Agricultural and International Trade

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Agricultural and International Trade

• By Brett Sheets
• Matt Jones
• Chris Salsbury

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Trade Policies

• Trade policies help to watch and oversee what's
  going on in agricultural and international trade.
• Trade policies around the world look out for all
  types and sizes of countries, (undeveloped,
  developing, and developed) by balancing prices
  between developing third world countries and the
  more wealthy greater nations of the world.

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Trade Policies

• There are many organizations and policies that
  oversee trade.
• IPC (International Food and Agricultural Trade
  Policy Council)
• WTO (World Trade Organization)
• CAP (Common Agricultural Policy)
• Each one controls such topics as tariffs,
  subsidies, imports, exports, and trade
  liberalization

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IPC

• The IPC is an organization that is able to
  communicate with many regions of the world.
• They have experts to deal with regional,
  bilateral, and multilateral agricultural trade
  proposals and agreements.
• Goals
• Maximize trade efficiency
• Make it economically stable for developing, less
  wealthy, nations
• The IPC negotiates with the more wealthy
  countries to lower tariffs and subsidies
• Gives developing countries a more substantial
  export system
• Increases Income

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WTO

• The WTO is an organization that oversees and sets
  policies that have to do with international trade
  and trade liberalization.
• WTO makes trade negotiations
• Two main negotiations
• Uruguay Round, formed in 1986
• Negotiation for lowering tariffs
• Doha Development Agenda, which went into effect
  in 2001
• Negotiation for lowering tariffs

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CAP

• The CAP by definition is a system of the European
  Union that oversees agricultural subsidies.
• Helps to maintain a minimum cost to the producers
  of agriculture

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CAP

• The first agreement formed by the CAP was the
  Treaty of Rome
• Goals
• Ensure agricultural community has a fair standard
  of living
• Establish stable markets
• Increase production at the optimum point
• Products that Treaty Covers
• Milk, beef, sugars, fruits, clothing materials,
  seeds, and animal feed

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CAP

• The way it works
• Raises and lowers certain goods that are imported
  into the country
• Helps to set a world market price
• There is also a minimum set price, if the price
  is under that then the CAP states the European
  Union will buy goods to raise the prices back up.

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Comparative Advantage

• The concept of comparative advantage is to
  explain why it is useful for the trade of two
  countries when one country has a lower cost of
  production than the other but is still producing
  the same good
• Total cost of production is not important only
  the opportunity cost

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Comparative Advantage

• Help to understand the benefits of trade
• Example Why the United States trades between
  other nations of the world
• Comparative advantages are relevant in such areas
  of agriculture as in farming as well as in the
  aspect of a grocery store.

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Comparative Advantage

• Developed countries
• Are starting to be dominated by technology
  manufacturing
• Services and Information
• Comparative advantages are shifting more because
  of the factors of production
• Land, labor, and capital

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Comparative Advantage

• More developed countries are out sourcing high
  labor jobs
• High technology for labor
• More information based
• In agriculture it is becoming more efficient to
  move production of a crop to a more resourceful
  area
• In international trade of agricultural goods this
  means it is more affordable and efficient
• To produce certain crops, materials, and clothing

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Comparative Advantage

• Example
• United States
• Wheat
• Land, Labor, Capital, and Management
• South America
• Bananas
• Climate

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Comparative Advantage

• It is also possible for the United States the
  produce bananas, and for South America to produce
  wheat.
• United States
• California it is possible to produce bananas
• Not as efficient as producing wheat
• Proper soil and climate
• South America
• Limiting factors
• capital and management
• proper soil and climate

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Comparative Advantage

• Specializing in only one production
• The United States will produce wheat
• South America will produce bananas
• Lower opportunity cost
• United States will trade a portion of its wheat
  to South America
• South America will trade a portion of their
  bananas to the United States

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Comparative Advantage

• United States has a more cost effective supply of
  bananas
• South America has a more cost effective supply of
  wheat

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Absolute Advantage

• Is the ability of a country to produce a good
  using fewer resources than another country
• One country may be able to produce more of two
  goods than another country
• Means that the country is producing only one good
  or the other at a time, to produce more than the
  second country
• In comparison a country may have an absolute
  advantage of two goods over another country, but
  it is more efficient to take into account of a
  comparative advantage

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Absolute Advantage

• Example
• United States producing wheat
• South America producing bananas
• United States also may have an absolute advantage
  over South America
• If United States only produces wheat, and South
  America also only produces wheat, the United
  States will produce a much higher output

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Absolute Advantage

• Example
• Because of the factors of production in United
  States, and more technologically stable than
  South America, it is very reasonable to assume
  the United States (if only producing bananas)
  will be able to produce more outputs than South
  America
• This gives United States an absolute advantage
  over South America
• United States is able to produce more of the two
  products
• Wheat and bananas

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Absolute Advantage

• Example
• Consequently if the United States produces an
  absolute advantage of bananas, they will in turn
  not be able to produce as much wheat
• Production is wrapped up in producing bananas
• Ultimately comparative advantage over rules and
  the United States will produce wheat, and South
  America will produce bananas, and the two
  countries will trade for more efficient means of
  production.

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Balance of Trade

• The balance of trade is the difference between
  the monetary value of exports and imports in and
  economy over a certain period of time.
• Positive balanceTrade surplus
• Export more than import
• Negative balancetrade deficit
• Import more than export

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• The balance of trade is part of a countrys
  current account.
• If the current account is in surplus, the
  countrys net international asset position
  increases.
• Equally, a deficit will decrease the net
  international asset position.

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Measuring Balance of trade

• Can be problematic
• Ex. When official data for the whole world is
  added up, exports exceed imports.
• This shows a positive balance of trade which
  cannot be true.

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Factors that affect balance of trade

• Prices of goods manufactured at home
• Exchange rates
• Trade agreements or barriers
• Taxes, tariffs and trade measures
• Business cycle

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• Many people believe that a trade deficit is a bad
  thing.
• This is not necessarily true.
• It all depends on the business cycle

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Largest trade partners

• Total monetary trade
• Canada
• China
• Mexico
• Japan
• Germany

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Foreign Exchange Rate

• The foreign exchange rate between two currencies
  specifies how much one currency is worth in terms
  of the other.

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• The foreign exchange market is one of the largest
  markets in the world.
• The current exchange rate is called the spot
  exchange rate.
• An exchange rate for a payment on a future day
  is the forward exchange rate.

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• An exchange rate that changes almost constantly
  and varies against that of another currency is a
  free-floating currency.

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Importance of Trade to Agriculture

• Trade is essential to Agriculture
• For every three agricultural acres one acres
  worth of product is exported internationally
• Agriculture exports for 2005 totaled 62.4
  billion
• According to the USDA Agricultural exports
  provide 836,000 Americans with employment

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NAFTA

• NAFTA stands for the North American free trade
  agreement
• NAFTA went into effect January 1, 1994
• It is an agreement between Canada, Mexico, and
  the USA
• Removal or reduction of tariffs
• Free trade
• Intellectual property rights

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NAFTA

• NAFTA includes two supplemental agreements
• North American Agreement on Environmental
  Cooperation (NAAEC)
• North American Agreement on Labor Cooperation
  (NAALC)

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NAAEC

• Reason for adding
• To create universal standards regarding the way
  corparations conduct themselves on the
  environmental issues.
• The NAAEC created North American Commission for
  Environmental Cooperation (NACEC)
• The NACEC brought about a means of enforcing the
  environmental standards that were in place

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NAALC

• Reasons for adding
• To create a foundation amongst the three members
  to resolve labor problems.
• To promote greater cooperation amongst trade
  unions and social organizations.
• To hold corporations accountable for the
  treatment of their workers

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NAFTA vs. European Union

• NAFTA
• Does not create a set of supranational government
  bodies
• Does not create its own law that supersedes
  national law
• NAFTA can be thought of more as a treaty rather
  than a organization such as the EU

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Creation of NAFTA

• President George H. Bush
• Brian Mulroney of the progressive conservative
  party of Canada
• It was passed in the House by 234 to 200 vote and
  in the Senate by 61 to 38 vote

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Opposition

• Since the conception of NAFTA there has been a
  lot of controversy surrounding it
• Opposition still exists present day
• Labor unions in the U.S. and Canada tend to
  oppose NAFTA due to the fear that jobs will be
  lost to corporations moving down to Mexico where
  lower wage costs exist.

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Opposition

• Mexican farmers tend to oppose NAFTA because they
  can not compete with large U.S. farm subsidiaries
• Many Mexican farmers have been driven out
  business since NAFTA went into effect

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Opposition

• NAFTA has also faced opposition from various
  advocacy organizations that feel the bad
  non-economic consequences greatly outweigh the
  overall economic benefit
• Since the signing of NAFTA poverty has increased
  and wages are down twenty percent in Mexico
  bringing the rise of increased illegal
  immigration from Mexico to the U.S.

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Controversy

• Chapter 11
• Allows corporations to sue federal governments if
  they feel a regulation or government decision
  adversely affects their investment.
• This potentially keeps countries from passing
  environmental regulations for the fear of being
  sued by the government

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Examples of Chapter 11 Exploitation

• Methanex
• The Canadian corporation sued the U.S. government
  for 970 million after a California ban on MTBE
  was placed after MTBE had been found in many
  wells in the state. Methanex claimed the ban was
  harmful towards its sales of methanol

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Examples of Chapter 11 Exploitation

• Metalclad
• The American corporation sued the Mexican
  government for 16.5 million after Mexico had
  banned the creation of a toxic waste dump they
  intended to build.

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For NAFTA

• Large corporations
• Some government officials
• It seems that NAFTA only increases the gap
  between wealthy and poor.

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GATT

• Stands for the General Agreement on Tariffs and
  Trade.
• GATT was a product of the Bretton Woods
  conference after World War II
• It was intended to help the world recover from
  the adverse economic effects of the war

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GATT

• GATT had the intention of
• Reducing tariffs
• Reducing Quantitative restrictions
• Creating government subsidies encouraging trade

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The history of GATT can be summarized by three
phases

• First Phase (1947-1959)
• Froze current tariff levels
• What commodities to cover
• Second Phase (1959-1979)
• Reduction of tariffs
• Third Phase (1979-1994)
• Extended agreement to cover services, agriculture
  and intellectual property rights
• Gave birth to the World Trade Organization (WTO)