Assessing the Economic Impacts of Incorporating Romania's Agricultural and Food Sectors into EU's Customs Union: an Applied General Equilibrium Approach

Abstract

Joining the European Union club implies, among many other policy changes, full integration of Romania's economy into EU's customs union. This is expected to have significant implications for domestic farmers and food processors. The paper constructs a single-country Applied General Equilibrium (AGE) model to investigate the impact of tariff border adjustments on changes in relative prices, production and trade patterns associated with fifteen local agro-food activities. Moreover, the modelling work identifies those agro-food sectors that have the potential to benefit the most from EU enlargement in terms of output effects given that Romanian producers are capable of fully responding to the incentives provided with integration. These mainly include (bovine) live animals and meat products, sugar, and cereal grains. Agro-food trade with EU intensifies in particular for those commodities for which trade restrictions are still substantial prior to accession. However, the magnitude of changes is relatively small due to the weak integration of domestic agro-food sectors into international trade structures. The AGE model also predicts static welfare gains of 0.65 percent of GDP equivalent variation. These seem to be more associated with better access to EU markets and increased export prices, and less with the preferential unilateral elimination of tariffs or their adjustment to EU's external levels. The model assumptions are highly theoretical and the model structure does not reflect with fidelity the workings of an economy in transition. Nonetheless, it does represent a solid base upon which further improvements could be added and structural transitional issues could be attached to more accurately predict potential outcomes.EU enlargement, Customs union, Agriculture, Romania, AGE modelling