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AGEC 450
International Agricultural Trade
Slides for Week 5
Export policies and the development paradox
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Results from Quiz 4
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The Welfare Effects of Import Restrictions:
Consumer losses outweigh producer gains
plus tariff revenue or quota rents
quota
Demand Supply D S S+quota
Pdom
tariff A B C D A B C D
Ptrade
Qs Qs’ Qd’ Qd Qs Qs’ Qd’ Qd
CS loss: area ABCD CS loss: area ABCD
PS gain: area A PS gain: area A
Tariff gain: area C Quota rents: area C
Net loss: area BD Net loss: area BD
…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!
If trade is good, surely more trade is better?
Pdom
A BC D E
F
Ptrade
Qd’ Qd Qs Qs’
The losses from export
subsidies are similar CS loss: area AB
to losses from import PS gain: area ABCDE
restrictions: Subsidy cost: area BCDEF
Net loss: area BF
To help producers (raise domestic prices),
governments restrict imports or subsidize exports:
both are similarly inefficient!
Price Pdom
($/unit) A BC D E
F
Ptrade
Supply
Pdom
A B C D
Ptrade Demand
Qs Qs’ Qd’ Qd Qd’ Qd Qs Qs’
CS loss: area ABCD CS loss: area AB
PS gain: area A PS gain: area ABCDE
Tariff gain: area C Subsidy cost: area BCDEF
Net loss: area BD Net loss: area BF
Tariff-equivalent import restrictions .
(% of world price)
0.0
50.0
100.0
150.0
200.0
250.0
300.0
Dairy products
Processed rice
Wheat
Paddy rice
Beverages + tobacco
Oil seeds
Sugar cane, sugar beet
Sugar
USA
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
Oth.High-Inc.
Motor vehicles and parts
Manufactures nec
Textiles
Animal products nec
Leather products
Mineral products nec
Fishing
Ferrous metals
Metal products
Wool, silk-worm cocoons
Med.Income
Wood products
Machinery + equip. nec
Chemical,rubber,plastics
It’s not that trade is good;
it’s that free trade is good!
Petroleum, coal products
Paper products,
import restrictions across sectors:
Metals nec
Electronic equipment
From last week, here is the pattern of
So why don’t we have free trade?
Transport equipment nec
Plant-based fibers
Low Income
Protection from imports in the world economy, 1997
Oil
Minerals nec
Forestry
Coal
Business services nec
Communication
Counting both export and import policies…
001
100
Net Farm Subsidies and Real Per-Capita Income
emocnI atipaC-reP laeR dna seidisbuS mraF teN
25,000 57Net Farm Subsidies and Real Per-Capita Income
25,000 75
erutlucirga ni ESP egatnecrep fo etamitse ADSU
USDA estimate of percentage PSE in agriculture
1982
GDP per capita, at PPP prices
20,000 1983
1982
05
50
1984
GDP per capita, at PPP prices
20,000 1983
PSE 1984
1985
(net
15,000
1985
1986
52
25
subsidy
15,000
1986
1987
as a
10,000 1987
1988
percent
0
0
10,000 1988
1989
of farm
1989
1990
income)
52-
-25
5,000
1990
1991
5,000
1991
1992
05-
-50
0 1992
-100
0 -75 -50 -25 0 25 50 75 100
-100 USDA-50
-75 estimate of
-25 percentage 25 in agriculture
0 PSE 50 75 100
57-
-75
GDP per percentage PPP prices
USDA estimate of capita, atPSE in agriculture
Real GDP
10,000000,01
15,000000,51
20,000000,02
25,000000,52
5,000000,5
001-100
-100
per capita
00
-
0
5,000
Source: Real GDP per capita is from the Penn World Tables (http://pwt.econ.upenn.edu), and percentage
GDP p PSE estimates are from the USDA Economics and Statistics System (http://usda.mannlib.cornell.edu).
Countries are Argentina, Australia, Bangladesh, Brazil, Canada, Chile, China, Colombia, Slovak Rep, France, Egypt, Hungary,
se cirp PPP ta ,atipa c rep PDG
Net Farm
-75
India, Jamaica, Japan, Kenya, Mexico, Nigeria, New Zealand, S. Africa, Senegal, Turkey, USA, Venezuela, Zambia, Zimbabwe.
US
This pattern of farm subsidies is plainly
inefficient and unfair across countries…
The “Development Paradox”:
Why do poor countries tax their farmers,
while rich countries subsidize them?
• Poor countries have a large and rising
number of farmers; food accounts for a
large share of consumer expenditure.
• Rich countries have a small and falling or
stable number of farmers; food accounts for
a small share of consumer spending.
• The only plausible explanation is a shifting
balance of political power, between
producers and consumers
Is this what governments say?
Revisiting the logic…
The most common arguments for intervention are that:
(1) free trade’s OK, but not without a level playing field:
foreigners subsidize their producers, or restrict access to
their markets, so we should do so as well;
(2) free trade’s OK, but not yet: first, our producers need
temporary “infant industry” protection
(3) free trade’s OK, but not for this industry: it’s needed for
“national security”, employment, or other non-market
reasons why prices do not reflect full costs/benefits
Our textbook (and most economists’) main argument is
(4) free trade’s OK, but we (slightly) restricted trade can
give us (slightly) improved prices, by market power
Let’s go through all of these using supply-demand diagrams…
