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ESTIMATION OF A TARIFF ONLY LEVEL TO REPLACE THE CURRENT EUROPEAN

PROTECTION SYSTEM FOR THE BANANA MARKET

ASOCIACIÓN GRUPO DE ESTUDIOS EUROPEOS Y MEDITERRÁNEOS, (AGREEM)

Coordination:Alejandro Lorca, Professor of Economical Analysis, Universidad Autónoma de Madrid

José Luis Pérez Sánchez, Commercial and Economic Government Expert (Técnico Comercial y Economista del Estado)

Research:Dr. Rafael de Arce, Universidad Autónoma de Madrid, Department of Econometrics

Dr. Gonzalo Escribano, Universidad Nacional de Educación a Distancia, Department of Economic PolicyDr. Ramón Mahía, Universidad Autónoma de Madrid, Department of Econometrics

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PRESENTATION PLAN

• Remember the objective• Sum up pre-analytical stages• Model key description• Scheme of analytical strategy• Detail on data• Detail on Imports / Exports functions estimation • Description of the optimization scheme• Results

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THE OBJECTIVE• TQR system protecting banana access to EU must be removed by

January 2006

• A new “tariff only” scheme will be adopted

• The goal of the research is to compute the tariff level of this “tariff

only system” necessary for preserving the status quo in banana

market.

• Preserving the status quo means maintain a level of protection

equivalent to that currently existing, upholding the EU import market

access conditions for all the current suppliers, maintaining the

relative trade structure and the competitivity of the different

productive areas and thus, using European Commission words,

ensuring that Community production is mantained.

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PRE-ANALYTICAL STAGES

Analysis of the International Banana

Market

Theoretical analysis of the current protection seeking

framework and its alternatives

Review of previous econometrical experiences

Critical study of the most recent technical proposals

on this same problem

Collection and treatment of statistical data

Selection of the econometrical model that

shall be used

Analysis of the structure and current situation of the international banana market and of the recent evolution of its trade regulations.

Theoretical study of the different tariff protection alternatives from a commercial policy perspective and the macro economical effects of its transformation.

Compilation of the different analytical documents on the matter, revising the strategies used in each of them and the results that have been obtained in each case.

Analysis of the most relevant proposals that have been carried out, both by the sector’s multinationals and international organizations. We have specially revised the proposals from Raboy, G. (2004) [1] – Dole -, Borrell (2004) [2] and the document from the FAO (2003) [3].

BEGINNING OF THE ECONOMETRICAL

WORKS

International banana trade flows, protection structures, prices, exchange rates, importer’s rent, etc… From 1972 to 2002, with a detailed level of more than 150 countries, and from all the available information at an international level.

A spatial and temporal equilibrium model estimating the import and export functions for each economic/geographical area and that later finds out the equilibrium through the quadratic optimization model.

ANALYSIS SETTING AND THEORY

PRELIMINARY TECHNICAL PHASES

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MODEL KEY DESCRIPTION• Simulation Approach

• Space - Partial Equilibrium model for net international

banana world trade

• Advantages:

– Mixing a times series approach for elasticities

computation and a cross - section simulation platform,

the system tries to capture not only dynamics but cross-

section dimension of trade.

– A wide – range selection of areas in the simulation

scenarios reduces estimation bias caused by the usage

of “representative” countries: all the market players are

considered.

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MODEL KEY DESCRIPTION

• Advantages (cont.):

– Involving almost all the importers / exporters in the

market, we make up a more realistic market picture

and simulation scenarios,

– This mix strategy avoids structural change simulation

problem using only a times series approach.

– In addition, calibration of the simulation tool, permits

to correct potential miss-specification in elasticities

computation

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MODEL SCHEME DATA COLLECTION, ANALYSIS, SELECTION AND TREATMENT

FINAL OUTLINE OF THE ECONOMETRIC AND OPTIMISATION MODEL

TEMPORAL SERIES TRADE AND

COSTS MATRIXES ECONOMETRIC

ESTIMATION IMPORT FUNCTIONS BY AREAS

ECONOMETRIC ESTIMATION EXPORT FUNTIONS BY AREAS

DATA GENERATION BY AREAS

QUADRATIC OPTIMISATION OF THE MARKET EQUILIBRIUM

GAUGING THE OPTIMISATION MODEL

SENSIBILITY AND ERROR ANALYSIS

INVERSE IMPORT AND EXPORT ELASTICITIES

ELASTICITY QX-PX

ELASTICITY QM-PM

PRELIMINARY RESULT

DETERMINATION OF INITIAL SCENARIO

Temporal econometrical analysis

Optimization system (cross-section)

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DATA

INCOMPLETE AND DESINTEGRATED

INFORMATION

Disintegration basis in 150 countries

Different basis: different publication

and statistical treatment criterias

DATA AGREGGATION BY EXPORTING AND IMPORTING AREAS

(Structure weighed by country according to its role in the banana market)

Incomplete data series

REFINEMENT – DATA TREATMENT

DATA CREATION

EXPORTS

IMPORTS

FLATT TARIFFS

AD-VALOREM TARIFFS

UNIT VALUE INDEXES

TRANSPORT COSTS

Non-existent Data

MEAN MATRIXES 1985-2002

TEMPORAL SERIES 1975-02

EXPORTS

IMPORTS

UNIT VALUE INDEXES

EXCHANGE RATES

INCOME

RETAIL PRICES

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MODEL SCHEME DATA COLLECTION, ANALYSIS, SELECTION AND TREATMENT

FINAL OUTLINE OF THE ECONOMETRIC AND OPTIMISATION MODEL

TEMPORAL SERIES TRADE AND

COSTS MATRIXES ECONOMETRIC

ESTIMATION IMPORT FUNCTIONS BY AREAS

ECONOMETRIC ESTIMATION EXPORT FUNTIONS BY AREAS

DATA GENERATION BY AREAS

QUADRATIC OPTIMISATION OF THE MARKET EQUILIBRIUM

GAUGING THE OPTIMISATION MODEL

SENSIBILITY AND ERROR ANALYSIS

INVERSE IMPORT AND EXPORT ELASTICITIES

ELASTICITY QX-PX

ELASTICITY QM-PM

PRELIMINARY RESULT

DETERMINATION OF INITIAL SCENARIO

Temporal econometrical analysis

Optimization system (cross-section)

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TIME SERIES ANALYSIS

• Specific functions for each of the Exp./Imp. Area:

• Sample (years): 1985 - 2002

• All variables in weighted terms

• Endogenous: Banana Supply / Demand

• Exogenous: Alternative measures of Weighted

Export/Import yields, price indexes and/or retail prices

and bilateral exchange rates.

• Robustness of output (elasticities) tested (changes in

price measures, changes in the estimation sample…)

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OPTIMIZATION SCHEMEStage 1: Current equilibrium

Exports- Imports Matrix (Tons)

CIF Import Prices Matrix

Imports Matrix (Value)

FOB Export Prices Matrix

Exports Matrix (Value)

Ad-Valorem Tariffs Matrix

Ad-Quantum Tariffs Matrix

Operational Costs Matrix

Export Yields (FOB)

Import Yields (CIF)

Costs Vector

CALIBRATION = STARTING EQUILIBRIUM

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OPTIMIZATION SCHEMETheoretical Background (I)

• Takayama and Judge (1971), from Samuelson’s

theoretical model.

• Equilibrium reached making equal the inverse functions

of imports expenditures and exports revenues

• ……given a structure of Ad-Quantum and Ad-Valorem

Tariffs, Tariff Rates Quotas and other operational costs.

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OPTIMIZATION SCHEMETheoretical Background (II)

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Ad-Quantum Tariff Matrix

Ad-Valorem Tariff Matrix

Import Inverse Function

Export Inverse Function

Existing Quota Regimes

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OPTIMIZATION SCHEMEStage 2: Disequilibrium

Exports- Imports Matrix (Tons)

CIF Import Prices Matrix

Imports Matrix (Value)

FOB Export Prices Matrix

Exports Matrix (Value)

Ad-Valorem Tariffs Matrix

Ad-Quantum Tariffs Matrix

Operational Costs Matrix

Export Yields (FOB)

Import Yields (CIF)

Costs Vector

DISEQUILIBRIUM

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OPTIMIZATION SCHEMEStage 3: Re-Equilibrium

New Exports-Imports Matrix

(Tons)

New Import Prices Matrix (CIF)

New Import Matrix (Value)

New Export Prices Matrix (FOB)

New Export Matrix (Value)

Ad-Valorem TariffsMatrix

New Ad-Quantum TariffsMatrix

Operational Costs Matrix

New Export Yields (FOB)

New Import Yields (CIF)

New Costs Vector

DISEQUILIBRIUM

Export Functions

Import Functions

NEW EQUILIBRIUM

(Equilibrium restored)

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RESULTS (I)

MAIN RESULT: TARIFF LEVEL TO RESTORE THE EQUILIBRIUM

• Our simulation model suggests a tariff

equivalent of 259.8 Euros per Ton

for the system to converge to the

equilibrium initially observed, maintaining

the current trade and price structures.

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RESULTS (III)SOME COMMENTS

• The existing market power in banana market invite us to consider this tariff level as a floor level.

• In our simulations, bananas coming from ACP countries maintain the current tariff exceptions up to a given quantitative restriction.

• Establishing a tariff of about 75 euros per ton would not re-establish the current market equilibrium.

• Establishing a tariff of about 300 euros per ton would cause a drop in banana imports from EU and a cut in export prices.