ESTIMATION OF A TARIFF ONLY LEVEL TO REPLACE THE CURRENT EUROPEAN PROTECTION SYSTEM FOR THE BANANA MARKET ASOCIACIÓN GRUPO DE ESTUDIOS EUROPEOS Y MEDITERRÁNEOS, (AGREEM) Coordination: Alejandro Lorca, Professor of Economical Analysis, Universidad Autónoma de Madrid José Luis Pérez Sánchez, Commercial and Economic Government Expert (Técnico Comercial y Economista del Estado) Research: Dr. Rafael de Arce, Universidad Autónoma de Madrid, Department of Econometrics Dr. Gonzalo Escribano, Universidad Nacional de Educación a Distancia, Department of Economic Policy Dr. Ramón Mahía, Universidad Autónoma de Madrid, Department of Econometrics

1 PRESENTATION PLAN Remember the objective Sum up pre-analytical stages Model key description Scheme of analytical strategy Detail on data Detail on Imports / Exports functions estimation Description of the optimization scheme Results

2 THE OBJECTIVE TQR system protecting banana access to EU must be removed by January 2006 A new “tariff only” scheme will be adopted The goal of the research is to compute the tariff level of this “tariff only system” necessary for preserving the status quo in banana market. Preserving the status quo means maintain a level of protection equivalent to that currently existing, upholding the EU import market access conditions for all the current suppliers, maintaining the relative trade structure and the competitivity of the different productive areas and thus, using European Commission words, ensuring that Community production is mantained.

3 PRE-ANALYTICAL STAGES

4 MODEL KEY DESCRIPTION Simulation Approach Space - Partial Equilibrium model for net international banana world trade Advantages: –Mixing a times series approach for elasticities computation and a cross - section simulation platform, the system tries to capture not only dynamics but cross-section dimension of trade. –A wide – range selection of areas in the simulation scenarios reduces estimation bias caused by the usage of “representative” countries: all the market players are considered.

5 MODEL KEY DESCRIPTION Advantages (cont.): –Involving almost all the importers / exporters in the market, we make up a more realistic market picture and simulation scenarios, –This mix strategy avoids structural change simulation problem using only a times series approach. –In addition, calibration of the simulation tool, permits to correct potential miss-specification in elasticities computation

6 MODEL SCHEME

7 DATA

8 MODEL SCHEME

9 TIME SERIES ANALYSIS Specific functions for each of the Exp./Imp. Area: Sample (years): All variables in weighted terms Endogenous: Banana Supply / Demand Exogenous: Alternative measures of Weighted Export/Import yields, price indexes and/or retail prices and bilateral exchange rates. Robustness of output (elasticities) tested (changes in price measures, changes in the estimation sample…)

10 OPTIMIZATION SCHEME Stage 1: Current equilibrium

11 OPTIMIZATION SCHEME Theoretical Background (I) Takayama and Judge (1971), from Samuelson’s theoretical model. Equilibrium reached making equal the inverse functions of imports and exports revenues Given a structure of Ad-Quantum and Ad-Valorem Tariffs, Tariff Rates Quotas and other operational costs.

12 OPTIMIZATION SCHEME Theoretical Background (II) Ad-Quantum Tariff Matrix Ad-Valorem Tariff Matrix Import Inverse Function Export Inverse Function Existing Quota Regimes

13 OPTIMIZATION SCHEME Stage 2: Disequilibrium

14 OPTIMIZATION SCHEME Stage 3: Re-Equilibrium

15 RESULTS (I) MAIN RESULT: TARIFF LEVEL TO RESTORE THE EQUILIBRIUM Our simulation model suggests a tariff equivalent of Euros per Ton for the system to converge to the equilibrium initially observed, maintaining the current trade and price structures.

16 RESULTS (III) SOME COMMENTS The existing market power in banana market invite us to consider this tariff level as a floor level. In our simulations, bananas coming from ACP countries maintain the current tariff exceptions up to a given quantitative restriction. Establishing a tariff of about 75 euros per ton would not re-establish the current market equilibrium. Establishing a tariff of about 300 euros per ton would cause a drop in banana imports from EU and a cut in export prices.