Transcript International Trade in Agriculture Commodities

International Trade in
Agriculture Commodities

The principle of comparative advantage
- compare the opportunity costs of producing
a commodity between the countries
- we consider the cost of producing additional
units of any one product in terms of reduction
necessary in the output of other good
- to produce additional units of crop x, the
country has to rearrange its resources in such
a way that it might have to relinquish the
opportunity to produce some unit of crop y.
International Trade in
Agriculture Commodities
- import goods for which the
international price is less than the
domestic opportunity cost of producing
an additional unit at home
- export products for which the
international price is higher than the
domestic opportunity cost of producing
an additional unit
International Trade in
Agriculture Commodities


International trade rests on possible
difference among countries in the rates
at which production of one item can be
replaced by another through internal
reallocation of resources
Principle of comparative advantage is
symmetrical.
International Trade of Ag.
Commodities - Indian context


Till 1990, international trade in agriculture
commodities was perceived as residual
phenomenon
- Based on difference between domestic
production and effective demand
It was controlled by Govt.
- quantitative restrictions: quotas, minimum
export price
- canalization: trade only through State
Trading Corporations (STCs)
International Trade of Ag.
Commodities - Indian context

Rationale for protected trade
- to maintain the domestic prices of
agriculture commodities at a level that
are commensurate with average income
- stability in domestic prices
- balance of payment constraint
New Agriculture Trade Policy





All Agriculture imports other than cereals,
oilseeds and edible oil have been decanalised
All agricultural exports, except onion have
been decanalised
Pulses, paddy and coconut: licensing
Sugar, cotton: quantitative ceilings
Groundnuts, tobacco: minimum export price
Measures of International Price
Competitiveness
Item
Value of Output
Value of Input
T
NT
T
NT
-------------------------------------------------------------------------------------------Domestic
A
B
C
D
Price
Economic Price
(a) Border price
E
G
(b) Opportunity
F
H
cost
Nominal Protection Coefficient (NPC) = A/E
Effective Protection Coefficient (EPC) = (A-C)/(E-G)
Effective Subsidy Coefficient (ESC) = [(A-C)+(H-D)]/(E-G)
Domestic Resource Cost Ratio (DRCR) = (H-F)/(E-G)
Border price

Exportable item:
- the domestic good competes in a
foreign port
- relevant border price is f.o.b price (say
at New York), net of the transportation
cost (domestic and international), port
clearance charges, marketing costs.
Border price

Importable items:
- the competition is supposed to be
taking place in a domestic port
- relevant border price to be compared
to farm gate price would be c.i.f price at
our port plus port charges, domestic
transport cost and other handling &
marketing cost.
Nominal Protection Coefficient (NPC)


A value of NPC greater than unity
means government is protecting the
commodity
- (under free trade, the price would be
lower)
A positive value of (1-NPC) would
measure the degree of competitiveness
of the commodity
Effective Protection Coefficient (EPC)



Calculation of EPC requires knowledge of
input structure for the commodity
In calculating the denomination of EPC, the
border price of tradable inputs must always
be calculated under the importable
hypothesis.
If value of EPC>NPC ?
- the domestic processors cum traders are
being accorded protection to tradable inputs
through govt. policy as they are realizing
higher profits as compared to free trade.
Effective Subsidy Coefficient (ESC)



Subsidies on non-tradable inputs
(electricity, irrigation, credit) exist.
It takes care of distortions in the
markets of both tradable and nontradable inputs
It is the most complex measure of
competitive analysis
Domestic Resource Cost Ratio
(DRCR)


It computes the value of domestic primary
and non-tradable resources in order to earn
or save a unit of foreign exchange through
production and exchange of the commodity
A value of DRCR less than unity implies that
the industry is using less of domestic nontradable resources as compared to value
addition through use of tradable resources.
- Hence the industry is said to be
internationally competitive from the social
welfare point of view.
Issues





Competitiveness (cost and quality)
Robustness (sensitivity analysis)
- international price (highly fluctuating)
- international transport cost
- domestic cost of cultivation
Mechanisms to increase exportable surplus
Impact on domestic economy – safety nets
Benefit distribution