Agricultural Trade Policy and Arrangements Chapter 19.

Agricultural Trade Policy and

Arrangements

Chapter 19

Discussion Topics

Trade and welfareWhy restrict trade?Trade restrictionsAgricultural trade policy makingThe importance of preferential trading

agreementsForms of economic integration

2

Trade and Welfare

Autarky/closed economy – A country is self-sufficientNo trade takes place between nationsMarkets are in equilibrium

Arbitrage – purchasing commodities in one market at a low price and rapidly selling them in another market at a higher price.

Partial equilibrium and excess supply – goods will always move from where prices are low (excess supply) to where prices are high (excess demand).

703

Equilibrium price in U.S. market: PUS

Prices above PUS, → excess supply PE: producers would supply QSUS3 while

consumers would only want QDUS4

4

$

Q

PUS

PE

Trade and Welfare

QUS QSUS3QDUS4

SUS

DUS

1 32

US Market Excess Supply (ES)

Equilibrium price in U.S. market: PJ

Prices below PJ, → excess demand PE: producers would only want supply

QSJ3 while consumers would want QDJ4

5

$

Q

PE

PJ

Trade and Welfare

QJQDJ4QSJ3

SJ

DJ

Japan Market

Same PE asin U.S.

A B Excess Demand (ED)

Trade and Welfare

United States Japan

PUS

PJ

SJ

DJ

SUS

DUS

ES

EDES0

ED0

PUS → U.S. price where ES = 0 ES = SUS – DUS at price above PUS

PJ → Japanese price where ED = 0PE → World price after trade (ES = ED = QE)

World Trade

PE

$ $ $

QJQD QE

QE

QE

Trade and Welfare

United States Japan

PUS

PJ

SJ

DJ

SUS

DUS

ES

EDES0

ED0

Let PJ2 = PUS2

What happens if the price in Japan decrease to PJ2? What happens if the price in the U.S. increases to PUS2? At PJ2 = PUS2 → ES > ED Thru trade, both country’s markets would be equilibrium

where ED = ES at PE

World Trade

PUS2

$ $ $

QJQD

PJ2

Excess Supply Excess Demand

Trade and Welfare

United States Japan

PUS

PJ

SJ

DJ

SUS

DUS

ES

EDES0

ED0

If Japan price ↓ from PJ to PE

Japan consumer surplus ↑ by area (A+B) Japan producer surplus ↓ by area A

If U.S. price ↑ from PUS to PE

U.S. consumer surplus ↓ by area 1 U.S. producer surplus ↑ by area (1+2)

World Trade

PE

$ $ $

PE

A B

1 2B2

Both countries register a net societal gain from trade Who wins and who loses differ across

country

U.S. Japan

Consumer Gain – Area 1 + Area (A+B)

Producer Gain + Area (1+2) – Area A

Net Gain to Society + Area 2 + Area B

Trade and Welfare

Gains From Trade

9

Why Restrict Trade?

To protect a new or infant industryTo counter unfair foreign

competitionTo improve the balance of paymentsTo protect national health, the

environment or food safety

Page 37310

Trade Restrictions

Tariff barriersNontariff barriers (NTB)

Voluntary export restraints (VERs)Tariff rate quotas (TRQ)Import quotas

Page 37511

Domestic market equilibriumDomestic market equilibrium

Sd

Dd

$/ton

Q50

4,000

Domestic demand

Domestic supplyDomestic supply

Page37712

3,000

1,500

20 80

At world price, ED = (80-20) = 60

Free trade supply (SFT)

Worldprice

ED

Importing Country Tariff Impact


Sd

Dd

$/ton

Q

Page37713

3,000

1,500$t

20 80

With tariff, ED = (60-40) = 20

World price plus tariff of $1,500

ED

40 60

SFT

SFT + Tariff

Sd

Dd

$/ton

Q

Page37714

3,000

1,500$t

20 80

SFT

World price plus tariff of $1,500

40 60World price

AB C D

E F

G

H


SFT +Tariff

Welfare Effects of a Tariff

CS before tariff on the previous slide was equal to Area (A+B+C+D+E+F+G)

After the tariff, the CS would fall to Area (E+F+G), or a loss of Area (A+B+C+D)

PS ↑ from area H to Area (A+H) after tariff

The tariff revenue received by the gov’t is Area C

Dead-weight loss to society is Area (B+D)Page 377

Tariff Rate Quota (TRQ)

TRQ: combines two trade policy tools Quota component: Imports entering

under quota portion of a TRQ are subject to a lower (sometimes zero) tariff

Imports above the quota’s threshold face a much higher (usually prohibitive) tariff

Page 377

Sd

Dd

$/ton

Q (tons)

Page 380 17

TRQ Impact on Small Nation Importer

300

200

100

Autarkicprice

Autarkicprice

10 20 40 50 60

SFT

SFT+Tariff1

SFT+Tariff2

15 45

Without trade: domesticprice of $300

With free trade, Sd = 10, Qd = 50, QI = 40

Assume TRQ is set at 5 tons

With initial imports exceeding the imports both within and over quota rates apply

TRQ causes price to ↑ from $100/ton to $200/ton

Tariff1 = $50Tariff2 = $50

18


TRQ causes price to ↑ from $100/ton to $200/tonDomestic production ↑ to 20 tonsDomestic consumption ↓ to 40 tons Imports ↓ to 20 tons

SdDd$/ton

Q (tons)

200

100

10 20 40 50 60

SFT

SFT+Tariff1

SFT+Tariff2

15 45


19


Welfare effects of TRQ ↑ in domestic prices and ↑ in production ↑ PS to E

SdDd$/ton

Q (tons)

200

100

10 20 40 50 60

SFT

SFT+Tariff1

SFT+Tariff2

15 45

FEG

25

A

D

B

C


20


Government tariff revenue generated by TRQ = Area (A + B + C)

SdDd$/ton

Q (tons)

200

100

10 20 40 50 60

SFT

SFT+Tariff1

SFT+Tariff2

15 4525

A B

C


Government Tariff Revenue20 tons imported after TRQArea A = Gov’t tariff revenue

under initial tariff = $50 x 5 tons

Area (B + C) = Gov’t tariff revenue from TRQ = $100 x 15 tons

150

21


Windfall profits generated by TRQ for domestic or foreign producers = Area D

SdDd$/ton

Q (tons)

200

100

10 20 40 50 60

SFT

SFT+Tariff1

SFT+Tariff2

15 4525


Windfall ProfitsFor 1st 5 tons imported, price =

$150/ton ($100 price + $Tariff1) Importer obtains foreign corn for

$150 and sell domestically for $200 → Area D windfall profits

If exporters restrict corn shipments and raise price to $200/ton

Any portion of Area D captured by exporters represents a welfare loss to importing nation

150D

22

Welfare Effects of aTRQ

CS would ↓ by Area (E + F + D + A + C + B + G)PS would ↑ by Area (E + D) Tariff revenue obtained by gov’t is Area (A + B + C)Dead-weight loss to society is Area (F + G)

SdDd$/ton

Q (tons)

200

100

10 2040 50 60

SFT

SFT+Tariff1

SFT+Tariff2

15 45

FEG

25

A

D

B

C


Rationale for Export Policy

Dispose of surplus productionLimit price increases in domestic

marketsGrow processing industries and

employmentLimit capability of another nationEncourage policy reforms by

denying trade

Page 382

Examples of Economic Integration

Free trade areas 1994 North American Free Trade Agreement

(NAFTA) Canada, Mexico and U.S.

Free trade agreements with S. Korea, Panama, and Columbia Signed by Pres. Obama in October 2011

Unions: European Union and its common agricultural policy (CAP)27 member countriesTransferred some of their sovereignty or

lawmaking authority

Page 388

Reasons for U.S. Preferential Trading Agreements…

Economic or political reasons tied to U.S. strategic interest

Timely reductions in barriers to tradeCounter economic and political power

of other trading agreementsReduce illegal immigrationFoster political stability and economic

prosperity

Page 389

Impact of Trade Agreements

Page 391

SMDM$

Q

Lets look at trade between Mexico and the U.S. where Mexico is the small nation importer Assume U.S. is the least cost supplier Prior to free-trade agreement a tariff of t per unit of

imports Domestic (Mexican) production, QS1, and demand, QD1 Quantity imported is (QD1-QS1)

DM,SM are Mexico D & SMUS+t = supply of U.S imports w/the tariff

PM+tMUS+t

QD1QS1

Quantity imported


Page 391

SMDM$

Q

Lets assume a free trade area is created Removes tariff ↑imports from the U.S. to MUS and ↓ price to PM

Domestic (Mexican) production ↓ Domestic (Mexican) consumption ↑ Imports from the US ↑ to (QD2 – QS2)

PM+t MUS+t

QD1QS1

PM MUS

QS2 QD2

Increasedimports


Page 392

SMDM$

Q

Impacts of Free Trade Agreement of small nation tariff Mexican CS ↑ by Area (A + B + C + D) Mexican PS ↓ by Area A Mexican gov’t loses tariff revenue by Area C Total Mexican welfare gains is Area (B + D)

PM+t MUS+t

PM MUS

QS2 QD2

A B C D

Impact of Trade Diversion

Page 392

Trade Diversion Assume one has a free-trade agreement Lower-cost imports from a non-member nation Replaced (diverted) by higher cost imports from a

member nation

Trade diversion ↓ global welfare Shifts production from more efficient producers

outside Agreement To less efficient producers within the

Agreement

Trade Diversion may result in Agreement members gaining or losing individually

Trade Diversion: Assume one has a free-trade agreement Lower-cost imports from a non-member

nation Replaced (diverted) by higher cost imports

from a member nation

Assume the following Both the EU and the U.S. compete for the

Mexican market The EU is initially the largest supplier to the

Mexican market, MEU > MUS There is an equal tariff, t, applied to the

imports from both countries


Page 392

Trade Diversion: With an equal tariff, the EU is the sole exporter to

Mexico because PEU+t < PUS+t

With no free trade area the price in Mexico is PEU+t

Mexican consumption: QD1, Mexican production, QS1


Page 392

SM

DM$

Q

PUS+t

PEU+t

PUS

PEU

MUS

MEU

MUS+t

MEU+t

QS1 QD1

Imports from the EU = QD1 – QS1

PM

QM

No trade equilibrium

Trade Diversion: Free-Trade Agreement between Mexico and the U.S. Remove tariff from U.S. but not EU imports PUS is now the price in Mexico

Mexican consumption ↑ to QD2, Mexican production ↓ to QS2 Imports from the EU ↓ to 0 and U.S. imports ↑ from 0 to QD2 - QS2 →EU imports replaced by imports from the U.S.


Page 392

SMDM$

Q

PUS+t

PEU+t

PUS MUS

MUS+t

MEU+t

QS1 QD1QS2QD2

Imports from the US = QD2 – QS2

Welfare Impacts of Trade Diversion: Consumers gain at the expense of producers and gov’t


Page 393

SMDM$

Q

PUS+t

PEU+t

PUS MUS

MUS+t

MEU+t

QS1 QD1QS2QD2

Who Impacted Impact

Consumer gains Area (A+B+C+D)

Producer gains − Area A

Government revenue − Area (C + E)

Net gains to society = Area (B + D – E)

Welfare Impacts of Price ↓

A B C D

PEUMEU

E

SummaryFree trade affects exporting and importing nations

differentlyRestrictions take the form of tariff and nontariff

barriers.PTAs can take many forms, including free trade

areas and economic unionsPTAs should lead to trade creation and increased

welfare of member nations.PTAs take on political importance.

$

PW

PC

ChinaDC

SC

QCdQCsQ

World Oil Trade: China and ROW

Pw is world oil priceChina demands more than

supplied domestically

The difference (QCd-QCs) is theamount imported

$

PW

PC

Venezuela

DV

SV

QVd QVsQ


Pw is world oil priceVenezuela produces more

than domestic demand

The difference (QVS-QVD) is theamount exported


China and Venezuela are two economies that obviously benefit from oil trade.

A graph of all importing nations would look similar to our one for China.

A graph of all exporting nations would look similar to our one for Venezuela.

By combining exporters and importers in systematic way, we can identify an equilibrium world price.


Crude Oil Exporter Excess Supply

P

Se De

Oil Exporters

Export (Trade) Potential

ES

PNT

$

= Amounts

Q Q


Why is crude oil Excess Supply (ES) upward sloping? At higher and higher prices, exporting nations

not bound by OPEC production constraints start producing more oil

Exploration increases Stocks (inventories) decline Domestic consumption declines at higher prices

$

Sm Dm

PNT

Oil Importers

ES

ED

Trade

ES


= Amounts


Why is crude oil Excess Demand (ED) downward sloping? As prices rise, importers demand less (i.e.,

people start driving less, purchasing hybrids) As prices rise, suppliers in importing region

increase output. (i.e., U.S. oil production rises.)

P

Sm Dm

Pw

P

SeDe

Oil Importers Oil Exporters

ES

ED

Trade

Qt


Q

World price determined where ES = ED

P


Let's work through some examples using the above model of trade The emerging tiger Former Vice-President Gore: Tax what you

burn, not what you earn policy. How could a hurricane cause gasolines prices to

rise while at the same time cause crude oil prices to fall at the same time?

Impact of China’s growing economy


P

SC DC

Pw

P

SeDe

China Oil Exporters

ES

ED

Trade

QT

Q

P

ED*

P*w

Q*T

Qt

Q*t

Impact of Global Carbon Tax


P

SC

DC

Pw

P

SeDe

China Oil Exporters

ES

ED

Trade

Q*T

Q

P

ED*

P*w

QT

D*e

ES*

D*C

Pre-Tax Equilibrium


Downward pressure on world oil prices

Reduce greenhouse gasesIncrease demand for non-carbon

energy sources: Wind, geothermal, solar, etc.

Carbon Tax on World Oil Markets

Katrina Impacts on World Oil Markets

Shuts down oil supply into the USa left shift of the import demand for oil by a major

importer, the U.S.→An excess supply available to ROW’s importersDecreases world crude oil prices

Shuts down gasoline refineries leaving U.S. consumers with less gas supply→ a left shift in the supply of gasoline to the U.S.

retail market Increased domestic retail gasoline price

Impact of Hurricane Katrina

World Oil Trade: U.S. and ROW

P

SC DC

Pw

P

SeDe

U.S. Oil Exporters

ES

ED

Trade

QTQ

P

ED*

P*w

Q*T

Impact of Katrina on U.S. Retail Gasoline Market

World Oil Trade: U.S. and ROW

S

D

P S*

PRG

QRG

P*RG

Q*RG

Q

The supply curve shifts up due to lack of ability to access enough crude oil feedstock to produce QRG

P

Sm Dm

Pw

P

SeDe

Corn Importers U.S.

ES

ED

TradeQT

Impact of the Use of Corn as an Ethanol Feedstock

Q

P

P

Sm Dm

Pw

P

SeDe

Corn Importers U.S.

ES

ED

TradeQT

Impact of the Use of Corn as an Ethanol Feedstock

Q

P

P*w

Q*T

Q*T < QT

SummaryTrade occurs because traders anticipate gains

from trading.Comparative advantage determines why nations

trade.The basis for trade is differing opportunity costs

among nations. Nations specialize in producing those goods in

which they are most efficient and exchange these goods with other nations.

53

Agricultural Trade Policy and Arrangements Chapter 19.

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Transcript of Agricultural Trade Policy and Arrangements Chapter 19.