class: center, middle, inverse, title-slide # Agricultural Markets ## Lecture 5: International Trade and Protectionism ### David Ubilava ### September 2020 --- # Gains from Trade Countries trade: - because some can produce certain commodities when others cannot (absolute advantage), or, - more typically, because some can produce certain commodities more efficiently than others (comparative advantage). Gains from trade can be grouped into two categories: gains from exchange, and gains from specialization. --- # Gains from Trade ## Gains from exchange - Drawing supplies from a world market allows access to a wider array of products at lower cost and perhaps with greater security of supply than can be produced by domestic industries. - Lower prices from imported goods allow consumers to buy more goods from disposable income. - Lower prices for imported raw materials, that are used to produce final goods, also benefit consumers by lowering prices of these final goods. --- # Gains from Trade ## Gains from specialization - Trade stimulates the expansion of low cost industries (and forces the contraction of high cost industries). - Increase of the size of the market allows firms or industry to take advantage of economies of scale. - Increase of competition provides greater emphasis on technological development and innovation, and results in increased skills of workforce. --- # Gains from Trade When trade occurs, in absence of transfer costs, the intersection of the excess demand and excess supply curves yields the world price. A more realistic scenario is trade with transfer costs. A way to think of the effect of transfer costs is by incorporating them into the supply function of the exporting country. Transfer costs increase the price at which commodities are traded, and reduce the quantity of traded commodities. As a result, in an importing market, consumers receive less of the commodity for a higher price, and producers sell more of the commodity for a higher price; the opposite is true in an exporting market. --- # Liberalization vs Protectionism The case for free trade is that producers and consumers allocate resources most efficiently when governments do not distort market prices through trade policy. Economic welfare of a small country is highest with free trade. With restricted trade: - consumers pay higher prices (than they would have paid otherwise); - distorted prices cause overproduction either by existing firms producing more or by more firms entering the market. --- # Liberalization vs Protectionism Protectionism consists of a set of actions that deviates the trade patterns from what would have been their state in absence of any regulations (i.e., in a free trade regime). The case for protectionism is primarily directed to maintain a considerable degree of self-sufficiency in the country, but can also be 're-active' to ongoing economic or political processes. Common levers for trade restriction are tariffs and quotas. Other government interventions that can play the role of trade distortions are taxes and subsidies. --- # Liberalization vs Protectionism In agriculture, strongly divergent climatic conditions around the globe, create ideal conditions for making use of comparative advantage. However, agriculture has been traditionally an area where governments have been reluctant to open up domestic markets to international trade. While the policies around the world (and over time) vary, typical pattern has been that developed countries tend to maintain high domestic prices, to protect farmers' incomes, while developing countries tend to keep domestic prices low, in the interest of consumers. --- # The History of Trade Negotiations After the World War II, nations around the world recognized the urgent need for coordinated policy efforts in the areas of economic development, monetary policy, and international trade. With that in mind, 23 nations signed a multilateral agreement regulating international trade known as the General Agreement on Tariffs and Trade (GATT) in Geneva on 30 October 1947 to take effect on 1 January 1948. GATT became the vehicle for trade negotiations for the next half century, until its successor - the World Trade Organization (WTO) was formed and took effect in 1995. --- # The History of Trade Negotiations Main principles of the GATT involved: - *most-favoured-nation* principle, meaning that trade benefits conferred on one country should be extended unconditionally to all other member countries; - *national treatment*, meaning that imports should be treated no less favourably than domestic products; and - *reciprocity*, meaning that negotiations should be conducted on a reciprocal and mutually advantageous basis. --- # The History of Trade Negotiations ## Agriculture in Trade Negotiations Idea of replacing agricultural price support with direct payments to farmers decoupled from production dates back to the late 1950s. Twelfth session of the GATT Contracting Parties selected a Panel of Experts, chaired by Gottfried Haberler, to examine the effect of agricultural protectionism, fluctuating commodity prices, and the failure of export earnings to keep pace with import demand in developing countries. --- # The History of Trade Negotiations ## Agriculture in Trade Negotiations The report (1958) found that there was a decline in the terms of trade for primary commodities (relative to the manufactured goods). This finding accords with what later became to be known as the *Prebisch--Singer hypothesis* (though Haberler himself had particular disagreement was with the idea that there was a systematic long-term decline in the terms of trade). --- # The History of Trade Negotiations ## Agriculture in Trade Negotiations The report: - stressed the importance of minimizing the effect of agriculture subsidies on competitiveness; - recommended replacing price support with direct supplementary payments not linked with production; - anticipated discussion on green box subsidies---the kind of subsidies that do not distort trade, or at most cause minimal distortion, that are government-funded (not by charging consumers higher prices), and that do not involve price support. --- # The History of Trade Negotiations ## Agriculture in Trade Negotiations In leading up to the 1986 negotiations, developed countries strongly resisted compromises on agriculture. This opposition was subsequently neutralized by guaranteeing farmers continued support, and allowing subsidies that cause not more than minimal trade distortion in order to meet public policy aims. --- # The History of Trade Negotiations ## Agriculture in Trade Negotiations In leading up to the 1986 negotiations, developed countries strongly resisted compromises on agriculture. This opposition was subsequently neutralized by guaranteeing farmers continued support, and allowing subsidies that cause not more than minimal trade distortion in order to meet public policy aims. --- # The History of Trade Negotiations ## Uruguay Round Agreement on Agriculture - which was reached in the third and final phase of the Uruguay Round - continues to be the most substantial trade liberalization agreement in agricultural products in the history of trade negotiations. The agreement revolved around these three directions: *market access*, *export competition*, and *domestic support*. --- # The History of Trade Negotiations ## Uruguay Round - *Market access*: to convert of all existing non-tariffs into tariff equivalents; developed countries to reduce tariffs by 36% over six years; developing countries to cut tariffs by 24% over 10 years; safeguard provisions to allow importers to guard against import surges and low world prices. - *Export competition*: export subsidies capped and subsequently reduced in both value (36%) and volume (21%). - *Domestic support*: reduction of the level of sector--wide (rather than product-specific) support - better known as the aggregate measurement of support - by 20% over six years for developed countries, and 13% over 10 years for developing countries.