Download - Agricultural Trade Policy and Arrangements
Agricultural Trade Policy and
Arrangements
Chapter 19
Discussion TopicsTrade 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).
Page 3703
Page 371
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)
Page 371
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)
Page 3716
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
Page 3717
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 PEWorld Trade
PUS2
$ $ $
QJQD
PJ2
Excess Supply Excess Demand
Page 3718
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 B1 2
B2
Page 373
Both countries register a net societal gain from trade Who wins and who loses differ across
country
U.S. JapanConsumer 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 RestrictionsTariff barriersNontariff barriers (NTB)
Voluntary export restraints (VERs)Tariff rate quotas (TRQ)Import quotas
Page 37511
Domestic market equilibrium
Sd
Dd
$/ton
Q50
4,000
Domestic demand
Domestic 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
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
A B C D
E F
G
H
Importing Country Tariff Impact
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
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
Page 380 18
TRQ Impact on Small Nation ImporterTRQ causes price to ↑ from $100/ton to $200/ton
Domestic production ↑ to 20 tonsDomestic consumption ↓ to 40 tons Imports ↓ to 20 tons
SdDd$/ton
Q (tons)
200
100
10 20 40 50 60
SFT
SFT+Tariff1
SFT+Tariff2
15 45
Tariff1 = $50Tariff2 = $50
Page 380 19
TRQ Impact on Small Nation Importer
Welfare effects of TRQ ↑ in domestic prices and ↑ in production ↑ PS to E
SdDd$/ton
Q (tons)
200
100
10 20 40 50 60
SFT
SFT+Tariff1
SFT+Tariff2
15 45
FE G
25
AD
B
C
Tariff1 = $50Tariff2 = $50
Page 381 20
TRQ Impact on Small Nation ImporterGovernment tariff revenue generated by TRQ =
Area (A + B + C)
SdDd$/ton
Q (tons)
200
100
10 20 40 50 60
SFT
SFT+Tariff1
SFT+Tariff2
15 4525
A B
C
Tariff1 = $50Tariff2 = $50
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 = $100 x 15 tons
150
Page 381 21
TRQ Impact on Small Nation Importer
Windfall profits generated by TRQ for domestic or foreign producers = Area D
SdDd$/ton
Q (tons)
200
100
10 20 40 50 60
SFT
SFT+Tariff1
SFT+Tariff2
15 4525
Tariff1 = $50Tariff2 = $50
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 $200/ton
Any portion of Area D captured by exporters represents a welfare loss to importing nation
150D
Page 380 22
Welfare Effects of aTRQCS would ↓ by Area (E + F + D + A + C + B + G)PS would ↑ by Area (E + D) Tariff revenue obtained by gov’t is Area (A + B + C)Dead-weight loss to society is Area (F + G)
SdDd$/ton
Q (tons)
200
100
10 2040 50 60
SFT
SFT+Tariff1
SFT+Tariff2
15 45
FE G
25
AD
B
C
Tariff1 = $50Tariff2 = $50
Rationale for Export Policy
Dispose of surplus productionLimit price increases in domestic
marketsGrow processing industries and
employmentLimit capability of another nationEncourage policy reforms by
denying trade
Page 382
Examples of Economic IntegrationFree trade areas
1994 North American Free Trade Agreement (NAFTA) Canada, Mexico and U.S.
Free trade agreements with S. Korea, Panama, and Columbia Signed by Pres. Obama in October 2011
Unions: European Union and its common agricultural policy (CAP)27 member countriesTransferred some of their sovereignty or
lawmaking authority
Page 388
Reasons for U.S. Preferential Trading Agreements…Economic or political reasons tied to
U.S. strategic interestTimely reductions in barriers to tradeCounter economic and political power
of other trading agreementsReduce illegal immigrationFoster political stability and economic
prosperity
Page 389
Impact of Trade Agreements
Page 391
SMDM$
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+t MUS+t
QD1QS1
Quantity imported
Impact of Trade Agreements
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
Impact of Trade Agreements
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
Impact of Trade Diversion
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
Impact of Trade Diversion
Page 392
SM
DM$
Q
PUS+t
PEU+t
PUS
PEU
MUSMEU
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.
Impact of Trade Diversion
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
Impact of Trade Diversion
Page 393
SMDM$
Q
PUS+t
PEU+t
PUS MUS
MUS+t
MEU+t
QS1 QD1QS2QD2
Who Impacted ImpactConsumer 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
PEU MEUE
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
China DC
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
World Oil Trade: China and ROW
Pw is world oil priceVenezuela produces more
than domestic demand
The difference (QVS-QVD) is theamount exported
World Oil Trade: China and ROW
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.
World Oil Trade: China and ROWCrude Oil Exporter Excess Supply
P
Se De
Oil Exporters
Export (Trade) Potential
ES
PNT
$
= Amounts
Q Q
World Oil Trade: China and ROW
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
World Oil Trade: China and ROW
= Amounts
World Oil Trade: China and ROW
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
TradeQt
World Oil Trade: China and ROW
Q
World price determined where ES = ED
P
World Oil Trade: China and ROW
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
World Oil Trade: China and ROW
P
SC DC
Pw
P
SeDe
China Oil Exporters
ES
ED
Trade
QTQ
P
ED*
P*w
Q*T
Qt
Q*t
Impact of Global Carbon Tax
World Oil Trade: China and ROW
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
World Oil Trade: China and ROW
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
QT Q
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