Armington Elasticities Research Articles

European Union–Mercosur Accord's effects on Brazilian milk powder

AbstractMilk is one of the few agricultural products in which Brazil is not competitive. The domestic market is served by domestic production and imports from Argentina and Uruguay. The Mercosur–European Union Biregional Association Agreement provides for the elimination of tariffs and the harmonization of nontariff measures between the parties. Because the EU is one of the most competitive regions in the world market for powdered milk, this study analyzes the effects of the agreement on the links in this production chain in the Brazilian market. A constant, nested, multisectoral, and vertically integrated elasticity of substitution model is structured incorporating uncertainty in the estimates of Armington elasticities through Monte Carlo simulations, as in Hallren and Opanasets. The model allows projecting the price effect (Armington) and the preference effect in the market shares of Brazil, Mercosur, and the EU on the domestic market. The results, in the most ambitious scenario of the agreement and in the most conservative estimate, show that Brazil would lose 71.7 percentage points in the domestic market. This means reducing Brazilian production by 475 thousand tons of powdered milk. The national agricultural link in this scenario would lose 15% of the current dairy demand. This loss benefits the EU, which would participate in the domestic market with a market share of 58.75%. Mercosur would add 13.41 percentage points to its current share of the Brazilian market [EconLit Citations: F13, F14].

Assessing the economic impact and welfare effects of RCEP: A case study of Malaysia's progress in the ASEAN-China Free Trade Agreement

This paper employs the WITS-SMART model to analyze the potential impacts of the Regional Comprehensive Economic Partnership (RCEP) on specific industries in Malaysia and China. By modifying the Armington elasticity and the parameter ‘a’ in the Swiss formula, five distinct scenarios are established to simulate the effects of various tariff reduction schemes. The analysis reveals positive and significant overall trade effects. In a scenario of complete tariff elimination, Malaysia experiences higher trade and welfare effects compared to China, addressing the longstanding trade deficit between the two countries. Finally, recommendations are made to gradually reduce tariffs in stages and sectors, prioritize tariff reduction on specific goods, implement zero tariffs in China first, focus on products with international competitiveness, and address potential asymmetric industrial output effects.

Trade policy analysis in Brazil: Assessing welfare impacts with revised Armington elasticities

Evaluating the impacts of trade policy through simulation can offer valuable insights, especially for developing countries still confronting significant trade barriers. However, the credibility of these insights might be compromised if the simulations depend on parameters derived from developed economies or are constrained by ad-hoc assumptions within the literature. To quantify these implications, we focus on Brazil as a case study, utilizing a Melitz-style model that facilitates sector-specific estimation of both an upper-tier “home-foreign” macroelasticity and a lower-tier “foreign-foreign” microelasticity. While 66%–77% of microelasticities surpass macroelasticities, the precision falls short in confirming the “rule of two” — the assumption that the microelasticity is twice the macroelasticity. In a simulated trade liberalization scenario, our findings show that welfare changes fall below those of models adhering to this rule, yet exceed those of approaches overlooking differentiation between the two elasticities. Furthermore, incorporating imperfect factor mobility results in more moderated predictions for welfare outcomes.

On estimating Armington elasticities for Japan's meat imports

AbstractBy fully accounting for the distinct tariff regimes levied on imported meat, we estimate substitution elasticities of Japan's two‐stage import aggregation functions for beef, chicken and pork. Although the regression analysis crucially depends on the price that consumers face, the post‐tariff price of imported meat depends not only on ad valorem duties but also on tariff rate quotas and gate price system regimes. The effective tariff rate is consequently evaluated by utilising monthly transaction data. To address potential endogeneity problems, we apply exchange rates that we believe to be independent of the demand shocks for imported meat. The panel nature of the data allows us to retrieve the first‐stage aggregates via time dummy variables, free of demand shocks, to be used as part of the explanatory variable and as an instrument in the second‐stage regression.

A general equilibrium model with an asymmetric Armington function: Method and application

In the modeling of imports, most CGE models use Armington functions with symmetric responses to increases and decreases in the ratio of prices of imports and domestic products. In this paper, we extend this by permitting asymmetric responses to changes in this price ratio. Specifically, we assume that it is easier to substitute imports for domestic products than vice versa. The rationale is that, in most contexts, the ability of the outside world to supply close substitutes for domestic products is stronger than the ability of domestic producers to supply close substitutes for imports. The paper presents the mathematical structure of an asymmetric Armington treatment and embeds it in a simple static CGE model based on a Mongolian dataset. The model is used to analyze how the impact of two external shocks - an increase in the foreign currency price of an import and the elimination of the current-account deficit - is influenced by whether a symmetric or asymmetric treatment is used for the Armington function; for the latter, the Armington elasticity is lowered if imports are reduced relative to domestic purchases. The application demonstrates that our asymmetric formulation is simple, robust and that, compared to the symmetric case, asymmetry may lead to important differences in the macro and sectoral impacts of import price shocks. Given this, the paper points to the need for econometric research that estimates Armington elasticities without imposing symmetry. If symmetry is rejected, then it would be important to switch to an asymmetric treatment like the one proposed in this paper.

Estimation of Armington elasticities: case of vegetables in Mongolia

Mongolian people often consume meat more than vegetable in diet due to traditional nomadic culture. Nowadays, the Mongolian people’s diet has been changing who consume more vegetables with associated urbanization (half of the population live in urban areas, mostly in the capital city). Even though vegetable consumption has been increased recently, the vegetable market is still a high reliance on imports and threatening national food security. Since 2016, the Mongolian government has especially paid attention to increasing vegetable's domestic production and substitution to import vegetables (Ministry of food and Agriculture, 2017). Therefore, this paper provided to substitution elasticity (the Armington elasticity) between import vegetables and domestic vegetables in Mongolia. Additionally, we estimated the home bias value of vegetables. The so-called Armington elasticities are widely used for computable general equilibrium (CGE) analysis, which determines a degree of substitution between import goods and domestically produced goods. Several of the authors studied Armington elasticities at the product level. We choose six vegetables (such as potato, garlic and onion, tomato, carrot and turnips, cabbage, and cucumber) related to lack of information. The empirical result shows that the Armington elasticities in the long-run higher than the short-run with exception of potato which means that products are similar in the long-run. However, our estimated Armington elasticities are quite lower than the previous studies result which means that Mongolian people indicated more prefer home growing vegetables than import vegetables. Moreover, we found that the home bias value is high in the short-run even long -run, this appears to be a higher relative weight on home vegetables.
 JEL code: F13, Q17, Q18

Armington Elasticities and the Third-Country Effects of Trade Wars

Armington Elasticities and the Third-Country Effects of Trade Wars

Gains associated with linking the EU and Chinese ETS under different assumptions on restrictions, allowance endowments, and international trade

Linking the EU and Chinese Emission Trading Systems (ETS) increases the cost-efficiency of reaching greenhouse gas mitigation targets, but both partners will benefit – if at all – to different degrees. Using the global computable-general equilibrium (CGE) model DART Kiel, we evaluate the effects of linking ETS in combination with 1) restricted allowances trading, 2) adjusted allowance endowments to compensate China, and 3) altered Armington elasticities when Nationally Determined Contribution (NDC) targets are met. We find that generally, both partners benefit from linking their respective trading systems. Yet, while the EU prefers full linking, China favors restricted allowance trading. Adjusted allowance endowments which shift reduction obligations to the EU cannot sufficiently compensate China so as to make full linking as attractive as restricted trading. Gains associated with linking increase with higher Armington elasticities for China, but decrease for the EU. Overall, the EU and China favor different options for linking ETS. Moreover, heterogeneous impacts across EU countries could cause dissent among EU regions, potentially increasing the difficulty of finding a linking solution favorable for all trading partners.

The dynamics of the U.S. trade balance and real exchange rate: The J curve and trade costs?

We study how changes in trade barriers contributed to the dynamics of the US trade balance and real exchange rate between 1980 and 2015 - a period when trade tripled. Using two dynamic trade models, we decompose fluctuations in the trade balance into terms related to trade integration (global and unilateral) and business cycle asymmetries. We find three main results. First, the relatively large US trade deficits as a share of GDP in the 2000s compared to the 1980s mostly reflect a rise in the trade share of GDP. Second, controlling for trade, only about 60% of net trade flows are due to business cycle asymmetries. And third, about two-thirds of the contribution of business-cycle asymmetries are a lagged response. For instance, the short-run Armington elasticity is about 0.2 while the long-run is closer to 1.12 with only 6.9% of the gap closed per quarter. We show that a two-country IRBC model with a dynamic exporting decision, pricing-to-market, and trade cost shocks can account for the dynamics of the US trade balance, real exchange rate, and trade integration. The model clarifies how permanent and transitory changes in trade barriers affect the trade balance and how to identify changes in trade barriers. It shows that uneven trade policy shocks substantially bias Armington elasticity estimates downward. We also show the effect of temporary trade policies on the trade balance depends on whether they induce a trade war.

Foreign-domestic substitution, import penetration and CGE modelling

ABSTRACT Foreign-domestic substitution elasticities (the so-called ‘Armington elasticities’) determine the degree of competitiveness in demand between similar products produced in different countries and are key parameters in a variety of numerical models of international trade. Armington elasticities are part of the explanation of the large increases in market shares of foreign products relative to locally produced ones in Australia, for example. The existing literature provides only limited evidence on these elasticities for Australia with the most disaggregated produced some time ago in 1977 by Alaouze and colleagues. This paper provides up-to-date parametric estimates of Armington elasticities for Australia with a reasonable degree of sectoral disaggregation. We use 22-years of data for 20 types of merchandise commodities, using OLS, panel and restricted-panel approaches. Our estimates range from 0.30 to 2.26, with higher elasticities for Transport and Equipment products and lower ones for Energy and Minerals. We illustrate the use of our elasticities with a trade-policy simulation using a computable generable equilibrium model of the Australian economy. We analyse the sensitivity of the results to the Armington elasticities by also using the previous estimates of Alaouze and colleagues. We find an overestimation of economic effects when using the old Armington values.

Estimating the Armington elasticity: The importance of study design and publication bias

A key parameter in international economics is the elasticity of substitution between domestic and foreign goods, also called the Armington elasticity. Yet estimates vary widely. We collect 3524 reported estimates of the elasticity, construct 32 variables that reflect the context in which researchers obtain their estimates, and examine what drives the heterogeneity in the results. To account for model uncertainty, we employ Bayesian and frequentist model averaging. To correct for publication bias, we use newly developed non-linear techniques. Our main results are threefold. First, there is publication bias against small and statistically insignificant elasticities. Second, differences in results are best explained by differences in data: aggregation, frequency, size, and dimension. Third, the elasticity implied by the literature after accounting for both publication bias and study quality lies in the range 2.5–5.1 with a median of 3.8.

Understanding the Stickiness of Commodity Supply Chains Is Key to Improving Their Sustainability

Summary Commodity trade is central to the global economy but is also associated with socio-environmental impacts, for example, deforestation, especially in producer countries. It is crucial to understand how geographic sourcing patterns of commodities and commercial relationships between places and actors influence land-use dynamics, socio-economic development, and environmental degradation. Here, we propose a concept and methodological approach to analyze the geographic stickiness of commodity supply chains, which is the maintenance of supply network configurations over time and across perturbations. We showcase policy-relevant metrics for all Brazilian soy exports between 2003 and 2017, using high-resolution supply chain data from www.trase.earth . We find that the Brazilian soy traders with the largest market share exhibit stickier geographic sourcing patterns, and that the supply network configurations between production places and traders become increasingly sticky in subsequent years. Understanding trade stickiness is crucial for supply chain accountability, because it directly affects the effectiveness of zero-deforestation commitments.

Estimating the welfare costs of autarky: A sufficient statistics approach

This paper uses the Jeffersonian Embargo enacted in 1807 to estimate the welfare costs of autarky. I use an Armington trade model to compute the welfare losses using two sufficient statistics: the share of expenditures on domestic goods and the elasticity of substitution between domestic and imported goods. I use historical data from 1792 to 1807 to estimate the Armington elasticity, using import tariffs as instrument for relative prices. The empirical findings suggest welfare losses of 2.83–8.14% of real income.

Estimation of Armington elasticities for trade-policy analysis

PurposeThe purpose of this paper is to compare the Armington elasticities for world average values and country-specific values and obtain evidence for whether the world average elasticities and the “rule of two”, which have been applied in many papers, are accurate for cereals in trade policy studies related to an individual country.Design/methodology/approachThe authors use panel data with a nested model to estimate and compare Armington elasticities based on world average values and country-specific values from 10 countries and regions.FindingsThe results suggest that cereals’ elasticities vary between world average values and country-specific values, and the “rule of two” is not strictly applicable. In fact, the “less than two” concept fits well in many cases.Originality/valueThis study sheds light on the effects of country heterogeneity on the elasticities and the accuracy of using world average elasticities in a trade policy study for an individual country. In addition, this paper offers estimated values of country-specific elasticities for 10 countries and regions.

Armington Elasticity and Development

We model trade competitiveness over the course of economic development, by focusing on real world links between technology, market shares, and consumers’ demand for technology products. Our starting point is the Armington elasticity (AE) which is the standard way to represent region-specific preferences in international trade; however, a great drawback is that it is assumed fixed. Our paper contributes by modeling the role of technological and economic progress in evolution of AE. This framework has theoretical and policy applications. We provide illustrations of how the framework can be used to analyze the conditions for successful government policy interventions in trade. Specifically we model supply and demand sides: (1) technological progress influencing AE, as substitution becomes easier when varieties embody similar technology and (2) steadier demand for technology intensive products as the economy develops and incomes rise.

Technology Choice and the Long- and Short-Run Armington Elasticity

This paper studies the international transmission of productivity shocks when the Armington elasticity is endogenized through firms' technology choice. With costly adjustment, technology choice allows for a low short-run elasticity and a high long-run elasticity. I provide analytical results which demonstrate how technology choice provides a solution to the Backus-Smith puzzle - the observed negative correlation between relative consumption and the real exchange rate. I then embed technology choice in a quantitative model of international trade with heterogeneous firms and endogenous producer entry. When the cost of adjustment is parameterized to match the correlation between relative consumption and the real exchange rate, the cross-correlation of GDP is higher than the cross-correlation of consumption, thereby providing a solution to the quantity anomaly.

Estimating Armington Elasticities in Major Beef Importing Countries by Bayesian Hierarchical Linear Model

Estimating Armington Elasticities in Major Beef Importing Countries by Bayesian Hierarchical Linear Model

Szoki technologiczne związane z wykorzystaniem energii w modelu CGE dla gospodarki Polski

1. Agencja Rynku Energii [2011], Sytuacja techniczno-ekonomiczna sektora elektroenergetycznego. IV kwartały 2010. Google Scholar

Free Trade Agreements and Import-import Substitution Effect Evidence from a CGE Analysis: The Case of EU-Korea and EU-Japan FTAs

Since the failure of the Doha Round, we have observed an increase in Free Trade Agreements (FTAs). These FTAs modify the market access conditions not only for the signatory countries’ companies, but also indirectly for companies of third parties to the agreement, since their exports become more expensive vis-a-vis their competitors’ benefitting from the FTA. With the FTA Road Map drawn in 2003, the Republic of Korea actively pursued an FTA strategy in trade policy; in 2011 it became the first Asian country to sign an FTA with the EU. In December 2017 Japan also finalised an FTA with the EU. Using a CGE model, implemented through GTAP, I show that Korea’s decision to sign an FTA with the EU before Japan could support Korea’s exports to the EU in the first scenario (I), where only the EU-Korea FTA is in force, and safeguard its exports from the effects of enforcing the EU-Japan FTA in the second scenario (II). On the other hand, Korea’s exports would have decreased if the EU-Japan FTA had been implemented before the EU-Korea FTA. The simulated scenarios take account of both the impact of different Armington elasticities and different actionability of NTMs. Keywords: EU-Korea FTA, EU-Japan FTA, CGE model, Armington elasticity, actionability of NTMs.

Estimating trade elasticities for South Africa’s agricultural commodities for use in policy modelling

ABSTRACTThe computable general equilibrium (CGE) model is often used to analyse the effects of policy changes because of its ability to capture multi-sectoral inter-linkages within the economy. The results of a CGE analysis largely depend on the database, policy shock and elasticities. Trade elasticities, such as the Armington elasticities, play a central role in CGE models to determine the demand substitution between commodities from different sources as a result of changes in relative prices. Because of their role, modellers are keen to know the correct elasticities for use in CGE models. Despite their importance, elasticities for South African agricultural commodities are outdated, leaving researchers to rely on value judgements. We address this limitation by estimating the Armington and export supply elasticities for individual and aggregate agricultural commodities using updated time-series data (1980–2016). The results for the two sets of trade elasticities show that estimates for an aggregate agriculture tend to be inelastic compared to estimates for an individual product, indicating a higher sensitivity of products to relative price changes. The Armington estimates were found to be closer to unity for the majority of products, suggesting that agricultural imports are imperfect substitutes for domestic products. The export supply elasticities for grains were found to be more elastic than for fruit and meat, implying that domestic grain production is relatively more responsive to price changes in the export markets. The long-run estimates for the two sets of elasticities were found to be larger than the short-run estimates for all agricultural products.