Work Package 6

Modification of CAPRI trade model

Objectives

Expand the country and commodity list of the CAPRI trade impact model to cover individual Mercosur countries with their most important agricultural products, and cover domestic policies as well as current agricultural trade instruments (tariffs, preferential agreements, Tariff Rate Quotas).

Description of work

• Expand list of countries in CAPRI market model to include individual Mercosur countries and set-up necessary basic data (trade flows expost, Supply utilization accounts, import tariffs etc.). Currently, the CAPRI trade module does only include a highly aggregated representation of the Mercosur countries which are part of the aggregate “Developing Countries in the Cairns group”. In parallel to the work in WP 2 where basic data on Mercosur agriculture which be sampled, the team in Bonn will access the statistical data base of FAO (FAOSTAT) and other standardised data sources to built up a fist version of a data base linked to the CAPRI trade model. With the help of the Mercosur colleagues (WP 5), that data base will allow to test the resulting framework before more refined data will be available. After the necessary data are available from WP 2 (deliverable D x), these data will be integrated in the model data base as well. [3 person months].
• Expand commodity coverage of CAPRI market model if necessary. One of the outcomes of the other work packages relates to the definition of such products where Mercosur countries have probably comparative advantages vis-à-vis the EU. Insofar as the current product list does not cover all of theses products, the project team will decide if these products will be fully embedded in the CAPRI model structure. The main advantage of the multi-commodity approach underlying the CAPRI trade model is the fact that interactions between products on the supply side (technological interactions, risk and policy effects) and on the demand side (substitution and income effects) are consistently captured. In some cases, e.g. single specialised processed products, where interactions with other products are less important and the developed of a global data and parameter base is prohibitive, stand-alone analysis may be the only feasible approach. [3 person months]
• Integrate domestic and trade policies in Mercosur countries into CAPRI market model. Currently, the framework captures domestic policies by the PSE/CSE approach which maps all domestic support measurements into a price gaps between import prices, domestic market prices, farm gate and consumer prices. But even PSE/CSE data for Mercosur data are not complete, as not all Mercosur countries provide the necessary data to OECD. The minimum data to be sampled in WP 2 are hence PSE/CSE data for key markets. If the analysis of domestic policy instruments reveals characteristics which render the price gap approach as less suitable, the project team will decide if an explicit representation will be embedded, as it is currently the case for the EU and purchases to and sales from intervention stocks and subsidised exports. Secondly, tariffs per country and commodity will be embedded in the data base, and where applicable, bilateral trade instruments as preferential agreements and Tariff Rate Quotas will be included in the modules. [3 person months].
• Test the resulting framework with parameters from literature/other models (e.g. @2030 from FAO). As a consequence of the work steps before, the framework will be technically ready for application besides a parameter data base. In parallel to the econometric estimations foreseen in WP 4, the project team will integrate parameters for Mercosur countries from other studies and model systems as the @2030 model of FAO or OECD’s AgLink model. These parameters will provide a fallback position for such cases where a product-country combination is of less importance and hence not included in WP 4. [3 person months].
• Include estimated parameters from WP 5, and repeat tests. The CAPRI trade module consists of identically structure country module embedding supply and demand systems of an identical functional form (normalised quadratic profit functions, generalised Leontief expenditure systems). As full blown system estimations for all Mercosur countries are not feasible given time frame and resources of the project, a synthetic approach is envisaged as already partially embedded in the current CAPRI version. That approach defines a set behavioural parameters for different countries modules based on constraints from microeconomic theory as homogeneity in prices, symmetry and correct curvature and a penalty function which minimises the difference between point elasticities derived from the parameters, prices and quantities and the point elasticities found in other studies/modelling system. The resulting set of parameters thus fits in the technical structure, and equally important, allows for a welfare analysis on the supply and demand side. [2 person months].
As a consequence of the work steps describe above, a fully functional version of the CAPRI trade model will be ready for application, broken down to individual Mercosur countries, including all products important for agricultural EU-Mercosur trade relations and sourced by reliable data and parameters

Deliverables

D15 New structure of CAPRI market model to allow for Mercosur trade links [12,O,RE]
D16 First impact assessment runs with synthetic parameters [24,O,RE]
D17 Fully functional CAPRI market model with Mercosur commodity trade links [31,O,RE]

Milestones and expected results

M16 CAPRI model expanded to individual Mercosur countries (and commodities) trade [12]
M17 New behavioural parameters integrated [31]