FREC 410 International Ag. Trade & Marketing. Agricultural Trade Policies: Barriers & Taxes. Trade Restrictions & Incentives

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1 FREC 410 International Ag. Trade & Marketing Dr. Titus Awokuse Agricultural Trade olicies: Barriers & Taxes 2 Trade Restrictions & Incentives Despite gains from free trade, nations do impose trade restrictions Imports Exports Restrictions Tariff Non-tariff Export tax Non-tax barriers Incentives Subsidy Why Do Govts Intervene in Trade? 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 Export taxes commonly used in developing nations Custom duties easier to collect than 3 4 1

2 Import Restrictions: Tariffs Definition: is a tax on imported good or service usually collected by customs at the Two main types: Specific tariff: tax levied as a fixed charge for each unit of imported commodity ( m = x + T m ) e.g. $5 per 100 pounds of tomato imports Ad valorem tariff: tax levied as a percentage of the value of imported commodity ( m = x + t m x ) e.g. on value of tomato imports Effects of Trade olicies Two types of effects: rice effect Import policy effects depend on country size: Large country: has large share of world market and domestic trade policies can affect world price Small country: very small share of world market and domestic trade policies do NOT 5 6 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 Free Trade Equilibrium m = x = w Exporter (Mexico) World Mkt ES D x Sx Importer (USA) S m 4) The markets are perfectly competitive w w w 5) The two countries are initially trading freely. Then, one country initiates a trade policy and there s no by the other country A B w ED W X 7 8 2

3 Effects of Import Tariff m = x +T m x = w2 Exporter (Mexico) World Mkt ES D x Sx m w w w w2 ED Importer (USA) S m rice Effects of Tariffs: Large Country Case Importing country (U.S.) price increase by less than the amount of the tariff U.S. is assumed to be a large importer Forces ROW to pay part of the tariff through a lower world price A C D B w2 w W Y Z X x S x D x w w m S m 9 10 Welfare Effects of Tariffs: Large Country Case Importing Co. Consumers: Import price rises --- CS falls Importing Co. roducers: Import price rises --- S rises Induces output increase by Increase in employment Increase in profits and/or Importing Co. Government: Receives tariff revenues Effects of Import Tariffs: Summary Large Country Case 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 TOT= X / M

4 Effects of a Tariff: 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 Effects of a Tariff: Small Country Case EFFECT of Tariff (see graph given in class) World price is NOT changed Redistribution of income from consumers to rice of import in importing country will rise by the amount of the tariff Higher domestic price reduces import Welfare Effects of a Tariff: Small Co. Case Importing Co. Consumers (Lose): Import price rises --- CS falls Importing Co. roducers (Gain): Import price rises --- S 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? Export Tax

5 Trade Restrictions & Incentives Despite gains from free trade, nations do impose trade restrictions Imports Exports Restrictions Tariff Non-tariff Export tax Non-tax barriers Incentives Subsidy Subsidy Export Tax Export tax can be collected: directly from exporters (producers) or indirectly through a govt. pays producers a price lower. More prevalent in LDCs: easy way for govt revenue collection source of funding for govt. spending Domestic prices in exporting country is forced to be lower than world price by the Export Tax: Large Country Case Two types of Export Taxes Specific tax: m = x + T x levied as a fixed charge e.g. $1 per bag of tea Ad valorem tax: levied as a fraction of the value of e.g. 5% tax on tea m = x (1+ t x ) where 0 < t m < 1 Effects of Export Tax Exporting & Importing country: Output level (supply and demand) rice level (See 3-panel Graphs)

6 Free Trade m = x = w m = x +T x Export Tax Exporter World Mkt Importer Exporter World Mkt Importer D x Sx ES S m D x Sx ES m S m w w w w w w ED x ED A B w W X A C D B w2 w W Y Z X x S x D x w w m S m Export Tax: Large Country Case Welfare Effects Exporting Co. Consumers (gain): Export price falls --- Exporting Co. roducers (lose): 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): Receives tax revenues Welfare Effects of Export Tax: Summary In the exporting country, income is transferred from producers to consumers and the govt. In the importing country, from consumers to producers Also, income is transferred from foreign consumers to the exporting country govt There is

7 Welfare Effects of Export Tax: Summary Large 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 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 --- Effects of Export Tax: Small Country Case 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) World price is NOT changed Redistribution of income from producers to consumers and govt rice of export in exporting country will fall by tax amount Lower domestic price increases domestic demand and Non-Tariff Trade Barriers: Types Import uota Import embargo ( ) Non-Tariff Trade Barriers (NTBs) Voluntary export restraint ( ) uota on trade imposed by the exporting country E.g. limits on Japan s auto export to US in 1981 ackaging and labeling requirements Health and food safety regulations Foreign exchange restrictions Import currency under-valuation Export currency

8 Import uota Absolute limit on import quantity Enforce by issuing import licenses to some domestic firms or foreign govts. (e.g. cheese, sugar, apparels) Result in increase in domestic prices for good (See graph given in class): Import uota vs. Tariff Similar results on prices and welfare Import tariff = import quota (at same quantity level) Domestic govt. receive revenue from tariff Import license holders receive quota rents Cost of quota may be higher than tariffs, if foreign govt is import license holder (true in most cases)