Trade Policy
AG BM 102
Achieving free trade is like
getting to heaven. Everyone
one wants to get there, but not
too soon.
Introduction
• Long history
• First ag policy – Sugar Acts one cause of
American revolution
• Also source of revenue – primary source
of U.S. government revenue before 1916
• Protection politically attractive
Tariff
• A tax on imports
• Flat tariff – 10 cents per pound –like gas
tax
• Ad valorem– proportional to value – like
sales tax – 10%
• Discourages imports and raises money for
the government
Suppose we put a 50 cent per
pound tariff on Mexican beef
Tariff on Beef Imports
4.5
SMex + tariff
4 SMex
PUS
3.5
DUS
PMex
3
2.5
2
1.5
1
0.5
0
0 7.5 15 22.5 30
Q
T
Tariff on Beef Imports
4.5
SMex + tariff
4 SMex
PUS
3.5
DUS
PMex
3
2.5 Revenue
2
1.5
1
0.5
0
0 7.5 15 22.5 30
Q
T
Effect
• Fewer imports
• Higher prices in U.S.
• Lower prices in Mexico
• Revenue for the U.S. treasury
Who pays?
• Prices higher in U.S.
– Who wins?
– Who loses?
• Prices lower in Mexico
– Who wins?
– Who loses?
• Tariff Revenue
– Who wins?
Quotas
• Specifies a maximum quantity of imports
• May be stand alone or have a tariff
attached to it (e.g, low or zero “within-
quota” tariff, high “over-quota” tariff)
• Used to restrict imports
Effect
• Fewer imports
• Higher prices in U.S.
• Lower prices in Mexico
Trade policy
• Used to protect domestic industry
• Keeps out imports
• Keeps domestic price high
• Lowers prices for exporters to the
protecting country
Removing protection – trade
agreements
• Free trade – consumers gain from lower prices
• Always has domestic opposition (those who
benefit from protection) and support (those who
gain from free trade)
• Depends on whether you are buying or selling
the product
• History of protectionism bad – tariff wars and the
Great Depression
• Trade agreements try to address this – e.g.,
World Trade Organization, North American Free
Trade Agreement
Current WTO trade talks
• Try to find a balance of concessions – e.g., we lower
steel tariffs if you lower agricultural tariffs
• European Union and Japan most protective of
agriculture (high cost producers, potential importers)
• Several groups of countries pushing for freer trade
(those who are exporters) –Australia & New Zealand,
Brazil
• Developing countries pushing for lower subsidies in rich
countries/more access to their markets, but want to limit
access to their own markets
• Most countries want to have free trade for products in
which they are competitive and protection for the rest
Free trade and agricultural policy
• Free trade means not using some policy
instruments
• Can’t artificially hold up domestic prices
with free trade (imports can always
undercut)
• Either an isolated market or part of global
market
• Trade allows sharing of shocks – drought,
etc.
Concluding comments
• Trade issues always in the news
• Important in election years
• Tough political decisions
• Benefits of free trade to economy are
substantial, but there are losers. Losers
have more to lose (per capita) than
winners have to gain