FREC 410
International Ag. Trade & Marketing
Agricultural Trade Policies:
Subsidies
Dr. Titus Awokuse
http://www.udel.edu/FREC/Awokuse/FREC410_webpage.htm
2
Why Do Govts Intervene in Trade?
Trade Restrictions & Incentives
„
Review:
™ To promote domestic production
™ To protect “infant industry”
- industries learn by doing – cost curves fall later
™ To protect national (food) security
™ To protect national health and safety
™ To retaliate against policies of trading partners
™ To generate revenues for the government
Despite gains from free trade, nations do
impose trade restrictions
Restrictions
Imports
„
„
Exports
„
„
Incentives
Tariff
Non-tariff
„
Subsidy
Export tax
Non-tax barriers
„
Subsidy
™
™
3
Export taxes commonly used in developing nations
Custom duties easier to collect than income taxes
4
1
Export Subsidy
„
World Mkt
Exporter
P
Pw
Pw
Dm
Sm
ES
Sx
Dx
Large Country Case
Importer
P
P
Px
Welfare Effects of Export Subsidy
Pm = Px - Vx
Pw
„
Exporting Co. Consumers (lose)
„
Exporting Co. Producers (gain)
„
Exporting Co. Government (lose)
Loses
Pm
amount of subsidy --- cut back on some programs
ED
C A
Px
B C
Sx
Qw
Q
Dx
Pw
Qw2
Y W
Q
Qw
Pm
X Z Q
Sm
Dm
5
Import Subsidy
„ Pm =
Px -
World Mkt
P
Sm
Pw
Pw
Pw
Dm
ES
Sx
Dx
Large Country Case
Importer
P
P
Px
Welfare Effects of Import Subsidy
Vm
Exporter
Px
Sx
Dx
Qw
Q
Pw
Qw
Qw2
Q
Importing Co. Consumers (gain)
„
Importing Co. Producers (lose)
„
Importing Co. Government (lose)
amount of subsidy --- cut back on some
programs
ED
B C
„
Loses
Pm
C A
6
Y W
Pm
X Z Q
Sm
Dm
7
8
2
Domestic Policies: Overview
„
Types of Domestic Policies
Trade policy:
is
„
any policy which directly affects the flow of
„
goods and services ____________________
„
Examples
are: import tariffs and quotas,
_____________________
„
Domestic tax policy:
Income / Firm Profit / Sales /consumption
Domestic subsidy policy:
Agricultural _______________________________
„
Price floors
Acreage reduction _____________________.
R&D
subsidies to technology industry
Spending contracts
Educational grants & _______________________
Domestic government regulations
environmental __________________
pollutant emission controls
Production & sale of __________________________
Defense
Domestic policy:
„
is
any policy which indirectly affects the flow of
goods and services between countries --- undue
_________________________
9
10
Equivalence between
Domestic & Trade Policies
Domestic Policies as a Basis for Trade
„
Domestic policy can be a basis for trade
Example:
Production subsidy effect
Assume
a small country initially _______________
exogenous world price
Imposes a _____________________
encourage domestic production
Domestic demand unchanged because consumers
still pay same world price for good
All extra production is then exported abroad
Conclusion: __________________ created exports
„
Combination of domestic policies can mimick a trade
policy
„
Specific import tariff is equivalent to:
Specific production subsidy plus Specific ___________
tax
Target: reduction of imports
„
Specific export tax is equivalent to:
Specific production tax plus Specific consumption
subsidy
Target: _____________________
„
Why analyze impact of domestic policies?
Faces
11
12
3
Preparation for PBL Sessions
Wednesday or Friday Classes
„
Review assignments on WTO Negotiations
„
Bring Xerox copies of important websites with useful
information as resources & references for in-class
discussions
„
Come prepared to articulate your views and participate
in group discussions
„
Grades will be assigned at end of class
Won’t get points if absent for class discussions
13
14
4