Effects of income growth and tariffs on the world salmon market

Abstract

The effects of income growth and tariffs on salmon prices, production, and trade flows are analysed using total elasticities derived from an equilibrium displacement model of the world salmon market. Results suggest the total income elasticity in world trade for salmon is about one, which means imports worldwide will grow at about the same pace as world income. However, owing in part to policies that restrict supply response, not all exporters will share evenly in this growth, with UK producers benefiting the most and Norwegian producers the least. Within importing countries, imports are more responsive to income growth than is domestic production, which means protectionist pressures are apt to increase with affluence. US tariffs on imports from Norway and Chile are counterproductive in that they reduce world imports with little effect on the US price. Norway's feed quota reduces the efficacy of US tariffs, makes imports less responsive to income, and increases price volatility. Hence, quota elimination may yield producer benefits in excess of producer losses associated with a lower world price.

Acknowledgements

Appreciation is expressed to Paul Aandahl and Jan Trollvik of the Norwegian Seafood Export Council for providing data and background material. An earlier version of this paper was presented at the 50th Anniversary Workshop on Global Aquaculture sponsored by the Centre for Fisheries Economics, Bergen, Norway, 11 June 2003. Responsibility for final content, however, rests strictly with authors.

Notes

As of January 1st 2005, the feed quota policy was replaced by a new policy to restrict supply response called maximum allowable biomass.

Equilibrium displacement models (EDMs), also known as ‘hat calculus models’ (Bhagwati et al., 2001, p. 131), were popularized in general and partial equilibrium settings by Jones (1965) and by Muth (1965), respectively. Piggott (1992) provides a good discussion of EDMs’ strengths and weaknesses for policy analysis; Davis and Espinoza (1998) discuss extensions to account for parameter uncertainty; Hertel (1997) discusses applications to global trade analysis.

For a cogent general discussion of income elasticities of world trade, including empirical estimates, see Houthakker and Magee (1969).

By the homogeneity condition η >ι when related consumer goods in the domestic market are net substitutes.

For a cogent general discussion of import competition, see Grossman (1982).

Analytical results to support this statement are provided in Kinnucan and Myrland (2002). That analysis indicates that the feed quota reduced Norway's domestic supply elasticity from 1.54 to 0.39. Since 97% of Norway's salmon production is exported, the domestic and export supply elasticities are of similar magnitude.

Norway collects a 0.75% ad valorem tax on its exports to support promotion programs.

Uniform values are used for all countries owing to the paucity of empirical estimates. For example, Herrmann and Lin (1988) and Steen et al. (1997) are the only known studies of supply elasticities. Also rare are income elasticities, with Wessells and Wilen's (1993, 1994) estimates for Japan being the only known estimates of recent vintage. Empirical estimates of demand elasticities for salmon are more abundant (Asche et al., 1998; Asche et al., 1999; DeVoretz and Salvanes, 1993; Herrmann et al., 1993; Bjørndal et al., 1992). However, these estimates lack the geographic coverage to be of much use here.

The analytics to support this statement, including an application to recent tariffs imposed by the USA on catfish imports from Vietnam, are provided in Kinnucan (2003).

The statement abstracts from the added supply from Norway that would be stimulated by quota removal, which would have a depressing effect on world price. To the extent that price declines associated with increased supply exceed price increases associated with enlarged consumer incidence, elimination of the quota would not be in Norway's international competitors’ interest. The larger point is that policy interactions can have unintended consequences, in the present case reducing the ability of tariffs to raise domestic price.

The ϵ _j corresponds to the excess supply curve faced by the jth importing nation; the

corresponds to the excess supply curve of the ith exporting nation. The two elasticities converge when there is one importing and one exporting nation.