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Multiple Marginalization and Trade Liberalization: The Case of the Canadian Dairy Industry

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  • Abbassi, Abdessalem
  • Larue, Bruno

Abstract

The paper analyzes the welfare impacts of trade liberalization under multiple marginalization through a spatial quilibrium model of provincial dairy markets. Canada’s dairy policy implements a supply management scheme designed to achieve higher domestic prices for farmers, taking into account the mark-up rules used by downstream firms. Our model builds on the reciprocal dumping model of Brander and Krugman (1983) as processing firms from different provinces compete à la Cournot with one another in several provinces. Simulations reveal that welfare in the Canadian dairy sector could increase by as much as $1 billion per year if aggressive tariff cuts were made while moderate liberalization plans would yield annual gains of $234.5 million. Even large producing provinces like Quebec and Ontario gain from trade liberalization. In comparison, a perfect competition model yields more modest welfare gains in the range of $15.6 million and $34.5 million. Finally, we show that the switch in the sign of the transport cost-welfare relation identified by Brander and Krugman (1983) occurs at transport costs that are too high to be policy-relevant.

Suggested Citation

  • Abbassi, Abdessalem & Larue, Bruno, 2012. "Multiple Marginalization and Trade Liberalization: The Case of the Canadian Dairy Industry," Working Papers 148592, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  • Handle: RePEc:ags:spaawp:148592
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    File URL: http://purl.umn.edu/148592
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    References listed on IDEAS

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    1. Zohra Bouamra-Mechemache & Jean-Paul Chavas & Tom Cox & Vincent Réquillart, 2002. "EU Dairy Policy Reform and Future WTO Negotiations: a Spatial Equilibrium Analysis," Journal of Agricultural Economics, Wiley Blackwell, vol. 53(2), pages 233-257.
    2. Veeman, Michele M. & Peng, Yanning, 1997. "Canadian Dairy Demand," Project Report Series 24037, University of Alberta, Department of Resource Economics and Environmental Sociology.
    3. Abdessalem Abbassi & Olivier Bonroy & Jean-Philippe Gervais, 2008. "Dairy Trade Liberalization Impacts in Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 56(3), pages 313-335, September.
    4. Moschini, GianCarlo & Moro, D., 1993. "Food Demand System for Canada, A," Staff General Research Papers Archive 12753, Iowa State University, Department of Economics.
    5. Moschini, G. & Moro, D., 1993. "A Food demand System for Canada," Papers 1-93, Gouvernement du Canada - Agriculture Canada.
    6. Moschini, Giancarlo & Moro, Daniele, 1993. "A Food Demand System for Canada," Technical Reports 243853, Agriculture and Agri-Food Canada.
    7. Richard Friberg & Mattias Ganslandt, 2008. "Reciprocal Dumping with Product Differentiation," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 942-954, November.
    8. Karl Meilke & Rakhal Sarker & Danny Roy, 1998. "The Potential for Increased Trade in Milk and Dairy Products between Canada and the United States under Trade Liberalization," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 46(2), pages 149-169, July.
    9. Doyon, Maurice & Brodeur, Catherine & Gervais, Jean-Philippe, 2006. "Imputing Dairy Producers' Quota Discount Rate Using the Individual Export Milk Program in Quebec," CAFRI: Current Agriculture, Food and Resource Issues, Canadian Agricultural Economics Society, issue 07.
    10. R. Melvin, James & Warne, Robert D., 1973. "Monopoly and the theory of international trade," Journal of International Economics, Elsevier, vol. 3(2), pages 117-134, May.
    11. Yang, Chin W. & Hwang, Ming J. & Sohng, Soong N., 2002. "The Cournot competition in the spatial equilibrium model," Energy Economics, Elsevier, vol. 24(2), pages 139-154, March.
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    Cited by:

    1. Colin Busby & Daniel Schwanen, 2013. "Putting the Market Back in Dairy Marketing," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 374, March.

    More about this item

    Keywords

    Double marginalization; supply management; dairy industry; reciprocal dumping; Agricultural and Food Policy; International Relations/Trade; Livestock Production/Industries; Q17; F12; L13;

    JEL classification:

    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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