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