...(Whitton 2004). the same time, most analysis the effects of agricultural border measures and domestic support on trade patterns has dealt with grains, cotton and similar bulk commodities with much less analysis of trade and trade policy for horticultural products.

For raw or bulk commodities domestic support and border measures may often apply directly to the same agricultural product. However, when processing is important and especially in horticultural markets, such policies apply to different vertically linked products within the same agricultural industry. Including the distortions from both raw product subsidies and border measures on processed products provides a richer analysis of the effects of policy reform. Economists have studied policy effects in vertically linked markets, e.g., Sumner and Wohlgenant (1985) examine policies applied to tobacco-cigarette markets, and Lusk and Anderson (2004) examine policies applied to livestock-meat markets. However, relatively little attention has been devoted to the interactions between subsidy and protection applied to horticultural products. Here we examine, specifically, the effects of domestic support applied to a non-traded farm-produced commodity together with border measures applied to value-added products in the processed tomato industry.

Much research has been devoted to understanding the economic consequences of domestic support applied to agricultural markets and the effects of introducing reform to these policy instruments. As one component of this, Sumner (2000) and Bagwell and Staiger (2001) examined the economic impact of including domestic support policies directly on the negotiating agenda of the World Trade Organization (WTO). With an eye to effects on developing countries, Beghin, Roland-Hoist, and van der Mensbrugghe (2003), Hoekman, Ng, and Olarreaga (2004), and Hertel and Keeney (2006) examined the impact of reductions in domestic support and compared it to reductions in tariffs for agricultural products. Using aggregated product groupings these studies found that reductions in border measures have a greater impact than reductions in domestic support for the overall welfare in developing countries.

The Uruguay Round Agreement on Agriculture (URAA) initiated gradual and partial reductions of both domestic support and border measures in agriculture and there remains much room for further reductions (e.g., see Josling and Tangermann 1999; Sumner and Tangermann 2002). During the current Doha Development Agenda negotiations, members have proposed to reduce subsidies and import barriers, and eliminate export subsidies on a global basis (WTO 2004; Josling 2005).

This article makes several interrelated contributions. Studies of global policy reform typically neglect horticultural commodities and focus primarily on field crops and livestock products) We begin to redress this imbalance here. We model reform of policies that apply at different stages along the vertical supply chain and show the importance of even limited input substitution between raw materials and other inputs. We also show the international impacts of border measures relative to domestic support in a case in which both measures are important. Finally, our results for the processing tomato industry are the first for this important subsidized and protected industry.

Processing tomato markets are particularly appropriate for this study. First, this is a large global industry and one of the most important processed horticultural industries in the United States, Europe, and several developing countries. Second, the processing tomato industry has significant import tariffs and has long been subject to large subsidies in the European Union (EU). These subsidies and trade barriers have substantial effects on trade partners and as suggested in recent legal analysis are vulnerable to WTO challenge (Stuart 2005).

Between 1999 and 2003, world production of processing tomatoes ranged between 25 and 30 million metric tons per year (Tomato News 2004). Using a per ton price of approximately $640 for tomato paste (Morning Star Company 2005), the production of processed tomato products are valued at more than $3 billion per year. Major producers export tomato products but also import, suggesting that products are not perfect substitutes. The EU produces about 30% of processing tomato products in the world and accounts for approximately 50% of (extra-EU) exports. The United States contributes another 35% of production and 20% of exports. The rest of the world, including leading producers such as China, Turkey, and Brazil, then accounts for 35% of production and the remaining 30% of exports (USDA/FAS 2004).

Processing Tomato Policy

Because the EU is a main producer and the only significant subsidizer of processing tomatoes, it is important to describe briefly the policies employed in the EU. The EU has had a domestic support policy for processing tomatoes for several decades. Since 2001 domestic support for processing tomatoes has been in the form of producer payments, and is 34.50 euros per metric ton in Italy, Greece, Portugal, and France, and 29.36 in Spain. The payment is made directly to growers and therefore creates a wedge between the price received by tomato growers and the price paid for tomatoes by processors. Producer payments are applied to a "threshold" quantity for each EU member nation. (2) In recent years the average grower price--including the per-unit subsidy--in the EU was approximately 80 euros per metric ton (Pazos 2004) so the ad valorem equivalent rate of domestic support has been approximately 43%. Processing tomatoes are perishable and bulky, and processing plants are located nearby to growing areas. Unlike fresh market tomatoes, processing tomatoes are not traded and tariffs or other government barriers to trade are not relevant.

Processed tomato products are traded and face ad valorem tariffs in the EU without the complexities introduced for trade in fresh tomatoes (Gallezot 2006). The EU tariff for canned tomato products and tomato paste has been 14.4% since full implementation of the URAA in 2001. The tariff applies to all imports of processed tomato products with two exceptions. First, some product enters the EU under preferential trade agreements with Mediterranean partners (European Commission 2004). Second, imported product that is destined for re-export (perhaps after additional processing or re-packaging) is allowed an import tariff refund or duty drawback. Although data describing the EU quantity of processed tomato products imported under preferential trade agreements are readily available, data related to EU imports with duty drawbacks are not. Evidence from EU industry sources indicates that the EU imports some processed tomato products under a duty drawback program, and that these imported products do not have domestically produced substitutes. Industry sources claim that this is due, partly, to EU firms that blend EU bulk processed tomato products with inexpensive foreign products (Amezaga 2002; Menghini 2004). (3)

The ad valorem rate for the import tariff applied to processed tomato products shipped into the United States is 12.5% (USITC 2006). Many other countries import processed tomato products with tariffs, e.g., Canada and Australia apply tariffs between 5% and 10%; Brazil, Argentina, Venezuala, and Mexico apply tariffs between 16% and 23%; and Japan, Korea, China, and the Philippines apply tariffs between 20% and 34%. The share-weighted ad valorem tariff rate applied to processed tomato products in the rest-of-the-world region is approximately 20% (APEC 2005; InterAmerican Development Bank 2005).

Simulation Model

We design a multi-market simulation model to assess how reductions of domestic support compare to reductions of border measures in the global processing tomato industry. The model is designed with the processing tomato industry in mind, but the basic structure could be applied to industries with differentiated products and vertically linked markets. The model provides analytical results and simulates proportional changes in economic variables (prices, quantities, and welfare measures) for input and output markets.

An equilibrium displacement model is adapted here to examine the effects of reducing the role of government support (domestic support and border measures) along a vertical market chain. Importantly, the model is adapted to allow intra-industry trade and substitution between farm and marketing inputs. The multi-market model facilitates a comparison of the effects of changes in domestic support and border measures when they apply at different stages within an industry....

NOTE: All illustrations and photos have been removed from this article.



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