AGEC 429: AGRICULTURAL POLICY LECTURE 22: AGRICULTURAL TRADE POLICY ANALYSIS I

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1 AGEC 429: AGRICULTURAL POLICY LECTURE 22: AGRICULTURAL TRADE POLICY ANALYSIS I

2 AGEC 429 Lecture #22 AGRICULTURAL TRADE POLICY ANALYSIS I The U.S. exports many agricultural commodities.

3 AGEC 429 Lecture #22 AGRICULTURAL TRADE POLICY ANALYSIS I The U.S. exports many agricultural commodities. But the U.S. also imports many agricultural commodities as well.

4 AGEC 429 Lecture #22 AGRICULTURAL TRADE POLICY ANALYSIS I The U.S. exports many agricultural commodities. But the U.S. also imports many agricultural commodities as well. Agricultural exports exceed imports resulting in a positive trade balance. Trade Balance = $Exports - $Imports Why the lower balance? slower world economic growth a strong U.S. dollar lower exports of high-value products falling prices for bulk commodities. $Exports > $Imports An increasingly positive agricultural trade balance.

5 AGEC 429 Lecture #21 AGRICULTURAL TRADE POLICY ANALYSIS I The U.S. exports many agricultural commodities. But the U.S. also imports many agricultural commodities as well. Agricultural exports exceed imports resulting in a positive trade balance. The U.S. government implements various instruments to change the level of our agricultural exports and imports, including: Policies to restrict trade: - - export taxes and quotas Policies to enhance trade: - import subsidies - Most common Trade protectionism. Trade protectionism results from political pressure by interest groups of producers and/or consumers to affect the level of trade and prices in the market.

6 Export and Import Markets To analyze the market effects of trade policies, we must first distinguish between export markets and import markets. Export Market: A market in which the domestic of a product (X) exceeds the domestic for that product at most price levels. Market for Product X P 3 P D X S X P Excess Supply of X (ES X ) P w = P 2 P 1 P 0 D W 0 A B Q 0 Q w Q Note that AB is equal to.0qw

7 Import Market: A market in which the domestic demand for a product (M) exceeds the domestic supply of that product at most price levels. Market for Product M D M S M P 0 S W P 1 P w = P 2 P 3 Excess Demand for X (ED M ) 0 W X 0 Q w.0qw Points to note: Note that WX is equal to 1. Export market: Excess supply (ES) is the quantity of domestic supply available for export at every price. ES is calculated as the difference between supply and demand at every price (ES = S X D X ). As price increases, quantity supplied increases and quantity demanded decreases so that the quantity available for export increases (i.e., ES curve is upward sloping). 2. Import market: Excess demand (ED) is the quantity demanded NOT available from domestic production. ED is calculated as the difference between demand and supply at every price (ED = D M S M ). As price decreases, quantity supplied decreases and quantity demanded increases so that the quantity demanded from imports increases (i.e., ED curve is downward sloping).

8 What is the motivation for trade protectionism? Import Restrictions limit competition from imports and raise domestic market prices - Who benefits? - Who loses? - Why? Export Subsidies make exports more competitive in world markets and raise domestic market prices - Who benefits? - Who loses? - Why? Who benefits in BOTH cases? Who loses in BOTH cases? have traditionally been more politically powerful than in the agricultural policy formulation process. Consequently, U.S. agricultural policy has included trade policies intended primarily to benefit (import restrictions and export subsidies)

9 Market Effects of Import Restrictions (Import Market) (1) Import Tariff (T M ): PM = P W + TM so that TM = P M - PW and P W = P M - T M (2) Import Quota (QM): Imports cannot exceed max. amount (QM) by issuing import licenses. Pm Earned by the import quota license holder or the government. price S w Who gets the difference - called the? price Import Tariff = Tm ED md ED m Q md Tariff Imported

10 Market Effects of Export Incentives (Export Market) Export Subsidy (VX): PW = PX - VX so that Vx = PX - PW Support price Selling price Ps ES x Export Subsidy = Vx Buying price Q x

11 Market Effects of Export Incentives (Export Market) What Export would Subsidy happen (VX): PW if the = PX world - VX demand so that Vx curve = PX (D - PW w ) was more ELASTIC? Ps No effects in the domestic market Same Selling price Much Export Subsidy (Vx) needed! P w Dw But higher Buying price! C D Q x Thus, the more ELASTIC the world demand (Dw), the the export subsidy cost. No effects on domestic market but REDUCTION in the price and markets effects in other countries!

12 Market Effects of Export Incentives (Export Market) What Export would Subsidy happen (VX): PW if the = PX world - VX demand so that Vx curve = PX (D - PW w ) was more INELASTIC? Ps No effects in the domestic market Same Selling price Much Export Subsidy (Vx) needed! C D Q x Dw P w But lower Buying price! Thus, the more INELASTIC the world demand (Dw), the the export subsidy cost. No effects on domestic market but REDUCTION in the price and markets effects in other countries!

13 Market Effects of Export Incentives (Export Market) What Export would Subsidy happen (VX): PW if the = PX world - VX demand so that Vx curve = PX (D - PW w ) was more INELASTIC? Ps No effects in the domestic market Same Selling price Much Export Subsidy (Vx) needed! C D Q x Dw P w But lower Buying price! Thus, the more INELASTIC the world demand (Dw), the the export subsidy cost. No effects on domestic market but REDUCTION in the price and markets effects in other countries!

1. Demand: willingness to buy a good or service and the ability to pay for it; how much of an item an individual is willing to purchase at each price

1. Demand: willingness to buy a good or service and the ability to pay for it; how much of an item an individual is willing to purchase at each price 2. The two things needed for demand to exist are: willingness