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International Trade in
Agricultural Products
Professor WEI Longbao
SoM· Zhejiang University
Course Outline
Lecture 1
Lecture 2
Lecture 3
Lecture 4
Lecture 5
Lecture 6
Lecture 7
Lecture 8
Lecture 9
Lecture 10
Lecture 11
Lecture 12
Introduction to Agricultural Trade
Review of Classic International Trade Theory
Trade Policies of Importing Countries
Trade Policies of Exporting Countries
Technical Barrier to Trade
Multilateral Trade Negotiations: GATT and WTO
Preferential Trade Agreements
Macroeconomic Policy and Agricultural Trade
Trade and Environment
FDI and Processed Food Trade
Competitiveness in Global Food Economy
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
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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/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 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 : 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
Price
Sd
Under free trade, the
country faces perfect
elastic supply curve
from the rest of the
world, at Pd=Pw
Pd=Pw
Se : effective
supply curve
Dd
QP
QC
Quantity
In equilibrium under free trade, the country produces at QP , consumes at QC ,
and imports (QC - QP)
Effects of an import tariff
Price
Sd
When there’s a an import
tariff t, price is Pd=Pw+t A
Pw
D
B
E
Welfare change
C
F
Se
G H
Dd
Producer surplus increases: ABED
Consumers lose: ACHD > ABED+BCGF
QC
QP ’ QC ’
Quantity
production increase to QC ’ ,
The country’s welfare falls by (BFE + CHG),
demand decreases to QC ’
BFE is production loss, CHG is consumption loss
imports fall to (QC ’ - QP ’)
Government revenue: BCGF
QP
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. But this is not true under import
quota case.
Effective supply under an import quota
Price
Sd
Se
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.
effective supply
curve under the
import quota
Pd
Pw
Dd
Q1
Q2 Q3
Quantity
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
Import tariff raises import prices
Price
Import quota limits import quantities
Price
Se
Pd ’
Se
Pw+t
Pw
Pd
Dd’
Dd ’
Dd
QP
Q3
Q4
Dd
Dd
Quantity
Q1
Q2 Q3 Q5
Quantity
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
Sd
Price
Price
A
ES
Pl
PW
PW ’
A
D
B
E F
I
B
C
PW
D
E
PW ’ G
H
﹛
C
G
Pl
t
H
F
J
H
ED
Dd
Quantity
QT ’
Quantity
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
Sd
Price
Price
A
ES
Pl
PW
PW ’
A
D
B
E F
I
B
C
PW
D
E
PW ’ G
H
﹛
C
G
Pl
t
H
F
J
H
ED
Dd
Quantity
QT ’
Quantity
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.
Optimal Import tariff
Price
MCI
ES
Pl
A
B
PW
PE
C
ED
QT ’
QT
Quantity
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 !