INTRODUCTION TO THE COURSE: WHY SHOULD WE STUDY AGRICULTURAL TRADE?Lectures 1 AHEED Course “International Agricultural Trade and Policy”

Taught by Alex F. McCalla, Professor Emeritus, UC Davis.

March 29 ,2010, University of Tirana, Albania

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Course Purpose and Outline

Is in 4 Sections: Section 1--to acquaint students with the nature of agricultural trade and how it is influenced by domestic and international policies. It addresses agricultural protection, current state of trade and recent events.

Section 2—A review of Neo Classical Trade Theory: General equilibrium trade theory will be briefly reviewed and a simple partial equilibrium two country model will be introduced.

Section 3--A simple partial equilibrium trade model will be the basic analytical framework used to analyze the impacts of protective trade and domestic agricultural policies on world markets. Empirical approaches will be reviewed and some attention will be paid the Uruguay Round WTO Agriculture Agreement including new trade remedy law and current Doha Round negotiations.

Section 4--Special topics will include new trade theory, globalization, biotechnology and trade, and what may be ahead for the world economy.

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Lecture Schedule -1

Section 1: The Nature, Evolution and Current Status of International Agricultural Trade.

Lecture # 1 -March 29. Introduction to course; Why we should study agricultural trade; While it is a

declining share of total trade it remains the most protected sector; While nations pursue domestic support policies which require border protection international trade is critical to national food security strategies.

2 –March 29. The History of Agricultural Protectionism. 3 –March 30. A Quantitative Snap shot of agricultural trade- commodity composition, bulk vs

processed, major players and trade flows. 4 –March 30. Agricultural trade in the broader macro context- BRIC’s, growth rates, trade flows

and Balance of Payments. 5 –March 31. (Public Lecture). Agricultural Commodity Markets in a broader context- linkages to

other commodity and financial markets. 6 –March 31. (Public Lecture). The Commodity Price Spike of 2007/08- what caused it? Some

alternative theories. Does it portend an end to declining real grain prices? What has happened since and why?

Section 2: A Review of Neo-classical Trade Theory. 7 –April 1. Classical approaches- Adam Smith – absolute advantage; Ricardian trade theory-

comparative advantage; Heckscher-Ohlin –Samuelson (HOS) neo-classical model. 8 –April 1. HOS cont.; financial flows and balance of payments.

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Lecture Schedule - 2

Section 3. Approaches to Trade Policy Analysis and Modeling.9. –April 2. A partial –equilibrium approach. The simple graphics of excess S & D functions; a two country world; introduction of transport costs and simple unit tariffs.

April 2. MID-TERM EXAM 1 hour 10 April 5. Modeling country interventions; ad valorem tariffs, quotas, variable levies; impacts on

price stability and price transmission. 11 –April 5. Tariff Rate Quota’s (TRQ’s) 12– April 6. Empirical approaches to trade modeling: General Equilibrium (CGE) models-World

Bank; Partial Equilibrium IFPRI IMPACT model. 13–April 6. Trade Remedy Law & Agriculture: anti dumping, countervailing duties, and dispute

resolution.

Section 4: Topics. 14 –April 7. New Trade Theory; Political Economy of Trade. 15 –April 7. Globalization and Agriculture. 16 –April 8. A Case Study of an emerging trade issue- Biotechnology and GMO’s . 17–April 8. What’s Ahead for the World Economy? April 9 Class summary and FINAL EXAM (2 hours)

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Why Study Agricultural Trade? Agricultural trade is a small and declining share of

world merchandise trade- so why worry about it? But it is the sector which remains the most

protected- under GATT/WTO average tariffs on industrial trade

have decreased from in excess of 40% to less than 5% since 1950;

But average agricultural tariffs have remained in the 40-50% range; (see next slide).

Thus benefits of potential gains from agricultural trade liberalization are very large almost as much as if industrial tariffs were reduced to zero;

The Uruguay Round Ag. Trade Agreement set the stage for liberalization through tariffication but little real reduction has yet been agreed despite 10 years of Doha talks

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Why Study Agricultural Trade?-2 Because it needs reform.

1947 1962 1972 1987 Post-UruguayGATT's Pre-Kennedy Post-Kennedy Post-Tokyo Roundestablishment Round Round Round

Source: Organization for Economic Cooperation and Development (OECD),"Agricultural Policies in OECD Countries: A Positive Reform Agenda"(November 6,2002).

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Why Study Agricultural Trade? -3 So reason one is there is a lot to be gained from

making it work better. Reason 2 is that for some developing countries

agricultural trade is important either as a potential source of Fx earning or as a critical source of food imports- for 15 developing countries> 50% OF EXPORTS; for 20 developing countries >25% OF IMPORTS.

The composition is changing towards more processed and packaged goods as the global super market revolution plays out.

For all countries international markets and how well they function is a crucial element of their National Food Security Strategy.

So will look a few slides about these issues

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The Changing Nature of Agricultural Trade.-1 Agricultural Trade is a declining share of

world trade – never >40% but dropping steadily since WWII, but nevertheless has grown –just less rapidly than all trade.Agricultural Trade Trends - Value and Share of Total Trade 1950 -2006

1950 1965 1976 1995 2000 2006

Value of Ag Trade 20.6 38.7 138 449 439 746$US Billion nominalAg Trade as % of 33.7 24.3 13.9 9.1 7.1 6.2Total Merchandise Trade

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Rapid Growth in all trade since 1950 but Agriculture Slower

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The Changing Nature of Ag. Trade.-Composition is shifting away from bulk commodities.

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The Changing Nature of Agricultural Trade.-Composition -2

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Ag Trade critical to many small developing countries-as food source12

Ag Trade critical to least developed countries- for export earnings13

World Ag Markets important to all countries for their National Food Security Strategy

Food Security Involves Four Critical Elements:

Availability of sufficient supplies of food;

Access to food via sufficient earned income or by safety nets;

Nutritional Wholeness access to complete and healthy diet; and recently added a fourth;

Stable Access to Sufficient Food at All Times - this where world markets come in.

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Many More Countries are Net Importers

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What is A Food Security Strategy?

I Argue that every Country’s Obligation is Assure That Every Citizen is Food Secure.

That Requires a Macro Economic and Social Policy Commitment Equivalent to: -Growth and Development - Fiscal Balances - Monetary Policy - Balance of Payments Policy - Sustainable Food Security. Must be Comprehensive and Pursued at

the Presidential or Prime Ministerial Level

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Why a Macro Policy at PM – Cabinet Level ?

Failure, as we have seen in many countries in the last three years, is first and foremost a humanitarian and a political crisis.

Left to fester it can lead to social instability. Equally important a poorly designed policy can put

other macro economic policies at risk; Rising fiscal costs of production subsidies and

feeding programs; Inflationary pressures from rising food prices; Drains on Foreign exchange balances; And a devastating effect on the poor who

spend more than 50% of their income on food.

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How To Construct a Macro FS Strategy.

The Task is Complex – On the Demand side:

it involves forward projections of population, income and urbanization to determine commercial food demand;

It requires projections of poverty and food safety net needs;

This gives us Aggregate Consumption Needs;

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How To Construct a Macro FS Strategy-2

Consumers access food through the Domestic Supply Chain made up of; Retailers, wholesalers, processors and distributors who can acquire their supplies from:

The Domestic Agricultural Sector or World Markets

Either as raw materials or processed products

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How To Construct a Macro FS Strategy-3

On The Supply Side we need to assess the comparative advantage of domestic agriculture;

What is our natural resource endowment? What level of domestic supply of basic foods do

we judge to be essential; e.g. Japan on rice; What can we profitably export and use the

proceedings to import food; How we manage competition for resources e.g

water; How much should we invest in R&D? This analysis will determine how much we

need to trade

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Food Security as a National Macro Policy

Trade Policy

Fiscal Costs

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Bottom Line If all countries depend on world markets for

some of their food supply; And many countries depend on world

agricultural markets for critical export earnings; Having an understanding of how these markets

work; and How they are influenced by domestic protective

policies pursued by most countries is important.

If you can show me one country that does not intervene to some extent in agricultural and/or food markets by managing the border =PRIZE

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