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Abstract
During the Uruguay Round of the GATT negotiations, emphasis has
been placed on the reduction of agricultural protection and trade
distorting policies. The difficulty in reaching a compromise,
particularly between the United States and the European Community,
raises the question as to the existence of a negotiated settlement such
that both the U.S. and EC can be made better off. This paper, by means
of a weighted Political Payoff Function (PPF), attempts to identify such
compromises.
Through the use of Modele Internationale Simplifie de Simulation
(MISS), the U.S. and EC PPF weights are estimated for base years 1986
and 1990. Simulations are performed based on Uruguay Round proposals
and using across-the-board reductions in protection levels. Because of
the importance of domestic prices in the PPF and their dependence on
exchange rates, shocks to the model are introduced by varying the
exchange rate levels for both the 1986 and 1990 base periods. These
simulations are conducted both with and without the possibility of
providing budget compensation to sectors made worse off as a result of
the policy change.
The results of the analysis show that reductions in protection
levels are likely if the liberalization is multilateral and sectors can
be compensated for welfare losses. In addition, the simulations suggest
that in the case of the U.S., incentive to reduce protection levels
increases as the dollar is devalued and decreases as the dollar is
revalued.