected under scenario C (staggered tariff reductions). Wheat 
production in Western Europe is expected to rise by more than 50% under scenario B 
(elimination of all tariffs). Forestry production is expected to increase in the USA, 
Australia and New Zealand, and South Africa by 1% to 2%. Reductions in forestry  
11 
production are projected in Japan and Korea, Central America, and South America of up 
to 1.5%. 
CO2 emissions from coal will drop in the USA, Canada, and the former Soviet Union up 
to 1%. CO2 emissions from Japan and Korea and the Middle East are project to rise, less 
that 1%. CO2 emissions from oil combustion is projected to fall in nearly all regions, -
0.5% to 2% CO2 emissions from gas combustion will fall in the USA, Canada, Former 
Soviet Union, and the Middle East by -0.75% to more than -2%. 
Brief summary  
Preliminary results indicate that the reduction in tariffs designed to be most protective of 
least developed nations (Scenario B), was most beneficial (or least harmful) to developed 
nations as well as being beneficial, but to a lesser extent, to the least developed nations. 
According to the welfare results, least developed nations gained the most from unilateral 
elimination of agricultural tariffs.  
Increased use of oil and gas and reduced reliance on coal, led to a reduction in CO2 
emissions in most countries, developed, developing, and least developed. 
A graphical display of the results discussed here is shown on the following pages.  
12 
Welfare change ($ US million)
-2000
-1000
0
1000
2000
3000
4000
5000
USA CAN JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS NAF SSA
Region
$
 
U
S
 
M
i
l
l
i
o
n
C EV
A EV
B EV
  
13 
% Change in Coal Price
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
 
c
o
a
l
 
p
r
i
c
e
C Coal
A Coal
B Coal
% Change in Regional Oil Prices
-0.5
0
0.5
1
1.5
2
2.5
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
 
c
o
a
l
 
p
r
i
c
e
C Oil
A Oil
B Oil
%  Change in Regional Gas Prices
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
 
p
r
i
c
e
C Gas
A Gas
B Gas 
14 
% Change in coal production
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Coal
A Coal
B Coal
% Change in oil production
-0.2
0
0.2
0.4
0.6
0.8
1
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Oil
A Oil
B Oil
% Change in gas production
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Gas
A Gas
B Gas
  
15 
% Change in consume r goods pr oduction
-1
0
1
2
3
4
5
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C CGDS
A CGDS
B CGDS
% Change in wheat production
-100
-80
-60
-40
-20
0
20
40
60
80
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Wheat
A Wheat
B Wheat
% Change in fore stry production
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Forestry
A Forestry
B Forestry
  
16 
Change in Total CO2 Emissions from Coal
-1.5
-1
-0.5
0
0.5
1
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Coal
A Coal
B Coal
Change  in Total CO2 Emissions from Oil
-2.5
-2
-1.5
-1
-0.5
0
0.5
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
C Oil
A Oil
B Oil
Change i n Total CO2 Emissions from Gas
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
USA CAN WEU JPK ANZ EEU FSU MDE CAM SAM SEA CHI ROW SAS SSA
Region
%
 
c
h
a
n
g
e
A Gas
C Gas
B Gas
  
17 
 
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Climate change and extreme events: an assessment of economic implications,

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Increasing returns, monopolistic competition, and international trade,

Introducing monopolistic competition into the GTAP model, GTAP

Micro-foundations of external scale economies,

Multilateral agricultural trade liberalization: the contrasting fortunes of developing countries in the Doha Round, CEPII working paper

National and international returns to scale in the modern theory of international trade,

Price and welfare effects of agricultural liberalization with imperfect competition in food industries and trade,

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Scale economies and imperfect competition,

Sensitivity of CGE trade policy analysis under imperfect competition to the specification of firm conduct,

Trade and trade policy with differentiated products: a Chamberlinian-Ricardian model,

Estimating Global Environmental Implications of Agricultural Trade Liberalization: A Computable General Equilibrium Analysis

Estimating Global Environmental Implications of Agricultural Trade Liberalization: A Computable General Equilibrium Analysis

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