FREC 410
International Ag. Trade & Marketing
Agricultural Trade Policies:
Barriers & Taxes
Dr. Titus Awokuse
http://www.udel.edu/FREC/Awokuse/FREC410_webpage.htm
2
Trade Restrictions & Incentives
„
Why Do Govts Intervene in Trade?
Despite gains from free trade, nations do
impose trade restrictions
Imports
Exports
Restrictions
Incentives
Tariff
„ Non-tariff
„ Export tax
„ Non-tax barriers
„
„
™ To promote domestic production
™ To protect “infant industry”
- industries learn by doing – cost curves fall later
™ To protect national (food) security
™ To protect national _____________________
™ To retaliate against policies of trading partners
™ To generate revenues ___________________
Subsidy
„
™
™
3
Export taxes commonly used in developing nations
Custom duties easier to collect than ____________
4
1
Import Restrictions: Tariffs
Effects of Trade Policies
Definition:
„ is a tax on imported good or service
usually
„
„
Price
collected by customs at the ____________
„
Specific tariff: tax levied as a fixed charge for each
unit of imported commodity (Pm = Px+ Tm )
„
Import policy effects depend on country size:
Large
country: has large share of world market and
domestic trade policies can affect world price
e.g. $5 per 100 pounds of tomato imports
Ad
valorem tariff: tax levied as a percentage of
the value of imported commodity (Pm = Px+ tmPx)
„
effect
_________________
Two main types:
Two types of effects:
Small
country: very small share of world market and
domestic trade policies do NOT _______________
e.g. ___________ on value of tomato imports
5
Basic Assumptions
1)
Two countries (e.g., US and Mexico)
2)
Each country has producers and consumers of a
tradeable good (e.g., Tomatoes)
3)
Tomatoes is a ________________ good
4)
The markets are perfectly competitive
5)
The two countries are initially trading freely. Then,
one country initiates a trade policy and there’s no
________________ by the other country
6
Free Trade Equilibrium
Pm =Px =Pw
Exporter (Mexico)
Importer (USA)
World Mkt
P
P
P
Pw
Pw
Sm
ES
Sx
Dx
Dm
Pw
Dm
ED
A
7
B
Q
Qw
Q
W
Q
X
8
2
Price Effects of Tariffs:
Effects of Import Tariff
Large Country Case
Pm =Px+Tm
Exporter (Mexico)
World Mkt
Importer (USA)
P
P
Dm
P
„
Sm
ES
Sx
Dx
Pw
Pw
Px =Pw2
Pw2
Importing country (U.S.) price increase by
less than the amount of the tariff
Pm
U.S.
Pw
Forces
is assumed to be a large importer
ROW to pay part of the tariff through a lower
world price
ED
A
C
Px
D
Sx
B
Q
Dx
Qw2
Pw
Qw
Q
Qw
W
Pm
Y
Z
Sm
X
Q
Dm
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10
Welfare Effects of Tariffs:
Effects of Import Tariffs: Summary
Large Country Case
Large Country Case
Importing Co. Consumers:
„
Import price rises --- CS falls
Importing Co. Producers:
„
„
„
„
Import price rises --- PS rises
Induces output increase by _______________________
Increase in employment
Increase in profits and/or _______________________
Importing Co. Government:
„
„
A tariff drives a wedge between foreign and domestic prices
„
Reduction in importing ____________________________
„
Increase in importing country producer surplus
„
Efficiency loss: caused by distortion faced by domestic
______________________________
„
Terms of trade gain: reflects tendency of a tariff to reduce
foreign export prices
Receives tariff revenues
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TOT=PX/PM
12
3
Effects of a Tariff:
Effects of a Tariff:
Small Country Case
Small Country Case
„
Small countries have very small share of world market
„
Import tariff has NO effect on world price (exogenous)
„
Export supply curve is horizontal at level of world price
„
EFFECT of Tariff (see graph given in class)
World
price is NOT changed
Redistribution
of income from consumers to
____________________________
Price
of import in importing country will rise
by the amount of the tariff
Higher
domestic price reduces import
___________________________
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14
Welfare Effects of a Tariff:
Small Co. Case
Importing Co. Consumers (Lose):
„ Import price rises --- CS falls
Export Tax
Importing Co. Producers (Gain):
Import price rises --- PS rises
„ Induces output increase by existing domestic firms
„ Increase in employment
„ Increase in profits and/or payments to fixed costs
„
Importing Co. Government (Gain):
Receives tariff revenues --- _________________________
„
National welfare: Decrease …why?
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4
Export Tax
Trade Restrictions & Incentives
„
Despite gains from free trade, nations do
impose trade restrictions
„
Export tax can be collected:
directly
from exporters (producers) or
indirectly
Imports
Exports
Restrictions
Incentives
Tariff
„ Non-tariff
„ Export tax
„ Non-tax barriers
„
„
„
Subsidy
„
pays producers a price lower __________________.
More prevalent in LDCs:
easy
„
way for govt revenue collection
source
Subsidy
„
through a govt. _____________________
of funding for govt. spending
Domestic prices in exporting country is forced
to be lower than world price by the ____________________
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Export Tax: Large Country Case
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Effects of Export Tax
Two types of Export Taxes
Specific tax:
Pm = Px + Tx
levied as a fixed charge __________________
e.g. $1 per bag of tea
„
Exporting & Importing country:
Output level (supply and demand)
Price level
(See 3-panel Graphs)
„
Ad valorem tax:
levied as a fraction of the value of
e.g. 5% tax on tea
Pm = Px(1+ tx)
where 0 < tm < 1
19
20
5
Export Tax
Free Trade
„
Pm =Px =Pw
„
Exporter
Importer
World Mkt
P
P
P
Sx
Dx
Exporter
P
P
Pw
Dm
Sm
ES
Sx
Dx
Pw
Importer
World Mkt
P
Sm
ES
Pw
Pw
Dm
Pm =Px+Tx
Pm
Pw
Pw
Px
ED
ED
A
B
Q
Qw
Q
W
A
Q
X
C
Px
D
Sx
B
Dx
Q
Qw2
Pw
Qw
Q
Qw
W
Y
Pm
Z
Sm
X
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Welfare Effects
Exporting Co. Consumers (gain):
„
Export price falls --- ____________________
„
„
„
„
from producers to consumers and the govt.
In the importing country, _______________________
Export price falls --- _____________________
Induces output decrease by existing domestic firms
Decrease in employment
Decrease in profits and/or payments to fixed costs
Exporting Co. Government (gain):
„
In the exporting country, income is transferred
Exporting Co. Producers (lose):
„
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Welfare Effects of Export Tax:
Summary
Export Tax: Large Country Case
„
Q
Dm
from consumers to producers
„
Also, income is transferred from foreign consumers to
the exporting country govt
„
There is --- ______________________________
Receives tax revenues
23
24
6
Welfare Effects of Export Tax: Summary
Large Country Case
„
Small Country Case
Income transferred from producers to consumers and
the govt. in the exporting country
„
In the importing country, income is transferred from
consumers to producers
„
Also, income is transferred from foreign consumers to
Effects of Export Tax:
„
Small countries have very small share of world market
„
Export tax has NO effect on world price (exogenous)
„
Export supply curve is horizontal at level of world price
„
EFFECTS (see graph given in class)
the exporting country govt. (The more inelastic the MD
and more elastic the XS curves, the greater the share
of the tax cost falls on the importing country
consumers --- ________________________
World price is NOT changed
Redistribution of income from producers to consumers and govt
Price of export in exporting country will fall by tax amount
Lower domestic price increases domestic demand and
_________________________________
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Non-Tariff Trade Barriers: Types
„
Import Quota
„
Import embargo (_________________)
„
Voluntary export restraint (_____)
Non-Tariff Trade Barriers (NTBs)
Quota
E.g.
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on trade imposed by the exporting country
limits on Japan’s auto export to US in 1981
„
Packaging and labeling requirements
„
Health and food safety regulations
„
Foreign exchange restrictions
Import
currency under-valuation
Export
currency _______________________
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7
Import Quota
Import Quota vs. Tariff
„
Absolute limit on import quantity
„
Similar results on prices and welfare
„
Enforce by issuing import licenses to some
domestic firms or foreign govts. (e.g. cheese,
sugar, apparels)
„
Import tariff = import quota (at same quantity level)
„
Domestic govt. receive revenue from tariff
„
Import license holders receive quota rents
„
Result in increase in domestic prices for good
„
„
(See graph given in class):
Cost of quota may be higher than tariffs, if foreign govt
is import license holder (true in most cases)
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