Review and Discussion of Selected Model-Based Analyses

3 Modeling Approaches and Results of Former Studies

3.2 Review and Discussion of Selected Model-Based Analyses

In this section some models which have been applied in the recent past to analyze the world sugar market are reviewed. First they are introduced and classified according to the characteristics identified in section 3.1. Then their scenarios and results are reviewed and where possible traced back to their characteristics and assumptions.

Table 3-1: Classification of Models Analyzing the Sugar Market

Study Model PE/GE Trade Formulation Dynamic/

Static

Linkage GE 1. Gross, Armington 2. Net-Trade, Homoge-neous Goods

Dynamic 22 Sectors Global, 16 Regions

GE Gross, Armington Static 13 (tradable) sec-tors,

GULA GE Gross, Armington Dynamic 7 Agricultural, 1 non Agricultural

GOAL GE Net-trade Static 75 products

(47 agricultural)

PE Net-trade Dynamic Cross price

ef-fects for wheat,

Sources: as stated in the first column, own compilation. ^a According to FAO (2005), 29 regions (as is stated for the FAPRI model in Elobeid and Beghin (2005)). ^b In the Last column of table 3.1 the coverage of the sugar sector is specified. The standard procedure applied by most models is to combine the cropping and the processing sector in the model and not to distinguish between raw and white sugar. This is referred to in the table as “One sector”. ^c For the EU 15 sugar beet are modeled and the processing industry is accounted for by passing through a constant share of their revenues to the farmer. The market module depicts the supply demand and trade of processed (white) sugar.

Table 3.1 lists the model studies which are surveyed in this section and states the ma-jor characteristics of the models applied. The first is Van der Mensbrugghe et al. (2003). The study uses the Linkage GE model, which is maintained and applied by the World Bank, for its analysis of several sugar policy scenarios. Those are a baseline scenario with the con-tinuation of policies that prevailed in the year 2000, i.e. after full implementation of the Uru-guay Round (UR) commitments by industrialized countries and several unilateral liberaliza-tion scenarios of the EU, the US and Japan, simulating increases in their TRQs and their above quota tariffs and combinations thereof. Also two multilateral liberalization scenarios are simulated, with one assuming full liberalization by all countries. The study involves a methodological advance, which is their way of implementing TRQs in GE models using MCP (Mixed Complementarity Problem) formulation.³⁶ The main results and conclusions of the study can be summarized as follows. TRQ increases are found to have a much stronger effect on trade expansion of the EU, the US and Japan than moderate out of quota tariff de-creases have. TRQ expansion leads to an increase in imports mainly from those countries which had a large TRQ in the baseline. Full multilateral liberalization on the other hand re-sults mostly in increasing exports of current low cost producers. Since the standard version of the model applied by Van der Mensbrugghe et al. (2003) relies on the Armington assump-tion, it is difficult to specify what happens to the world market price, because in such a model only bilateral import and export prices exist. In the full liberalization scenario those (precisely the country averages) increase for most countries in a range from 7% to up to 37%, the average being about 15%. In the case of central and Eastern Europe the average price decreases.

The last scenario (full liberalization) is also calculated with a homogeneous goods (net-trade) version of the model in which all trade distortions are accounted for by ad valorem equivalents. In such a model it is possible to state a world market price, which in-creases by 21% in case of liberalization. Other results (production, consumption, trade wel-fare) move, except for the case of SACU, in the same direction as they did in the Armington version. They are, however, more pronounced.

The model in its Armington version is unable to let competitive producers capture market shares in countries in which they have not formerly been present as TRQ holders.

This severe drawback is well known by modelers and also discussed by the authors. The net-trade model they construct does away with the Armington assumption and allows for more

36 For a detailed explanation of MCP see section 4.1.1

realistic increases of exports of those countries. It is, however, unable to specify the direc-tions in which this expansion takes place.

Another CGE analysis had been carried out a few years earlier by Elbehri et al.

(2000), calculating similar scenarios as Van der Mensbrugghe et al, i.e. 33% TRQ expan-sions and out of quota tariff cuts of the same size for the EU and the USA, not for Japan, though. Elbehri et al. did also not simulate a full liberalization scenario and they applied a different approach than that of Van der Mensbrugghe et al. to implement TRQs in a CGE.

They use the database version 4 of the GTAP model for their calculations. The authors do not publish results of prices and, as is very common among CGE studies, they publish there results in values rather than quantities, which makes it difficult to compare them to the other studies surveyed in this section. The most far-reaching liberalization scenario they simulate is a global 33% tariff cut and TRQ expansion.³⁷ EU imports increase by US$ 444 million in that case, those of the USA by US$ 220 million. Sugar production decreases by 2.4% and 2.9% respectively. Global trade increases by more than US$ 2 billion. Surprisingly, Brazilian exports increase only slightly, by US$ 33 million, or 1.1%, while especially African coun-tries other than South Africa can expand their exports considerably by almost US$ 400 mil-lion. Unfortunately, the detail in which the results and the base data of the model are pub-lished in the study does not allow relating them to the features of the model.³⁸ The strong increase of African exports is most probably a result of the market shares they already have in the EU and to a smaller degree also in the US. The small increase in Brazilian exports can in turn be explained by its small base share in these markets. However, the total increase in Brazilian exports is hardly more than an extrapolation of the base share of 10% which it has in US imports. Middle East and northern African countries which increase their imports by US$ 274 million would in that case have to be importing all this increase from other regions although the current Brazilian market share in this region is considerable and should be so in the base situation of the model.

Another more recent CGE study has been carried out by Van Berkum et al. (2005) us-ing the GULA model, a model focused on the sugar market which was developed out of the standard version of GTAP (Version 6). The study simulates the medium term effects of a full implementation of EBA market access of LDCs to the EU market, first under the assumption

37 The study does not state the year of projection.

38 This is not only a problem of that particular study, but a common problem of model-based studies (and probably any complex quantitative analysis). This leads also to difficulties when comparing models and their results with each other.

of a continuation of 2005 EU sugar policies and afterwards assuming the implementation of the Fischler proposal for a sugar market reform from 2004.³⁹ Their benchmark is the situa-tion which prevailed in 2001. For both scenarios they simulate a much lower increase in LDC sugar exports to the EU than other studies. In the first scenario they increase by about 400 thousand tons (raw equivalents). In the second scenario which assumes a reform of the EU sugar sector LDC sugar exports under EBA increase by merely about 200 - 250 thousand tons. If the figure for the first scenario is compared to estimates by other authors (~ 2-3 mil-lion tons of total imports under EBA, see e.g. the literature cited in 2.1.2.1) they are much lower. The authors relate that to the fact, that other studies treated the raw sugar produced by LDCs and the white sugar demanded by EU consumers and industrial users of sugar are im-perfect substitutes und try to justify the Armington assumption that way. The imim-perfect sub-stitutability of raw and white sugar and its implication for modelers have been discussed in section 2.2. Given the fact, that Van Berkum et al. explicitly model medium run effects, which rules out the establishment of additional refining capacity either in the EU or in the LDCs, this argument can be supported.⁴⁰ The validity of their argument would, however, find its limits if one were either to investigate the long term effects, which allow for the con-struction of additional refineries, or increased market access for a white sugar producing country. It does furthermore not address the issue of substitutability between raw sugars of different origin. The authors conduct a sensitivity analysis with respect to their Armington parameters which are from the standard level of 2.7 increased to 5 and 10 respectively. The latter case is considered to model sugar from different origins as perfect substitutes. With that elasticity, the authors calculate increased imports of 2.7 million tons in the case of no reform and 900 thousand tons in case of implementation of the Fischler reform proposal.

The most recent CGE study surveyed here has been published by Bureau et al.

(2007). They use the GOAL CGE, which has been used before by Gohin and Bureau (2006), to simulate various scenarios. Two features about this study make it different from other CGE based analyses of the sugar market. First, they run a mixed approach considering the depiction of trade for agricultural products. Some are modeled as bilaterally traded products which are heterogeneous with regard to origin. Some others, among them sugar, are modeled as homogeneous, net-traded commodities. For preferential imports of sugar in the EU this has the consequence that they cannot be modeled endogenously anymore, but they have to be

39 This proposal differed in some regards from the reform which was finally decided in 2006. The envisaged decrease of the reference price was somewhat lower, for instance. For further details refer to the study or to European Commission (2004a).

40 However, according to Sommer (2003) some of the LDCs are producers of white sugar.

fixed. Secondly, they evaluate the supply response of European Farmers with econometri-cally estimated supply functions, instead of determining supply changes endogenously.

These functions account among others for cross subsidization of out-of-quota sugar. The results for supply are subsequently fed into the model to calculate overall effects of the sce-narios.

Two of their scenarios are discussed here, a reference scenario and a possible out-come of WTO negotiations.⁴¹ The reference scenario simulates a price decrease in the EU to the final reference price level of € 404 and a reduction of sugar production in the EU 15 to roughly 12 million tons. The WTO scenario simulates for sugar which the authors assume to fall in the one of four bands which is subject to highest tariff reductions. The tariff for sugar is assumed to be cut by 60%. This provides sufficient border protection to sustain a price level of € 404. The effect that such a WTO agreement has on the EU sugar market is through the abolishment of export subsidies. The authors assume this to happen via quota cuts of a corresponding amount. This will lift world market prices to € 325 in comparison to € 308 which prevailed in the reference scenario.

The study stands out by the high degree of empirical and technical detail which is used to investigate the supply behavior of EU sugar producers. In addition, the release of the Armington assumption for the world sugar market allows for a realistic prediction of compe-tition with imports from abroad. The drawbacks of the approach are first that as a net-trade model it is unable to simulate bilateral policies and trade flows and secondly that the supply behavior of third countries is only very roughly represented.

The first partial equilibrium model surveyed in this section is one of the most well known models in of the international sugar market, the CARD International Sugar Model. It has probably the most detailed policy coverage and best empirical foundation of all global models of the world sugar market. It is used by FAPRI together with other components to establish the annual FAPRI baseline (FAPRI, 2006). The model is a dynamic, non spatial (net-trade), partial equilibrium model. Two studies which have used the model to analyze sugar policies are discussed here. The first is Elobeid and Beghin (2005). The authors

41 The original reference scenario of Bureau et al. is a continuation of current (post 2006 reform) policies with-out a reduction of exports to the WTO limit since, as the authors argue, sugar can be exported in the form of non-Annex I products, which is facilitated by the current situation on the world dairy market. For the review in this section, however, a scenario in which the reduction is implemented shall be considered the reference sce-nario.

late three liberalization scenarios in which first the trade distortions⁴², then additionally the domestic distortions of production and finally also consumption subsidies are removed. The scenarios also account for effects of liberalization of policies for other crops than sugar beet and cane. The reform steps are introduced in the model in 2002/03 and the results are pre-sented for the year 2011/12 and as averages for the transition period.⁴³ The FAPRI baseline from 2004 is used as a base scenario. Under full liberalization, the world market price for sugar (Caribbean fob) increases by 47%. Global production and consumption decrease by 2% on aggregate. The individual increases and decreases are, however, more pronounced.

The EU-15, for instance, reduces its sugar production by around 60% and becomes a strong net importer. Japanese production decreases even stronger, by 64%. Competitive cane pro-ducers as Brazil and Australia increase their production and exports by high percentages, on the other hand. Brazil’s production increases by about 18% and its exports increase by 43%.

For Australia the figures are 10% and 12% respectively. Beet production generally decreases whereas cane production goes up, which meets common expectations. Sensitivity analyses carried out with respect to price elasticities of demand, supply and stock holding led in a small number of cases to extreme reactions. The directions of change predicted in the origi-nal aorigi-nalysis were, however, maintained in virtually all cases.

Unlike, the studies applying the Armington approach surveyed before, the analysis with the CARD model showed, under the assumption of full liberalization, expansions of trade and price effects in line with common expectations.⁴⁴ Since the model cannot explicitly account for bilateral TRQs the effects on trade flows under these TRQs in the base had to be neglected in the study.

The CARD model had been used before to simulate a sugar liberalization scenario by Beghin et al. (2003). They amend the standard version of the model by a multimarket sweet-ener model of the USA, which simulates the production and consumption of cane, beet, raw sugar and white sugar as well as maize and HFCS. The authors simulate the elimination of the US sugar program, i.e. import restrictions and internal price support. They perform their calculations twice, applying datasets from two different years (1996 and 1998). Using 1998 Base data, they estimate a 13.2% increase of the world market price for raw sugar. A further

42 The domestic market price is however maintained, by assuming unlimited availability of government funds to do so. This scenario does not have any meaningful interpretation as such, but is conducted to separate specific effects of trade policies and domestic policies. Thus, only the results of the full liberalization scenario shall be discussed here.

43 Note that the model at hand is dynamic. Here, the 2011/12 figures shall be presented.

special feature of the model is its depiction of the processing sector in the USA. This enables the authors to investigate the effects of different assumption about pass-through of sugar prices to consumers on the distribution of welfare effects of the policy changes.⁴⁵ Further-more, the effects of substitutability between sugar and HFCS can be investigated by the model. They are, however, found to be negligible, since the possibilities of substitution are limited and industrial users of sugar and HFCS are highly specialized.

The study of Adenäuer et al. (2004) is based on a Positive Mathematical Program-ming (PMP) calibrated PE analysis. The authors use the CAPRI model to analyze the effects of the EBA initiative on the sugar sub-sector in the EU. CAPRI models the supply of the EU 15 on a detailed level of regional disaggregation (so-called NUTS II).

Their reference scenario is a continuation of CAP policies including the implementa-tion of the 2003 CAP reform, but without market access for LDCs. Subsequently, the authors simulate the implementation of the EBA initiative under two different sets of assumptions.

The first EBA scenario simulates the market access for LDCs with a corresponding reduction in the EU sugar quota to comply with the WTO limit of export subsidies. The second EBA scenario envisages market access for LDCs plus a larger quota cut than the other EBA sce-nario, sufficient to fully abolish export subsidies. The projection horizon for all scenarios is 2009. The results of the reference scenario lie by and large within expectations. Real internal and external prices for sugar decrease by 4-5%, and beet area in the EU decreases slightly due to these lower prices and due to technical progress. EU production under A and B quotas as well as imports stay rather constant whereas C production increases by 14%. As a result, exports increase by an equivalent amount. In the first EBA scenario the imports from LDCs increase from 650 thousand tons (which is the size of their protocol and SPS quotas) to 3.1 million tons. Quota production in the EU is reduced correspondingly. Due to increased pro-duction of C sugar, however, total exports of the EU increase. The price level in the EU is not affected. In the second EBA scenario, imports of quota sugar and re-exports of imported sugar are abolished. Only C-sugar is exported, about 2 million tons. Imports from LDCs in-crease by additional 200 thousand tons, due to a slightly higher EU price.

44 The authors state that the world market price increase the project is rather large, but they see it “within the ballpark of previous estimates obtained with partial equilibrium models”.

45 The overall level of welfare changes is reported to be not affected significantly by those assumptions, as well as the increase in imports and world market prices.

The strength of the CAPRI analysis is the high degree of regional disaggregation and the thus achieved detailed coverage of production constraints and interdependencies. This is, however, not the case for the regions in the model representing the LDCs. The study covers bilateral international trade relationships, though on a rough level of disaggregation, which does not allow for investigations of the export behavior of single countries. Furthermore, the study relies on the Armington assumption to depict bilateral trade. The parameters of the Constant Elasticity of Substitution (CES) demand function, have, however, apparently been

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