An assessment of market access and export subsidy reforms on the world dairy markets

by Larivière, Sylvain

AN ASSESSMENT OF MARKET ACCESS AM) EXPORT SUBSIDY REFORMS ON THE WORLD DAIRY MARKETS S y1vain Larivière University of Guelph, 1999 Dr. Karl D. Meilke Supervisor This research examine the impact of potential changes in the level of protection provided by dairy poiicies in major dairy trading countries, in the post-Uruguay Round world. It provides quantitative information on the impact of tariff-rate quotas (TRQ) reforms and export subsidy reductions on production, consumption, trade flows and prices on the world dairy market, and assesses their welfare effects on the various participants in the Canadian dairy industry. To examine these issues, a trade model of the world dairy industry was constmcted. The model is composed of six OECD country/regions and one module for the rest of the world. The mode1 includes final demand equations, supply equations of dairy products, milk component suppiy and demand functions, price equations linking domestic market to world market prices, and balance identities which equate sources and uses of milk and milk components. The analysis covered four aggregated dairy products : 1) butter ; 2) cheese ;3) skim milk powder and ;4) a residual category which includes fluid milk and al1 other fresh dairy products. The modeling approach used in this research is an improvement over existing dairy trade modeis in several ways. First, the model endogenized the price of milk components and processor margins. Second, a multistage production setting is developed linking three levels of the dairy marketing chah which are the farm, the processing sector and the wholesale level. This approach allows the processing sector to allocate milk components based on the relative profitability of dairy products which is theoretically more consistent. Third, supply of dairy products are modeied through behavioral equations instead of technical relationships. Fourth. the model was constructed to capture the medium-run effects (3 to 5 years) of partial trade liberalization. The world dairy model is used to assess the impact of various policy reforms that could be implemented following the next Round of multilateral trade negotiations scheduled to begin in December 1999. The scenarios exarnined include increases in minimum access, reductions in tariff levels, and the elimination of export subsidy. The simulation results for partial trade iiberalization indicate consistent and sizable impacts on the world dairy market. This is particularly true for the allocation of milk components across products, and the allocation of dairy production arnong regions which are projected to change significantly. Simulation results also indicate that there is no single partial trade liberalization policy that benefits al1 participants in the dairy industry. The trade impact of partial trade liberalization varies by country and by sector making a win-win compromise hard to reach arnong the participants in the industry. In al1 the scenarios, market oriented countries such as Australia and New Zealand are expected to improve their cornpetitive position in the world dairy market as border mesure are removed. in contras. the dairy sectors in supply management regions are projected to be better off under complete trade Iiberalization in some cases, or by opposition when the reforms do not compromise their current policy settings, while giving some additional market access for production surplus. In a complete free trade world, the impacts on supply management regions are projected to be significant both in terms of growth and econornic welfare. For Canada, the simulation results indicate positive effects on the economic welfare of processors and consumers, but largeiy negative impacts on milk producers and traders.