Price and Welfare Effects of Agricultural Liberalization with Imperfect Competition in Food Industries and Trade

Liberalization of the agricultural sector will prove critical to success or failure of the Doha negotiations. On the one hand, tariff and subsidies reduction will allow developing countries to specialize in the agricultural sector, following their comparative advantages. On the other hand, the fall in agricultural prices will improve the consumer welfare of the rich countries. Most of the studies about trade liberalization assume perfect competition in the food industry and we think that it is misleading. Farmers do not sell directly theirs produces to consumers. The role of the food processing industry, as an intermediary, must be taken into account and this sector may be the real winner of the trade liberalization. The purpose of this paper is to examine the consequences of an imperfect competition in the food processing market on the gains of trade liberalization. The framework of analysis is a general equilibrium model with a multi-region and multi-sector specification that follows the standard theoretical specifications of trade focused CGE models. The base year is 1997 and most of the data come from the database of the Global Trade Analysis Project (GTAP), version 5.3. Several comparative static analyses are carried out from this benchmark. We simulate several trade liberalization scenarios. Following an unilateral perspective, simulations is run in order toestimate the consequences of the announcement of the European Commission (December 2002) to cut by half its different restrictions to trade (tariffs, production and export subsidies) from the year 2006.