Agriculture and Euro-Mediterranean trade liberalization

Agriculture and Euro-Mediterranean trade liberalization
Implications for quantitative modeling
a Universidad de Valencia, Departamento de Economía y Ciencias Sociales
Versione italiana

Introduction*

This paper pays special attention to priorities for research in agricultural economics, with focus on quantitative modeling addressing the impacts of agricultural trade liberalization in the Euro-Mediterranean region.
Without neglecting the presence of specific economic and political interests, most of the opposition to deep integration in the Euro-Mediterranean regions is likely connect with the lack of knowledge about potential impacts of the agricultural trade liberalization. Behind this issue there has been a traditional confrontation between the expectations of Mediterranean Partner countries (MPCs) to increase their exports in order to promote their economic growth, and the fear of European Mediterranean farmers that a higher international competition may endanger their own subsistence (see (Garcia-Alvarez-Coque, 2002; Garcia-Alvarez-Coque and Jordan, 2006).
The benefits of a complete integration of agriculture in the free market depend substantially on the institutional capability of the Southern Mediterranean countries and on their domestic policies. However, the benefits from integration for these countries can be reduced if the process impedes them from exploiting new opportunities for their agriculture exports. This was recognized by the Euro-Mediterranean Summit of Heads of States that took place in Barcelona in November 2005, which opened a new road-map to undertake further steps in the agricultural trade liberalization.
In the next sections we draw the picture of agricultural trade liberalization in the region, to pay more attentions to the research devoted to assess the quantitative impacts of trade liberalization. We finalize the paper with some implications for further research.

Consequences of further agricultural liberalization

The granting of tariff concessions has been the traditional way agricultural trade liberalization has been considered in the Euro-Mediterranean region. These imply significant price advantages for the preferential countries (Grethe et al., 2005; Martinez, 2007). The experience of the last 25 years of trade preferences has not become a great impulse for the exports dynamic of the MPCs but simply a continuation of the traditional trade flows from these countries to the EU (Garcia Alvarez-Coque and Jordan, 2006). All this past experience should help to dissipate the existing fears in Southern Europe of an agricultural exports avalanche from the Southern Mediterranean countries. Nevertheless, further consideration can be taken about the potential impact if the process moves ahead.
In theory, progressing in the reciprocal trade openness, as stated in the “road-map” established in the Conference held in Barcelona in November 2005, should imply an increase of trade flows in both senses, North-South and South-North, with the generation of new opportunities for the actors of both sides of the Mediterranean. However, it is clear that there are also risks involved in such openness, due to the social consequences arisen from the adjustment required in the less competitive sectors, both in the North and in the South of the region.
In the MPCs, the potentially winning sectors by such openness would be those related to agriculture exports, in addition to urban consumers and part of the agricultural and food industry. On the contrary, the impact can be negative for the traditional farming sector and the areas where it is located (Radwan and Reiffers, 2003). In fact, the primary production of the dry farming extensive systems in the SMC can hardly compete with the imports of continental products coming from the EU, given the existing difference between the production methods and the farming structures. In addition, the fear of these countries to commercial openness is increased by direct subsidies granted under the CAP to European farmers, which facilitates the exports of cereals from the EU without needing export subsidies.
In the case of the EU, the potentially winning sectors of wider trade openness with the SMC are industry in general, transport and services, as well as the continental farming product exports. By contrast, as it is well-known, the potentially losing sectors are those related to the production of fruits and vegetables. The progressive increase in tariff-rate quotas, after the revision of the Partnership Agreements, shall impulse the exchange of perishable products whose commercialization is concentrated on certain periods of the year.
In order to analyze the possible effects of different paths towards trade liberalization, a great deal of quantitative models has been developed during the last twenty years. The experience of quantitative research on agricultural trade models should be valuable to diminish uncertainties implied in the Euro-Mediterranean process.

Lessons from CGE modeling

A number of studies have explored the Association Agreements, largely within a computable general equilibrium (CGE) framework and usually focused on a particular country (see Anania, 2001; Stern, 2001; Kuiper, 2004; Garcia-Alvarez-Coque et al, 2006, for further discussion and review of models of trade liberalization). The aim of such studies has been typically to investigate the impact on production, trade-flows, factor markets and of course overall welfare. The CGE framework has obvious advantages to assess the ex ante effects of trade liberalization, including the consideration of the agricultural sector and cross-effects originated in the rest of the economy.
Let us make some comments on the usefulness of these quantitative studies (see Garcia Alvarez-Coque and Sarris, 2003):

  • the results depend on the assumptions of trade liberalization (e.g. Euro-Mediterranean, unilateral, multilateral liberalization; with and without productivity gains; liberalization of industrial imports vs. liberalization of agricultural imports; with and without increased market access for agricultural products).
  • Some models assume mobile capital and labor. Many impacts of trade liberalization are sector-specific and also concentrate on specific territories, where not many alternative opportunities for capital and labor can be found in the short term. 
  • Except for a few studies, the quantitative simulations make little account of the short-term adjustment costs and social impact of the trade creation.
  • Welfare improvements tend to be higher in models when tariff liberalization is accompanied by other reforms, such as the removal of non-tariff barriers, adoption of international standards, multilateral trade reforms and increased market access in the EU. If the “deep integration” is really deep and brings about a strong reduction in “red tape” and a increase in transparency and competition, its effects will be substantial.
  • Typically static welfare effects derived from the Euro-Mediterranean initiative are estimated to be fairly small, and in certain cases negative (it must be recalled that partner countries already had nearly duty-free access to EU markets for industrial goods).

In summary, if MPCs rely only on bilateral tariff liberalization of EU industrial imports, no significant gains appear. Deep integration leading to harmonization of standards may help to improve prospects. Long-term productivity growth, associated to attraction of FDI, contributes to make the balance positive, although there is no guarantee for that. Positive impact will clearly be either the outcome of reciprocal concessions in agricultural trade, or of multilateral trade liberalization involving Mediterranean countries as well as all partners, including the EU.
Some studies (see Löfgren, El-Said and Robinson, 2001; and Chemingui and Dessus, 2001, Doukkali, 2003) show a rather optimistic view, namely that agricultural liberalization would help to lessen the traditional anti-agricultural bias in the region by increasing the effective protection of the sector. It is quite common that the standard literature concludes with the argument that domestic economic policies is, at the end of the day, the responsible for achieving the maximum benefits from the Euro-Mediterranean partnership. Nevertheless, the CGE approach has been really able to suggest that any scenario of liberalization of agriculture without reciprocal concessions from the EU would significantly reduce the MPCs’ welfare gains (Bchir et al. 2002).

Where PE modeling could be appropriate

Political opposition to free trade in the EU is concentrated on a small number of products, which are of interest for SMC as well as for many Southern EU regions, mainly fruit and vegetables. Horticultural markets, which are relevant for SMC, are plenty of complexities that are difficult to capture in CGE models. The crucial role of F&V in deepening the Euro Mediterranean Free Trade Area suggests the interest in moving the modeling framework to PE approaches that allow a detailed description of specific commodities’ markets.
In fact, the number of contributions modeling horticultural trade in the Mediterranean area is scarce and, when F&V have been considered, it has been in a fairly superficial or general way. Kuiper (2004) reviewed eleven different applied models that quantify the impact of the Euro-Mediterranean Association Agreements but only one of them (Chemingui and Thabet, 2001) took F&V specifically into account when setting its scenarios. Two relatively recent contributions, by Lorca (2000) and Bunte (2005) defined multi-commodity models including some fruit and vegetables, but without a detailed consideration of the policy instruments applied to these products and of the seasonal nature of horticultural trade. Lorca’s work is perhaps the one which has better reflected differentiated country effects (Morocco, Egypt, Tunisia and Turkey) and the impact of non-tariff barriers. Other models consider wide range of F&V but with little detail in the description of policy instruments or seasonal effects (Bunte, 2005).
Some studies have focused on a single-commodity approach for studying selected F&V trade. The banana trade was, for instance, examined by Vanzetti et al. (2005, draft) by means of the GSIM model being a comparative static, partial equilibrium model without stocks. Also for bananas, Guyomard et al. (1999) created a single-commodity, multi-country partial equilibrium world market model describing the pre and post 1993 banana’s Common Market Organization scenarios. Such single-commodity approach shares and could even deepen some of the problems of PE models. Trade losses and gains will be overestimated because the transfer of resources between sectors is not considered in an explicit way.
However, working with a single-commodity model allows for providing a detailed description of specific products that may be substitutes for the product studied in consumption or production. This in turn should allow for further detail on trade instruments and geographical impacts for perishable products, with seasonal fluctuations. Partial equilibrium is consistent with an imperfect substitution approach that can model product with different origin in an explicit way (see Garcia-Alvarez-Coque et al. 2007 for an application to the fresh tomato market).

Some implications for further research

Future research will contribute to clarifying some of the “myths” of Euro-Mediterranean integration. Most of the questions relevant in the past remain open for the future, but research has to provide more precise answers to them. Though the role of market access to the EU in providing gains for SMC exports is increasingly recognized, there is a great deal of methodological and empirical work yet to be undertaken.
In any case, a better access to the agricultural market of the EU is not by itself a guarantee of development for these countries. The benefits of a complete integration of agriculture in the free market depend substantially on the institutional capability of the Southern Mediterranean countries and on their domestic policies. This is why, in addition to the quantitative modeling work, there is a need for further research on the behavior of institutions, producer organizations and individual actors in Mediterranean product markets. One line of work, clearly indicated by the 1st Mediterranean Conference of Agro-food Social Scientists (Barcelona 23-25 April, 2007) is promoting coordination among research groups working on Mediterranean issues to avoid overlapping and to take advantage of potential synergies. Moreover, project results have to be discussed and disseminated outside the research community.

Note

*Authors: José M. García Alvarez-Coque, Universidad Politecnica de Valencia; Josep M. Jordán Galduf, Universitat de Valencia-Estudi General .

References

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