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Analysis of Protectionist Trade Policies in Agriculture
Dr. George NortonAgricultural and
Applied EconomicsVirginia Tech
Copyright 2008
AAEC 3204AAEC 3204
Objectives
Analyze impacts of protectionist policies in Agriculture
Discuss potential solutions to trade problems
Trade impediments in developing countries
External demand constraints• Terms of trade problem• Trade Restrictions (quotas, tariffs, subsidies,
Health and Safety restrictions) Domestic restrictions on trade
• Direct (tariffs, export taxes, etc.)• Indirect (exchange rate manipulation)
Market instability
Protectionist policies of developed countries
Quotas, tariffs Health and safety regulations Subsidized prices in developed countries
Example:
Sugar
Effects of a Tariff
P D S
Excess demand
P
Q Q
= Tariff revenue
P0
Pw
T{
Q1 Q0
Imports
0 0
Export Tax
PD S Excess
Supply
P
Q Q
= Tax revenue
P0
Pw
Q1 Q0
0 0
Exchange Rates
What are they?
How do they become overvalued?
What are the trade effects of overvalued exchange rates?
Market Instability
Price
Quantity
DemandSupply 1
Supply 2P1
P2
Q1Q2
Small changes in supplies of agricultural products can result in large changes in prices as overall demands are inelastic
Solutions to trade problems
External demand constraints
• Multilateral trade agreements
• Special bilateral preferences
• Product diversification
• Regional cooperation
Solutions (continued)
Domestic trade restrictions
• Develop alternative revenue sources
• Enhanced information to reduce transactions costs
• Financial help to reduce short term losses
Market Instability
Product diversification
Commodity agreements
Compensatory financing
Enhanced use of market information
Multilateral Trade Agreements
General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
Conclusion
Many types of internal and external trade restrictions• Can have significantly reduce welfare
Some trade restrictions require international agreements to remove