Sensitivity analysis of cotton trade liberalization: a global simulation model approach

Abstract: Despite global efforts to reduce international trade barriers in order to enhance trade liberalization and establish a more fair competition environment with generally accepted standards, agricultural trade is still regarded as a distorted area, where subsidies are particularly abused by some countries with an aim to create unfair advantage for their goods in the world market. The cotton sector is one of the typical examples for the abuse of subsidies in international trade by titling the playing arena against developing countries. This thesis seeks to study the impact of cotton trade liberalization (i.e. removal of all tariffs and subsidies) and analyze the sensitivity of the Armington elasticities; in particular how escalating these elasticities may affect the results. This analysis is undertaken by developing a partial equilibrium model similar to the Global Simulation model (’GSIM’) designed by Francois and Hall (2003). The results show that the world prices increase evenly with the level of trade liberalization. The complete removal of tariffs and subsidies would increase the world cotton price by 7.13 per-cents. If the world price is lifted, non-subsidizing countries increase their production while the subsidizing countries decrease the same. The research once again confirms that huge losses that non-subsidizing countries suffer due to subsidies will become attained gains for these countries when such subsidies were eliminated. In addition, escalating the maximum value of elasticities of substitution will lead to smaller impacts on world prices (6.82 per-cent change in world price), but larger impacts on quantity (23.05 per-cent change in quantity). Furthermore, the sensitivity analysis performed in this thesis showed no evidence that the Armington elasticities have a significant impact on the results.