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CAPRI
General:
CAPRI
• Products:40
•Regions : 18 trade blocks (EU15, EU10, USA, CAN, ANZ,
ACP, LDC, ROW, Mediterranean and Mercosur broken
down to in single countries)
• EU regions broken down in Member States
• Policy variables: tariff rate quotas (global), subsidised
exports, sales to intervention stocks, Minimum import
prices (EU25)
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Two Stage Armington
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Demand (Arm1) =
Human consumption
+ Feed Use + Processing

Arm i ,r  sp1i ,r dpi ,r ,rwImports i ,r
Domestic Sales
(DSales)

 dpi ,r ,r DSales i ,r

  1 
Imports (Arm2)
Imports i ,r

 
 sp 2i ,r  dpi ,r ,r1Streamsi ,r ,r1 
 r1

Streams(R,R1,XX)
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....
1 
Streams(R,Rn,XX)
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•
•
Policy instruments:
What kind of tariffs in CAPRI?
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During runs bi-lateral “applied” rates, either specific (fixed duty
per quantity, “STARIFF”) or ad-valorem (percentage of import
prices, “ATARIFF”)
The applied rates fall in one of the following 3 categories:
1. Fixed, defined as the minimum of the bound rate
(maximum tariff allowed according to WTO, so-called “Most
favorite Nation” or MFN rates) and the applied rate ex-post
2. Fixed to zero, based on preferences (e.g. North-American
free trade zone, EU15  EU10, Cotonou, Everything but
arms)
3. Endogenous:
1. Under TRQs
2. and/or under Minimum Import Price regimes
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Endogenous policy instruments
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• Globally:
– Tariffs as functions of import quantities in case of a
Tariff Rate Quota (TRQ)
• EU specific:
– Flexible levies, i.e. tariffs under a minimal import
price regime
– Subsidized exports under WTO value
commitments Intervention purchases and releases
from intervention stocks
CAPRI Training Session Warsaw 2006
CAPRI market model: Endogenous Policy
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Policy instruments impacting
directly on import prices
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Exogenous
Endogenous tariffs
MFN
rates
Allocated
TRQs
Global
TRQs
Preferential
agreements
Minimum import
prices
Import prices = Market Price x Exchange Rate x (1 + bilateral ad valorem tariff)
+ bilateral specific tariff
- export subsidy
Administrative price
CAPRI Training Session Warsaw 2006
Function
For subsidized
exports
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•
•
Tariff Rate Quota, regimes and rents
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Two tiered tariff:
– In quota tariff up to a certain quantity
– MFN (Most Favorite Nation) rate for over-quota imports
Possible regimes:
– TRQ not filled
• lower in quota tariff applied  marginal willingness to pay equal to
border price plus in quota tariff
• No rents
– Over quota imports
• higher over quota tariff applied  marginal willingness to play equal to
border price plus over quota tariff
• Economic rents for imports up to quota: difference between tariffs times
quota
– Binding quota
• In quota tariff applied  marginal willingness to pay in between border
prices plus in quota tariffs and border price plus over quota tariff
• Rent as difference between marginal willingness and border prices plus
in quota tariffs times quota
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CAPRI market model: TRQs
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Tariff Rate Quota, regimes and rents
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Over quota tariff
Import price
= Border
Price + tariff
In quota tariff
Border
Price
Imports
Quota
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CAPRI market model: TRQs
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Regime I: underfilled TRQ
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Import demand
Over quota tariff
Import price
= Border
Price + tariff
In quota tariff
Border
Price
Imports
Imports
CAPRI Training Session Warsaw 2006
Quota
CAPRI market model: TRQs
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Regime III: over quota imports
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Import demand
Price
paid for
imports
Economic rent
Import price
= Border
Price + tariff
Over quota tariff
In quota tariff
Border
Price
Imports
Imports=Quota
CAPRI Training Session Warsaw 2006
Imports
CAPRI market model: Endogenous Policy 10
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Regime II: binding TRQ
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Import demand
Price
paid for
imports
Economic rent
Import price
= Border
Price + tariff
Difference between marginal willingness
to pay and import price
In quota tariff
Border
Price
Imports
Imports=Quota
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CAPRI market model: TRQs 11
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Why are TRQs important?
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• In countries with high MFN rates as the EU, larger
share of imports occur under TRQs
– Realistic simulations of effect of changes in border
protection only possible if TRQs taken into
account:
• A change in the in-quota or over-quota (MFN) tariff may
not provoke any changes in import quantities or prices
• WTO proposes to expand binding TRQs
– Preference erosion:
• Reducing the MFN tariff reduces rents
• In many cases, (L)LDC “own” quotas and thus loose
income
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What are the problems with TRQs?
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• In many cases, TRQ relate to specific tariff lines
which are more dis-aggregated as the model’s
product  aggregated product is mix of TRQ and
tariff only regime
• Depending on quota administration, the observed fill
rate may not be an indicator for the regime
• Quota may be allocated to single countries or even
firms, but the information may be not available
• “Kinked” functional relationship leads to dis-continous
derivatives of the Langrangian  not suitable for
gradient based solvers => “fudging” function
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“Kinked” policy instruments
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• Solution either by “Mixed-Complementary Programming”
+ Complementary slackness conditions defined explicitly
- Require specific solvers
• Or by “fudging functions” which smooth out kinks
+ no switch of solver necessary
+ no 0/I solution by behavioural functions for policy agent
- steep derivatives can render solution difficultly
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CAPRI market model: Endogenous Policy 14
A “fudging” function
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• Sigmoid function:
Sigmoid x   exp  min x,0
 1  exp  absx   
• Symmetric S-shaped form
• Overall differentiable
Sigmoid(x)
• Between 0 (if x = -) and 1 (if x = +),
1
• Sigmoid(0) = 0.5
0.5
+
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0
+
x
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How are TRQs modelled in CAPRI?
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• Two types:
– Bi-laterally allocated TRQs: open only for specific trading
partners (TRQREG)
– TRQs open to everybody who has no bi-lateral TRQ (TRQWOR)
• What data are stored:
– TRQNT:
the quota quantity
– TsMFN:
specific tariff MFN (over quota tariff)
– TaMFN:
ad valorem tariff MFN (over quota tariff)
– TsPref:
preferential specific tariff (in quota tariff)
– TaPref:
preferential ad valorem tariff (in quota tariff)
CAPRI Training Session Warsaw 2006
CAPRI market model: TRQs 16
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Where can I find the results on TRQs?
1) Who is benefiting from preference?
2) What is the maximal quantity
benefiting from the preferences?
4) What is the value of
the economic rents?
3) How much is imported
total?/with preferences?
Preferential rates = in quota tariffs
CAPRI Training Session Warsaw 2006
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5) What is rent per
ton imported under
preferences?
MFN-rates = Over quota tariffs
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Flexible levy or minimum import prices
Import price
= Border prices + tariff
Minimal
import price
(mip)
Border price
= 45 degree line
Maximum
tariff (max)
Applied tariff
(flexible levy)
Applied tariff at:
Import price ip:
at=max
ip<mip
Max>at>0
ip=mip
CAPRI Training Session Warsaw 2006
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Applied tariffs which
are adjusted so that
a minimum import
price is guaranteed.
They may be upper
bounded by the
WTO bound rate.
at=0
ip>mip
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Why are flexible levies important
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• In the typical range where the applied rate is above
zero, but below the bound rate, the price
transmission from border to market is zero: only the
tariff is adjusted when the border price changes
• A change in the bound rate may not provoke changes
in import prices (specific case of “water under the
tariffs”)
• Used in important EU markets (some coarse grains,
sugar, vegetables)
• Simply using the bound rate overestimates import
prices and effects of trade liberalization
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Subsidised exports for EU
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• Instrument to increase competitiveness of EU exports
in international markets
– Increase import demand for EU products
– Stimulates exports
– Decreases market pressure in EU markets
– Increase EU market prices
• So-called market comities decide in regular intervals
upon amount of subsidy, but decision criteria defined
in CMOs are vague
• Quantities and values of subsidized exports are
upper bounded since the WTO Uruguay round,
so-called commitment
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CAPRI market model: Endogenous Policy 20
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Data on subsidised exports for EU
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• FEOGA budget delivers yearly budget outlays
• EU notifies to WTO quantities, budget outlays and
commitments
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CAPRI market model: Endogenous Policy 21
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Modelling subsidised exports for EU
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• The model cannot make a distinction between
subsidized and non-subsidized exports to a specific
destination
• In the base period, a mix subsidized and nonsubsidized exports takes place
• We don’t possess data to distinguish the subsidy by
destination
 All exports receive the same subsidy
• Value limits are integrated in the model,
as the observed mix of export with and without
subsidies cannot be modeled
CAPRI Training Session Warsaw 2006
CAPRI market model: Endogenous Policy 22
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Function for subsidised exports



PMrki   i PADM i
ExpsVali  FEOE_maxi 1  1 exp    i
 i PADM i


EXPSVALi
FEOE_maxi


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 


value of subsidies paid
WTO commitment on subsidies paid
defines steepness of function
percentage of administrative price PADMi
at which EXPSVALi is 50% of FEOE_MAXi
PMrk
PADM
 PADM
EXPSVAL
50% FEOE_MAX
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FEOE_MAX
CAPRI market model: Endogenous Policy 23
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Modelling subsidised exports for EU
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• Assumption to define parameters of function:
– Function depends on EU market prices and administrative
ones: the lower the market price relative to the administrative
one, the higher the value of the subsidies
– Two parameters:
• Steepness of response to prices changes
• Mid point of function
– Function recovers values of subsidized exports for the base
year period
 one degree of freedom left
 a second point is constructed by assuming that only 5% of
commitment is used at 125% of administrative price
• Rather rapid response to price changes
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CAPRI market model: Endogenous Policy 24
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Where to find results on subsidised exports?
Table: FEGOA
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Value of subsidies
CAPRI market model: Endogenous Policy 25
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Intervention purchases
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• Instrument to stabilize market prices:
– If certain trigger prices are undercut, public
purchases into intervention stocks take place
=> additional demand, price drops are softened
– At higher market prices, stocks will be released,
increase supply and dampen price increases
• Problems for modeling:
– Intervention may react to short-time price
fluctuations
– Complex legislation defining the trigger prices
depending on short time price notations
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How are intervention stocks modeled
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• Three variables:
– Intervention purchases: probability of market
prices to undercut administrative ones times
maximum intervention purchases
– Intervention releases: (1-probability of market
prices to undercut administrative ones) times
probability of market price to exceed unit value
exports without subsidies times times intervention
stock size
– Intervention stock size: start size + purchases releases
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How are intervention stocks modeled
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Assumed normal distribution
around current EU market price
Administrative
price
Export
unit value
Probability
to undercut
administrative price
Probability
to exceed
unit value exports
without subsidies
Endogenous
market price
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Where to find results on intervention stocks?
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Financial costs=
Depreciation=
(Size in base year x base year price
(Market prices – unit value exports)
+ simulated final size x final price)/2 x 4% x final size
Other=
Purchases x Admin. Price
Technical costs=
– releases x unit value export
(Size in base year + simulated final size)/2
x costs per ton
Changes = Purchases - releases
Table: FEGOA STOCKS
Final stock size = start size + purchases - releases
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Training with the market model
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• Run on Member State level with 3 iterations one of
the following simulations
• (1) abolish EU15 subsidized exports for wheat
(policy file policy\01NOSUPX.gms)
• (2) Close EU15 tariff rate quota for wheat
(policy file policy\01NOTRQ.gms
While the model runs understand the policy files
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• $include pol_input\mtrstd.gms
• **** policy changes
•
DATA("EU015000","FEOE_max",XX,SIMY) = eps;
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