1. Integration of CEE agri-food sector into the EU: What does the trade theory and empirical evidence tell us? Imre Fertő GEWISOLA 2009 Agrar- und Ernährungsmärkte nach dem Boom Kiel, September 30-October 2, 2009

2. Outline Motivation Theoretical considerations Overview on empirical evidences Conclusions

3. Motivation Kym Anderson (1992) The CEE countries and the Soviet Republics might become major agricultural exporters The potential sources of agro-food trade growth in transition countries are less documented Transition as a natural experiment Potential explanations Dynamics of comparative advantages New trade theory

5. The evolution of trade specialisation Standard Heckscher-Ohlin model –the pattern of trade specialisation changes only if trading partners experience a change in their relative factor endowments –implication: the existence of persistent trade patterns New Trade Theory –it depends on the nature of economies of scale –varied in nature and outcomes, but one of the main implications is that the pattern of trade tends to become more specialised Proudman & Redding (2000): it is ultimately an empirical question

6. Empirics on trade specialisation Fertő (2008), PCE –8 transition countries, 1992-2002 Bojnec-Fertő (2008), CJAE –12 NMS countries, 1999-2006 Bojnec-Fertő (2009), FP –8 CEBC countries, 1995-2007 Main results –The extent of specialisation in Central European trade exhibits a mixed trend –Divergency/convergency increased over time –Trade spec. indices are stable for product groups with comparative disadvantage, but product groups with comparative advantage show significant variation

7. Empirics on trade specialisation –Trade increased among countries after the NMS-12 countries joined to the EU –EU enlargement has a negative impact on agro-food relative trade advantages for all eight analyzed countries –Higher and more stable relative trade advantages are found for bulk primary raw agricultural commodities and less for consumer-ready foods, implying competitiveness shortcomings in food processing and in international food marketing

8. New trade theory Intra-industry trade Quality trade Trade variety Duration of trade

9. Intra-industry trade Horizontal product differentiation –Different models of monopolistic competition developed based on preference structure: –General equilibrium model (CHO) developed by Helpman and Krugman (1985) Vertical product differentiation: –Falvey (1981), Falvey and Kierzkowski (1987) and Flam and Helpman (1987) Increasing importance of IIT in agri-food trade, but poorly documented in the NMS

10. Intra-industry trade Fertő (2005), JAE –Hungary, 1992-1998 Bojnec et al. (2005), EAAE –Slovenia, 1996-2002 Bojnec-Fertő (2008), IAMO Forum –SEE-7 countries, 1995-2003 Main results –IIT tends to increase –Most of IIT is based on vertically differentiated products –The importance of the high and low quality vertical IIT vary between the SEE –Positive relationship between factor endowment and vertical IIT –More attention to the VIIT theory in empirical analysis

11. Marginal IIT IIT leads to lower costs of factor market adjustment, particularly for labour Two sources: –Factor price rigidity –Factor specificity Empirical manifestation –Unemployment –Factor price disparity

12. MIIT empirics Fertő (2009), JAE –Hungary, food industry, 1995-2003 –Some support to the SAH –Our results confirm that industry-specific variables may have a significant affect on employment changes and the associated adjustment costs

13. Quality and price competition Bojnec-Fertő (2009), ChER –CEFTA-5, 1995-2003 –4 competition groups –Modest price and/or quality trade competition catching up development of the CEC-5 agro- food trade with the EU-15 markets –Natural and human factor endowments increase the share of successful price competition

14. Quality and price competition The importance of successful quality competition is also reduced by the level of economic development Agricultural labor productivity improves trade surplus at low price and trade surplus at high price R&D expenditures lead to agro-food trade surplus at high price

15. Trade variety Krugman (1979, 1980, 1981): two channels for the gains from trade arising from variety growth –reductions in trade costs –through the growth of the income in the foreign country Policy implications (Romer, 1994) –trade liberalization increases the number of traded varieties as a source of welfare gains

16. Trade variety in CEE countries Bojnec-Fertő (2009), IAMO Forum 12 CEE countries, 1995-2007 Rauch (1999) product classification Homogenous products Referenced priced products Differentiated products

17. Empirics on trade variety The impact of increased agro-food product variety on agro-food export growth is positive The privatisation, transformation and restructuring process has positive effects on agro-food export and its variety growth The price and trade liberalisations reduce agro-food export

18. Duration of trade One question is often not adressed when countries trade and how long do their trade relationships last Besedeš and Prusa (2006) extend Rauch and Watson’s (2003) matching model Two hypotheses: –differentiated products are traded longer than homogenous goods –for each product type the duration of trade increases with initial purchase size

19. Empirics on agri-food trade Bojnec-Fertő (2009) still in progress CEEC17: NMS-12, NIS-5, 1999-2007, EU15/EU12 duration of agro-food export differs in the NMS-12 and EU-15 markets the length of agro-food export is longer in NMS-12 than in the EU-15 markets –quality requirements –tradition and border effects differentiated products are exported for more extended periods than homogenous products trade relationships starting with large initial exports are more likely to survive the observed five year period than those starting with small values estimations are robust to both markets segments

20. Conclusions? Underdeveloped research area Puzzling evidences without coherent picture Forgotten topics: e.g. trade creation/diversion We can learn a lot from the recent developments on theoretical and empirical trade literature to understand the transition in agriculture What about plant-level new trade theory?