Figure 13.1

Figure 13.1

Tariff-inclusive price

Single good, small country Import tariff: Welfare loss Revenue gain Distribution issues (producers gain/lobby) Domestic producer subsidy Welfare loss (though less than tariff) Revenue cost Distribution issues (producers gain/lobby)

Quotas Equivalent to tariff in protection terms

(if no uncertainty) Revenue cost Distribution even more toward producers/importers Uncertainty makes tariffs and quotas non-equivalent.

Tariff leaves quantity of imports uncertain Quota leaves domestic price uncertain

Export subsidy Welfare loss Revenue cost Distribution issues If downward sloping world demand curve then

may be terms of trade cost Whole economy: uniform import tariff = uniform export tax

These are the static effects. Arguably more important in the long-run are: Dynamic effects: Infant industry argument (learning by doing, Horndal effect) Competitive pressure argument

(Productivity only way to survive) And

Problem of rent-seeking and corruption associated with discretionary trade restrictions

Source: IMF WEO 07

Tariff Structures and Effective Protection

p

ppt

The nominal tariff rate, t, is

Wherep′ is the tariff-inclusive pricep is the free trade price

(13.1)

Tariff Structures and Effective Protection

v

vvg

The effective tariff rate, g, is

Wherev′ is the value added per unit of output,inclusive of the tariffv is the value added per unit of outputunder free trade

(13.2)

Table 13.1

Small positive effects reflect: 1. Monopolistic intermediaries meant that only about half the price increase passed to farmers 2. India acts as monopsonistic buyer of raw cashews (Terms of trade loss from additional output) 3. Weak supply response – little new planting (Maybe due lack of confidence that policy will stick).

Figure 13.3

Free trade bad for the poorest?

• Panagariya’s six fallacies (World Economy, 2005)

• Surprising facts neglected in the debate about Doha

• No obvious political bias—some strange bedfellows

• (Oxfam and the IMF MD both sign up to most of them)

• Relates to current discussion about rising food prices and the poor.

http://www.blackwell-synergy.com/doi/pdf/10.1111/j.1467-9701.2005.00734.x?cookieSet=1

Panagariya’s six fallacies

1. Agricultural border protection and subsidies are largely a rich country thing

2. Rich country subsidies and protection …hurt the poorest countries most

3. …hurt the poor rural households in the poorest countries

4. …constitute the principal barrier to the development of the poorest countries

5. Agricultural protection reflects double standards and hypocrisy in the rich countries

6. Benefits of aid to the poorest countries are more than offset by the losses from developed countries


Implications:

A Doha round fully liberalizing trade could badly damage the poorest countries

Though it would be good for middle income countries

And for the world as a whole,

The poorest countries would need to be compensated for this loss

Different groups

• Least Developed Countries– Most of Africa, Afghanistan, Bangladesh,

Cambodia, Nepal etc.

• Cairns Group– With strong comparative advantage in Ag– Argentina, Brazil, Chile, Colombia, Costa

Roca, Indonesia, Malaysia, Philippines, South Africa, Thailand and Uruguay

• Other developing countries– (mixed bag includes India, China….)








60

40

20

0

20

40

60

80

100

120

140

NOR

CHEIS

LEU15

NZDUSA

CANAUS

IND

TUNRO

MCO

LBG

DTUR

KOR

VENPO

LLK

AID

NM

EXBRA PHI

THAARG

HUNM

YSCZE

IPN

Bound tariff

% of goods duty free

Bound and Actual Tariffs

0

10

20

30

40

50

60

70

0 50 100 150 200

Bound

Act

ua

l








The Key Step in the Argument• Poorest countries already have free access under EBA

• And therefore they benefit from measures that raise internal EU prices (such as export subsidies)

• Importing LeastDCs also benefit from EU’s export and output subsidies (as they both lower the world price)

• Lower import price; higher export price for LeastDCs

• (But what about Cotton?)

EU output subsidies lower world price

• EU is large enough to affect the world price

• So exporters in the rest of the world selling their agricultural produce at the world price are made worse off by the EU output subsidy.

• Importers in ROW benefit from EU output subsidy

• For simplicity the figure shows things as if only an output subsidy exists – in fact there are also tariffs and export subsidies

EU ROW

EU export subsidies raise the internal EU price above world price

• This benefits EU producers…

…but also exporters from LeastDCs who can sell directly into the EU market without tariffs

• It also lowers the world price, which is good for food importers in ROW

• Losers are other exporters from outside the EU

EU ROW

At least in the short-run• Many of the poorest countries are net importers of food and of

agricultural products

• (But what about Cotton?)Yes, it’s an exception

EU doesn’t produce it, so no big production subsidiesAnd it is an important export of some LeastDCs

• Another caveat: regulatory, sanitary and phytosanitary (plant health) requirements represent significant barriers

• On the other hand:it’s not just the EU’s “Everything but Aid” initiative: US “Africa Growth and Opportunity Act” (among other regionally focused initiatives) also provides duty free access for a lot.

Many LICs are net importers of food

Many LICs are net importers of agric prods

In the longer run

• Importers can become exporters

• Maybe quite quickly…

• Dynamic effects need to be taken into a/c

• But internal conditions and policies key to ability of LeastDCs to take advantage








The other “fallacies are a bit rhetorical, making the general point that over-concentration on trade liberalization could lead to a backlash in countries where the most crucial barriers to growth are non-trade

World Bank Global Economic Prospects 2005

Trading blocs in the global South

Regional preference within Africa?

• Africa's non-oil exports are concentrated in a few products, none of them important regional imports.

• There is relatively little intra-African trade and the mismatch between African exports and imports cannot quickly change.

• Moreover, intra-African trade is highly concentrated, geographically, with almost no trade between East and West Africa.

• This finding makes less compelling the arguments that regional trade can help overcome problems of small domestic markets.

• Giving preference to imports from other African countries risks making your own exports uncompetitive in the world market

• In short, regional trade agreements seem to present Africa with a "lose-lose" situation.

Yeats, 1998

Nunn QJE 2008

Documents

Figure 13.1