Agricultural Trade Liberalization and Downstream Market Power: The Ad Valorem Case

Exports of agricultural commodities to developed countries play a significant role in the economies of many developing countries.  The elimination of import tariffs has the potential to benefit producers in the developing countries, but estimates of the extent of the gains from trade liberalization typically assume perfect competition.  Significant concentration in the food processing and retailing sectors of the U.S. and the EU undermine the plausibility of this assumption in the case of agricultural trade, however.  Sexton, Sheldon, McCorriston, and Wang (2007) develop a model of the effects of trade liberalization that accounts for the vertically-linked and concentrated characteristics of the developed countries’ food markets.  Their analysis is limited to the case of a constant per unit tariff, however.  In this paper, we extend the analysis of the effects of trade liberalization in the presence of downstream market power to the case of an ad valorem tariff and we find important qualitative differences from the results for the unit tariff case.