Introduction to Agricultural Economics, 5 th ed Penson, Capps, Rosson, and Woodward © 2010 Pearson Higher Education, Upper Saddle River, NJ 07458. • All Rights Reserved. Agricultural Trade Policy and Arrangements Chapter 19
Jan 18, 2015
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Agricultural Trade Policy and
Arrangements
Chapter 19
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Discussion Topics
Trade and welfareWhy restrict trade?Trade restrictionsAgricultural trade policy makingThe importance of preferential trading
agreementsForms of economic integration
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Discussion Topics
Reasons for preferential trading agreements
Do preferential trading agreements create or divert trade?
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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).
Page 370
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page 371
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 371
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.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 371
U.S. price where excesssupply (ES0) is equalto zero…
U.S. price where excesssupply (ES0) is equalto zero…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Japanese price whereexcess demand (ED0)is equal to zero…
Japanese price whereexcess demand (ED0)is equal to zero…
Page 371
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 371
If the price in Japanis Pj2, excess demandwould be ED1.
If the price in Japanis Pj2, excess demandwould be ED1.
If the price is the U.S.Is PUS2, excess supplyWould be ES1
If the price is the U.S.Is PUS2, excess supplyWould be ES1
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Thru trade, both country’smarkets would be in equilibrium where ED=ESat price PE.
Thru trade, both country’smarkets would be in equilibrium where ED=ESat price PE.
Page 371
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 371
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 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
If the price in the U.S. isPE, consumer surplus woulddecline by area 1+2 whileproducer surplus wouldincrease by area 1+2+3
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page 373
Both countries register a net societal gainIn economic welfare. The winners andLosers differ however…
Both countries register a net societal gainIn economic welfare. The winners andLosers differ however…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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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
Page 373
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Trade Restrictions
Tariff barriersNontariff barriers (NTB)•Voluntary export restraints
(VERs)•Tariff rate quotas (TRQ)• Import quotas
Page 375
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page377
Domesticdemand
Domesticdemand
Domesticsupply
Domesticsupply
Domestic market equilibriumunder free market conditionsshows a price of $4,000 andquantity of 50 tons.
Domestic market equilibriumunder free market conditionsshows a price of $4,000 andquantity of 50 tons.
50
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Free trade supply
Free trade supply
PrevailingWorld price
PrevailingWorld price
Quantitysupplied
Quantitysupplied
Quantitydemanded
QuantitydemandedExcess Demand
60 = 80 – 20
Excess Demand60 = 80 – 20
Page 377
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Prevailingworld priceplus tariff
Prevailingworld priceplus tariff
Quantitysupplied
Quantitysupplied
Quantitydemanded
QuantitydemandedExcess Demand
20 = 60 – 40
Excess Demand20 = 60 – 40
Supply with tariff
Supply with tariff
Page 377
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
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Page 380
Autarkicprice
Autarkicprice
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page 380
Free tradesupply
Free tradesupply
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page 380
Combines both a tariffand a quota…
Combines both a tariffand a quota…
Tariff rate for imports under quota
Tariff rate for imports under quota
Free tradesupply
Free tradesupply
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 380
Combines both a tariffand a quota…
Combines both a tariffand a quota…
Tariff rate for imports under quota
Tariff rate for imports under quota
Tariff rate for imports over quota
Tariff rate for imports over quota
Free tradesupply
Free tradesupply
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 380
Combines both a tariffand a quota…
Combines both a tariffand a quota…
Tariff rate for imports under quota
Tariff rate for imports under quota
Tariff rate for imports over quota
Tariff rate for imports over quota
Free tradesupply
Free tradesupply
Producersurplusincreasesby area eas price to $200
Producersurplusincreasesby area eas price to $200
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.
Page 380
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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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
Page 388
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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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
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page 392
Impact of removal of small nation tariffsMeans consumers gain A+B+C+D. The net gain to society is B+D.
Impact of removal of small nation tariffsMeans consumers gain A+B+C+D. The net gain to society is B+D.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Page 393
Diversion reduces global welfare. Consumers gainA+b+c+d, but the net gain to society is b+d-e.
Diversion reduces global welfare. Consumers gainA+b+c+d, but the net gain to society is b+d-e.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
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.