Impact of Trade Liberalization on Indonesian Food Crops

Abstract

This paper presents a multimarket focxl crop supply/demand model for Indonesia and assesses the impact of food crop trade liberalization using the model. The results indicate that a trade liberalization policy would generate substantial net benefits to society because gains to consumers from reduced foOO expenditures are larger than losses in farm revenues. The net import bill for food commodities increases with trade liberalization due to increased demand for the liberalized commodities. However, because of the strong cross effects from price changes on the production and conswnption of other crops, increases in the import bill are moderated. Increases in import expenditures for food due to liberalization are small relative to total export earnings. The results suggest that Indonesia should reduce protective trade barriers for food crops and move towards trade liberalization. Given government ooncems with farm income and with potential adjustment problems in the process of liberalization, a possible alternative to full trade liberalization would be to permit free trade in food crops but to institute a moderate import tariff on the most highly protected commodities: soyabeans, sugar, and wheat. Full trade liberalization generates larger net welfare gains than free trade with moderate tariffs. However, a moderate tariff on soyabeans, wheat, and sugar combined witl;i free trade would reduce the degree of distortion of incentives to producers relative to current policies and would rationalize the current system of import controls and regulated transfer pricing that encourages inefficient rent seeking in the distribution of these commodities.