Transcript Document

Economics of Litigation for
Mediterranean Commodities
Presented at the
Cal-Med Consortium Workshop
Montpellier, France
June 26, 2006
Daniel A. Sumner
University of California Agricultural Issues Center, and
Department of Agricultural and Resource Economics, UC Davis
Outline and Main Points
1.
Potential WTO litigation makes status quo farm programs
vulnerable. The big case has been a field crop commonly
grown in California and the Mediterranean region of
Europe as well as elsewhere.
2.
Does the economic situation for horticultural crops
commonly grown in Mediterranean zones suggest such
vulnerability?
3.
What are implications for litigation, unilateral reforms or
reforms as a consequence of WTO negotiations?
Initial Clarifications
• Litigation is for lawyers and you do not want your
legal advice from an economist.
• Fortunately we have that covered here.
• The law and applicable economics seems to be still
evolving. One should be modest in the one’s claims.
Initial Background
• It does not take much actual litigation to get a
lot of attention.
• One or two WTO cases, not even yet
completed (in terms of implementation)
• Informal discussion of others
• That is all the real action
• But many observers rank litigation as one of
the significant drivers of potential changes in
US and EU farm programs
• So, the topic is worth some discussion
Relevance of the WTO Brazil/U.S.
Upland Cotton Case
• Lawyers tell us that the cotton case broke new
legal and economic ground at the WTO.
• For economics of commodity markets standard
economic models and evidence were presented
by both sides and third parties.
• This may suggest a lesson for how economics in
other litigation may proceed.
Framework Economic Issues
• Serious prejudice
– Price suppression
– Market quantities
• Export subsidy violations
• Are there commodities and programs where
export subsidies were not included?
• National treatment
– Eligibility for payments, support, marketing
order benefits, etc?
• Economic modeling centers on serious
prejudice
Budget for US commodity subsidies:
(recent total ~$20 B)
Commodity
Share of Outlays
(Varies by Year)
Feed grains
Soybeans
Wheat
Cotton
50%
10%
10%
12%
Rice
Dairy
7%
3%
Other commodities
Disaster
Other
4%
2%
2%
Production Shares Commodities
Commodity
Share of Value of Output
(Varies by Year)
Feed grains
Soybeans
Wheat
Cotton
13%
9%
4%
3%
Rice
Dairy
1%
10%
Meat and Poultry
Horticulture + F&V%N
Hay and other
33%
25%
2%
Share of Producer Support in California, 20012003, by Policy
Dairy Marketing
Order, 5%
Economy Wide
Policies, 4%
Research, 5%
Other Marketing
8%
Import Barriers
41%
Input Assistance
10%
Government
Paymnents
26%
Source: Agricultural Issues Center
Export Assistance
1%
Producer Support Estimate in California, 2001-2003, by
Commodity or Commodity Group
70%
60%
50%
40%
30%
20%
10%
Source: Agricultural Issues Center
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Impacts of payments on lesssubsidized crops
• Most Mediterranean crops have not received output
subsidies,
• Overall government support is a small share of revenue
• Subsidies are applied to crops that compete with these
Mediterranean crops for land and water
• Because of and in spite of planting restrictions, subsidy can
thus have significant impacts on non-subsidized crop area
– Planting restrictions increase are of program crops and eligible
crops
– W/O planting restrictions, more area of Mediterranean crops
• Also affect less-subsidized commodities through trade
negotiation prospects
Legal and economic issues on effect of
subsidies
What counts as support… a “green box issue”
GATT legal text: Annex 2 para 6(a)
“Eligibility for such payments shall be determined by clearly-defined criteria such as
income, status as a producer or landowner, factor use or production level in a
defined and fixed base period”
Issue of base updating as a violation of the “fixed base period was not settled one
way or the other.
GATT legal text: Annex 2 para 6(b)
“The amount of such payments in any given year shall not be related to, or based on,
the type or volume of production (including livestock units) undertaken by the
producer in any year after the base period.”
Seems clear in hindsight that restricting what can be grown on the base land
looks like a violation that payments not be based on “type…of
production”.
Economic question: do the US (or EU) restrictions affect program crop
production significantly? Conceptually the relationship is clear and
allowing a farmer to plant nothing at all is obviously irrelevant. The
answer empirically depends on data that is hard to get.
Magnitude of Effects: expectations,
insurance and decoupling
• Impacts of price contingent subsidies vary by year
depending on expected price
• Crop insurance subsidy directly lowers cost of this “input”
… but would they have bought insurance w/o the subsidy?
• Some payments are not tied to current production but also
are not divorced from production incentives:
– reduced risk aversion (likely small),
– planting restrictions,
– Expectations of updating: (AusJARE 2003) expectation
that future subsidy is tied to current production
Degree of linkage = ∑t (1+r)-t(E(Rt/Rn))(Probability Ut)
Model approach
• Naturally asking the question: what if subsidies
were not in place? This is a counterfactual for the
new intermediate run equilibrium would have been
(or would be) but for the effects of specific offending
subsidies.
• The question suggests a simulation model not
econometrics applied to actual data which has not
“run the right experiment.”
• Question suggests a model focusing on effects for a
specific commodity, although multi-commodity
impact and responses may be important.
A simple model of effects of subsidies
(1)
(2)
(3)
(4)
dlnSu = εu(dlnRu)
dlnDu = ηu(dlnP)
dlnSr = εr(dlnP)
dlnDr = ηr(dlnP),
Ru -- effective revenue per unit received by producers
dlnS -- log change in the quantity supplied,
dlnD – log change in the quantity demanded,
dlnP – log change in market price.
εu and εr – own elasticities of supply.
ηu and ηr – own price elasticities of demand
Subscripts: u subsidized suppliers, rest of market
A simple model of effects of subsidies
Ru = P + G
G = γg,
g: per unit government support, including all subsidies
γ: degree of production incentive relative to a
production subsidy or market income
(5)
dlnRu = αdlnP + (1-α)dlnG.
A percentage reduction in G may be achieved by
reducing the degree of production incentives inherent
in the support, dlnγ, or by reducing the level of
support, dlng.
(6)
dlnG = dlnγ + dlng
(7)
α = P/Ru,
(8)
(1-α) = G/Ru
(9)
(1-α) = (γg)/(P + γg) = (γ/(γ + P/g).
A simple model of effects of subsidies
World supply in log differential form:
(10) dlnSm = δsudlnSu + (1-δsu)dlnSr
= [δsuεuα + (1-δsu)εr]dlnP + δsuεu(1-α)dlnG,
δsu -- share of U production in the market.
Similarly, on the demand side:
(11) dlnDm = δdudlnDu + (1-δdu)dlnDr
= [δduηu + (1-δdu)ηr]dlnP,
δdu -- share of U consumption in the market.
dln Sm = dlnDm, so that,
Price impact of a commodity subsidy,
quantity impacts are analogous
(12) dln Pm = -[δsuεu(1-α)]/
[δduηu + (1- δdu)ηr – (δsuαεu + (1- δsu)εr)],
δ are supply and demand shares,
• η are demand elasticities,
• ε are supply elasticities and
• 1-α measures the amount of subsidy and its
relative degree of production incentive
• regions u and r
Impact of a commodity subsidy: Summary
Price equation result: Effects of program removal in U
dln P = -[δsuεu(1-α)]/
[δduηu + (1- δdu)ηr – (δsuαεu + (1- δsu)εr)],
δ are supply and demand shares,
• η are demand elasticities,
• ε are supply elasticities and
• 1-α measures the amount of subsidy and its relative
degree of production incentive
• regions: u--subject member, r--rest of market
…… Similar result for quantities
Next …Show a little background for this result.
Determinants of policy effects on price
suppression
1. Programs linkage to relative marginal revenue.
a. subsidy share of revenue (xx%)
b. Degree of subsidy linkage (% of pure production
subsidy)
2. Supply response in U to fall in revenue relative to
other crops over a few years horizon (elasticity)
3. Production share in U (%)
4. Supply response in other countries to revenue rise
filtered by price transmission (elasticty)
5. Demand response to price rise (elasticities in U
and R)
Some candidate commodities
•
•
•
•
•
•
•
Wine
Processing tomatoes
Vegetables
Citrus
Fresh market grapes
Raisins
Processed peaches, pears other processed fruits,
vegetables and nuts
• Olives and Olive oil
• Tree nuts…almonds, walnuts and pistachios
Processing tomatoes in the EU
• Rickard and Sumner model the tariffs and domestic
subsidy impact on market prices, quantities and trade
flows in 3 regions
– Allows downstream linkages from tomatoes to paste
(and canned tomatoes), substitution with nontomato inputs and less than perfect substitution
across regional products
– Incorporates regional tariffs and duty drawback
• EU 14.4 % tariffs cause most distortion, but 44%
subsidy has significant price, quantity and trade flow
– Major benefits of EU program elimination for US
growers and processors
Processing tomatoes in the EU
• Apply the much simpler model above to tomato paste:
δseu (production share)
36%
η (demand elasticities)
-0.5
εeu (supply elasticity, down)
1.0
εrow (supply elasticity, up)0.5
(1-αeu) subsidy share of effective revenue, for the
processed (44%)(share of tomatoes in paste cost)
(0.44)(0.5) =0.22
Market price effect subsidy elimination:
dln Pm = (0.36)(1)(0.22)/[0.5+(0.36)(.78)+(0.5)(0.64)]
= 0.08/1.1 = 7.3% price increase
Just a very rough approximation for illustration only.
Olive Oil in EU
• Apply the much simpler model above to raisins:
δseu (production share)
74%
η (demand elasticities)
-0.5
εeu (supply elasticity, down)
1.0
εrow (supply elasticity, up)0.2
(1-αeu) subsidy share of effective revenue, for the
processed (20%)(share of olives in oil cost)
(0.2)(0.6) =0.12
Market price effect subsidy elimination:
dln Pm = (0.74)(1)(0.12)/[0.5+(0.74)(0.88)+(0.26)(0.5)]
= 0.09/1.28 = 7.0% price increase
Just a very rough approximation for illustration only.
US fruit and tree nut marketing orders
other subsidy
• Mostly promotion and research some marketing quality
(food safety) restrictions
– Most apply to domestic and imports
– Probably attempt to bias rules, but within a framework
that restricts such bias…not too blatant
• Little remaining market flow regulation
– Almond storage and market allocation
– Some tree pulls
• Complex program for raisins for supply control, price
discrimination and market regulation
– Raises market prices and shifts raisins among markets
• Hard to find sizable broad market effects for subsidy to F,
N & V products in US, but may be in specific markets.
From Subsidy effects to trade litigation
• Subsidies raise concerns of international
competitors that they affect markets, but even
if this is true…
• Litigation is costly, uncertain and divisive
• It may take a trigger event to ignite litigation
• Litigation against US became more relevant
after the 2002 Farm Bill suggested the US was
on a path to increase not reduce subsidies
• Litigation can include WTO cases and bilateral
trade remedy countervail and anti-dumping
WTO Implications of Litigation
• Affect process of negotiation and agreement…more attention
to specific wording
• Some implications of definition of colored boxes…
• Pressure for rules that can be predictably binding
• Credibility of WTO in small and developing countries
increased with successful developing country cases
• More similar cases, but these are hard to develop
– Success is not a “slam dunk”
• Implications for the role of economists
– Major role for economic argument and evidence
– Effect policy path through contributing analysis affects
litigation first and then negotiation and legislation
– Litigation draws on relatively “academic” research