Domestic Support Policies for Agriculture in Ecuador and the U.S.-Andean Countries Free Trade Agreement: An Applied General Equilibrium Assessment

For the past two years the United States and Colombia, Peru and Ecuador have being negotiating a Free Trade Agreement (FTA). One of the main concerns of Ecuador's farmers is the asymmetry that exists between U.S. and Ecuador agricultural sectors. U.S. agriculture is highly subsidized in products such as rice, corn, and soybeans, products that represent an important export and subsistence products for Ecuadorian farmers. To reduce any negative effect that the FTA may have, Ecuador's government is studying land-based payments for rice, corn, soybeans and livestock producers. This program would offer direct initial support to farmers' income after the FTA enters in full effect. The objectives of this paper were twofold. First, estimate the effects on the Ecuadorian economy, and especially on Ecuador's agriculture of the FTA. And second, study the viability of the domestic support program for agriculture proposed by the Ecuadorian government, as well as some alternative domestic support policies. We use a modified version of the GTAP global general equilibrium model specific for agriculture support, called GTAP-AGR. The results show that trade liberalization will negatively affect all agricultural sectors in Ecuador, except for the exporting sectors (bananas, coffee, cocoa, and flowers). Government subsidies are estimated to disproportionally help rice and soybeans producers, but they will not be enough for corn and livestock producers. We conclude that government subsidies should be extended to other sector such as sugar cane and cotton.