Understanding the World Wool



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Understanding the World Wool Market: Trade, Productivity and Grower Incomes
part i: introduction*1

by

George Verikios



Economics Program

School of Economics and Commerce

The University of Western Australia

DISCUSSION PAPER 06.19


abstract
The core objective of this thesis is summarised by its title: “Understanding the World Wool Market: Trade, Productivity and Grower Incomes”. Thus, we wish to aid understanding of the economic mechanisms by which the world wool market operates. In doing so, we analyse two issues – trade and productivity – and their effect on, inter alia, grower incomes. To achieve the objective, we develop a novel analytical framework, or model. The model combines two long and rich modelling traditions: the partial-equilibrium commodity-specific approach and the computable-general-equilibrium approach. The result is a model that represents the world wool market in detail, tracking the production of greasy wool through five off-farm production stages ending in the production of wool garments. Capturing the multistage nature of the wool production system is a key pillar in this part of the model. At the same time, the rest of the economy, or nonwool economy, is represented through six representative agents: nonwool producers, capital creators, households, exporters, governments and importers.

The model is first applied to analysing the relationship between productivity changes and grower incomes. Here, we examine the relationship between grower incomes and on- and off-farm productivity changes. The analysis indicates that the nature of the assumed supply shift from research is crucial in estimating returns to wool growers from productivity improvements. Assuming a degree of research leakage to foreign producers, a pivotal supply shift (whereby each supply price decreases equiproportionately) will reduce quasi-rents to Australian wool producers for both on- and off-farm research, in both the short and long run; the losses are largest from on-farm research. Again assuming a degree of research leakage to foreign producers, a parallel supply shift (an equal absolute decrease in each supply price) will increase quasi-rents to Australian wool producers for both on- and off-farm research, in both the short and long run; the gains are largest from on-farm research.

The model is then applied to analysing the economic effects of wool tariff changes. Changes in recent wool tariffs (i.e., between 1997 and 2005) are found to cause positive welfare effects for most regions. Nevertheless, sensitivity analysis shows that the estimated welfare gains are robust only for three regions: Italy, the United Kingdom and China. The welfare gains for Italy and China, 0.09% for both regions, are significant given the small relative size of the wool industries in these regions. The results indicate that Italy and China are the biggest winners from changes in recent wool tariffs.

For the removal of current (2005) wool tariffs, China and the United Kingdom are estimated to be the only winners; but the welfare gain is robust only for China. The estimated welfare gain for China is 0.1% of real income; this is a significant welfare gain. For three losing regions – Italy, Germany and Japan – the results are robust and we can be highly confident that these regions are the largest losers from the complete removal of 2005 wool tariffs. In both wool tariff liberalisation scenarios, regions whose exports are skewed towards wool textiles and garments gain the most as it is these wool products that have the highest initial tariff rates.

The overall finding of this work is that a sophisticated analytical framework is necessary for analysing productivity and trade issues in the world wool market. Only a model of this kind can appropriately handle the degree of complexity of interactions between members (domestic and foreign) of the multistage wool production system. Further, including the nonwool economy in the analytical framework allows us to capture the indirect effects of changes in the world wool market and also the effects on the nonwool economy itself.

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