Analysis of Protectionist Trade Policies in Agriculture Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2008 AAEC 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 P0P0 PwPw T{ Q1Q1 Q0Q0 Imports 00

Export Tax P DS Excess Supply P Q Q = Tax revenue P0P0 PwPw Q1Q1 Q0Q0 00

Exchange Rates What are they? How do they become overvalued? What are the trade effects of overvalued exchange rates?

Market Instability Price Quantity Demand Supply 1 Supply 2 P1 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