Analyzing India-EU Agricultural Trade Policies: Insights from Modeling and Policy Analysis

1. India-EU trade reforms: Comments on modelling and policy analysis Agricultural Trade Policies and Development R. Jongeneel (LEI-WU) Agricultural Trade Project 25 April 2008 LEI Seminar

2. Contents • Introduction • Some experiences & lessons • Reasons for scrutiny post-model analyses • Specific issues India application • Concluding remarks

3. Introduction

4. Science/models: Looking for an appropriate map

5. Why use models ? • Need for ‘systematics’ in the analysis • Need for quantification • Need for explicitizing assumptions • Need for framework to discuss disagreements • Need to clarify costs and benefits (welfare impacts) from policy changes • Need to explore policy options …

6. Why use models ? • Check for alternative policy scenario’s • Check for all kind of impacts (income, welfare, markets, budget, environment, … • Do sensitivity analysis about uncertainties and show impacts

7. Qualifications (i) • Models simplify reality • Models often hide uncertainties • Models use a lot of basic assumptions and supplementary assumptions • Models are weak in accounting for changes in behavior • Models are often too restrictive wrt market structure (e.g. deviations from full competition such as monopolistic comp., etc)

8. Qualifications • Model closure (and non-considered feedback links) are important • Models don’t prescribe policy, but can be easily abused for this • Institutional issues are often downplayed or presumed • It is difficult to include the full real world dynamics (expectations, non-linearities, comparative static)

9. Some experiences and lessons

10. Some examples • Use models for their strengths not their weaknesses • Power of GTAP and its ‘family’-members lies in world-wide impact analysis of trade policy changes • See overview partial (Harbinson) (slide 1) and full trade liberalisation analysis (slide 2) (source J-C. Bureau)

11. Model use and WTO /TrLib (i)

12. Models and WTO/TrLib (ii) Even with same model and same scenario different researchers come up with differentresults

13. Lessons from modelling WTO/TrLib (i) • Only a few model families are used • Caution needed for artifical consensus • More liberalisation leads to larger gains: already by assumption • Gains are actually quite small (0.x% of GDP) • In particular developing countries gain relatively little (although they did in older studies).

14. Lessons from modelling WTO/TrLib (ii) • More recent model version show smaller impacts due to better data (applied tariffs, TRQ-treatment, other NTBs) • Better desaggregation of DC (still weak on impacts of binding overhang, tariff data precision, somtimes simplistic assumptions wrt consumer surplus changes offsetting producer surplus changes) • Few models still take the relationship between intervention prices, tariffs and export subsidies properly into account (EU)

15. Post-modeling analysis

16. Model use matters • Model have limited direct impact, but large and increasing indirect impact • Models are (more) used in trade panels (with country focus!) • Need for good quality management & accountability about performance and limitations • When focus on specific country-market-impacts post-model analysis is required

17. Post-modeling analysis • Models are calibrated: lack empirical testing • Specification errors (aggregation, heterogeneity, down-scaling, macro-micro, lacking detail in policy implementation) • No market power • Instantaneous adjustments (signal transmission, responsiveness) • Dynamics & structural change not well-captured • Balance of trade-closure Also plea for pre-modeling analysis

18. Specific issues wrt India

19. Comments/questions on analysis • Modeling assumptions • BoP closure rule => dX = dM • Factor mobility assumption • Meat import fixation

20. Comments/questions on analysis • Context: quantitative assessment of India-EU FTA • Q1 : PTA or FTA? • Q2 : ‘external’ tariff assumption? • Q3: TC and TD (how to explain) • Q4: TRQ treatment • Scenario design

21. Comments/questions on analysis • Post-modeling analysis (fed/state level desagr?) • Check for main affected products • Padi rice • Processed rice • Sugar cane, sugar beet? • Textiles and leather? • Wool, silkworm cocoons? • (Manufactures) • Analyse in detail • Policy representation • Price transmission

22. Concluding remarks

23. Some conclusions • GTAP contains lot and still increasing amount of expertise on modeling, trade volume, price and policy data • CGE is encompassing but captures not everything properly and with proper detail • Plea for (pre-) and post-modeling analysis • (scenario design) • (scenario implementation: policy transl.) • interpretation and modification of results • derived impact analysis