Regional impact of trade policy: A macroeconomic analysis of short-run and spatial effects with application to the agricultural sector and the Italian economy

The regional impact of trade policy has been a somewhat neglected topic for a long time and it has been recently rediscovered in analyzing interesting policy issues such as the formation of common markets or custom unions. Our analysis moves, indeed, from a real world policy issue, namely, the variation of agricultural prices due to the recent modification of the European Union agricultural policy and to the conclusion of the GATT agreement. Through the construction, estimation and simulation of a two-region macroeconometric model of the Italian economy, three basic issues are investigated. First, we question whether or not existing trade theoretical model frameworks are suitable for the assessment of regional trade policy issues, in particular with respect to the short-run (more policy oriented) concerns. Second, we investigate if the short-run impact can indeed be considered remarkably different from the long-run impact and how well the econometric methodology compares with other applied general equilibrium approaches. Third, we perform an indirect test of the hypothesis that the modification of the price transmission mechanism across regions and borders, which in turn depends on transportation cost differentials and trade barriers, plays an important role in assessing the impact of trade policy variation, in particular by generating movement of people or production shifts even in the short run. The results of the investigation are that the regional short-run tracking of trade policy effects may reveal a distinctive chain of effects, although the impact on factor incomes are sometimes similar to some longer-run focused theoretical models. Also, spatial factors seem to play a role but only under modest parametric change of the price transmission equation. The application to the agricultural sector in the Italian economy reveals situations in which the production in the less developed region increases but, yet, regional wage differentials widen and create a potential for interregional migration. The assessment of the regional impact of trade policy in agriculture in an economy-wide setting emerges therefore as necessary, together with a more precise definition of the role of the locational variables