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Agri 2312 chapter 19 agricultureal trade policy and preferential trading arrangements

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Agri 2312 chapter 19 agricultureal trade policy and preferential trading arrangements

  1. 1. Agricultural Trade Policy and Arrangements Chapter 19
  2. 2. Discussion Topics <ul><li>Trade and welfare </li></ul><ul><li>Why restrict trade? </li></ul><ul><li>Trade restrictions </li></ul><ul><li>Agricultural trade policy making </li></ul><ul><li>The importance of preferential trading agreements </li></ul><ul><li>Forms of economic integration </li></ul>
  3. 3. Discussion Topics <ul><li>Reasons for preferential trading agreements </li></ul><ul><li>Do preferential trading agreements create or divert trade? </li></ul>
  4. 4. Trade and Welfare <ul><li>Autarky/closed economy – the nation is self-sufficient, no trade takes place between nations, and markets are in equilibrium. </li></ul><ul><li>Arbitrage – purchasing commodities in one market at a low price and rapidly selling them in another market at a higher price. </li></ul><ul><li>Partial equilibrium and excess supply – goods will always move from where prices are low (excess supply) to where prices are high (excess demand). </li></ul>Page 370
  5. 5. Page 371 The equilibrium price in the U.S. market is P US . at prices above P US , the market would exhibit excess supply conditions. At price P E , for example, producers would supply QS US3 while consumers would only want QD US4 .
  6. 6. Page 371 The market equilibrium in Japan occurs at P j . At prices below P j , excess demand conditions will occur. At P E , for example, consumers were willing to buy QD j4 while producers only wished to supply QS j3 .
  7. 7. Page 371 U.S. price where excess supply (ES 0 ) is equal to zero…
  8. 8. Japanese price where excess demand (ED0) is equal to zero… Page 371
  9. 9. Page 371 If the price in Japan is P j2 , excess demand would be ED 1 . If the price is the U.S. Is PUS2, excess supply Would be ES1
  10. 10. Thru trade, both country’s markets would be in equilibrium where ED=ES at price P E . Page 371
  11. 11. Page 371 If the price in Japan is P E , consumer surplus would increase by area a+b while producer surplus would fall by area a. If the price in the U.S. is P E , consumer surplus would decline by area 1+2 while producer surplus would increase by area 1+2+3
  12. 12. Page 373 Both countries register a net societal gain In economic welfare. The winners and Losers differ however…
  13. 13. Why Restrict Trade? <ul><li>To protect a new or infant industry </li></ul><ul><li>To counter unfair foreign competition </li></ul><ul><li>To improve the balance of payments </li></ul><ul><li>To protect national health, the environment or food safety </li></ul>Page 373
  14. 14. Trade Restrictions <ul><li>Tariff barriers </li></ul><ul><li>Nontariff barriers (NTB) </li></ul><ul><ul><li>Voluntary export restraints (VERs) </li></ul></ul><ul><ul><li>Tariff rate quotas (TRQ) </li></ul></ul><ul><ul><li>Import quotas </li></ul></ul>Page 375
  15. 15. Page377 Domestic demand Domestic supply Domestic market equilibrium under free market conditions shows a price of $4,000 and quantity of 50 tons. 50
  16. 16. Free trade supply Prevailing World price Quantity supplied Quantity demanded Excess Demand 60 = 80 – 20 Page 377
  17. 17. Prevailing world price plus tariff Quantity supplied Quantity demanded Excess Demand 20 = 60 – 40 Supply with tariff Page 377
  18. 18. Welfare Effects of Tariff Consumer surplus before the tariff on the previous slide 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+h after 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
  19. 19. Page 380 Autarkic price
  20. 20. Page 380 Free trade supply
  21. 21. Page 380 Combines both a tariff and a quota… Tariff rate for imports under quota Free trade supply
  22. 22. Page 380 Combines both a tariff and a quota… Tariff rate for imports under quota Tariff rate for imports over quota Free trade supply
  23. 23. Page 380 Combines both a tariff and a quota… Tariff rate for imports under quota Tariff rate for imports over quota Free trade supply Producer surplus increases by area e as price to $200
  24. 24. Welfare Effects of TRQ Consumer surplus would fall as a result of the TRQ 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
  25. 25. Rationale for Export Policy <ul><li>Dispose of surplus production </li></ul><ul><li>Limit price increases in domestic markets </li></ul><ul><li>Grow processing industries and employment </li></ul><ul><li>Limit capability of another nation </li></ul><ul><li>Encourage policy reforms by denying trade </li></ul>Page 382
  26. 26. Forms of Economic Integration <ul><li>Free trade areas such as the North American Free Trade Agreement (NAFTA) </li></ul><ul><li>Customs unions such as the European Union with its common agricultural policy or CAP </li></ul><ul><li>Common market </li></ul><ul><li>Economic union </li></ul>Page 388
  27. 27. Reasons for Preferential Trading Agreements… <ul><li>Economic or political reasons tied to U.S. strategic interest </li></ul><ul><li>Timely reductions in barriers to trade </li></ul><ul><li>Counter economic and political power of other trading agreements </li></ul><ul><li>Reduce illegal immigration </li></ul><ul><li>Foster political stability and economic prosperity </li></ul>Page 389
  28. 28. Page 392 Impact of removal of small nation tariffs Means consumers gain A+B+C+D. The net gain to society is B+D.
  29. 29. Page 393 Diversion reduces global welfare. Consumers gain A+b+c+d, but the net gain to society is b+d-e.
  30. 30. Summary <ul><li>Free trade affects exporting and importing nations differently. </li></ul><ul><li>Restrictions take the form of tariff and nontariff barriers. </li></ul><ul><li>Preferential trading agreements (PTA) legal within GATT and WTO rules. </li></ul><ul><li>PTAs can take many forms, including free trade areas, customs unions, common market or economic union. </li></ul><ul><li>PTAs should lead to trade creation and increased welfare of member nations. </li></ul><ul><li>PTAs take on political importance. </li></ul>

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