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Final Report Summary - AGFOODTRADE (New issues in agricultural, food and bioenergy trade)

Executive summary

The AGFOODTRADE project (please see online) focuses on the analysis of trade agreements and their consequences in the agricultural sector, with particular emphasis on the linkage between the food and bioenergy sectors. This includes regional, bilateral and multilateral agreements, ongoing and planned trade negotiations. The project focuses on issues that go beyond the standard analysis of trade agreements. It addresses not only the effect of trade agreements on prices, exports, production and welfare, but also their consequences on poverty, price stability, food security and the environment. This includes emphasis on modelling the linkage between food and non-food demand for agricultural products driven by the use for energy. The whole project relies on a series of models, databases and case studies.

the strategic objectives addressed included the delivery of conceptual and empirical tools to:

- understand the main drivers of world trade in food and non-food markets, including energy demand and changing consumption patterns in emerging economies;
- assess the impact of multilateral and bilateral agreements being negotiated by the European Union (EU) using a large-scale dynamic general equilibrium model, a spatial trade model and a model of the EU farm sector;
- quantify the effect of trade liberalisation on trade flows and the agricultural sector of the EU, accounting for imperfect competition, price transmission and the role of state trading and large corporations, using methods that allow for testing the role and the importance of these issues;
- assess the possible impact of trade liberalisation on price instability;
- analyse the new framework brought about by the interdependency of the energy and food markets;
- provide an in-depth assessment of distributional impacts of trade policy changes based on case studies in the EU (Ireland, France, Poland) and on targeted developing countries, i.e. Uganda and Senegal, with emphasis on the impact of trade liberalisation on poverty in these countries;
- assess the role of non-tariff issues and other limitations to market access in world trade and the relevant policies to address this issue.

A major output of the project has been the development of detailed databases which will make a major contribution to providing the evidence base for EU stakeholders when assessing policy alternatives. Methodological developments in trade modelling have led to academic publications and to the provision of new techniques and software to the academic community.

Project context and objectives

Agriculture continues to be a prominent and controversial topic in the analysis of trade policy. The world average duty applied on agri-food imports remains much higher (more than four times) than the average tariff on manufactured products. Farm subsidies are still large in several developed countries and are growing rapidly in emerging economies. The immediate prospects for agricultural markets are a key issue for developing countries and poverty reduction as more than half of the population in these countries lives in rural areas.

Liberalisation in agriculture has been a focus of the current World Trade Organization (WTO) negotiations and is a key component of ongoing regional and bilateral trade negotiations. The potential impact of trade liberalisation on agricultural systems has been subject to numerous assessments. While many such assessments have concluded that agricultural trade liberalisation has, and could have, large impacts on sectorial production and farmers' income as well as on export and import trade flows, other studies suggest more moderate effects. Evaluating the effects on these variables of recent and expected liberalisation, both due to multilateral and regional agreements, is a key issue. One objective of the AGFOODTRADE project was to develop methods for evaluation which goes beyond traditional indicators and concerns and take account of new issues, developments and stakeholders.

The most important aspects related to agricultural trade liberalisation addressed in the AGFOODTRADE project are as follows.

- The rise of fossil oil prices and the consequences for climate change of its growing consumption have led governments, non-governmental organisations, and consumers to focus on the potential of biofuels as a substitute energy source. The potential demand from energy markets could be large enough to have a substantial impact on food markets and could even reverse the historical secular decline in real agricultural product prices. Simultaneously, the launching of big programmes aimed at increasing the production and use of biofuels in developed countries' markets is a major policy initiative that has to be scrutinised.
- Rapid population growth in developing countries, concentrated particularly in urban areas, and rising prosperity in some regions, both of which are associated with changing dietary preferences, will lead to increased demand for industrialised food processing. Research has to provide an in-depth understanding of the implications of these rapid demographic and income shifts for world demand for agricultural products and agricultural systems.
- Markets are imperfectly competitive and the growing importance of global food processing and retailing chains makes the degree of price transmission between farm and food prices increasingly uncertain. Concentration can affect the expected size and distribution of gains from trade liberalisation, among foreign producers, retailers, processors, and consumers.
- The political economy of successful reform requires identification of potential losers and the design of compensation and adjustment packages to overcome the opposition of groups who will lose from reform. This requires much greater attention to the household and distributional impacts within-country of alternative liberalisation strategies. This is important where liberalisation affects developing countries where small changes can have major impacts on overall food security and the number of people in poverty.
- Trade liberalisation may affect the volatility of world prices. A larger market should reduce price fluctuations, but the concentration of production in few climatic zones could increase volatility. One of the initial objectives of protectionism was to reduce, or even eliminate, the transmission of world volatility into domestic markets. Thus, the global impact of trade liberalisation on price volatility is a key concern and needs thorough evaluation.
- While tariff barriers are continuously reduced, there is growing concern over the proliferation of sanitary, phytosanitary (SPS) and other regulatory measures and their potential impact in terms of food security and trade. Both developed and developing countries protest regularly against the increasing use of these barriers.

The project has focused on developing extensive research using state-of-the-art methodologies to address emerging issues related to the impact of various agricultural liberalisation alternatives. Research undertaken includes an assessment of the impact of various trade agreements on production, trade, prices and welfare using new tools specially developed or elaborated under this project. The research emphasised issues that have not been given enough consideration in previous research, such as the impacts of potential development of production and consumption of biofuels, major demographic and income changes at world level and their implications for changes in food preferences, the role and influence of transnational companies, impact of new non-tariff barriers, and the potential role of storage to address market price volatility. Addressing these objectives through measurable and verifiable outputs was central in the project.

The strategic objectives addressed included the delivery of conceptual and empirical tools to:

- understand the main drivers of world trade in both food and non-food markets, including energy demand and changing consumption patterns in emerging economies (WP1 and WP5);
- assess the impact of multilateral as well as bilateral agreements being negotiated by the EU using a large-scale dynamic general equilibrium model, a spatial trade model and a model of the EU farm sector (WP2);
- quantify the effect of trade liberalisation on trade flows and the agricultural sector of the EU, accounting for imperfect competition, price transmission, and the role of state trading and large corporations, using in particular methods that allow for testing the role and the importance of these issues (WP4, tasks WP4.T1);
- assess the possible impact of trade liberalisation on price instability (WP04, tasks WP04.T02);
- analyse the new framework brought about by the interdependency of the energy and food markets (WP5);
- provide an in-depth assessment of the distributional impacts of trade policy changes based on case studies in the EU (Ireland, France, Poland) and on targeted developing countries, i.e. Uganda and Senegal, with special emphasis on the impact of trade liberalisation on poverty in these countries (WP3);
- assess the role of non-tariff issues as well as other limitations to market access in world trade and the relevant policies to address this issue. (WP4, task WP4.T3).

A major output of the project was the development of detailed databases which will make a major contribution to providing the evidence base for EU stakeholders when assessing policy alternatives. Methodological developments in trade modelling have led to academic publications and to the provision of new techniques and software to the academic community. The quantification of impact of trade negotiations was intended to assist those involved in trade negotiations to better understand their impacts. The development of quantitative instruments will make it possible to provide a forward-looking assessment of future agreements, including their effects on EU-27 trade and on the common agricultural policy and to answer the European Commission (EC)'s need for quantitative simulations. A strategic objective was also to integrate the scattered research on the aspects that are often neglected in the assessment of trade negotiations.

Project results

WP1: The current state and predictable future of agricultural liberalisation

The main objective of WP1 was to provide complete assessment of the current intensity of trade and trade distortions in agriculture in the EU and its main trading partners. Another objective was to provide a picture of possible liberalisation scenarios in agriculture in the EU and in its main trading partners in the near future (10 years). This included multilateral trade liberalisation as well as planned regional agreements and preferential schemes. Consultations with the Directorate-General (DG) for Trade and DG Agri of the EC helped to decide the focus on specific agreements. AGFOODTRADE made use of several models to reach its objectives. To feed these models AGFOODTRADE developed large-scale databases that make it possible to assess effects of trade liberalisation as well as domestic agricultural policies. These databases include highly detailed information on tariffs, tariff rate quotas, including preferential and applied tariffs under the various regimes, as well as the matching trade flows.

Significant developments in the information needed to model agricultural policies, including social accounting matrices, were made. Four main databases were developed. The first one aimed to incorporate into GTAP the producer support estimates provided by OECD. BACI is a detailed world trade database covering more than 200 countries and 5000 products, between 1995 and 2007. It covers values, quantities and unit-values of bilateral international trade at the product-level. MAcMap-HS6v2 covers 171 importer and 209 exporter countries and 5113 products, following the HS-6 digit nomenclature. The data set contains consolidated tariffs, ad valorem applied tariffs, ad valorem equivalent of specific tariffs, tariff rate quotas (TRQ), prohibitions and antidumping duties, as well as preferential rates for the year 2004. Finally, the AgroSAMs database creates a set of social accounting matrices with a disaggregated agricultural sector for the EU-27 Member States by combining national supply and use tables with data from the agricultural sector model CAPRI. Baselines were defined as the set of current policies that form a conceivable framework for international and domestic agri-food sectors in the future.

The baselines provide a benchmark to enable comparisons between scenario analyses about specific effects introduced by each scenario proposed. The baseline is not considered as a scenario, given that it exclusively considers projections of macroeconomic indicators, policies that remain unchanged, and policies already agreed. The baselines incorporate information on known and agreed policy reforms including changes in agricultural trade policies, foreseen changes in European domestic policies, non-European domestic policies, various bilateral trade agreements that have been signed but either not yet implemented or which will be implemented over a long time period, as well as the expected world economic developments.

Scenarios were then defined to be simulated by different economic models. The time horizon considered in the scenarios of this project assumes full implementation of all free trade agreements already signed. From this departure point, two scenarios are drawn. The first scenario simulates that all nations eliminate all import tariffs; this scenario is called multilateral trade liberalisation. The second scenario takes as its starting point the possibility of a strong focus on regional trade agreements and no further WTO agreement: this is called regional policies.

The increasing interest in how to measure openness of developed countries' markets vis-à-vis developing countries exports motivated the development of new quantitative indices. Work in the project focused on the construction of trade restrictiveness indexes (TRI) and mercantilist trade restrictiveness (MTR) Indexes of agricultural trade policies in the EU and in its main trading partners. These indicators attempt to summarise the effects of both tariff and non-tariff barriers reflected in their combined impact on the affected economy. The TRI answers the question of what is the equivalent uniform tariff in a country that would keep real income constant.

In the framework of this project, a mercantilistic trade preference index (MTPI) was developed with a firm foundation in economic theory and that can be actually computed. The MTPI is defined as the uniform scaling factor applied to the maximum levied tariffs that would produce the same effect on real income as the importing country's preferential tariff structure. These indexes are particularly useful in assessing impact of preferential trade agreements. Preferential margins vary a lot across products and countries, so an aggregation process is needed to get an overall measure.

A major challenge in trade policy analysis is to get the aggregation right. Several forms of aggregation have been used but most of them are without theoretical foundation and lead to biased results. What is needed is a conceptual framework within which the level and the effects of preferential policy can be combined. This is what the new approaches with rigorous theoretical foundations for the aggregation problem have provided. From the methodological point of view, the MTPI uniform preferences and the trade-weighted margins tend to move closely together when the number of commodities is small, and when the dispersion of margins is low. However, the trade-weighted aggregator overestimates the true preferential margin as measured by the MTPI.

Outputs of this WP
Several papers were published as an output of this project.

Web-based resources
The MAcMap tariff database was updated and complemented by an integrated database on TRQ. A series of highly disaggregated social accounting matrices for individual EU-27 Member States were developed and have been widely disseminated (now included in the GTAP database). A fully disaggregated EU agricultural domestic support was developed; this database too has been integrated into the GTAP database and thus widely disseminated. Some software on market access was developed. This includes the tariff analytical and simulation tool for economists (TASTE) software developed to manage MAcMap data and to act as a user-friendly interface for the use of tariffs for modelling purposes. A graphic interface called GATT was developed that allows easy data extraction, user-friendly calculation of various indicators of protection, and graphic representation using a map related interface.

WP2: Changes in world agricultural trade
This WP focused on the development and application of new analytical tools to study the impacts of further liberalisation of agricultural trade with a special focus on EU trade with its main partners. Central to the project was the development of a large-scale computable general equilibrium model of the world economy nicknamed 'MIRAGE'. While a preliminary, static version was developed under a previous Sixth Framework Programme (FP6) project TRADEAG, the model was expanded in several important dimensions, including being able to target specific sectors and countries, being able to utilise policy information at disaggregated levels, being able to address the inter-linkages between the agriculture and energy sectors, and being able to use projections of demographic changes for likely future growth of world food demand. The dynamic version was completed, as well as the version giving the choice to opt for a dual labour market in developing countries.

A demand system using cutting edge methodology was developed. Considerable work was done to develop a whole new dataset that distinguishes the energy use of agricultural products and makes it possible to model land use changes resulting from international agreements and policy reforms. A specific version of MIRAGE working at the HS6 level has also been developed. Some of these modelling developments were used in subsequent tasks, while others were used in other parts of the project. Detailed and up-to-date information on the development of the MIRAGE model under the AGFOODTRADE project is listed on a website exclusively devoted to it and a detailed report discusses in detail a specific version of the model addressing the interactions between agricultural and the biofuel sectors. The development of CGE models in includes alternative CGE models. For instance, members of the team expanded the land use specification and dynamics of the University of Copenhagen version of the large-scale CGE model GTAP; developed schemes to model EU domestic support instruments in CGE models; and introduced and evaluated a general equilibrium measure of the relative effective rate of protection.

The WP also included a spatial model focusing on impact on directions of trade resulting from trade agreements to complement the analysis which can be derived from CGE model-based studies. The research team has developed a set of technical papers outlining the formulation, specification and calibration of a particular multi-product and multi-country spatial trade model. Several applications on specific trade policy discussions were carried out. One of these papers won the Quality of Policy Contribution Award from the European Association of Agricultural Economists (EAAE) for 2010.

The tools developed were used to evaluate the impact of various global and regional trade liberalisation scenarios. Studies on global trade liberalisation undertaken include applications of both the CGE and partial equilibrium spatial trade models. They include an evaluation of impact of global trade liberalisation under a potential Doha round agreement; a numerical analysis on the potential costs of a failed Doha round; a review and evaluations of various Doha negotiation proposals; a study on sensitive products in the Doha negotiations; a study of the impact of a potential WTO agreement on the banana market and a study of the consequences of a EU-India agreement. In addition, the team has conducted analyses on a wide range of preferential / regional / free trade agreements, including EU Economic Partnership Agreements and non-reciprocal preferential trading arrangements. Several papers were published as an output of this WP.

WP3: Changes in national agricultural systems and income distribution

The main objective was to provide a detailed analysis of the potential consequences of trade and trade policy changes on the European agricultural system. The second objective was to assess effects of trade liberalisation on income distribution and poverty in selected African countries in order to evaluate the coherence of EU agricultural, foreign assistance and trade policies. The common theme was the focus on disaggregated results. Many models developed under the AGFOODTRADE project are agricultural partial or general equilibrium models which provide a sector or an economy-wide perspective. However, they are unable to predict detailed agricultural and environmental impacts due to commodity and regional aggregation.

The French case study developed a farm-level agricultural supply model agricultural supply model for microeconomic policy analysis (ASMMA) for arable farms, which allows detailed exploration by region and farm type of impact of policy shocks on land use, farm output, farm income and chemical emissions. ASMMA is a static-comparative positive mathematical programming (PMP) model which includes most arable crops used for both food and energy purposes. A case study of the impact of the impact of EU biofuel policy using this model was completed.

The Irish case study developed a combined computable general equilibrium-micro simulation (CGE-MS) model to explore ex ante the distributional implications at household level of policy shocks. A case study of the impact of a potential Doha round scenario was completed. The first stage was the construction of a social accounting matrix for the Irish economy. In a second step, the agricultural and food industry sectors were disaggregated into individual agricultural and food industry activity accounts, land is introduced as a factor of production, the flow of public funds to the agricultural sector through various direct payment schemes is disaggregated and the household sector is disaggregated into the 6884 households represented in the Irish household budget survey. This resulted in a disaggregated AgriSAM which is then used as the basis for the CGE-microsimulation model for policy analysis. The CGE model is static and describes a single country open economy. A trade policy simulation of potential impacts of a Doha round agreement was carried out. Given the importance of the milk sector in Irish agriculture, particular attention is paid to the modelling of milk quota and its removal after 2015. Terms of trade effects were provided exogenously from a simulation experiment of Doha round. Results showed that the Irish agricultural sector would be adversely affected by the tariff elements of Doha liberalisation in the good sectors, but that non-farm households would also be hit because of the inter-industry and responding effects of lower farm output and incomes.

The work on Poland used the GTAP model to evaluate the impact of further trade liberalisation on the Polish economy. The GTAP 7 data was updated to take account of EU enlargement in 2004 and 2007. Demand parameters in the standard GTAP model for the 'other meats' category were replaced by estimates derived separately by the authors. The model was used to simulate potential Doha round outcome. It focused on improved understanding of household behaviour in responding to trade policy shocks. Specific investigations focused on apples and pork, which are important products in agricultural production and food consumption in Poland.

The EU-wide component focused on the treatment of common agricultural policy (CAP) instruments in quantitative policy models. One paper evaluated the welfare effects of sudden and immediate introduction of reforms compared to a gradual introduction over a transition period. Another paper concluded that the production effects of direct payments brought about by changes in behaviour by risk-averse farmers as a result of the wealth effect were likely underestimated.

The focus was on an explicit representation of post-2003 CAP instruments, including a new specification for direct payments which could take into account their various indirect effects on inputs and outputs. Due to the shift of policies towards decoupled direct payments, it appeared necessary to revisit the measurement of the coupling effect through wealth for risk-averse farm households. Ignoring capitalisation of income support programme in asset prices tends to understate the coupling effects of these programmes through farmers' attitude toward risk when farmers exhibit downside risk aversion. A result of the work is a much better characterisation of the effect of direct payments' wealth effect. The wealth of a farm household depends on expectations. The leakage and the production effect of CAP payments depend on the structure of farm household's assets and degree of risk aversion. Results imply that support instruments classified in the green box can have a real impact on production. How farmers form their expectations can influence the optimal policy. The development of two consistent dynamic CGE models with either perfect expectations or adaptive expectations made it possible to model saving and investment dynamic decisions. Simulations of complete removal of the CAP instruments under different timing show that it is critical to incorporate in dynamic models the different decisions and associated expectations of the many actors operating in farm markets. CGE models are usually calibrated with long-run supply elasticity. As expected, reducing the values of this supply elasticity to reasonable short-run ones reduces occurrence of diverging cobweb models.

Further work has focused on determinants of factor content in foreign trade in countries from central and eastern Europe (CEE). It shows the importance of taking into account heterogeneity in production structures. Traditional explanations are poor predictors of the factor content of CEE trade until account is taken of the role of different production structures determined not by efficiency consideration but by transaction costs. In the transition countries of CEE, adjustment of farm organisation is costly due to market imperfections. This is the case in land and credit markets in agriculture where transaction costs prevent adjustment of the distorted centrally planned farm organisation, factor allocation, specialisation and hence of the factor content of the CEE transition country agricultural trade. In these countries these are determined by past political decisions because of high transaction costs which prevent emergence of more efficient structures.

A unique data set of agricultural production and trade in CEE countries was developed. Transaction costs and market imperfections that affect the organisation of production distort farm specialisation and hence factor content of agricultural trade. Countries where small farms are dominant tend to specialise in and export labour intensive products. Countries where big corporate farms are dominant tend to specialise in and export capital-intensive products. Controlling for firm heterogeneity, firms in agriculture and food processing are found to be more credit constrained due to higher risk present in this sector. Another main contribution is to improve understanding of coherence of EU agricultural and trade policies with the EU's development objective to contribute to reduction of global poverty. African, Caribbean and Pacific (ACP) countries are in the process of negotiating Economic Partnership Agreements (EPAs) with the EU to replace the non-reciprocal trade preferences they previously enjoyed under the Cotonou Agreement. These negotiations have raised a number of fears about the possible adverse effects on ACP countries' economies. Two case studies, of Uganda and Senegal, were undertaken to investigate the impact of EPAs on income and poverty. Quantitative impacts of an EPA on Uganda were simulated using a combined CGE-micro simulation model which enables quantification of adjustment impacts on the economy following EPA liberalisation and of impacts on income distribution and poverty. The CGE model used is based on the IFPRI standard computable general equilibrium model in GAMS but modified to better reflect features of the Ugandan economy. Two sets of simulations were undertaken. Early work followed the sequential approach and used datasets which are now rather out-dated (the CGE model was calibrated to a social accounting matrix from 1999 and the household budget survey from 2002 / 2003). Subsequent work was based on an integrated CGE-MS model based on more recent data (the Ugandan SAM from 2007 and the household budget survey from 2006 / 2007). A further paper estimated a household demand system for Uganda from cross-sectional household survey data. Results of this paper were used to parameterise the demand system used in the micro simulation of EPA impacts on poverty in Uganda.

A series of simulations was undertaken with the integrated CGE-MS model. Taking into account that Uganda has had duty-free access to EU markets, simulations were restricted to the impact of Uganda's own EPA import tariff reductions. To assess impact of protection which is retained through exemptions included in the list of sensitive products of the agreement, the EPA scenario is contrasted with a full liberalisation of imports from the EU. To avoid unaccounted welfare effects, all simulations hold government consumption and saving constant. Two different choices for the tax instrument used to replace government revenue lost from the removal of tariffs are compared, an income levy and a uniform increase in sales taxes. In the income levy scenarios, the induced government revenue loss is compensated by a uniform percentage point increase in a hypothetical levy on all household incomes including consumption of own produce. The income levy is assumed to be income distribution neutral. As a uniform income levy is unrealistic in terms of implementation, the impact of compensating for the government revenue loss by means of an increase in sales taxes is also examined. In the sales tax scenarios, all existing sales tax rates increase uniformly by the same percentage.

The way the government compensates for the loss of tariff revenue is crucial to determining the poverty impact of the agreement. When lost tariff revenue is replaced by an income-neutral levy, there is a small reduction in the national poverty headcount with improvements likely in both rural and urban areas, although when the indicators for the depth and severity of poverty are examined, the positive impacts for the very poorest are strongest in the rural areas. These results are reversed when the lost tariff revenue is replaced by a sales tax. This is mainly because the price effects of lower tariffs are mainly felt by investment goods, while the replacement tax is borne by consumers on consumption goods. An important finding is that attempts to protect sensitive sectors by maintaining protection against EU imports dampen the positive poverty effects of an agreement in the case of the income levy but amplify the negative poverty effects of an agreement in the case where the current sales tax is used to replace the lost tariff revenue.

In assessing the impact of an external policy shock on domestic prices and poverty, CGE models are limited to assuming that the shock is of the same magnitude throughout the country. In practice, domestic transactions costs and market imperfections mean that movement of prices in different parts of the country in response to an external shock can be quite uneven. This hypothesis was tested by examining the transmission of border price changes and spatial price variability in Uganda, and their effect on poverty outcomes. He uses time series of retail prices for six major local markets in Uganda and over a number of different commodities, combined with the Ugandan national household survey 2002 / 2003. The research finds marked differences in poverty impacts between perfect and imperfect spatial price transmission scenarios. This suggests that ignoring the spatial dimension of price transmission can lead to strongly exaggerated conclusions about poverty impacts of global food price shocks.

The Senegal case study aimed to develop a single country CGE model including a household disaggregation in order to measure the potential impacts of two scenarios, the first on full liberalisation and the second on the potential implementation of an Economic Partnership Agreement between the EU and ECOWAS. Classical indicators of poverty and inequality were also computed in addition to the equivalent variation measure in order to capture the effects of the implementation of these policies on Senegalese households. A number of more general papers reviewing trends in the CAP from a developing country perspective were also produced as part of this work package.

Several paper publications were the output of this WP.

WP4: Competition, regulations and price fluctuations

The work included research on introducing imperfect competition and collusive behaviour in world trade models and assessment of the impact of tariff quotas and associated rents. It included work on the role of state trading enterprises, oligopolies and transnational companies and a review of the literature on the relation between agricultural trade liberalisation and volatility of world prices, and an investigation of the effects of higher volatility on world markets. An econometric assessment of historical volatility and the development of dynamic tools were also researched. Because food price volatility has emerged as a major issue in international negotiations during the lifespan of the project, price volatility has been addressed more extensively than it was originally planned. Econometric assessments of price volatility and the development of dynamic tools were carried out, with a focus on impact of trade liberalisation. The team has developed the issue of optimal storage and the impact of trade fluctuations through the use of general equilibrium models.

The research used data from individual firms to draw a global image of trade impediments for entry to different European agri-food markets. Both the decision to export and the value of exports were estimated. Evaluating both showed both the extent to which current export activity is affected by the past and the extent to which the current export activity is determined by characteristics of the firm. The analysis of trade under tariff quotas leads to rather counter-intuitive results that have largely been ignored by negotiators. Other research investigated possible explanations of price volatility. Approaches differ by nature, which is reflected in the various outputs of the work developed. Part of the work considers that volatility is caused only by exogenous productivity shocks. Private storers have rational expectations, and their action tends to stabilise markets. Other work considers that price volatility is caused by two kinds of supply shocks: exogenous productivity shocks and endogenous supply shocks created by the imperfection of agents' expectations. The work led to analyse trade and/or storage policies in a context where consumers are risk averse and markets are incomplete. An optimal storage policy alone fails to protect consumers but an optimal combination of storage and trade policies results in a powerful stabilisation of domestic food prices.

Sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT) were seen as a major source of trade impediments. Work on non-tariff measures using different case studies provides up-to-date estimates in terms of gravity equation estimation technology and accounts for the impact of NTMs on both the probability that trade takes place and the intensity of trade by computing the full marginal effect. Experimental economics were used to estimate actual social costs and benefits of standards and to base regulations on a sounder economic analysis. The results of a lab experiment detailing consumers' valuations for the environment were used for estimating the welfare impact of a tax, a minimum-quality standard, and a label, measures that affect trade in a different way. Analysis of the protectionist role of standards showed that policymakers or the WTO should pay attention to competitive structures and market mechanisms, and not only on risk assessment, when a domestic standard differs from the international standard.

Several papers were published on this WP.

WP5: Structural changes in food and biofuels demand

The objective was twofold:

(i) to provide assessment of impact of two policy scenarios in the biofuels sector on the EU's and developing countries' agriculture, and
(ii) to assess the potential changes in agricultural food demand as implicated by economic growth, demographic forces, urbanisation, and related changing dietary preferences.
The surge of bioethanol and biodiesel sectors in the EU has underlined the connection between energy and food markets. Energy prices used to affect the price of agricultural inputs. Because of biofuels, energy prices now also affect the price of agricultural outputs. As the exogenous volatility of oil prices is passed on to agricultural markets, biofuel could make world prices more erratic for food producers and consumers, creating more food insecurity. Impacts could also concern the environmental dimension. The efficiency of EU biofuels is questioned with respect to greenhouse gas balance and because of the impact on biodiversity and local sustainable development. The pressure on land use expansion could worsen the deforestation and the intensification of production could put some scarce resources at risk. The emergence of the EU biofuel market will create incentive for export-led investments. Recent studies report contrasting results regarding the pro-poor effects of biofuel policies. The search for more land may lead to competition. The large level of production of EU biofuels necessarily has an impact on agricultural markets. A large proportion of feedstock is going to the energy sector under a mandate and the demand for EU vegetable oil has rigidified. The stabilising effect of biofuels is offset by the exogenous volatility of the crude oil market that spills over agricultural markets. The issue of biofuels are closely related to the issue of land use and indirect land use changes. Work was put into a 'biofuel' version of the MIRAGE model. The model has led to policy analyses within the project and for the European Commission DG Trade.

Objectives also included analysis of alternative demographic and economic scenarios on world demand for agriculture and food products. This included development of a poverty focused version of MIRAGE that helps assessing the impacts on households of trade reform scenarios, which affects calorie intake. The work on the modelling of indirect land use changes made it possible to provide a comprehensive framework to assess how support to biofuels has consequences that spread to other feedstock and to other countries. The WP included a numerical evaluation of effects of alternative demographic and economic scenarios in developing countries on world demand for agricultural and food products. It included a literature review on the modelling of rural-urban migration, and alternative demand systems and their capacity to capture changing dietary preferences in developing countries is needed and a survey of literature on potential evolution of the world population and on the economic drivers and consequences of rural-urban migration. Several papers were published on this WP.

Potential impact


Access to good data is the most limiting factor in impact assessments of international agreements. Because of the importance of data, the AGFOODTRADE project has devoted a considerable effort in the development and updating the MAcMapHS6, BACI and the CAP payments database. MAcMap, MAcMap-HS6v2 developed with AGFOODTRADE resources by CEPII (P13) and IFPRI (P05) has been used extensively by modellers worldwide. The entire database has become a public good disseminated for free. Some graphical, user-friendly software tools were developed to present information and extract data. Several other data tools were developed as well. Data gathered was used to define a consistent baseline for projections and simulations of trade reform scenarios. The baseline considers projections of macroeconomic indicators, policies that remain unchanged, and already agreed upon policies. The datasets developed, or expanded, under the AGFOODTRADE project represent valuable tools for the research community and the stakeholders. As a result, particular efforts were devoted to their dissemination.

. Models

A variety of task-specific economic models was developed. General equilibrium models of the economies of Senegal and Uganda were constructed and linked with household survey data. A supply model of the French arable crop sector was constructed to investigate how trade policy reforms and reforms in the EU biofuel policy would affect farmers. The Copenhagen version of the GTAP model was developed including new features such as improved land use specification. The ATSPEM model is a partial equilibrium model incorporating an explicit representation of spatial trade flows, together with an innovative calibration method developed by UNICAL (P12) with some collaboration by INRA (P01). The MIRAGE model is a large-scale computable general equilibrium model of the world economy which had been initiated under a previous project (FP6).

Policy oriented results

In order to assess the consequences of a Doha agreement several studies were conducted. A numerical analysis suggests that an agreement would have positive effects on global world welfare. Welfare would increase by a modest 0.2 % of world GDP. It is estimated that the potential costs of a failed Doha round. Using the highest applied or bound rate imposed by countries from 1995 to 2008 as an indicator, they use the MIRAGE model to simulate the impact of several scenarios. In the scenario where the applied tariffs of major economies would go all the way up to currently bound tariff rates, world trade would decrease by 8 %. In a more modest scenario, world trade would decrease by 3 %. Perhaps, the key importance of a Doha agreement is not in lowering tariffs but in the fact that it would ensure that the level of protection remain close or lower than the countries remain at a level of protection close to, or lower than the current level, thus preventing a rise in tariffs.

The combination of the MAcMap dataset and the MIRAGE model also helped assessing the various Doha negotiation proposals tabled since 2003 by the different WTO participants simulations of different proposals tabled during the negotiations imply losses for some developing countries, reflecting eroding preferences and rising terms of trade for imported commodities, including food products. Analyses were conducted on preferential/regional trade agreements. Based on a partial equilibrium spatial trade model for the banana market, it was suggested that the impact of the EPA on production and consumption of bananas in the EU will be limited, while benefits for ACP countries will be significant.

It was found that the costs of compliance play a role in making the non-reciprocal preferential schemes for developing countries work: the lower the costs, the greater the impact on preferential margins. The impact was assessed on trade of EU trade policies using a gravity model based on disaggregated trade flows from 169 developing countries (DC) to 25 EU Member States. The results: EU preferences matter and have a positive impact on developing countries' exports at the intensive margin and an ambiguous impact at the extensive margin with significant differences across sectors. The effects were examined of the EU GSP scheme in enhancing developing countries' exports to EU markets, using a gravity model for a sample of 769 products exported from 169 countries to the EU over the period 2001-2004. The analysis offers evidence that the impact of GSP on developing countries' agricultural exports to the EU is positive. Other work included investigating the determinants of evasion of customs duties on the potential impact of the EU-India free trade agreement and the EU-MERCUSOR free trade agreements. The rationale for the use of export taxes is provided, in particular in the context of food crisis, using both partial and general equilibrium theoretical models. It has been argued that the existing literature on the 2007 / 2008 world food price crisis has been little concerned with the interactions of different policy measures applied by governments. Using a global CGE model, this paper provides a first quantitative assessment on the individual and joint effects of China's short-term trade policy actions and existing domestic support measures.

AGFOODTRADE made several contributions on this issue brought forward by the recent food crises. It was shown that two possible explanations of agricultural price dynamics confront. One follows cobweb logic and emphasises that expectations create complex dynamics and possibly chaos. The other stems from the rational expectations tradition of dynamics driven by real shocks. Some consider that volatility is caused only by exogenous productivity shocks mediated by competitive storage. Private storers have rational expectations, and their action tends to stabilise markets. Others address supply shocks: exogenous productivity shocks and endogenous supply shocks created by the imperfection of agents' expectations.

A framework was proposed for designing optimal food price stabilisation policies in developing countries. He analyses how stabilisation policies can play a protective role for poor population and shows that optimal simple rules, when designed optimally, can achieve more than four-fifths of the maximum gain. It was shown that in a small open economy an optimal storage policy alone fails to protect consumers, since most additional storage is used to serve the world market. In contrast, an optimal combination of storage and trade policies results in a powerful stabilisation of domestic food prices. This policy mix includes export restrictions that are harmful to the country's partners. Under the assumption of imperfect expectations, price dynamics may be sub-optimal and the introduction of stockholding behaviour may have effects opposed to those traditionally found in the literature. Building a model addressing these issues and conducting illustrative simulations, Results were found that stand in contrast with the conclusions of previous studies concerning the effects of speculative storage on market volatilities; they also reveal the importance of the form of economic agents' expectations, and of the links between their intertemporal decisions when studying such an instrument. The timing of the research allowed for frequent interaction with policy makers and media on these issues. Also, the framework will serve as a starting point for a World Bank work of the ways to increase collaborations between countries to avoid the use of export restrictions.

Different analytical tools were used to model trade liberalisation under imperfect competition. Two original models were developed which incorporate imperfectly competitive market structures in a spatial modelling framework and propose a procedure to identify the degree of market power in international trading which is consistent with observed prices and traded quantities. The model has been used to assess the impact of the most recent changes in the EU import regime for bananas. Accounting for the heterogeneity of firms changed considerably the assessment of trade liberalisation agreements. Other issues addressed include the regional impact of import competition discipline under imperfect competition; and the issue of exchange rate uncertainty in the presence of non-purely competitive trade.

How a state trading or regulated monopoly behaves, regarding price and output setting was investigated. What was examined is the case of heterogeneous input sold to a downstream oligopolistic industry. It was shown that downstream processing firms may prefer the monopoly to competitive suppliers of the input. This is the case if the monopoly provides sufficient quality assurance to the downstream firms and carries raw material inventories to guarantee quality and to allow processors to respond to international demand shocks.

Analyses carried out under the project focused on the impact of TRQs and of their liberalisation when international agricultural markets are dominated by oligopolistic traders. Oligopoly models with capacity constraint were developed to address two main issues concerning TRQs: the tariff equivalent of the TRQs and the effectiveness of the various liberalisation options when TRQs are in place. Results show how the presence of a TRQ introduces a flexible capacity constraint, as traders can increase their imports out-of-quota, albeit at a higher cost. The mode of competition between firms and the final equilibrium depends on the difference between the costs of adjusting capacities in the two periods, that is. The tariff equivalent of a TRQ changes according to the prevailing mode of competition under the TRQ. The model was used to address the issue of the 2006 tariffication of the TRQ for EU banana imports from Latin American exporters. Results suggest that under the TRQ, firms competed on quantity and that, for a wide range of parameter values, the tariff which would have left unchanged imports was higher than the one introduced by the EU. The liberalisation of TRQs may have rather diverse results when oligopolistic competition is taken into account, especially when there are no out-of quota imports. The most significant finding is that consideration of the nature of competition between traders could reverse a number of usual conclusions about the (in)effectiveness of the various liberalisation options. Under certain circumstances, even if imports are lower than the quota, a reduction in the out-of-quota tariff is effective, whereas the reduction in the in-quota tariff does not increase trade. This may have quite important policy implications.

Regulations are often necessary in order to alleviate market failures, but domestic regulations can be imposed simply to impede imports of foreign competitors. Evaluating impacts of such NTMs requires tricky estimations.

The AGFOODTRADE project made extensive use of gravity modelling. Original methods were developed and a book was released. The work showed that one can take into account the coefficient measuring the forgone trade linked to NTMs in a gravity equation to determine the relative variations of both price and quantity in a partial equilibrium model used for welfare analysis, with the integration of experimental results to evaluate the damage for consumers. Another contribution is to estimate welfare variations caused by a stricter standard. The work has relied on experimental economics, which have been found to be a promising way to estimate the actual social costs and benefits of standards and to base regulations on a sounder economic analysis.

AGFOODTRADE provides an overview and in-depth analyses of the EU biofuel market and the EU biofuel policy. EU authorities legitimise various incentives for the development of biofuels on three grounds. Biofuels are presented as a significant instrument of the EU strategy against emissions in the transport sector; to reduce dependence on foreign oil supply; and to provide a larger outlet to the farm sector and contribute to raise farm incomes. Analyses show that the carbon balance of biofuels is questionable. MIRAGE-BF is the first model that distinguishes explicitly the feedstocks and the co-products that are devoted to feed, food and energy uses. It has made it possible to assess the indirect land use effects of the EU and US biofuel policies but also to measure the production subsidy equivalent of the biofuel programmes, in particular the EU and US biofuel mandates, for the agricultural sector.

AGFOODTRADE also addressed environmental issues related to the biofuel policy. The large level of production of EU biofuels necessarily has an impact on agricultural markets. Under the AGFOODTRADE project, attention was paid to the trade impact of the EU biofuel policy and on whether it led to re-introduce implicitly farm policy instruments. Biofuels use a considerable amount of feedstock. Considerable quantities of corn are channelled to the production of biofuel in the US, sugar cane in Brazil and rapeseed in the EU. Such levels have an impact on markets. With such a significant proportion of the feedstock going to the energy sector under a mandate, the demand for EU vegetable oil is made more rigid and inelastic. As a result, a supply shock can have a greater large effect on the world price and hence generate larger fluctuations. Analysis of the international market of biofuels and its implications in terms of trade of agricultural products show that some price support mechanisms are heavily affected by biofuel policies. By shifting some of the cost of farm support back to consumers, biofuel policies offset some of the gains for consumers. There are some major differences with the ‘old’ instruments of farm policy. The stakeholders experiencing the costs of biofuel policy are not those that bear the burden of traditional farm policies. In addition, a biofuel mandate shifts some of the burden of farm price support to gasoline and diesel users.

Modelling of indirect land use changes has made it possible to provide a framework to assess how support to biofuels has consequences that spread to other feedstock and countries. Typically, international prices that vary because of biofuel programmes have domino effects and can lead to an expansion of land cultivated in remote countries. There are some serious questions on the way this affects the energy and the environmental balance of EU biofuels. The debate on indirect land use change (ILUC) has questioned the principle that biofuel policies would lead to greenhouse gas (GHG) savings as long as land use diversion effects are taken into account. Growing biofuel crops would lead to displacement of production historically dedicated to food and feed needs in other regions and would drive massive natural land conversion to cropland. The model developed benefits from specific development on the data side and on the modelling side that makes it particularly suitable to study such policies. Applied to the assessment of the EU biofuel policy, if current targets are followed, the work shows that emissions driven by land use changes would most likely be significant (38 g CO2 for the median case).

Future needs would make most of the global cropland expansion take place outside of Europe, Latin America, Eastern Europe, Russia and Sub-Saharan Africa. By looking at alternative composition mixes for the future EU biofuels consumption, it is shown that ethanol and biodiesel demands have quite different effects, biodiesel releasing twice as much CO2 due to land use changes as ethanol. Significant uncertainty exists for measuring such effects, driven by behavioural parameters, confidence intervals and modelling specifications. Efforts to permit large-scale conversion of cellulose into biofuels are being undertaken in the EU. Market conditions will determine whether the necessary private investment will be available to allow a cellulosic biofuels industry to emerge.

AGFOODTRADE addressed the EU policy goal to achieve greater policy coherence between agricultural and trade policy and the interests of developing countries in a number of ways. Ex post analysis of the effectiveness of EU preference schemes for agri-food trade was examined using both empirical gravity model studies and through general statistical analysis. Case studies of impacts of EPAs on poverty and food security in both Uganda and Senegal were undertaken. The research showed a positive and significant effect of agri-food trade preferences. The EBA initiative has had positive effect in enhancing LDC exports to the EU. Data and modelling code are made publicly available to allow replication and further work. Shift-share analysis showed that, adjusting for the commodity composition of exports, all African regions with the exception of North Africa lost market share in their main export commodities over the past decade.

The recommendation to give greater attention to addressing domestic supply-side issues rather than focusing on external trade barriers carries important implications for the design of African agricultural development strategies. Case studies of the impact of EPA's on poverty in Uganda and Senegal showed ambiguous results. In the case of Uganda, the results indicated small positive macroeconomic and negligible poverty impacts. Stronger negative poverty impacts were found in the Senegal case study. This research helps in designing EPA agreements which can contribute to the development of partner countries.

Dissemination and articulation with policy makers

The task 'Dissemination tools set-up and update' led to the construction of a website which has been useful both as a portal to allow the public to access project results and publications, and as an intranet to manage documents.

Working papers were posted on the intranet, visible to all the researchers participating to the AGFOODTRADE project as well as a list of 12 correspondents at the EC (DG Trade, DG RTD, DG Agri). After one month, the papers were either posted on the public webpage, or sent to a journal. Public working papers were disseminated through the RePEC and AgEconSearch system. Conferences were also organised in several meetings. Members of the consortium contributed to conferences specifically relevant for economic policy analysis and policy modelling. A total of 65 papers and book chapters were published by 30 November 2011. The dissemination work also includes two workshops following a demand from DG Agri to present the results of the project.

A special task was designed to facilitate contacts and coordination with Commission's representatives. The project executive board of the AGFOODTRADE project supported the idea of frequent contacts with the EC and other international organisations that were working in closely related fields. The frequent contacts with the EC helped design scenarios for simulations of reforms. They made it possible to curb the programme of work when some particularly important topics gained importance in the policy arena. This is particularly the case of the work on biofuels and the work on price volatility.

Frequent contacts took place with organisations working in the area of trade. Representatives of the Food and Agriculture Organisation were invited to meetings, and the FAO even provided its facilities for a large-scale meeting to present preliminary results. Collaborations were close with the global trade analysis project. Some databases (MAcMap, EU-27 SAMs, farm support data, etc.) were integrated to the project central data, and are now used by modellers all over the world. Software for ad hoc aggregation of the trade and SAM data was developed by IFPRI (P05) in association with the GTAP project (Monash University and Purdue University). The Economic Research Service (US Department of Agriculture) was associated and an ERS researcher was invited to meetings as an invited member of the Advisory Board of the project.

Project website:
The website provides the following information:

1. general information on the project;
2. the project presentation;
3. the official documents of the project when they are public;
4. the work done for each activity of the project through descriptions pages;
5. the public data and documents (working papers) issued by the AGFOODTRADE work.

Website address:

Contact: Jean-Christophe Bureau