Transcript Agricultural Economics

Agricultural Economics
Lecture 8: Agricultural Trade
What’s happening to world ag.
trade?
Figure 1.1 Value of World Agricultural Trade, 1974-2003
(billions of U.S. dollars)
600
500
400
300
200
100
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
19
74
0
What’s happening to world ag.
trade?
Fig. 1.2 Agricultural Exports of Selected Countries,
1974-2003 (billions of U.S. dollars)
70
US
60
France
Netherlands
50
Germany
40
30
20
10
19
74
19
76
19
78
19
80
19
82
19
84
19
86
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88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
0
Who are the ag. exporters? Why?
Income per person, 1995 (with sub-national data for 19 countries)
Source: Sachs, JD, “Tropical Underdevelopment.” NBER Working Paper 8119. Cambridge, MA: NBER.
Agricultural Employment as a Share of Civilian Employment
and Real Farm Output as a Share of Real GDP
SOURCE: U.S. Department of Commerce and the Federal Reserve Bank of St. Louis. Reprinted from K.L. Kliesen and W. Poole,
2000. "Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.
Food Expenditures as a Share of Total
Consumer Expenditures in the US
Source: K.L. Kliesen and W. Poole, 2000. " Agriculture Outcomes and Monetary Policy Actions: Kissin'
Cousins?" Federal Reserve Bank of St. Louis Review 82 (3): 1-12.
The gains from trade are similar for both
“importable” and “exportable” goods
Price
($/unit)
Supply
Pe
Pt
A B
Pe
A
B
Pt
Demand
Qs Qe
Qd
with imports, consumers gain more
than producers lose:
Qd Qe
Qs
with exports, producers gain more
than consumers lose:
So why don’t we see free trade?
To understand trade policy, let’s start by describing it:
For which goods do governments usually restrict trade?
Effect of free trade
in importable goods
Pe
Effect of free trade
in exportable goods
Pt
A
A B
B
Pe
Pt
Qs Qe
Qd
Qd Qe
Qs
Given these effects of trade,
what do governments choose to do?
Free trade…
for imports helps consumers
but hurts producers;
for exports helps producers
but hurts consumers.
Which constituencies do governments favor?
Dairy products
Processed rice
Wheat
Paddy rice
Beverages + tobacco
Oil seeds
Sugar cane, sugar beet
Sugar
Meat products nec
Meat: cattle,sheep, etc.
Cereal grains nec
Vegetables, fruit, nuts
Food products nec
Crops nec
Vegetable oils and fats
Cattle,sheep,goats,horses
Raw milk
Wearing apparel
Motor vehicles and parts
Manufactures nec
Textiles
Animal products nec
Leather products
Mineral products nec
Fishing
Ferrous metals
Metal products
Wool, silk-worm cocoons
Wood products
Machinery + equip. nec
Chemical,rubber,plastics
Petroleum, coal products
Paper products,
Metals nec
Electronic equipment
Transport equipment nec
Plant-based fibers
Oil
Minerals nec
Forestry
Coal
Tariff-equivalent import restrictions
(% of world price)
.
Protection from imports in the world economy, 1997
USA Oth.High-Inc.
Med.Income Low Income
300.0
250.0
200.0
150.0
100.0
50.0
0.0
…So why do governments restrict
imports?

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


all these could be true, but economists find that they do not actually explain what
governments do
the only plausible explanation is that governments favor some groups over
others. This is a significant source of inefficiency and low incomes in all
economies!

Beginning from the year 1980, Turkey changed its economic
development policy from “import substituting industrialization” to
“export led growth” strategy. Economy opened up to world trade,
export-promoting incentives were initiated (including tax
exemptions, rebates and favorable credit terms), direct import
controls have been eliminated, and quantity restrictions have
been dismantled. State intervention in the economy was reduced
to minimum level. As a result of these efforts, Turkey has
increased her share from world markets, from 0,15% in 1980 to
0,6% in the year 2003. Between 1980 and 2004 exports of
Turkey has increased from 2,9 billion dollars to 63 billion dollars.
Structure of exported goods has also changed much from mainly
agricultural products and raw materials to higher value added
industrial products. Transformation still continues with increasing
exports of transportation vehicles and office equipments.
The Share of Foreign Trade in GNP
80,00
Imports
Exports
Volume
Deficit
%
60,00
40,00
20,00
0,00
1970
1980
1990
2000
2003
2004*
2005**
Turkey's Foreign Trade ($ Million)
% Change
1990
1995
2000
2001
2002
2003
2004
12 959
21 637
27 775
31 334
36 059
47 253
63 121
Exports (FOB)
2004/ 2003
33,6
22 302
35 709
54 503
41 399
51 554
69 340
97 540
Imports (CIF)
40,7
Volume
35 261
57 346
82 278
72 733
87 613
116 593
160
66
1
Balance
- 9 343
- 14 072
- 26 728
- 10 065
- 15 495
- 22 087
- 34 419
55,8
58,1
60,6
51,0
75,7
69,9
68,1
64,7
-5,0
Exp./Imp.
37,8
Trade and Welfare
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Autarky/closed economy – the nation is selfsufficient, no trade takes place between
nations, and markets 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).
The equilibrium price in
the U.S. market is PUS.
at prices above PUS, the
market would exhibit
excess supply conditions.
At price PE, for example,
producers would supply
QSUS3 while consumers
would only want QDUS4.
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The market equilibrium in
Japan occurs at Pj. At prices
below Pj, excess demand
conditions will occur.
At PE, for example, consumers
were willing to buy QDj4
while producers only wished
to supply QSj3.
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U.S. price where excess
supply (ES0) is equal
to zero…
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Japanese price where
excess demand (ED0)
is equal to zero…
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If the price in Japan
is Pj2, excess demand
would be ED1.
If the price in the U.S.
is PUS2, excess supply
would be ES1.
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Thru trade, both country’s
markets would be in
equilibrium where ED=ES
at price PE.
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If the price in Japan is PE,
consumer surplus would
increase by area a+b while
producer surplus would
fall by area a.
If the price in the U.S. is
PE, consumer surplus would
decline by area 1+2 while
producer surplus would
increase by area 1+2+3.
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Gains to Trade
United States
Japan
Consumer gains
-(1+2)
+(a+b)
Producer gains
+(1+2+3)
-(a)
+3
+b
Net societal gain
Both countries register a net societal gain
in economic welfare. The winners and
losers differ however…
Why Restrict Trade?
To protect a new or infant industry
 To counter unfair foreign competition
 To improve the balance of payments
 To protect national health, the
environment or food safety

Trade Restrictions
 Tariff
barriers
 Nontariff barriers (NTB)
 Voluntary export restraints
(VERs)
 Tariff-rate quotas (TRQ)
 Import quotas
Domestic
supply
50
Domestic
demand
Domestic market equilibrium
under free market conditions
shows a price of $4,000 and
quantity of 50 tons.
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Prevailing
world price
Free trade
supply
Quantity
supplied
Excess Demand
60 = 80 – 20
Quantity
demanded
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Prevailing
world price
plus tariff
Supply
with
tariff
Quantity
supplied
Excess Demand
20 = 60 – 40
Quantity
demanded
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Welfare Effects of Tariff
Consumer surplus before the tariff on the previous
slide was equal to area a+b+c+d+e+f+g.
After the tariff, consumer surplus would fall to
area e+f+g, or a loss of area a+b+c+d.
Producer surplus increases from area h to area a+h
after the tariff.
The tariff revenue received by the government is
equal to area c.
Dead-weight loss to society is equal to area b+d.
Autarkic
price
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Free trade
supply
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Combines both a tariff
and a quota…
Tariff rate
for imports
under quota
Free trade
supply
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Combines both a tariff
and a quota…
Tariff rate
for imports
over quota
Tariff rate
for imports
under quota
Free trade
supply
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Combines both a tariff
and a quota…
Tariff rate
for imports
over quota
Producer
surplus
increases
by area e
as price
to $200
Tariff rate
for imports
under quota
Free trade
supply
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Welfare Effects of TRQ
Consumer surplus would fall as a result of the
TRQ by area e+f+d+a+c+b+g.
Producer surplus increases by area e+d
The revenue received by the government is
equal to area a+b+c.
Dead-weight loss to society is equal to area f+g.