International Trade

The Market for Cardamon in India

Indian Market for Cardamom without Trade

India is isolated from rest of the world and produces cardamom.

Assume —

No one in India is allowed to import or export cardamom.

The market for cardamom consists of the buyers and sellers in India.

QC250 500

PC

SIndia

PIndia

The Market for Cardamom (C) in India

Qe

DIndia

QC

consumer surplus

producer surplus

e

With Free Trade, India would Import Cardamom

Without trade, PIndia > Pworld

The World Price and Comparative Advantage

Guatemala and other “rainforest” countries have a comparative advantage in the production of cardamom; India does not.

250 500

PC

SIndia

PIndia

The Market for Cardamom (C) in India

DIndia

QC

Ae

Consumer surplus before trade = A

ImportsProducer surplus before trade = B+C

PWorldC

B D

Consumption in India

Production in India

SWorld

250 500

PC

SIndia

PIndia

The Market for Cardamom (C) in India

DIndia

QC

Ae

Consumer surplus after trade = A+B+D

ImportsProducer surplus after = C

PWorldC

B D

Consumption in India

Production in India

SWorld

SIndia

PIndia

DIndia

QC

Ae

C PWorld

B

PC

No Trade

SIndia

PIndia

DIndia

QC

Ae

C PWorld

B

PC

Free Trade

SWorldD

Consumption & Production in India Consumption in IndiaProduction &

Imports

Winners and Losers from Trade in India

With Free Trade…Consumers are better off by

Farmers are worse off by

Society is better off by

B D

BD

Gains from Trade

With Free Trade…Consumers are better off by

Farmers are worse off by

Society is better off by

B D

BD

Gains from TradeTrade raises the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers.

“In India, Farmers in Debt Reach the Depths of Despair”

NY Times, 8/28/07

India Should (Re-)Impose Barriers to Trade

Policy Proposals to Aid…

The right of governments to raise tariffs on imports and discriminate in favor of their farmers and industries should be reinforced. —Christian Aid

Promote Freer Trade by Subsidies on cotton and other crops in the US and Europe

India Should Continue Lowering Trade Barriers But Help Losers:

its National Rural Employment Guarantee Act guarantees 100 days of daily-wage employment to all rural Indian families.

Farmers in Crisis

Chicago Tribune Editorial, June 20, 2005

Paying the Sugar Tax

“Sugar in the U.S. cost just under 22 cents a pound last week. Outside the U.S., the world market price for sugar was just under 9 cents a pound. There's nothing complicated about that math. Americans pay 13 cents more for a pound of sugar than anyone else does…. It is, in effect, a tax. You pay a 13-cent-per-pound sugar tax every time you buy a candy bar or a cake or anything

else that uses sugar. You pay that tax so that 6,000 sugar producers can continue to operate in a protected environment.”

MN Sugar BeetFL Sugar Cane

How does the government protect sugar cane and sugar beet farmers?

US Agribusiness

Europe Farmers

Sugar Quota limits the amount of foreign sugar that may imported into US.

Sugar Quota in 2005 2.5 billion pounds per year

SOURCE: Economic Research Service, US Dept of Agriculture www.ers.usda.gov/Briefing/Sugar/data.htm

SUS

SWorld

DUS

($ per lb)

Quantity of Sugar (billions of lbs per year)

PSugar

PNo Trade

PWorld = $0.09 per lb

PQuota = $0.22 per lb

Quota = 2.5 billion lbs

The US Sugar Market

$0.09

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

PWorld = $0.09 per lb

PQuota = $0.22 per lb

Quota = 2.5 billion lbs

SUS + Quota

2.5 billion lbs

$0.09

$0.22

($ per lb)

PSugar

The US Sugar Market

Commodity 1990 2000 2004 2005

Sugar, Refined Cane and Beet 64.4 65.5 61.5 62.8

High-fructose corn syrup 49.6 62.6 59.2 59.0

[In pounds, retail weight, except as indicated]

Table 205. Per Capita Consumption of Major Food Commodities

SOURCE: Statistical Abstract of the United States, 2008

Table 2. Population

Year Population

2005 296,940

[In thousands]

Total Sugar Consumption = (Per capita Sugar Consumption)(Population)

= (62.8)(296,940,000)

= 18,647,832,000 ≈ 18.5 billion pounds per year

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

= 18.5 billion lbsThe US Sugar Market

SUS + Quota

2.5 billion lbs

$0.09

$0.22

ConsumedQuotaQ

18.516.0

($ per lb)

PSugar

ConsumedTrade FreeQ

Academic Literature 0.35ˆd e

?QConsumedTrade Free

25 billion lbs per year

2/PP

PP

2/QQ

QQ

P%

Q%

FreeTradeQuota

FreeTradeQuota

DFreeTrade

DQuota

DFreeTrade

DQuota

D

de

Demand for sugar is

inelastic

2/09.0 0.2209.0 0.22

2/2518.52518.5

P%

Q% D

de

36.0839.0

299.0

was chosen so that the resultingConsumed

Trade FreeQ Hence,price elasticity was consistent with that found in the literature.

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

SUS + Quota

2.5

$0.09

$0.22

18.516.0 25

Quota Free Trade

Consumer Surplus

Loss in CS due

to Quota= $2.8275 billion

($ per lb)

PSugar

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

SUS + Quota

2.5

$0.09

$0.22

18.516.0 25

Quota Free Trade

Consumer Surplus

Loss in CS due

to Quota= $2.8275 billion every year

≈ Americans spend going to baseball games each year.

($ per lb)

PSugar

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

SUS + Quota

2.5

$0.09

$0.22

18.516.0 25

Quota Free Trade

Producer Surplus

Gain in PS due to

Quota

($ per lb)

PSugar

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

SUS + Quota

2.5

$0.09

$0.22

18.516.0 25

The loss to consumers exceeds the gain to producers by

DWL Transfer DWL

The quota blocks trades for which WTP > PWorld

($ per lb)

PSugar

SUS

SWorld

DUS

Quantity of Sugar (billions of lbs per year)

SUS + Quota

2.5

$0.09

$0.22

18.516.0 25

DWL Transfer DWL

Opp Cost of producing Sugar Cane in FL > PWorld

Owners of Quota Permits buy sugar for 9 cents and sell it for 22 cents, which transfers $ from consumers to permit owners.

($ per lb)

PSugar