Armington elasticities and tariff regime: An application to European Union rice imports
Most of the European Union’s (EU) import sources for rice are in developing countries and the least-developed countries (LDCs). The EU has moreover made a commitment to allow duty-free and quota-free access to rice imports originating in the LDCs from September 2009 onward. The purpose of this article is to answer two questions – First: Does the inclusion of import tariffs in the specification lead to different estimated Armington elasticities? Second: When a discriminating tariff is introduced, what happens to the market share of large rice exporters to the EU, especially to the market share of poor countries? Consequently, we present the Armington model, derived from a constant elasticity of substitution (CES) utility function, and a non-homothetic CES utility functional form, which is more flexible. Then, we estimate the Armington model, with and without the inclusion of a tariff, and we compare the elasticities. Lastly, we model five scenarios with different discriminating import tariff rates to calculate the changes in the market access of large rice exporters to the EU. Our empirical results show that it is worthwhile to consider non-homothetic preferences and import tariffs. When the model is estimated, ignoring the import tariffs and the non-homothetic parameter, results may be biased and of uncertain validity. Furthermore the simulation findings demonstrate that in spite of a large difference between import tariff rate of Suriname and other countries (scenario V), its market access would not change greatly. This may be caused by supply side problems like poor infrastructures, weak technology and small capacity production in LDCs.
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