Tariff protection elimination and Common Agricultural Policy reform: implications of changes in methods of import demand modelling

Abstract

The study proposes a way for accommodating the traditional Armington assumption to capture the possibility for a country to import imperfect substitutes as well as perfect substitutes for domestically produced goods. When this possibility is incorporated into a modelling framework, then a Common Agricultural Policy elimination scenario, including the setting to zero of import tariffs, would have starker implications than many studies suggest. To illustrate this point, a Computable General Equilibrium (CGE) model of the French economy is used, highlighting agricultural and food sectors. The study analyses the consequences for the French economy of a complete liberalization scenario in the European sector of cereals.

Notes

¹ On the export side, the standard approach consists in specifying a Constant Elasticity of Transformation (CET) function between domestically produced goods for sale on the domestic market and domestically produced goods for sale on the export market.

² On this point, see also Brown (1987) who argues that the monopoly power implicit in product differentiation is the source of the strong terms-of-trade effects observed in Armington-type models.

³ In practice, the liberalization scenario applies to cereals (wheat, maize, barley and other cereals), oilseeds (rapeseed, sunflower, soya and linseed) and protein crops (peas, beans and lupins) in so far as the provision for support to these three categories of products is provided for within the same scheme, i.e., the Arable Area Payments Scheme (AAPS). For more details, see Section III.

⁴ The degree of imperfect mobility of a primary input is captured by the elasticity of transformation of a CET function. Following Peerlings (1991), it is assumed that this parameter equals 0.1 for land, 0.3 for labour and 0.5 for capital.

⁵ The voluntary set-aside programme is not modelled.

⁶ Before the URAA, protection was ensured through threshold prices and variable import levies. Under the URAA, the threshold prices were abolished and the import levies were converted into specific duties. In the case of cereals in the EU, the duty-paid price cannot exceed 155% of the intervention price.

⁷ Export subsidies are granted in the light of market situations. As a result, the subsidy can be a tax if world prices are greater than EU prices. Following Weyerbrock (1998), one does not allow for agricultural export taxes because it is thought that the EU is not able to defend export taxes over an extended period. In practice, it is assumed that EU market prices cannot be lower than world prices.

⁸ To simplify notation, the i subscript corresponding to the type of cereals is dropped (1 for common wheat, 2 for barley, 3 for maize and 4 for other cereals).

⁹ With t_RoEU = 0.

¹⁰ The three liberalization experiments apply to all COP crops. For oilseeds and protein crops, there are no import duties and exports do not qualify to subsidies. In addition, there is no system of intervention and the support is given only through direct aids. In the three experiments, these direct aids are set to zero. Note also that France and the RoEU are very large net importers of oilseeds in the base year.

¹¹ These outcomes may easily be explained by noting that the fall in own price causes demand to increase, but the fall in prices of substitutable crops causes demand to decrease. In the case of maize and other cereals, the negative cross-price effects offset the positive own-price and expansion effects so that total domestic demand remains nearly unchanged for maize and decreases for other cereals.

¹² In the 1990 reference year, French imports of cereals from the RoW were very low. Figures from the French National Accounts indicate that the share of these imports in total domestic demand was 0.36% for common wheat, 0.01% for barley, 5.35% for maize and 1.72% for other cereals. Moreover, related calculated ad valorem tariff equivalents were also very low: 3.03% for common wheat, 0% for barley, 1.54% for maize and 1.61% for other cereals. These figures suggest that cereals imported from the RoW are mainly imperfect substitutes for domestically produced ones, tariffs levied on these imports being much lower than corresponding URAA consolidated tariff equivalents, and these cereals entering the French market because they satisfy specific needs corresponding to demands for high quality cereals.