The Political Economy of International Trade
OPENING CASE: Why Are Global Food Prices Soaring?
INSTRUMENTS OF TRADE POLICY
Country Focus: Subsidized Wheat Production in Japan
Import Quotas and Voluntary Export Restraints
Local Content Requirements
Management Focus: U.S. Magnesium Seeks Protection
THE CASE FOR GOVERNMENT INTERVENTION
Political Arguments for Intervention
Country Focus: Trade in Hormone-Treated Beef
Economic Arguments for Intervention
THE REVISED CASE FOR FREE TRADE
This section is followed by a discussion of the merits of government intervention into international trade. The author provides a balanced view of this difficult issue.
The second half of the chapter focuses on the development of the global trading system. A historical context is provided, along with a view of the global trading system as it exists today. The author acquaints the reader with the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization.
Opening Case: Why Are Global Food Prices Soaring?
The opening case examines why global food prices are rising significantly. For more than two decades, improvements in agricultural productivity and output have contributed to lower food prices, but in 2007, the price of wheat was double its price of just a few months earlier, and the price of corn had risen some 60 percent. Two explanations for the phenomenon are increased demand, and the effects of tariffs and subsidies for bio-fuels. Discussion of the case can revolve around the following questions:
QUESTION 1: Food prices have risen dramatically since 2007. Reflect on the reasons for the price increase, and discuss the implications of higher prices for consumers in developed and developing countries.
ANSWER 1: For decades, consumers have enjoyed the benefits of increased productivity and output in the global food industry. In 2007, however, everything changed. The price of wheat reached its highest point ever, and the price of corn rose 60 percent over its 2006 price. Two factors contributed to this situation. The first was the increased demand for food from China and India. The second factor involved tariffs and subsidies for bio-fuels. Farmers in the European Union and in the United States are currently the recipients of subsidies for the production of crops used in bio-fuels. As a result, land that might be used for growing food is being converted to bio-fuel crops, pushing up prices on food. While some experts believe that sugar cane may be a better product for bio-fuel production than corn, tariffs on imported sugar cane effectively are keeping the crop out of the market. While all consumers are feeling the pain of higher food prices, the situation is especially dire for consumers in poor countries where calorie intake could be reduced by as much as -8 percent by 2020.
QUESTION 2: How has demand for bio-fuels affected the price of food? What are the implications of this trend? Reflect on the role of government in pushing prices up. What role do tariffs and subsidies play in the situation? In your opinion, should the governments of the United States and the European Union bear any responsibility for bringing food prices back down?
ANSWER 2: In an effort to slow global warming, both the European Union and the United States have adopted policies designed to increase the production of ethanol and bio-diesel. The policies involve providing subsidies to farmers. The net...