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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.

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