1. Chapter 14: The Political Economy of Trade and Agriculture
Topics in chapter 14:
What explains trade barriers in general ?
Protectionism and political processes
Why is agriculture protected ?
Effects of agricultural protection
WTO and agriculture
Europe`s CAP

2. Trade Barriers
We have seen that in many cases there will be winners and losers from free trade
Trade policy is in real life very much the outcome of a political process, where the political strength of each group is the critical factor

3. Politics of Protection
Key elements in the political process:
What is the size of the gain for the winners from protection and how many are they?
Assume gain is BP and number is NP
What is the size of the loss for the losers from protection and how many are they ?
Assume loss is BC and number is NC
What is the reason for taking positions against protection ?
Assume this is the gain and loss (BP and BC)

4. Politics of Protection
Types of political activities and their costs
Voting and lobbying
Political institutions and the political process
Direct voting
Representative democracy

5. When are tariffs unlikely ?
Direct democracy
Assume everyone votes
Number of losers NC almost always > number of winners from protection NB
Representative democracy
Assume that everyone will devote as much effort to lobbying until cost of efforts are equal to the gains or losses (BP and BC)
Since BC > BP free trade will prevail

6. When are tariffs likely ?
Some groups may be more effective than others in organising political activities
If the benefit from to the individual is less than the cost, the individual will not participate
Average gain per supporter of protectionism is BP/NP and average gain for each opponent of protectionism is BC/NC
Consumers average gain from free trade often poor, loss for producers often large

7. Tariff escalation
Tariff escalation refers to the fact that tariff rates often rise with the stage of production
Tariffs are higher on final consumer goods than intermediate goods or raw materials
This may be due to weak lobbying strength of consumers
Political sympathy - the sudden damage effect

8. The protection and taxation of agriculture
Agriculture - “turning the laws of nature upside down”
Extremely high protection in many (most ?) industrial countries, but often taxed in developing nations
Nominal protection coefficient (NPC)
NPC = Pprod/Pworld
If NPC > 1, agricultural producers are protected, if < 1 producers are taxed

9. Why all the protection ?
To make sure that enough food is produced to meet the country’s needs
To shield farmers from the effects of the weather and swings in world prices
To preserve rural society

10. Nominal protection coefficient
NPC is not a perfect measure of support
Support to farmers not always provided by higher prices - direct income support also used
NPC does not catch the effects of input prices - subsidisation of fertilisers etc.
Effective rate of protection (ERP) or producer subsidy equivalent (PSE) are better measures

11. Cost of agricultural subsidies

12. The Uruguay Round

13. Effects of an export subsidy

14. Europe`s Common Agricultural Program