1 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter Tariff-Rate Quotas and Quality Trade: An application to the agricultural trade between the MERCOSUR and the EU 4 Mai 2004, Séminaire Interne de l UMR Economie Publique, Grignon. J-C. BUREAU, M.P. RAMOS and L. SALVATICI UMR Economie Publique (INRA-INAPG) and University of Molise mailto:ramos@inapg.inra.fr http://www.grignon.inra.fr/economie-publique
2 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter Plan 1 INTRODUCTION 3 2 TRADE BARRIERS AND QUALITY TRADE: state of arts 4 3 THE MODEL 6 3.1 The nonlinear optimization problem.............. 7 3.1 Comparative statics...................... 9 4 EU-MERCOSUR BEEF TRADE APPLICATION 10 4.1 The EU trade policy vis-à-vis the MERCOSUR........ 10 4.2 Data and Model Calibration.................. 11 4.3 Mixed Complementary Problem................ 12 4.4 Scenarios of Trade Barriers variation and their Results..... 12 4.5 Simulation Results....................... 13 5 CONCLUSION 14
3 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 1. INTRODUCTION Motivations: The European consumer preferences of high-quality beef imports from Mercosur: the influence of the EU s trade policy. Objective: - Upgrading (downgrading) effect and welfare effect of TRQ s components in trade. - To shed some light on the possible outcome of present trade negotiations between the EU and MERCOSUR, specially for beef trade.
4 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 2. TRADE BARRIERS AND QUAL- ITY TRADE: state of arts Quality effect of trade barriers - The quality upgrading effect of transport cost (Alchian and Allen 1983) - The quality upgrading effect of specific tariff (Borcherding 1978), (Hummels 2004) - The upgrading effect of a quantitative restriction (Falvey 1979), (Rodriguez 1979), (Aw and Roberts 1986), (Feenstra 1988), (Boorstein and Feenstra 1991) - No quality effect of an ad-valorem tariff (Boorstein and Feenstra 1991), (Falvey 1979) - Quota doesn t upgrades quality necessarily and an ad-valorem tariff doesn t keep unchanged the quality trade composition under imperfect competition (Krishna 1987) - The downgrading effect of an ad-valorem tariff (Hummels 2004) TRQ literature - Demand side analysis of the efficiency and redundancy of TRQ s components Boughner, of Gorter and Sheldon (Boughner and Sheldon 2000) - Trade creation effect of the TRQ compared to a simple quota and to prohibitory tariffs (Abbott and Paarlberg 1998)
TRQ graphics 5 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter
6 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 3. THE MODEL Hypotheses: - partial equilibrium model. - a representative consumer. - 2 qualities of the same good: and m h. - CES utility function improved with quality parameters (Hummels 2004). U(, m hi, m ho ) = (λ h (m hi + m ho ) σ 1 σ + λ l ( ) σ 1 σ σ ) σ 1 where λ h λ l. - a TRQ applied to the high-quality good: m h = m hi + m ho (Van der Mensbrugghe and Mitchell 2003). - a (ad-valorem+specific)tariff affects low-quality good.
7 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 3.1. The nonlinear optimization problem Max U(, m hi, m ho ) = (λ h (m hi + m ho ) σ 1 σ s.t. R p l + p h (m hi + m ho ) (µ) q h m hi (θ) m hi, m ho, 0 where, σ: elasticity of substitution. λ h and { λ l : quality parameters => λ h λ l phi = p p h = hw (1 + t h ) if m h = m hi q h p ho = p hw (1 + t) + T if m h = m ho > q h p l = p lw (1 + t) + T q h : quota of the high-quality. µ and θ are the Lagrange s multipliers. + λ l ( ) σ 1 σ σ ) σ 1 We construct the Lagrangian and we obtain the Kuhn-Tucker conditions.
Consumer problem with TRQ 8 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter
9 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter The relative import demands: From Kuhn-Tucker conditions we obtain the Marshallian demand functions for and m h. Then we construct the relative import demands m h, in and out-of the quota, because we are interesting on import quality composition. p l µ = ( ) σ ( λ h ) σ θ + µp hi λ l m hi if m h = m hi q h (1) m ho = ( p lλ h ) σ p l µ ( ) σ ( λ h ) σ p ho λ l θ + µp hi λ l if m h = m ho > q h (2) 3.1. Comparative statics Theoretical results: m h / T > 0 Quality Upgrading effect of a specific tariff out-of-quota m h / t < 0 Quality Downgrading effect of an ad-valorem tariff out-of-quota m h / t h = 0 NO Quality effect due to an ad-valorem tariff in-quota m h / q h = 0 NO quality effect due to a high-quality quota
10 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 4. EU-MERCOSUR BEEF TRADE APPLICATION 4.1. The EU trade policy vis-à-vis the MERCOSUR The GSP for Mercosur doesn t include the sensible products (beef, chicken and poultry meat, pork meat, wheat, corn, dairy products and eggs products. According to WTO conditions, the EU concedes to Mercosur the TRQ to improve the access market for some products. - Sheep and Goats meat: 23000 t (Argentina) and 5800 t (Uruguay) -current access. - Beef (fresh, chilled and frozen): 17000 t (Argentina) and 2300 t (Uruguay) -minimum access. - Beef (frozen): 66000 t (TRQ non allocated to Mercosur but Brazil profits the most). - Chicken and Poultry meat: 15500 t (Brazil) -minimum access. - Corn: 2500000 t (TRQ non allocated to Mercosur)was opened when Spain and Portugal enter in the EU (1986). - Sugar: 82000 t (Brazil) when Finland enter to the EU (1995). - Beef (frozen): 53000 t of frozen beef and 50700 t of frozen beef intended for processing (TRQ non allocated to Mercosur) when the European East countries enter in the EU (2004). - Hilton Beef: 28000 t (Argentina), 6300 t (Uruguay), 5000 t (Brazil) and 1000 t (Paraguay)
11 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 4.2. Data and Model Calibration Data information: - COMEXT database NC8: import volumes (tons) and CIF prices (euro/100kg) for 2003. - High-quality beef: 02011000, 02012030 and 02013000 (line codes). - Low-quality beef: 02022090, 02023010, 02023050 and 02023090 (line codes). - TARIC database (12 digits): for TRQ and tariff information. Variables and Parameters Initialization: Variables and Parameters Initialization Values m h 1042989 (100kg) 1069106 (100kg) p hw 455.4 (euros) p lw 236.4 (euros) t 20%(ad-valorem) t h 12.8% (ad-valorem) T h 303.4 (euros/100kg) T l 146.3 (euros/100kg) q h 503000 (100kg) p h equation p l equation σ 4 λ h λ l = λ ( m hi ) 1/σ p h pl
12 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 4.3. Mixed Complementary Problem First system: Second system: m hi 0 m hi = ( λ h λ l ) σ ( p l p hi ) σ + w 1 v 1 q h w 1 0 v 1 0 w 1 ( m hi 0) = 0 v 1 ( q h m hi ) = 0 m ho + m hi = ( λ h λ l ) σ ( p l p ho ) σ + w 2 0 m ho w 2 0 w 2 ( m ho 0) = 0 4.4. Scenarios of Trade Barriers variation and their Results Benchmark: FREE-TRADE 1st Scenario: Elimination of in-quota tariff 2d. Scenario: Elimination of the ad-valorem component of the out-of-quota tariff. 3d. Scenario: Elimination of the specific component of the out-of-quota tariff. 4th. Scenario: Increase of the high-quality quota of the TRQ.
13 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter 4.5. Simulation Results Import Quality Composition results Variables Initial Situation Benchmark Scenario 1 Scenario 2 Scenario 3 Scenario 4 m h 0.975 0.299 0.975 1.054 0.300 0.975 m hi 0.470 0.299 0.470 0.470 0.234 0.935 m ho 0.505 0 0.505 0.584 0.066 0.040 p l 569.759 236.4 569.759 539.5 266.659 569.759 p hi 546.480 455.4 455.4 546.48 546.48 546.480 p ho 816.791 455.4 816.791 758.5 513.691 816.791 Welfare results Variables Initial Situation Benchmark Scenario 1 Scenario 2 Scenario 3 Scenario 4 VarU 86.305% 0% 4.7% 15.081% 0% VarTR -100% -7.669% -6.399% -80.045% -22.49% VarQR -100% 33.694% -21.564% -112.130% 98.807% VarXR 78.513% 0% 5.286% 10.267% 0%
5. CONCLUSION 14 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter The theoretical and empirical results agree with about the next relationship between TRQ components and quality in trade. - Quality Upgrading effect when a specific tariff increases. - Quality Downgrading effect when an ad-valorem tariff increases. - No quality effect when the in-quota tariff increases or when the high-quality quota increases. For welfare results: - The consumer surplus increases under the out-of-quota tariff elimination. - All scenarios show a reduction on tariff revenue, even under the augmentation of the high-quality quota. - The quota rent for high-quality exporters increases when the in-quota tariff decreases and when the high-quality quota increases. - The export revenue for both quality exporters increases only when the out-of-quota tariff decreases. Which is the optimal trade agreement between the EU and Mercosur in the beef sector?. - generation of a iso- exporter utility (export revenue+rents) surface, with all the possible combination of TRQ s components. - generation of a iso- importer utility (consumer surplus+tariff revenue) surface, with all possible combination of TRQ s components. Which would be the allocation between high and low-quality goods if a total quota is applied?.
15 Début Préc. Suiv. Fin Retour Plein Ecran Fermer Quitter References Abbott, Philip C., and Philip L. Paarlberg (1998) Tariff rate quotas: Structural and stability impacts in growing markets. Agricultural Economics 19(3), 257 267. TY - JOUR Alchian, Armen, and William R. Allen (1983) Exchange and Production: Competition, Coordination and Control, 3th edition ed. (Wadsworth) Aw, Bee, and Mark Roberts (1986) Measuring quality change in quota-constrained import markets. Journal of International Economics 21(1), 45 60 Boorstein, Randi, and Robert C. Feenstra (1991) Quality upgrading and its welfare cost in u.s. steel imports, 1969-74. International trade and trade policy pp. 167 186. TY - JOUR Borcherding, Thomas E.; Silberberg, Eugene (1978) Shipping the good apples out: The alchian and allen theorem reconsidered. Journal of Political Economy 86(1), 131 138 Boughner, Devry S., de Gorter Harry, and Ian M. Sheldon (2000) The economics of two-tier tariff-rate import quota in agriculture. Agricultural and Resource Economics Review 29(1), 58 69 Falvey, Rodney E. (1979) The composition of trade within import-restricted product categories. Journal of Political Economy 87(5), 1105 1114. TY - JOUR Feenstra, Robert (1988) Quality change under trade restraints in japanese autos. Quartely Journal of Economics 103(1), 131 146 Hummels, David; Skiba, Alexandre (2004) Shipping the good apples out? an empirical confirmation of the alchian-allen conjecture. Journal of Political Economy 112(6), 1384 1402 Krishna, Kala (1987) Tariffs versus quotas with endogenous quality. Journal of International Economics 23(1), 97 112. TY - JOUR Rodriguez, Carlos Alfredo (1979) The quality of imports and the differential welfare effects of tariffs, quotas, and quality controls as protective devices. Canadian Journal of Economics 12(3), 439 449. TY - JOUR Van der Mensbrugghe, Dominique, John Beghin, and Don Mitchell (2003) Modeling tariff rate quotas in a global context: The case of sugar markets in oecd countries. Working Paper 03-WP 343, Iowa State University, Ames, Iowa 50011-1070, September