Strategic agricultural trade policy interdependence and the exchange rate: A game theoretic analysis

Abstract

Strategic Agricultural Trade Policy Interdependence is modeled using a game theoretic framework. The model distinguishes between the European Community, the United States and a politically passive rest-of-the-world. Particular emphasis is placed on the effect of the exchange rate on the equilibrium outcome of this game. Without compensatory payments to those with the highest political influence, the results suggest that only modest reform is possible. With compensation, liberalization occurs but free trade is not obtained. Simulations also indicate that the U.S. gains incentive to reduce protection given a depreciation of the dollar, while incentive to liberalize trade policies decreases as the dollar appreciates.

Weight Perception and Efficiency Loss in Bilateral Trading: The Case of US and EU Agricultural Policies

“…Kennedy et al (1996) on the other hand, found that SQ option for both US and EU was the optimal choice using 1990 weights, and without compensatory payments, only modest reform is possible. The PPF values with 2000 weights calculated in this study indicate that (SQ US ; SQ EU ) option is the best interest for both US and EU given the three alternative scenarios of SQ, 50% decrease in protection levels, and free trade.…”

“…Price instruments are denoted by A p fn and A p cn , and shift instruments such as subsidies are denoted by A s fn and A s cn , for producers and consumers, respectively. Denoting the world price of the commodity by P wn , the following domestic price functions are defined for producer and consumer price's respectively (Johnson et al, 1993;Kennedy et al, 1996).…”

“…Their analysis searched for mutually acceptable agreements in trade negotiations between these two blocs using a world trade model. Agricultural trade policy interdependence has also been modeled by Kennedy et al (1996) using a game theory framework and a PPF. The model distinguishes between the EU, the US, and a politically passive rest of the world.…”

Implications of Game Theory for International Agricultural Trade

“…This model highlights the importance of redistributional goals of agricultural policy captured by using a payoff function (govemment objective), which is a weighted sum of producer surplus, consumer surplus, and government budgetary expense, and the potential strategic interactions among players, since their strategies (export subsidies) give rise to differing payoffs depending upon opponents' strategies. This simplified structure captures the essential elements of many of the contributions to this literature (e.g., Paarlberg and Abbott 1986;Johnson, Mahe, and Roe;Kennedy, von Witzke, and Roe).…”

A Game Theoretic Analysis of Turkish Accession to a European Customs Union

“…Scenarios of this type are examples of the problems that exist in analyzing agricultural trade negotiations as the result of agricultural trade policy interdependence (Kennedy et al 1996). Countries considering the ratification of both bilateral and multilateral trade agreements must consider the results of their choices with respect to the policies of other countries.…”