Intra-Industry Trade in Agricultural Products at Intra-EC Level: The Impact of the Common Agricultural Policy (CAP) Funds

By Katrakilidis, Constantinos; Mardas, Dimitris | Agricultural Economics Review, July 1, 2011 | Go to article overview

Intra-Industry Trade in Agricultural Products at Intra-EC Level: The Impact of the Common Agricultural Policy (CAP) Funds


Katrakilidis, Constantinos, Mardas, Dimitris, Agricultural Economics Review


Abstract

This paper aims at specifying the main determinants of the intra-industry trade in agricultural products, associated with the funds of the Common Agricultural Policy (CAP) of the EC, and more precisely, with its "price support mechanism" and its "structural reform policy". It presents CAP's reformed main tools and mechanisms, and explains the choice of selected variables as determinants of intra-industry trade in agricultural products at intra-EC trade. The econometric analysis covers the period 1973-2005, following recent developments in time-series analysis employing the ARDL approach to cointegration. The empirical results provide evidence of Granger causal effects in both the short-run and long-run horizons running from the CAP's above mentioned policy tools to intra-industry trade.

Key words: Common Agricultural Policy (CAP), Economic integration, intra-industry trade, Cointegration, Granger Causality

JEL Classification: Q17, F15,C22,CS2

(ProQuest: ... denotes formulae omitted.)

Introduction

The Treaty of Rome (1957) made specific reference to a Common Agricultural Policy (CAP) for the European Community (EC) in Articles 39 to 47. However, the CAP started being formulated in 1962. Indeed, in 1960 the Commission proposed to make a first step of downward adjustment with the prices of cereals and sugar during 1961/62, which was strictly opposed by the German Bauernverband (DBV). After tough negotiations a compromise, which protected Community farmers against low world market prices ("Community Preference") was reached. The implementation of this "temporary" system began with 14 January 1962, when a package determining the final state of support and thus the definitive common market organization was adopted. This decision came into force with 30 July 1962 for cereals and cereals-based products, which later served as the role model for other commodities.

During the first twenty five years of its operation, CAP focused on a price support policy while the structural reforms policy remained a secondary task. The latter has been progressively reinforced since 1992. Although this approach boosted production and intra-EC trade, it created imbalances in EC external trade relations in agricultural products. Indeed, the price policy, operating in protected by CAP' s mechanism context, favored high market prices in agricultural products, introducing however different budgetary support among products, within the EC member-states markets. The prices under consideration, used to be higher than the international ones. This, in turn introduced a protection system against competitive extra-EC imports and subsidies mechanism favoring extra-EC exports (Demekas et al. 1988; Borrell and Hubbard, 2000).

In recent years, the CAP has been in favor of structural intervention and of a selective price policy. However, all these CAP mechanisms since 1962, despite the ensuing criticism, have managed to promote GDP per capita, the convergence process and cohesion among EC member-states (Esposti, 2007; Zanias, 2002; Badinger, 2005). In terms of the intra-EC trade relations, since 1962, the above price policy resulted in a significant Customs Union "trade creation effect" in agricultural products (Balassa 1965), which in turn favored intra-industry trade within the EC member-states. Besides, the comparative advantage of each member state, which may be very different with respect to the commodities produced, can be also considered as a major driver for intra-EU trade flows. We have to point out however that European agriculture was quite homogenous only at the origin of the EC with only 6 member states. Afterwards, it became more and more heterogeneous with each round of enlargement.

This paper aims at specifying the main determinants of intra-industry trade in products under examination, which are associated with expenditures for agriculture, and more precisely with the CAP price support and structural reform policies. …

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