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Priorities for the Economics of International Agricultural Trade Presentation at the CFARE Workshop


Not detailed or specific enough to guide negotiations, but can motivate policy directions ... D: Firm relationships driving trade rather than governments driving trade ... – PowerPoint PPT presentation

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Title: Priorities for the Economics of International Agricultural Trade Presentation at the CFARE Workshop

Priorities for the Economics of International
Agricultural TradePresentation at the C-FARE
WorkshopSan Antonio, TexasNovember 6, 2003
  • Daniel A. Sumner
  • University of California Agricultural Issues
    Center and Department of Agricultural and
    Resource Economics, UC Davis

Stakeholder priorities for competitiveness and
  • Farmers and others have the priority to become
    more competitive and profitable.
  • Competitiveness and profit involves technology,
    management, marketing and a host of issues to
    which economists can contribute research,
    teaching and outreach.
  • International trade economics has some
    contribution to make on this goal, but is
    relevant also to other stakeholder goals.
  • Thus, my title is broader than that assigned.

Priorities for the Economics of International
Agricultural Trade
  • Broader than contributing to competitiveness and
    profit in US agriculture.
  • Competitiveness and profit are positive for
    farmers and other businesses and generally
    positive for the economy, but parts of US
    agriculture may be best served by learning to
    exit rather than attempting to compete.
  • Furthermore some firms and industries may be
    maintained in profitability only through public
    investments or policies that are not profitable
    for the economy as a whole.

Public economic priority must remain on broad
social benefits
  • Most often using economics to contribute to
    competitiveness is consistent with general social
  • In fact, economics can illuminate where this
    consistency holds and where it may not.
  • From a broader perspective we can provide
    information that will help farmers and others
    shift resources to areas that are likely to
    competitive such that agriculture as a whole
    gains profitability and competitiveness.
  • This may not satisfy each commodity constituency.

International issues are pervasive and interact
with most other topics for which economics is
  • International dimensions apply to any economics
    that also applies in other countries, which is
    most economics.
  • Food safety and nutrition issues,
  • Technology development and transfer,
  • Rural development, and
  • Environmental and resource issues
  • all have international components.

Priority topics for the economics of agricultural
  • International trade policy (this has long been
    the core topic for trade economists)
  • Analysis for trade negotiations
  • Analysis for trade dispute settlement
  • Analysis for policy reform consistent with trade
  • Projections of agricultural competitive positions
    for different locations
  • Cost comparisons
  • Basis for economic advantages in different
  • Global competition policy
  • Foreign direct investment and trade flows

A Trade policy economics has been used more
fully every year
  • Economics is used because it is useful for
    several phases of trade negotiations and trade
  • Nonetheless, many economists are frustrated that
    economics is not more influential in the
    resolution of disputes and negotiations.
  • But, is our analysis is ready to play an even
    larger role?
  • How can we be more relevant and accurate to be
    more useful?

Uses of trade policy economics in negotiations
  • Set the general understanding of the benefits and
    costs of more open markets
  • Project outcomes of specific options and
  • Provide ex post projections of actual negotiated
    agreements to guide understanding of what to
  • Assess the outcomes and effects of previous
    agreements or dispute settlement
  • Each of these requires different approaches and
    must not be confounded.
  • All are difficult

General quantitative sense of impacts of reform
  • 1. The idea is to give the flavor and rough idea
    of implications of various policy reforms
  • Stylized policies and proposals
  • Estimates using retrospective counterfactuals
  • Aggregate summary results
  • Improvement on the gross misrepresentations of
    non-economic approaches and rhetoric
  • Not detailed or specific enough to guide
    negotiations, but can motivate policy directions
  • CGE models and most academic studies

Detailed projections of specific options
  • 2. With sufficient policy detail, projections can
    guide choice of negotiating options.
  • Often requires short turn-around and rapid
    communication to negotiators.
  • Requires comprehensive understanding of policies,
    markets and alternatives
  • Requires underlying research and models that can
    be adapted quickly.
  • CGE models are not yet adaptable for this work
  • Academic-style research supplies data, parameters
    and model development, usually not detailed
    projections relevant to negotiation process

Projections of impacts of negotiated policy reform
  • 3. Can guide expectations and plans of market
    participants and may influence implementation
  • Requires comprehensive understanding of policies,
    markets and alternatives
  • Requires underlying research and models that can
    be adapted to the detailed specification of the
    actual agreement.
  • Most academic-style research models do not have
    sufficient policy detail and are not adapted to
    specify complex policy changes.

Estimation of outcomes attributable to specific
policy reform
  • 4. Most reforms are partial and normal market
    flux makes isolating of policy reform
  • Requires careful specification of expectations of
    real policy changes real changes
  • Most expected market shifts are gradual and small
    relative to agricultural market variability
  • Requires marshalling as much data as can be found
  • Econometrics must be developed carefully and
  • Can be useful for understanding of future policy

Empirical economics may be more used and useful
in trade dispute settlement
  • Trade dispute resolution applies detailed
    economic analysis for proceeding at USITC, WTO
    and related forums
  • A high proportion deal with agriculture or NR
  • This will spread globally from North America
  • Already there is more economics in the WTO
    dispute settlement process than a few year ago
  • We need more development of standard tools and
    standards for how to evaluate the economics
    applied by staff and parties

Elements to improve applicability of empirical
trade research
  • Model approximations of policies and alternatives
  • All models rely on approximations, but this is
    not the place to cut corners for useful analysis
  • Gross approximations of policy are helpful
    pedagogic tools, but may be more misleading than
    helpful for empirical trade policy research
  • Seemingly small differences can have significant
  • Domestic support schemes in agriculture provide
    many examples

Elements to improved applicability of empirical
trade research
  • Understand details of commodity markets and
  • Even definitions of commodities may not be
  • Is wheat wheat? (Is durum a different product?
    How closely related are HRS and HRW?
  • When can indica and japonic rice be aggregated?
  • Similar aggregation questions apply to markets,
    how integrated is India in the world dairy
  • These are research questions that can only be
    approached with a thorough empirical research
  • Econometric evidence is often lacking and
    difficult to develop

Elements to improve applicability of empirical
trade research
  • Parameter values drive model results
  • Model complexities may hide reliance of results
    on a few supply or demand elasticities
  • Yet, we continue to have problems conceptualizing
    appropriate parameters and how they might be
    defined and obtained
  • Parameters depend on the specific market
    situation and policy question. E.g.. it makes no
    sense to ask what is the supply elasticity for
  • Much econometric effort has not helped
  • These are basic questions to which we must devote
    more systematic and careful thinking

Econometrics alone will not yield estimates of
policy-relevant supply response
  • Government programs and expectations about the
    programs affect the relevant supply response
    parameters. As policies change or when we
    investigate new policies, we must use parameter
    estimates that are structural and not functions
    of the policy in place.
  • Econometric estimates from the literature will
    seldom have this property.

Defining the counter-factual baseline projection
may be crucial
  • Even comparative results are not invariant to
    baseline projections under the alternatives
  • Effects of TRQs and deficiency payments depend on
    projections of world and domestic prices
  • This means investing more in baseline projections
    to understand impact of policy reforms
  • ERS, FAPRI and very few others make these
    investments and few academic resources are
    devoted to the critique

We may only attempt to project Pb - Pa, rather
than Pb itself. Still, relative impact of
removing a, for example, deficiency payments
(marketing loan or C-C payment) depends on the
baseline. The same applies to the impact of
removing a TRQ. When comparing different
internal prices this implies that long term
exchange rate projections are required!
Current policy
B Projections of regional production patterns
and competitive positions
  • Which industries are on the competitive edge and
    what will keep them there?
  • This requires considering opportunity costs of
    resources in each location.
  • The peach industry in California competes first
    with tomatoes and almonds in California and then
    with the peach industry in Greece or China
  • Assessments of cost of production in various
    regions can help, but these are dangerous and
    very difficult to get right.
  • Budget measures are fraught with error and a
    problematic track record.

Projections of regional production patterns and
competitive positions
  • It is easy to miss advantages or linkages that
    give an industry an edge
  • Quality
  • Reputation
  • Existing business relationships
  • Economists have a difficult time analyzing these
    factors and others.
  • Must be careful not to oversell our capabilities
    to compare costs and assess competitiveness

C Global competition policy
  • The joint research in international trade and
    industrial organization is well underway
  • Practical findings and useful empirical or
    simulations are more difficult to master
  • Using countries as the unit of analysis is less
    interesting than considering firms
  • Traditional questions of monopoly power and cross
    border analysis of mergers combines these
  • With consolidation globally in both farm supply
    and marketing these issues become more relevant

D Firm relationships driving trade rather than
governments driving trade
  • When firms cross borders this may have important
    implications for choice of suppliers
  • Thus, foreign direct investment may affect trade
    in goods and service
  • Perhaps a Wal-Mart produce supplier in the U.S.
    will also have an advantage supplying produce to
    Wal-Mart in Mexico.
  • Perhaps firm-based quality standards or
    firm-based rules will dominate government-based
  • COOL may become irrelevant, but not yet

Concluding comments
  • Services provided by economists will continue to
    be demanded in international trade policy
  • We have a long way to go to improve our
  • Economics can inform parties of projected
    economic impacts, decisions are based on
    interests and economics can make these more
  • Projections of competitiveness require detailed
    specific information and remain troublesome, with
    much capacity to mislead
  • Research linking trade with industrial
    organization may be growing in importance
  • The core demands for economics remain trade