Tariff-Rate Quotas and Quality Trade:

Full text

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Tariff-Rate Quotas and Quality Trade:

An application to the agricultural trade between the MERCOSUR and the EU

4 Mai 2004, S´

eminaire 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

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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-`

a-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

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1.

INTRODUCTION

Motivations:

The European consumer preferences of high-quality beef imports from

Mer-cosur: 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.

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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 un-changed 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)

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3.

THE MODEL

Hypotheses:

- partial equilibrium model.

- a representative consumer.

- 2 qualities of the same good:

m

l

and

m

h

.

- CES utility function improved with quality parameters (Hummels 2004).

U

(

m

l

, m

hi

, m

ho

) = (

λ

h

(

m

hi

+

m

ho

)

σ−σ1

+

λ

l

(

m

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).

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3.1.

The nonlinear optimization problem

M ax

U

(

m

l

, m

hi

, m

ho

) = (

λ

h

(

m

hi

+

m

ho

)

σ−1 σ

+

λ

l

(

m

l

)

σ−1 σ

)

σ σ−1

s.t.

R

p

l

m

l

+

p

h

(

m

hi

+

m

ho

)

(

µ

)

¯

q

h

m

hi

(

θ

)

m

hi

, m

ho

, m

l

0

where,

σ

: elasticity of substitution.

λ

h

and

λ

l

: quality parameters =

>

λ

h

λ

l

p

h

=

p

hi

=

p

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.

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The relative import demands:

From Kuhn-Tucker conditions we obtain the Marshallian demand functions for ml and mh. Then we construct the relative import demands mh

ml, in and out-of the quota, because we

are interesting on import quality composition. mhi ml = ( plµ θ+µphi )σ(λh λl )σ if mh ml = mhi ml ≤ q¯h ml (1) mho ml = ( plλh phoλl )σ−( plµ θ+µphi )σ(λh λl )σ if mh ml = mho ml > q¯h ml (2)

3.1.

Comparative statics

• Theoretical results: ∂mh/ml

∂T >0 Quality Upgrading effect of a specific tariff out-of-quota ∂mh/ml

∂t <0 Quality Downgrading effect of an ad-valorem tariff out-of-quota ∂mh/ml

∂th = 0 NO Quality effect due to an ad-valorem tariff in-quota ∂mh/ml

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4.

EU-MERCOSUR

BEEF

TRADE

APPLICATION

4.1.

The EU trade policy vis-`

a-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

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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

mh 1042989 (100kg) ml 1069106 (100kg) phw 455.4 (euros) plw 236.4 (euros) t 20%(ad-valorem) th 12.8% (ad-valorem) Th 303.4 (euros/100kg) Tl 146.3 (euros/100kg) ¯ qh 503000 (100kg) ph equation pl equation

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4.3.

Mixed Complementary Problem

First system: mhi ml = ( λh λl) σ( pl phi) σ+w 1−v1 0≤ mhi ml ≤ q¯h ml w1 ≥0 v1≥0 w1( mhi ml −0) = 0 v1( ¯ qh ml −mhi ml ) = 0 Second system: mho ml + mhi ml = ( λh λl) σ( pl pho) σ+w 2 0≤ mho ml ≤ ∞ w2≥0 w2(mho ml −0) = 0

4.4.

Scenarios of Trade Barriers variation and their Results

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4.5.

Simulation Results

Import Quality Composition results

Variables Initial Situation Benchmark Scenario 1 Scenario 2 Scenario 3 Scenario 4

mh ml 0.975 0.299 0.975 1.054 0.300 0.975 mhi ml 0.470 0.299 0.470 0.470 0.234 0.935 mho ml 0.505 0 0.505 0.584 0.066 0.040 pl 569.759 236.4 569.759 539.5 266.659 569.759 phi 546.480 455.4 455.4 546.48 546.48 546.480 pho 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%

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5.

CONCLUSION

• 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.

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References

Abbott, Philip C., and Philip L. Paarlberg (1998) ‘Tariff rate quotas: Structural and stability impacts in growing markets.’Agricultural Economics19(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 Economics21(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 policypp. 167–186. TY - JOUR

Borcherding, Thomas E.; Silberberg, Eugene (1978) ‘Shipping the good apples out: The alchian and allen theorem reconsidered.’ Journal of Political Economy86(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 Review29(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 Economics103(1), 131–146 Hummels, David; Skiba, Alexandre (2004) ‘Shipping the good apples out? an empirical confirmation of the alchian-allen conjecture.’

Journal of Political Economy112(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 Economics12(3), 439–449. TY - JOUR

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