Download Part 2 - Economics of Agricultural Development

Analysis of Protectionist
Trade Policies in
Agriculture
AAEC 3204
Dr. George Norton
Agricultural and
Applied Economics
Virginia Tech
Copyright 2008
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
D
P
P
S
P0
T{
Pw
Excess
demand
0
Q
0
Q1
Imports
= Tariff revenue
Q0
Q
Export Tax
P
D
S
P
Excess
Supply
Pw
P0
0
Q
0
= Tax revenue
Q1 Q 0
Q
Exchange Rates

What are they?

How do they become overvalued?

What are the trade effects of overvalued
exchange rates?
Market Instability
Demand
Price
Supply 1
P1
Supply 2
P2
Q1Q2
Quantity
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