Trade Wars and Trade Negotiations in Agriculture

We employ a numerical equilibrium model to evaluate the payoffs to agricultural and non-agricultural interests in the EC and the US. A government objective function for each region is calibrated as a weighted sum of the payoffs to the two interest groups with weights corresponding to the benchmark political influence. The objective function is employed by each government to determine the level of agricultural support. The influence weights on agricultural interests that would rationalize the existing protection system with these objective functions are 72% in the EC and 61% in the US. A negotiated outcome which fulfills certain economic efficiency criteria with this disagreement point could result in partial liberalization of the CAP by 75% while simultaneously allowing US agriculture to gain an additional 50% protection. There are, however, alternatives to direct negotiations that could result in partial CAP liberalization. A marginal change in the political influence weights of European interest groups would also result in a 75% liberalization of the CAP. A complete liberalization of the CAP would nonetheless require substantial changes in these political weights. Even if the EC were indifferent to income distributional aspects of the outcome, corresponding to 50:50 weights, these would be an efficiency argument in favor of unilaterally keeping some endogenous protection in place. Complete liberalization would therefore, to some extent, require a reversal of the bias in income distributional considerations that now favors agricultural interests.