Agricultural Economics

Lecture 8: Agricultural Trade

What’s happening to world ag. trade?Figure 1.1 Value of World Agricultural Trade, 1974-2003

(billions of U.S. dollars)

0

100

200

300

400

500

600

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

What’s happening to world ag. trade?Fig. 1.2 Agricultural Exports of Selected Countries,

1974-2003 (billions of U.S. dollars)

0

10

20

30

40

50

60

70USFranceNetherlandsGermany

Income per person, 1995 (with sub-national data for 19 countries)

Source: Sachs, JD, “Tropical Underdevelopment.” NBER Working Paper 8119. Cambridge, MA: NBER.

Who are the ag. exporters? Why?

Agricultural Employment as a Share of Civilian Employment and Real Farm Output as a Share of Real GDP

SOURCE: U.S. Department of Commerce and the Federal Reserve Bank of St. Louis. Reprinted from K.L. Kliesen and W. Poole, 2000. "Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.

Source: K.L. Kliesen and W. Poole, 2000. " Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of St. Louis Review 82 (3): 1-12.

Food Expenditures as a Share of Total Consumer Expenditures in the US

The gains from trade are similar for both“importable” and “exportable” goods

Pt

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QdQe

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Demand

Price($/unit)

A B

Qs

Pt

Pe

QsQe

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Qdwith imports, consumers gain more than producers lose:

with exports, producers gain more than consumers lose:

So why don’t we see free trade?

Pt

Pe

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A B

Qs

Pt

Pe

QsQe

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To understand trade policy, let’s start by describing it: For which goods do governments usually restrict trade?Effect of free trade

in importable goodsEffect of free trade in exportable goods

Given these effects of trade, what do governments choose to do?Free trade…

for imports helps consumers but hurts producers;

for exports helps producers but hurts consumers.

Which constituencies do governments favor?

Protection from imports in the world economy, 1997

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…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!

Beginning from the year 1980, Turkey changed its economic development policy from “import substituting industrialization” to “export led growth” strategy. Economy opened up to world trade, export-promoting incentives were initiated (including tax exemptions, rebates and favorable credit terms), direct import controls have been eliminated, and quantity restrictions have been dismantled. State intervention in the economy was reduced to minimum level. As a result of these efforts, Turkey has increased her share from world markets, from 0,15% in 1980 to 0,6% in the year 2003. Between 1980 and 2004 exports of Turkey has increased from 2,9 billion dollars to 63 billion dollars. Structure of exported goods has also changed much from mainly agricultural products and raw materials to higher value added industrial products. Transformation still continues with increasing exports of transportation vehicles and office equipments.

The Share of Foreign Trade in GNP

0,00

20,00

40,00

60,00

80,00

1970 1980 1990 2000 2003 2004* 2005**

%

Imports Exports Volume Deficit

  Turkey's Foreign Trade ($ Million) % Change

  1990 1995 2000 2001 2002 2003 2004 2004/ 2003

Exports (FOB) 12 959 21 637 27 775 31 334 36 059 47 253 63 121

33,6

Imports (CIF) 22 302 35 709 54 503 41 399 51 554 69 340 97 540

40,7

Volume 35 261 57 346 82 278 72 733 87 613 116 593

160 66

1 37,8

Balance - 9 343 - 14 072 - 26 728 - 10 065 - 15 495 - 22 087 - 34 419 55,8

Exp./Imp. 58,1 60,6 51,0 75,7 69,9 68,1 64,7 -5,0

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.

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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.

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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 in 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.

Gains to TradeUnited States Japan

Consumer gains -(1+2) +(a+b)

Producer gains +(1+2+3) -(a)

Net societal gain +3 +b

Both countries register a net societal gainin economic welfare. The winners andlosers differ however…

Why Restrict Trade? To protect a new or infant industry To counter unfair foreign competition To improve the balance of payments To protect national health, the

environment or food safety

Trade RestrictionsTariff 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.

50

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Free trade supply

Prevailingworld price

Quantitysupplied

Quantitydemanded

Excess Demand60 = 80 – 20

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Prevailingworld priceplus tariff

Quantitysupplied

Quantitydemanded

Excess Demand20 = 60 – 40

Supply with tariff

Welfare Effects of Tariff

Consumer 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.

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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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Combines both a tariffand a quota…

Tariff rate for imports under quota

Tariff rate for imports over quota

Free tradesupply

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Combines both a tariffand a quota…

Tariff rate for imports under quota

Tariff rate for imports over quota

Free tradesupply

Producersurplusincreasesby area eas price to $200

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.