Implications of a Free Trade Region FTR

1
Implications of a Free Trade Region (FTR)

• FTR China, REAS, India, ROSA, USA, EU
• Scenario remove 100 percent of tariffs (TMS) and
  output subsidies (TO) on 19 Agricultural and Food
  Commodities

2
Removal of Tariffs in the Free Trade Region (FTR)

• Simulation Removal of Tariffs in the Region
• Simulated alternative Tariff Reductions
• Tariff reductions set at 30, 50, 70 and 100
  of existing TMS Rate
• Conclusion All countries that joined the Free
  Trade Region had positive welfare impacts for all
  reductions except one India.

3
Welfare Effects
4
Welfare Decomposition
5
Why?

• The reason for the decrease in allocation
  efficiency from MTAX is from trade diversion.
• The main commodity causing this is Vegetable Oils
  and Fats (VOL) from Indonesia and Malaysia

6
Withdrawal of output subsidies in agriculture in
SIX regions
Page 1

• I look at the welfare change
• 3 countries (IND, USA and EUR) are gaining
• 3 countries (CHN, REAS and ROSA) are loosing
• I concentrate on why REAS is loosing
• Welfare decomposition figures suggest that
  welfare loss in REAS is caused by loss in
  allocative efficiency and loss in terms of trade.
  
• I further concentrate on the loss in allocative
  efficiency
• The Puzzle
• Why there is a loss in allocative efficiency in
  REAS even though output subsidies on agriculture
  have been withdrawn.

7
Withdrawal of output subsidies in agriculture in
SIX regions
Page 2

• You can have a decrease in allocative efficiency
  after a removal of output subsidies if after
  liberalization there is an expansion in the
  sectors who were previously receiving output
  subsidies.
• Therefore, we should check qo (industry output
  of commodity i in region r)
• 4 sectors were receiving output subsidies in
  agriculture in REAS
• Paddy rice (PDR), Oil seeds (OSD), Live animals
  (CLT), and Raw milk (RMK).
• Simulation results suggest contraction of output
  in OSD, CTL and RMK (which are as expected).
• BUT, interestingly, output of Paddy Rice
  increases.
• Decomposing qo suggest that the increase in
  output in Paddy rice is primarily driven by the
  increase in exports of PDR from REAS. The share
  of exports of PDR from REAS in total PDR output
  in REAS is more than 88.

8
Withdrawal of output subsidies in agriculture in
SIX regions
Page 3

• Why do Exports of PDR from REAS increase?
• REAS and USA are the two major players in the
  international PDR export market, having 49 and
  13 share in global PDR exports (VXWD).
• Base data on output subsidies suggest that USA
  has the highest rate of to on PDR (86),
  whereas REAS has only 2.
• Therefore, the withdrawal of output subsidies on
  PDR in USA make USA PDR expensive both at
  domestic and international market. This can be
  explained by the fact that PMS (PDR, USA, REAS)
  increases by 64, while PMS(PDR, REAS,REAS)
  increases by only 2. Production of PDR in USA
  declines by 55.
• Therefore, exports of PDR from USA to REAS
  decreases and exports of PDR from REAS to both
  USA and REAS increase. The changes in volume of
  exports confirm that the increase in
  intra-regional trade of PDR in REAS is the
  principal contributor of the increase in exports.
  
• Finally, a decomposition of the allocative
  efficiency also suggest that there is a loss in
  import tariff revenue, because of the fall in
  imports in RESA since composite import price
  (pim) increase.