The Effects of China's Tariff Reductions on EU Agricultural Exports

Transcription

1 The Effects of China's Tariff Reuctions on EU Agricultural Exports Jyrki NIEMI Ellen HUAN-NIEMI Paper prepare for presentation at the X th EAAE Congress Exploring Diversity in the European Agri-Foo System, Zaragoza (Spain), August 2002 Copyright 2002 by Jyrki NIEMI an Ellen HUAN-NIEMI. All rights reserve. Reaers may make verbatim copies of this ocument for non-commercial purposes by any means, provie that this copyright notice appears on all such copies.

2 The Effects of China s Tariff Reuctions on EU Agricultural Exports Abstract. China s accession to the WTO means significant increases in export opportunities for China s traing partners. This stuy attempts to ientify an measure quantitatively the effects of changing economic environment an trae policies on China s agricultural imports from the European Union (EU). The approach is to estimate eman functions for China s agri-foo imports from the EU using semi-annual ata from 1980 to The eman functions are use to measure the impacts of relative-price an trae policy changes on EU agricultural exports to China. The results suggest that in China, there is a relatively strong eman response for agrifoo imports to changes in income an prices. Furthermore, the results inicate that relative-price variations affect significantly the export market shares of the EU. Trae liberalisation in the form of tariff reuctions is foun to be relatively significant in changing the quantity of agri-foo imports eman from China. Key wors: China, WTO, agricultural trae, tariffs, eman functions, estimation 1. Introuction China's huge potential agri-foo market has long ha a mesmerising effect on western exporters. As the incomes of China's 1.3 billion people continue to rise, eman for more an higher quality agri-foo proucts will grow. Domestic prouction will be unable to meet all of this eman, an in the future, China will be a key market for agri-foo exports. China has mae a maor effort to open up to worl trae over recent years - by cutting tariffs, reforming its currency an eveloping its legal system. China's entry into the Worl Trae Organisation (WTO) in December 2001 will further improve market access in one of the worl's largest an most rapily expaning markets. China will have to change an clarify its stringent agricultural policy being a member of the WTO. Uner the framework of the WTO, China has committe to make vast reforms on its agricultural trae policy. China agree to improve market access, eliminate nontariff barriers, an also not to maintain or introuce any export subsiies on agricultural proucts. The impact of these reforms on EU agricultural trae with China will be significant, affecting mostly EU agricultural exports to China. Currently, the EU is not a significant player in the Chinese agri-foo market, accounting for less than 4% of China s total agri-foo imports. Nevertheless, China is consiere as one of the most ynamic an promising of all markets for EU agri-foo proucts. The sheer size of China s agrifoo market is one factor. The first prognoses (Zhi Wang 1997, Colby et al. 2000) publishe about the impacts of China s WTO accession inicate that freer trae woul substantially accelerate Chinese eman for agri-foo proucts. Schmihuber (2001) has recently argue that with sharp tariff reuction, EU export proucts will become competitive in China s market not only on quality but also in price, thus stimulating the consumer eman for importe goos. Therefore, EU exports of these proucts are expecte to grow rapily. This paper attempts to examine EU agri-foo exports to China in regar to China s trae liberalisation in the form of tariff reuctions ue to China s WTO commitments. More

3 2 specifically, it attempts to moel behavioural relationships in the agri-foo trae between China an the EU by consiering three issues in etail. The first is the long-term relationship between the growth rate of agri-foo imports an the rate of economic growth in China. The secon issue concerns the capacity of the EU suppliers to influence their export market shares. This epens on prouct heterogeneity, which woul suggest that EU can alter the eman for exports through relative-price changes. The thir issue concerns the magnitue of the effect that China s tariff reuctions coul have on EU exports. The paper is ivie into three main parts. First, the general trens an patterns of the agri-foo trae between China an the EU countries are examine. This is followe by an investigation of the maor Chinese trae policy changes influencing EU s agri-foo exports. Then, given a sample of semi-annual ata that cover the EU exports to China for selecte agri-foo proucts from 1980 to 2000, eman functions for China s agri-foo imports from the EU are estimate by applying a theory-base, ynamic econometric moelling framework. These eman functions relate the level of imports to real income, price, an exchange rate. Finally, the estimate functions are use to examine the impacts of China s tariff reuctions on agri-foo trae between the EU an China. 2. Agricultural trae relations between China an the EU China has been an increasingly important estination for EU agri-foo exporters. In 2000, the EU agri-foo exports reache 584 million (USD 540 million), up more than 217 million or 60% more compare to the 1990 level. Growth in EU exports to China average 4.6% per year in the perio Booming mile class income levels have fuelle most of the country's increase appetite for importe foo proucts. The prouct composition of EU agri-foo exports to China has staye more or less the same over the same perio. The seven leaing proucts exporte are barley, rape see, meat proucts, whey, milk power, beer an wine. These seven proucts together account for about 50% of EU agri-foo exports to China (Figure 1). Overall, China is a 17 billion (USD 16 billion) market for agri-foo proucts, with the EU holing a 3.5% share only. EU s market share in China has been growing slow, but steay over the recent years. Currently, the EU hols a commaning market share in China's alcoholic beverage imports, an a sizeable share of airy an meat proucts imports as well. The EU market share of China's alcoholic beverage imports has hel steay at aroun 70% range, while at the same time the size of the market, especially in wines, has grown substantially. EU s marketing avantage has been price with the ai of prouction an export subsiies. France is the largest agri-foo exporter to the Chinese market out of the EU-15 member states. France hols a 32.6% share of the total EU agri-foo exports to China, followe by escening orer the Netherlans (24.7%), Germany (9.8%) an Spain (9.7%). Foreign competitors confronting the EU exporters in the Chinese foo market are intensifying. Numerous countries are entering the Chinese market for processe an intermeiate foo proucts. Proucts that compete with the EU foo proucts originate from the USA, Australia, New Zealan, Canaa, Japan, Argentina an Chile.

4 3 Figure 1. Year 2000 commoity composition of EU agri-foo exports to China in millions of euros (an as a percentage share of total EU agri-foo exports to China). Despite the success in penetrating to the Chinese market in some specific prouct markets such as rape see, cereals, airy proucts an meat proucts over the recent years, EU s market penetration has been obstructe by the protection practise in the agricultural policy of China. Among the maor irritants in the EU-China agricultural trae relations have been high tariffs an non-tariff barriers (e.g. price controls, iscriminatory registration requirements, an arbitrary sanitary stanars). Problems have also arise from the lack of transparency in China's legal system. China's time-consuming an cumbersome licensing an registration proceures, in particular, have elaye the entry of new proucts into the Chinese market. Particularly, in the view of the importance of China in the worl foo economy, the EU has taken a special interest in encouraging China to liberalise its trae in agriculture. Therefore, the EU has been very supportive in China s accession to the WTO. The bilateral EU-China Trae Agreement signe in Beiing on May, 2000 marke a maor step forwar in the EU-China relations. Together with the US-China Trae Agreement signe in 1999, the agreements ha virtually pave the way for China s accession to the WTO. These agreements secure firm commitments on the reuction an bining of tariffs, the liberalisation of services, the elimination of quantitative restrictions, an the improvement of Sanitary an Phytosanitary agreements (SPS). In the WTO negotiations with the EU, China agree to boun tariffs for all agri-foo imports,

5 4 reuce tariffs an to accept Tariff Rate Quotas (TRQs). As a result, all Chinese agricultural tariffs will be boune an all tariff cuts will be implemente by 2004, which is the en of the phase-in perio for eveloping countries to implement their Uruguay Roun tariff reuctions. Most importantly, the EU obtaine an aitional reuction in the EU priority agri-foo proucts not covere by China s previous bilateral trae agreements (such as US-Sino protocol). The average tariff is falling from 31% in 1998 to 10,9% by January 2004, with steeper rops in tariffs for oilsees, milk power, butter an barley. Rape see oil an barley are foreseen to benefit the most from the tariff reuctions among the EU key export proucts. The tariff for rape see oil will rop sharply from 85% to 9% an for barley from 91% to 9% (Table 1). The tariff of airy proucts an meat proucts will also reuce consierably. The tariff for airy proucts will go own from average 40% to 15%, an meat proucts will fall from 32,5% to 15%. Improvements have also been mae on the tariff rate quotas for wine (own from 65% to 14%), olives (own from 25% to 10%) an wheat gluten (own from 30% to 18%). Another maor commitment by China is to reuce non-tariff barriers to trae. Two of the most important barriers are import quotas or licences an state traing enterprises. Compare to tariff barriers, non-tariff barriers are much more complex forms of intervention an are closely linke to China's agricultural policies an institutional system in general (Colby et al. 2001). They are part of an agricultural policy structure in China geare towars protecting omestic agriculture in orer to maintain self-sufficiency in agricultural supply, especially in the foo grain prouction. Table 1. Selecte Tariff Cuts in China's WTO Commitments (Average pre- an post-accession tariff rates on selecte commoities in China). Commoity Pre-Accession Post-Accession Rate rate Barley 91 9 Rape oil 85 9 Meat proucts Whey 0 0 Milk power Beer Wine Source: The Sino-EU Agreement on China s Accession to the WTO, 1999 The import quota quantities for maor agricultural commoities (incluing corn, wheat, cotton, rice an soybean oil) will increase annually from 2000 through In-quota tariff rate will meanwhile ecrease significantly (for example, 1% for the grain, no more than 10% for partially processe grain proucts). In aition, China has committe to eliminate quotas on a variety of oilsees an oilsee proucts such as cottonsee, sunflower, safflower, peanut an corn oil an replace them with a 10% tariff on the imports of these proucts. China also agree to improve the import quota for rape oil. This together with further reuction in tariffs for rape see an rape see oil, EU exports of oilsees an oilsee proucts to China will grow rapily an substantially.

6 5 3. Theoretical an methoological framework of the stuy Imperfect competition arising from prouct ifferentiation unerlies the moelling framework of the stuy. The estimation of eman systems is erive from the Armington s (1969) moel, where it is assume that the same goos of ifferent origins are imperfect substitutes within an importing country s commoity market. Furthermore, in orer to reuce to number of parameters to be estimate, the moel assumes a constant elasticity of substitution (CES) for each prouct pair. Following the moel, the importing ecision is split into two stages. The solution to the utility maximisation problem for the first level of ecision yiels the overall eman scheules for agri-foo imports M of importer, given a import price P an a level of constant ollar income Y, an is expresse as M p m P = k 1 Y (1) D where k 1 is a constant with expecte sign k 1 > 0; D is the eflator; an m p is the price elasticity of import eman for goo M. The income elasticity is equal to unity, a hypothesis that will later be teste. Once the level of expenitures Y for the importe prouct M has been etermine, the solution to the utility maximisation problem of how much of the prouct to purchase from alternative suppliers - let say an exporter of interest i an its competitors k, which refer each of the n-1 other foreign supplying countries, to market whose corresponing export prices are P i an P k - may be expresse as p x P i X i = k 2 M (2) P where X i is the quantity of the prouct exporte from country i to country, k 2 is a constant; P i is the price of the goo importe from country i to country ; P is the average price of the prouct importe to country ; an x p is the relative-price elasticity of export eman. Consier now the introuction of a tariff whose per-unit value is a specifie amount into the import eman equation (1). The tariff raises the price of the prouct to (1+t) P in the geographic market. The resulting import eman scheule is M = k p m (1 + t) P Y 1 (3) D If export eman is proportional to the change in import eman in the geographic market an relative prices remain unaltere: that of the country of interest i an its competitor k is (1+t) P i /(1+t)P k, the export eman scheules for the country i in the long-run ynamic equilibrium relationship implicit in equation (2) is

7 6 X i = å (1 + t) P p x * i 2 M (4) (1 + t) P In other wors, a change in the quantity emane of the prouct as a result of tariff woul cause a proportional change in the eman for the prouct supplie from foreign sources. Empirical analysis of the stuy is base on econometric moels that capture the ynamics unerlying trae an price formation in agri-foo markets, an it is conucte by means of recently evelope econometric concepts. Among these, the so-calle general to specific approach avocate by Henry (1986) is applie in the context of ata series whose (non-) stationary properties are investigate. Furthermore, the notion of cointegration (Engle an Granger, 1987) of a set of variables is analyse. The approach follows closely the moelling strategy evelope in a series of papers by Davison et al. (1978), Henry (1986), Lor (1991), Urbain (1992), an Carone (1996). For the purpose of the stuy, long-run elasticities of Chinese eman are of particular interest. However, estimating such long-run relationships is likely to pose some problems because the variables use in the analysis typically exhibit multicollinearity an non-stationarity. The problems are often ealt with by taking first ifferences of all the variables before any estimations are one. Nonetheless, taking first ifferences is a maor rawback because the low frequency (long-run) variation of the ata is remove. Thereby, only short-run effects are explaine by the moel (Bentzen an Engste, 1992). In this paper it is argue that since time series ata use in trae analysis are often non-stationary unit root processes, econometric moelling of eman shoul be base on methos, which explicitly take this feature of the ata into account, namely cointegration techniques an errorcorrection moel (ECM). There are several main avantages in using an ECM. First, it is possible to clearly istinguish between short-run an long-run effects since both first ifferences an levels of the variables enter the ECM. Secon, the spee of austment towar the long-run relationship can be irectly estimate. Finally, the ECM has a soun statistical founation in the theory of cointegration evelope by Engle an Granger (1987). 4. Empirical analysis of EU-China agricultural trae 4.1. Data, unit roots an cointegration The empirical analysis of this stuy will be conucte with a sample of semi-annual ata that cover China s agri-foo imports for selecte proucts from the EU an the rest-of-worl from 1980 to In 2000, these proucts together accounte for about 50% of China s agri-foo imports from the EU Volume an value ata on trae flows over the perio are obtaine from EUROSTAT an FAOSTAT. Volume ata is compile in metric tons, an value ata in thousans of euros. The transaction value is the value at which goos were sol by the exporter, an inclues the cost of transportation an insurance to the frontier of the exporting country

8 7 (free-on-boar (f.o.b) valuation). The unit prices of China s imports( P C ), an unit prices of exports by the EU ( P EU ),are erive by iviing value by volume. The gross omestic prouct (GDP) inex an the consumer price inex (CPI) are use as a measure of economic activity ( Y C ) an price eflator ( D C ) of China, respectively. The source of the ata is the International Financial statistics ata base of the International Monetary Fun (IMF). Tests for unit roots are performe using the augmente Dickey-Fuller (1981) tests. Having establishe that certain series of the variables are integrate of orer I(1), the augmente Dickey- Fuller (1981) an Phillips an Ouliaris (1990) cointegration tests are unertaken, an the nature of any cointegrating vectors explore Moelling import eman functions The first-orer stochastic ifference equation as a logarithmic function of the theoretical relationship in (1) is expresse as ( P / D ) + α 4 ln( P / D ) + α 5 M, t 1 v t M t = 0 + α1 lny t + α 2 lny, t 1 + α 3 ln ln t t 1 1 ln α + (5) where the expecte signs are α 1, α 2 > 0; α 3, α 4 < 0; an 0< α 5 < 1. The results of the cointegrating regressions show that eman for imports in Chinese market ( ln M C ) has a steay-state response to the omestic economic activity ( ln YC ), an a transient response to the constant ollar price of imports (P/D). Transformation of the equation (5) to incorporate an ECM riven by economic activity, an with a ifferences formulation of the constant ollar price term - neste in the levels form of the equation - results in the following import eman specification: P P M ln M t = + lnyt + lny, t + ln ln v t D + α D + 0 α1 δ2 1 α3 δ4 δ5 Y + 1 (6) where δ 2 = (α 1 + α 2 + α 5-1), δ 4 = ( α 3 + α 4 ), an δ 5 = (α 5-1). The expecte signs of the coefficients are α 1 > 0, δ 2 > δ 5, -1 < δ 5 < 0, an α 3, δ 4 < 0. The fifth term of the equation, δ 5 ln (M /Y ) t-1, is the mechanism for austing any isequilibrium in the previous perio. The long-run ynamic solution of a single-equation system generates a steay-state response in which growth occurs at a constant rate, say g, an all transient responses have isappeare (Currie, 1981, Lor, 1992). With growth rates of omestic economic activity an import eman, ln Y t = g 1 an ln M t = g 2, respectively, the long-run ynamic equilibrium solution of equation (6), in terms of the original (anti-logarithmic) values of the variable, is ( δ / δ ) ( ) M = k Y P / D (7) 1 δ / δ t t 1 t 1

9 8 where k 1 = exp {[-α 0 + (1-α 1 )g 1 ]/δ 5 }. Equation (7) encompasses the static equilibrium solution when g 1 = 0. The income elasticity of import eman is expresse as y m = 1 - (δ 2 /δ 5 ). The price elasticity of import eman is p m = -δ 4 /δ 5. The thir response is stimulate by a change in the rate of growth of economic activity, an is expresse as M α ε YG 1 1 = = 1 g M δ Moelling export eman functions In terms of the general stochastic ifference specification, the export eman relationship in (2) is expresse as ( ) ( i ) ln Xit = β0 + β1ln M t + β2 ln M, t 1 + β3ln Pi / P + β4 ln P / P + β5ln Xi, t 1 + v2 t (8)1 where the expecte signs of the coefficients are β 1, β 2 > 0; β 3, β 4 < 0; an 0< β 5 < 1. The results of the cointegrating regressions suggest that China s eman for exports from the EU ( ln X EU ) has a steay-state response to the import eman of China ( ln ), an a transient response to the relative price of the Chinese market (lnp EU /lnp C ). The following transformation of (8) incorporates an ECM riven by import eman M : t M C t 1 ( ) ( i ) 4 ( i ) ln Xit = β0 + β1 ln M t + γ 2 ln Pi / P + γ 3ln P / P + γ ln X / M + v2 t (9) t where γ 2 = b 3, γ 3 = (β 3 + β 4 ), an γ 4 = (β 5-1). The expecte signs of the coefficients are β 1, γ 2 > 0, γ 3 < 0, an -1 < γ 4 < 0. The relative price term in the foregoing specification have been so transforme as to nest the ifferences formulations of the variable in the levels form of the equation. The isequilibrium austment mechanism in the fourth term, γ 4 ln (X i /M ) t-1, measures errors (ivergences) from the long-run equilibrium an corrects for previous non-proportional responses in the long-run ynamic growth of export eman. Since in ynamic equilibrium ln M t = g 2, ln X = g 3 an ln (P i /P ) t = 0, it follows that the solution of (9), in terms of the original values of the variable, is t 1 t 1 ( i / ) X = k M P P i 2 γ3/ γ4 (10) where k 2 = exp {[-β 0 + (1-β 1 )g 2 ]/γ 4 }. Therefore, export eman is assume to have a unitary elasticity with respect to the level of import eman in the geographic market 2. The price 1 The ynamics for the export eman relationship is assume to be of relatively small orer, an can therefore be restricte to cases where the lagge values of the variables are of one year. The Lagrange multiplier (LM) tests are again performe for omitte higher lagge variables.

10 9 elasticity of export eman is expresse as x p = -γ 3 /γ 4. The import growth elasticity, enote ε MG, is efine as a percentage change in export eman brought about by a 1 per cent change in the growth rate of import eman, an is expresse as ε X MG i 1 1 = = g 2 X i β1 γ 4 5. Regression results of moel equations 5.1. The import eman functions The estimate equations of import eman show, as expecte, that income is statistically significant in explaining the level of eman for agri-foo imports in China. The estimate longrun income elasticities of import eman range from significantly less than unity (0.45) for rape see to 3.68 for wine (Table 2). The income elasticity for whey is near unity. These large ifferences have important implications for sales by exporters. Wine exports have a consierably stronger growth potential in China than other proucts, because of a strong response of buyers in China to improvements in their real income. At the same token, wine exports will also be susceptible to larger swings of eman uring business cycles. Overall, the results suggest a relatively strong growth potential for the selecte proucts in the Chinese market. The austment of import eman from one level of income to another is etermine by the error correction term. Regaring whey an milk power, for example, the coefficients of the error correction terms in the import eman relationships are, in general, close to unity in absolute terms. This fact reflects the relatively quick response of Chinese importers to changes in income an prices, i.e. it oes not take a great eal of time for import eman to resume its long-term equilibrium growth path when a short-run isequilibrium arises between import eman an income. In case of barley the situation is slightly ifferent. The error correction term in the import eman relationship is clearly less than unity (-0.23) in absolute terms. This fact reflects the relatively slow response of Chinese barley importers to changes in income an prices. The price elasticities of import eman by China range from to in the short-run, an from to in the long run. The results confirm the expectation that eman for agricultural imports in China is relatively elastic. The policy implication of this fact is that exchange rate policies an commercial policy intervention measures in the form of tariff an nontariff barriers to trae coul be relatively effective in changing the quantity of imports emane. Table 2. Short-run an long-run elasticities of import eman in China for selecte commoities. Commoity Income elasticity Price elasticity Income growth 2 Where the long-run response between the export eman of a country i an imports of its traing partner is not necessarily proportional, an aitional term (explanatory variable for imports of a country lagge by one perio) is introuce into the equation (8).

11 10 Short-run Long-run Short-run Long-run elasticity Barley Rape see Rape oil Meat Whey Milk power Beer Wine The export eman functions As expecte, relative price movements affect significantly China s eman for the EU exports, implying that EU s market share is influence by price competitiveness (Table 3). In other wors, the EU exporters confront a ownwar-sloping eman scheule in China. For the combine agri-foo exports of the selecte proucts, the trae-weighte average price elasticity for China s export eman from the EU (which is equivalent to the elasticity of substitution for market share in China) is equal to 0.97 in the short run an 3.43 in the long run. These results can be contraste with those for exports from the rest-of-worl to China, where the price elasticity is equal to 0.74 in the short run an 2.91 in the long run. Accoring to Lor (1991) exporters with high price elasticities have more evelope marketing an traing practices than exporters with low elasticities. Hence, one coul conclue that the EU exporters in these selecte proucts have been slightly more flexible in their traing practices than the rest-of-worl. Table 3. Dynamic equilibrium solutions of export eman functions for selecte agri-foo proucts from the EU into China. Prouct Relative price elasticity of Response to changes in Import growth export eman the level of EU import elasticity Exporter Short-run Long-run Short-run Long-run Barley Rape see Rape oil Meat Whey Milk power Beer Wine Export eman generally takes several perios to aust to the relative-price change. Exports of beer an rape see reflect relatively quickly to changes in relative-prices. It takes only one perio for beer exports of the EU to aust to 90 per cent of the new steay state solution. However, exports of meat an milk power see aust to price changes slowly, a characteristic that is reflecte in near-zero coefficient of the error-correcting term. For example, it takes five perios

12 11 for EU meat exports, an it takes four perios for EU milk power exports to China to aust to 90 per cent of their new steay-state solutions. Another influence on the export eman, or market share, of an exporter is the ynamic effect originating from changes in the rate of growth of imports. The estimate import growth elasticities of export eman range from 1.33 for meat to 2.45 for milk power. Therefore, at given import quantity an relative-price levels, a 1 per cent increase in the rate of growth of Chinese milk power imports leas to a 2.45 per cent increase in the average ratio of milk power exports from the EU. 6. The effects of trae liberalisation on EU agricultural exports to China Since China s WTO Accession means significant tariff cuts for selecte agricultural proucts, it is of interest to see what woul happen to China s imports from EU when China removes import protection. Equation (3) shows that the effect of a tariff epen on the price elasticity of import eman, p m, an the tariff-equivalent rate, t, in the importing country. In aition feeback effects can occur between omestic prices an the worl market price of a commoity when tariff removal take place either in a large importing country or in several countries at the same time, an these effects will influence prouction an consumption ecisions in both exporting an importing countries (Lor 1991). The empirical finings presente here are analyse without the feeback effects between omestic prices an the worl market price. The analysis simply examines the effects of tariff reuctions by China on its agri-foo imports from the EU. Import eman generally takes several perios to aust to the price change. Therefore, of interest here are both the short-run effects an the long-run effects after the full austment has taken place. The first can be obtaine using the short-run elasticity of import eman. The secon is erive using the long-run static equilibrium. The effect of a tariff removal on the level of EU exports is proportional to the change in the total imports of China. Recall equation (4) in chapter 3, which shows that when relative prices remain unchange, the change in export eman is proportional to the change in import eman in the geographic market. Since relative price woul be unaffecte by the tariff removal, the market shares of the exporting countries in China woul remain unaltere. The effects of a one-time change in imports tariffs are summarise in Table 4, from which a number of points can be mae. The removal of the tariffs will have a price-ecreasing effect on the Chinese market. As a result, an increase in China s imports woul take place. The effects of tariff reuctions on import volumes are quite large in some proucts. The largest percentage increase in import volumes is shown by barley. China increases its barley imports by 68%, i.e., of which 330,000 metric tons represents aitional export quantities sol by the EU. The case is similar in rape oil, where the China woul increase its imports by 54%. Over ten percent (or 130,000 metric tons) of this aitional imports is supplie by the EU.

13 12 All other proucts show somewhat smaller changes. Lower tariff cuts or low price elasticities in these proucts result in small changes in import volumes. The estimate increases in import volumes range in the long-run from aroun 8% for milk power to 37% for wine. Table 4. Effects of tariff reuctions on China s agri-foo imports for selecte proucts. Commoity Initial effect Long-term effect Import price Import volume Import price Import volume Barley Rape oil Meat Whey Milk power Beer Wine The finings of the analysis also emonstrates the extent of the time lag between the initial reuction in import prices after tariff removal an the time require for imports to aust fully to the new price level in the market area. Imports of whey an milk power reflect relatively quickly to changes in prices. It takes only one perio for whey imports of China to aust to 90 per cent of the new steay state solution. However, imports of barley aust to price changes slowly, a characteristic that is reflecte in near-zero coefficient of the error-correcting term. It takes four perios for barley imports of China to aust to 90 per cent of their new steay-state solution. An important limitation of the analysis above is that it focuses on tariff reuctions an oes not take into account China's pervasive non-tariff barriers, such as import quotas, an state traing behaviour. 7. Conclusions This paper attempts to quantify the short-run an long-run effects of changes in economic growth, relative-prices, an tariff levels on China s agri-foo imports from the EU. The approach is to estimate eman functions for EU s agri-foo exports to China using semi-annual ata from 1980 to The eman functions are use to measure the impacts of China s tariff liberalisation. A reasonably flexible ata etermines the moelling approach base on the error correction mechanism (ECM) was applie in orer to emphasise the importance of ynamics of trae functions. Prior to the measurement, several econometric issues relating to specification, pre-estimation testing an ynamic specification tests have to be consiere. The overall results for the estimate import eman functions for the selecte agri-foo proucts covere by this stuy suggest that there is a relatively strong eman response to income changes in China. The results also emonstrate the relatively elastic nature of price responses to China s eman for importe agri-foo proucts. The policy implication of this fact is that policy intervention measures in the form of tariff an non-tariff barriers to trae coul be significant in changing the quantity of imports emane.

14 13 The export eman functions inicate that relative-price variations affect significantly the export market share of the EU. Therefore, the finings supports the theory of trae ealing with prouct ifferentiation an imperfect competition. In other wors, EU exporters confronts a ownwarsloping eman scheule in the Chinese markets. The average price elasticity of EU exporters to these markets is equal to 0.97 in the short run an 3.43 in the long run. These results can be contraste with those for exports from the rest-of-worl to China, where the price elasticity is equal to 0.74 in the short run an 2.91 in the long run. Hence, one coul conclue that the EU has been more flexible in its traing practices than the rest-of-worl (in case of the proucts covere by this stuy). The estimate moels of this stuy are use to assess the results of China s WTO accession on agri-foo trae between the EU an China. Accession to the WTO means a transformation of all China s existing non-tariff barriers to boune tariffs an tariff rate quotas, an it is expecte that this will greatly improve market access for EU agri-foo exports to the Chinese market. As tariff an non-tariff restrictions are sharply reuce, the costs of exporting to China will be less. The results confirm that China s tariff reuctions coul eventually increase EU agri-foo exports to China quite substantially, with barley an rape oil exports gaining the most. The path to a new steay-state solution was foun to epen on the ynamics unerlying the prouction an consumption responses to the price changes. References Armington, P. (1969). A theory of eman for proucts istinguishe by place of prouction, International Monetary Fun Staff Papers 16: Bentzen, J. an Engste, T. (1992). Short an Long Run Elasticities in Energy Deman. Working Paper 18, Institute of Economics, Århus School of Business. 20 p. Carone, G. (1996). Moeling the U.S. Deman for Imports Through Cointegration an Error Correction. Journal of Policy Moeling 18:1-48. Colby, H, Price, J. an Tuan, F. (2000). China's WTO Accession Woul Boost U.S. Ag Exports an Farm Income," Agricultural Outlook, Economic Research Service/USDA, AGO-269, March Colby H., Diao, X. an Tuan, F. (2001). China's WTO Accession: Conflicts with Domestic Agricultural Policies an Institutions. The Estey Centre Journal of International Law an Trae Policy 2(1), Retrieve [ate] from the Worl Wie Web: Currie, D. (1981). Some Long-Run Features of Dynamic Time Series Moels. Economic Journal 91:

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