Integration%20of%20CEE%20agri-food%20sector%20into%20the%20EU:%20What%20does%20the%20trade%20theory%20and%20empirical%20evidence%20tell%20us?

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Integration of CEE agri-food sector into the EU
What does the trade theory andempirical evidence
tell us?

• Imre Ferto
• GEWISOLA 2009
• Agrar- und Ernährungsmärkte nach dem Boom
• Kiel, September 30-October 2, 2009

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Outline

• Motivation
• Theoretical considerations
• Overview on empirical evidences
• Conclusions

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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

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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

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Empirics on trade specialisation

• Ferto (2008), PCE
• 8 transition countries, 1992-2002
• Bojnec-Ferto (2008), CJAE
• 12 NMS countries, 1999-2006
• Bojnec-Ferto (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

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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

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New trade theory

• Intra-industry trade
• Quality trade
• Trade variety
• Duration of trade

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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

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Intra-industry trade

• Ferto (2005), JAE
• Hungary, 1992-1998
• Bojnec et al. (2005), EAAE
• Slovenia, 1996-2002
• Bojnec-Ferto (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

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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

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MIIT empirics

• Ferto (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

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Quality and price competition

• Bojnec-Ferto (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

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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
• RD expenditures lead to agro-food trade surplus
  at high price

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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

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Trade variety in CEE countries

• Bojnec-Ferto (2009), IAMO Forum
• 12 CEE countries, 1995-2007
• Rauch (1999) product classification
• Homogenous products
• Referenced priced products
• Differentiated products

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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

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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
  Watsons (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

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Empirics on agri-food trade

• Bojnec-Ferto (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

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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?