International Trade in International Trade in Agricultural ProductsAgricultural Products

Professor WEI Longbao

SoM· Zhejiang University

Course Outline

Lecture 1 Introduction to Agricultural Trade

Lecture 2 Review of Classic International Trade Theory

Lecture 3 Trade Policies of Importing Countries

Lecture 4 Trade Policies of Exporting Countries

Lecture 5 Technical Barrier to Trade

Lecture 6 Multilateral Trade Negotiations: GATT and WTO

Lecture 7 Preferential Trade Agreements

Lecture 8 Macroeconomic Policy and Agricultural Trade

Lecture 9 Trade and Environment

Lecture 10 FDI and Processed Food Trade

Lecture 11 Competitiveness in Global Food Economy

Lecture 12 International Marketing for Agricultural Products

Lecture 3

Trade Policies of Importing Countries

Course Outline

1. Brief Introduction

2. Major Types of Import Barriers

3. Why Trade Barriers?

4. Concise Analysis of Import Policy Effects– 4.1 Import Tariff– 4.2 Import Quota– 4.3 World Price Stability under Tariffs & Quotas– 4.4 The Large Country Case and Optimal Tariff– 4.5 Fixed Internal Prices – 4.6 Tariff-Rate Quotas– 4.6 State Trading

1. Brief Intro to Import Policies

Despite the clear gains from free trade, we may often witness various kind of trade barriers that make prices in importing countries higher than world prices.

As relative prices shift, production and consumption adjust and welfare of various groups changes.

It’s important to understand production, consumption, and welfare changes from various policies imposed by importing countries.

2. Major Types of Import Barriers

Type 1

Import Tariff/TaxImport Tariff/Tax : the earliest and most visible barrier, it can be Fixed Amount per Unit, or Fixed Percentage of Price of the imported good’s

Type 2

Import quotaImport quota : restricts the quantity of a product that enter the country, it can sometimes be fixed on a country basis, e.g. the Philippines can ship only X tons of sugar into the U.S.. To import these products a firm usually needs a license.

Type 3

Tariff-rate Quota : Tariff-rate Quota : a combination of above two types

3. Why Trade Barriers ?

The most common arguments against free trade are:

foreigners are “dumping” their products and will raise their prices eventually

our producers are “infant industries” and will reduce their costs eventually

pollution, labor standards or other “market failures” make prices not reflect full costs/benefits

if we have a large share of the world market, restricting trade could improve our prices

……

3. Why Trade Barriers ?

1. To redistribute welfare among producers, consumers and the government.

i.e. sources for government budget.

2. To protect certain products and industry from international competition for national security reasons.

i.e. self-sufficiency of food, to protect newly established businesses or so-called infant industry.

3. Pressure from businesses for protection from import competition.

The government can get more benefit from an additional unit of welfare to producers than to consumers.

3. Why Trade Barriers ?

Unfortunately, barriers often reduce the overall welfare of consumers and producers, moreover, subsidizing producers by distorted prices through trade barriers are often less efficient than subsidizing through direct payments.

Some economists do argue that the only legitimate economic reason for import barriers is: if the importing country is large enough, it can use its market power to extract welfare from exporting country. The world price will fall due to import restriction of this large country and can thus benefit it and increase its welfare. Still some other economists find that the reason above do not actually explain what governments do. The only plausible explanation is that governments favor some groups over others.

4. Effects of Specific Import Policies

Anyway, let’s look at the effects of various kind of trade barriers because it’s still not uncommon in today’s world.

We will start from free trade cases and measure the losses resulting from various trade barriers. And we will assume small country case, zero transport costs, and perfect competition for the sake of convenience for analysis and applicability.

Free trade is used as the baseline of our analysis because free trade is generally the policy that maximizes the country’s welfare.

4.1 Policy Effects of Import Tariff

Import tariff can be a constant amount per unit of the product, or a constant percentage of the product’s value.

Either way, there will be an artificial distance between exporter’s price and importer’ price, even the transportation costs are zero.

If the country is small, the normal supply-demand picture will tell the entire story, since the country does not markedly influence world supply or demand, which is the common case for most agricultural products.

The importing country with free trade

Under free trade, the country faces perfect elastic supply curve from the rest of the world, at Pd=Pw

In equilibrium under free trade, the country produces at QP , consumes at QC ,

and imports (QC - QP)

Quantity

Sd

Dd

Price

Pd=Pw

QP QC

Se : effective

supply curve

When there’s a an import tariff tt,, price is

Effects of an import tariff

Pd=Pw+tt

Welfare change

Producer surplus increases: ABED

Government revenue: BCGF

Consumers lose: ACHD > ABED+BCGF

The country’s welfare falls by (BFE + CHG),

BFE is production loss, CHG is consumption loss

production increase to QC ’ ,

demand decreases to QC ’

imports fall to (QC ’ - QP ’)

Quantity

Sd

Dd

QP

Se

QC

Pw

A B C D E F G H

QP ’ QC ’

Price

4.2 Policy Effects of Import Quota

The effects of the import tariff can be identical with the effects of an import quota at a given point in time (when there’s no shifts in supply and demand.)

The difference between an import tariff and an import quota involves the effective supply curves. The effective supply curve under the import tariff case is perfectly elastic at Pd=Pw+t.t. But this is not true under import But this is not true under import quota case.quota case.

Effective supply under an import quota

QuantityQ1 Q3Q2

Sd

Dd

Se

Pd

Pw

Price

effective supply curve under the import quota

Domestic Price is Pd

World Price is Pw

At Pw, the world is willing to supply any amount the country will allow, but the country will allow only (Q2- Q1) = import quota.

Domestic production is Q1 + Q3 - Q2 Domestic consumption is Q3

Imports are Q2 - Q1

Differential effects of a demand shift with import tariffs and quotas

Quantity

Dd ’Dd

QP

Se

Q4

Pw+t

Pw

Q3

Price

QuantityQ1

Se

Q3

Pd ’

Pd

Q2

Price

Dd

Dd’

Dd

Q5

Import tariff raises import prices Import quota limits import quantities

Because effective supply curve are different between import tariff and quota, the effects of shifts in domestic supply and demand will differ.

Both figure have initial consumption at Q3, and initial domestic production is

identical (Q1 + Q3 - Q2 ). If domestic demand curve Dd shift outward to Dd’, in tariff case, the imports rises, but in quota case, the imports will not change.

4.3 World Price Stability under Tariffs and Quotas

When world price changes, it is a signal that the relative scarcity of the product in question has changed. Price increase means more scarcity, the producers should produce more and consumers to consume less

Under an import tariff, the importing country allows those world price signals to be transmitted to domestic producers and consumers. Because the price is allowed to change, the production and consumption will adjust.

Under an import quota, those signals are not allowed to be transmitted to domestic producers and consumers, what will happen?

4.4 The Large Country Case & Optimal Tariff

Quantity

PriceSd

Dd

A B C

D E F G H

I J

Pl

PW

PW ’

Quantity

Price

ES

ED

Pl

PW

PW ’

A

B

D

G

H

C

E F

H

QT ’

﹛t

Under a tariff of t per unit, the difference between the world price and the import price is t units. The world price falls from PW to PW ’, the price of the importing country increases to Pl. Import falls to QT ’. The left panel shows that producer surplus increases by area ABED and consumer surplus decreases by area ACHD, and government revenue of area BCJI. BFE and CHG are production and consumption losses, respectively, which are smaller than those under the small country case because the new world price is lower. The total effect is not clear because we must compare (BFE + CHG) and FGJI to determine it.

4.4 The Large Country Case & Optimal Tariff

The right panel shows that the exporting country has lost because of the import tariff, especially area DFHG.

The importing country gain from trade under the import tariff is area ACHG, representing, relative to free trade, a gain of area DEHG and a loss of area CEF.

If the former area is greater than the latter, then the importing country has gained from the import tariff.

Quantity

PriceSd

Dd

A B C

D E F G H

I J

Pl

PW

PW ’

Quantity

Price

ES

ED

Pl

PW

PW ’

A

B

D

G

H

C

E F

H

QT ’

﹛t

Optimal Import tariff

MCI

ED

ESPl

PE

Price

Quantity

PW

A

B

C

QT ’ QT

Given an upward-sloping ES curve, an import tariff increases welfare for the importing country.

Optimum tariff is the tariff that maximizes the large country’s gain from trade.

If the importing country took advantage of its size in the world market, it would import until the MCI (marginal cost of import) curve intersects the ED curve.

4.5 Fixed Internal Prices by Importing Countries

Real reason for trade barriers for many countries is to support domestic producer incomes. These function can also be perform by a variable levy(差价税 ).

A variable levy is a tax applied to imports to ensure that they cannot enter the country below a fixed minimum level (often called threshold price). It is simply the differences between the minimum import price (PT) and the world price. Mathematically,

L= PT – PW

The welfare effects of a variable levy are the same as an import tariff at a point in time, but if domestic supply and demand curves change, there will be no change in the country’s importing pattern.

4.6 Tariff-Rate Quotas

TRQ(关税税率配额 ) is becoming more popular in recent years as countries have attempted to simplify their import policies and lower their trade barriers over time.

TRQ allows a certain amount of imports at a lower tariff (sometimes zero), with imports above the quota assessed at a higher tariff.

TRQ is also an important part of the 1994 GATT agreement, as will be discussed in Lecture 5.

4.7 State Trading

State-owned organizations that control importation and the resale prices of imported products can also become import barriers.

State-owned organizations can make the import policies more restrictive, and many of the other policies discussed in this lecture could be implicit in the organization’s actions.

Summary

Trade barriers are used for many purposes, but their intent is normally to protect domestic producers and therefore shift welfare from consumers to producers.

Import tariffs increase the domestic price, encouraging production and discouraging consumption. Producers gain, consumers lose, and the government gets a revenue source.

An import quota specifies the maximum amount that can be imported into a country. Its effect is similar to the import tariff, but the dynamics are different.

A large country can gain from an import tariff by significantly reducing world trade. In this case, the large country extracts welfare from other countries by lowering world prices, which reduce welfare of exporting countries.

A tariff-rate quota is a means to guarantee that some minimum amount (the quota) will be imported at a lower tariff, but import above the quota are subject to a higher import tariff.

Thank you !