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GTAP Resource #1476

"Economy-wide Costs for Norway of Food Trade Restrictions"
by Gaasland, Ivar

Since Norway is a small country well off with natural resources like oil, fish and wood, trade is crucial for national welfare. Nevertheless, Norway is among the countries that impede the progress of the trade talks in the current Doha round of the World Trade Organisation (WTO) due to its reluctance to liberalise the farm sector.
The Norwegian farm support is substantial. Import tariffs in the range of 200-400% exclude foreign competition. Furthermore, to get rid off surplus production of milk (10% of total milk production) export subsidies are used. Total support amounts to 71% of the value of production in agriculture (OECD, 2003), which places Norway, together with Switzerland (75%), Korea (66%) and Iceland (63%), among the biggest spenders of the OECD members.
Why wealthy countries like Norway are reluctant to cut agricultural support, is thoroughly discussed in the literature on the political economy of agricultural policy (see Gorter and Swinnen, 2002), and will not be revisited in this paper. The aim of this paper is to consider the costs of holding on to this policy, when taking account of side effects on the rest of the economy.
Naturally, a rich literature on the costs of agricultural policy already exists. Partial equilibrium models have been widely employed to study welfare effects, measures by Harberger triangles, of alternative agricultural policies in national economies. Also, welfare effects for different regions, e.g. developing countries, of a global farm liberalisation have been thoroughly analysed, using multi-region general equilibrium models.
One reason why agricultural policies in national economies most commonly are analysed by partial equilibrium models, is that this model type is quite easy to set up and understand, and permits a detailed specification of the sector and support measures in question. The economic rationale has been that agriculture constitutes a marginal part of most developed national economies (often below 2% of the gross domestic product), and therefore is assumed to have negligible effects on the rest of the economy.
However, motivated by the tax-incidence literature Alson and Hurd (1990) demonstrate that the deadweight losses connected to the financing of farm programs can be substantial. This point is enforced by Chambers (1995) who applies a highly aggregated general equilibrium model to show that traditional, partial equilibrium incidence calculations systematically overstate the benefits farmers receive from farm programs.
Gylfason (1995) considers the macroeconomics of European agriculture, and argues that freer farm trade could deliver a substantial supply-side boost to the European economy, by lowering costs and prices. Also, his survey of model analyses shows that short-run partial equilibrium studies indicate deadweight losses due to farm support equivalent to about 1% of GDP on average, while long-run general equilibrium considerations are shown to raise the loss estimates to about 3% of GDP.
In this paper we apply a special purpose comparative static AGE model to consider economy-wide costs of the Norwegian agricultural policy. The model is highly disaggregated with regard to agriculture, fisheries, fish farming and food manufacturing, and special emphasis is put on the interdependence between different levels of the food chain. The rest of the economy is on a more aggregated form. The model relies on social accounting matrices for its empirical structure. The food sectors are constructed by means of micro data from different sources.
The incorporation of agriculture and fisheries into the same modelling framework allows us to highlight the diverging trade interests of these industries. The agricultural sector depends on trade restrictions and support due its climatic related comparative disadvantage. The fisheries and fish farming, on the other hand, are profitable industries in spite of trade restrictions in the export markets. Both industries are major contributors to rural employment.
In the analysis we assume that farm subsidies and import tariffs are lowered to 1/3 of the present level. It is also assumed that trade restrictions on fish produce in foreign markets are lowered correspondingly. Public consumption is fixed, so lower net budgetary outlays (e.g. as a consequence of saved subsidies or higher revenues from import tariffs) have to be paid back to the representative household. Two alternative assumptions are used to balance the budget: I) lump sum transfers, and II) a reduction in the relatively high and distorting wage tax. Since the analysis merely involves a change in the composition of the net taxes, it can be interpreted as a sort of tax reform analysis.
Dependent on the assumptions the model analysis suggests that the prescribed liberalisation may elevate household economic welfare by 2% to 5%. Less budget support to the farmers and lower food prices are the main sources of this gain, but higher rents in fisheries and fish farming also count. The rest of the economy is stimulated as resources withdraw from agriculture and demand increases due to higher transfers (or lower taxes), higher rents from fisheries and lower food prices.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Gaasland, I. (4/30/2004)
Updated: Gaasland, I. (4/30/2004)
Visits: 2,998
No keywords have been specified.

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