Agri 2312 chapter 19 agricultureal trade policy and preferential trading arrangements

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward

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Agricultural Trade Policy and

Arrangements

Chapter 19

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Discussion Topics

Trade and welfareWhy restrict trade?Trade restrictionsAgricultural trade policy makingThe importance of preferential trading

agreementsForms of economic integration

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Discussion Topics

Reasons for preferential trading agreements

Do preferential trading agreements create or divert trade?

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Trade and Welfare Autarky/closed economy – the nation is self-

sufficient, 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).

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The equilibrium price in the U.S. market is PUS.at prices above PUS, themarket would exhibit excess supply conditions.

At price PE, for example,producers would supplyQSUS3 while consumerswould only want QDUS4.

The equilibrium price in the U.S. market is PUS.at prices above PUS, themarket would exhibit excess supply conditions.

At price PE, for example,producers would supplyQSUS3 while consumerswould only want QDUS4.

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The market equilibrium inJapan occurs at Pj. At pricesbelow Pj, excess demandconditions will occur.

At PE, for example, consumerswere willing to buy QDj4 while producers only wished to supply QSj3.

The market equilibrium inJapan occurs at Pj. At pricesbelow Pj, excess demandconditions will occur.

At PE, for example, consumerswere willing to buy QDj4 while producers only wished to supply QSj3.

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U.S. price where excesssupply (ES0) is equalto zero…

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Japanese price whereexcess demand (ED0)is equal to zero…

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If the price in Japanis Pj2, excess demandwould be ED1.

If the price is the U.S.Is PUS2, excess supplyWould be ES1

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Thru trade, both country’smarkets would be in equilibrium where ED=ESat price PE.

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If the price in Japan is PE, consumer surplus would increase by area a+b whileproducer surplus would fall by area a.

If the price in the U.S. isPE, consumer surplus woulddecline by area 1+2 whileproducer surplus wouldincrease by area 1+2+3

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Both countries register a net societal gainIn economic welfare. The winners andLosers differ however…

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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

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Trade Restrictions

Tariff barriersNontariff barriers (NTB)•Voluntary export restraints

(VERs)•Tariff rate quotas (TRQ)• Import quotas

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Domesticdemand

Domesticsupply

Domestic market equilibriumunder free market conditionsshows a price of $4,000 andquantity of 50 tons.

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Free trade supply

PrevailingWorld price

Quantitysupplied

Quantitydemanded

QuantitydemandedExcess Demand

60 = 80 – 20

Excess Demand60 = 80 – 20

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Prevailingworld priceplus tariff

Quantitysupplied

Quantitydemanded

QuantitydemandedExcess Demand

20 = 60 – 40

Excess Demand20 = 60 – 40

Supply with tariff

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Welfare Effects of TariffConsumer surplus before the tariff on the previousslide 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+hafter 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.Page 377

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Autarkicprice

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Free tradesupply

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Combines both a tariffand a quota…

Tariff rate for imports under quota

Free tradesupply

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Tariff rate for imports over quota

Free tradesupply

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Tariff rate for imports over quota

Free tradesupply

Producersurplusincreasesby area eas price to $200

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Welfare Effects of TRQConsumer surplus would fall as a result of theTRQ 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.

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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

tradePage 382

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Forms of Economic Integration

Free trade areas such as the North American Free Trade Agreement (NAFTA)

Customs unions such as the European Union with its common agricultural policy or CAP

Common marketEconomic union

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Reasons for 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

prosperityPage 389

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Impact of removal of small nation tariffsMeans consumers gain A+B+C+D. The net gain to society is B+D.

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Diversion reduces global welfare. Consumers gainA+b+c+d, but the net gain to society is b+d-e.

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SummaryFree trade affects exporting and importing nations

differently.Restrictions take the form of tariff and nontariff barriers.Preferential trading agreements (PTA) legal within GATT

and WTO rules.PTAs can take many forms, including free trade areas,

customs unions, common market or economic union.PTAs should lead to trade creation and increased welfare of

member nations.PTAs take on political importance.

Agri 2312 chapter 19 agricultureal trade policy and preferential trading arrangements

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