ceu lecture 3 2015 update

UnderstandingTrade… and a debateon perceptionsTrade is good for you… under certain conditions

Bad and good farming and public perception

Jorge NunezCEU

Master course Economics

Issues covered

Why should trade be good? The limitations of the comparative advantage

theory: A banana is not a car… WTO Uruguay round agreements… Measures of support used and … their limits Tariffs, types and consequences Non tariff barriers Debate on food safety, GMOs, public perception

of risk

David Ricardo and comparative advantage

Trade economics is founded on the theory of comparative advantage

The origins of Trade economics are from David Ricardo and his theory of comparative advantage in Trade

The logic is simple. Each country has different endowments, thus some countries are better in some things than others.

By trading what you are good at (low opportunity cost), you can de facto get what you are not good at (high opportunity cost) cheaper price. Specialisation benefits you.

The opportunity costs are different.

A very simple model (absolute advantage)

Apples

Bananas

60

20

Apples

Bananas

70

A 30

B

If they trade they can SpecialiseGlobal output would be higherNow 45 apples40 bananas

Now they tradeIf each do only one:60 apples70 bananas C1 gives 30 apples for 25 bananas

Country 1 Country 2

Both are better off

A’B’

UA

UB

U’A

U’B30

10

15

30 4525

Relative advantageApples

Bananas20

Apples

Bananas

70

AB

With diminishing returns,Trade still beneficiary due to relative advantage

Comparative advantageapplesApples become more expensive Wp, it exports apples andbuys bananas

Country 1 Country 2

A’

B’

UA

UB

U’A

U’B

Dom ex rate,isorevenue

International,Ex. rate

Bananas become more Expensive (Wp) it exports and buys apples, until domestic production price same

We are all happy… but… Products are not equivalent, if we put bananas and

cars and both have absolute advantage, trade expands but the value added of products is very different. Bananas are also land dependant, imagine islands.

Most countries are trapped in poverty because of low value added.

Study of 154 countries (Felipe et al.): There are only 34 countries in the world that export

mostly sophisticated and well-connected products – high tech + services

28 countries in the world that are in a “middle product trap,”

17 countries that are in a “middle-low” product trap, and 75 countries that are in a difficult and

precarious “low product trap.” One day read Reinhard

What does development require… Human capital: Solow growth model fallacy ‘A’

technical change is NOT exogenous, now well recognised

Infrastructure and administrative capacity Protection or high capital for investment as entry

costs high (barriers for infant industry argument?) Contradicts drive for free trade, free trade increases

barriers to new entrants, increases opportunity costs. Indirect support in richer countries makes it

harder => WTO conundrum. Free trade is fine, but not ‘per se’ in all

circumstances. It is specially AFTER you have the structures in place

Trade liberalisation in agriculture slowing down . Why? History of GATT and WTO EU and US were affecting strongly world price of

agriculture Rich countries liberalised manufacturing before

developing countries had a say. OECD measured consumer and producer support

equivalents CSE – PSE, which measure the subsidy or tax of policies on producers and consumers.

The GATT (WTO) agrees on methodology to calculate the AMS (Aggregate Measure of Support)

GATT: 1946-1995 from 1995: WTO Seven Rounds of Negotiations Most famous Uruguay Round 1986-1991, first

agriculture agreement Tariffication of barriers Tariff reductions Distorting subsidy estimation, limitation and

phasing out Doha Development Round… the never ending

Round since 2001 – maybe it does not tackle real issues?

GATT and AMS Trade distortive subsidies are registered in the

amber box (eg export subsidies, export credits, etc.).

Non distortive subsidies in the green box. Europe negotiated a blue box (a kind of

transition box from amber to green) for the direct payments.

First agreement on agriculture in the Uruguay Round

After that stagnation… why?

Free trade is double sided Are green box policies not curtailing markets for

developing countries? LDCs got free trade access (e.g. EU – EBA), but

more trade liberalisation also cuts their relative advantage, in particular ACP (African, Caribbean and Pacific) countries.

Getting rid of tariff barriers is nice, but NTBs (Non tariff barriers) are growing.

SPS (Sanitary and Phytosanitary) rules are creating new barriers

Rules of origin agreed hamper trade. Developing countries want more fairness.

Treatment of developing countries

GATT rules of MFN (Most favoured Nation) mean that all countries have to be treated same

Exception for DCs: GSP (Generalised System of Preferences) for preferential access since 1971

EU’s EBA has limited effect This is why in BALI meeting (Dec 2013) the real

deal was on technical assistance to facilitate trade from LDCs

Further trade liberalisation could actually harm LDCs

Increase in non trade barriers SPS rules expand EU makes unscientific anti GM policy (with

unintended results?) Due to SPS changes rejections of imported

goods to EU multiply over the years. EU introduces fork to farm – traceability

creating a costly process and impossible to comply for developing country smallholders – fosters large producers specialised in exports

SPS rules not based on scientific standards and subjective.

EU approach to safety based on flawed precautionary principle – minimax approach

Unrealistic worse case scenario is weighted against maximum benefits, regardless of probability of worse case scenario. As 100% food safety is impossible, rules become draconian.

Aflatoxins standards of EU for example. Rare disease. EU imposes standards far above international CODEX (FAO). Death risk 1,4 per billion people avoided, but killed 64% OF AFRICAN IMPORTS of cereals fruits and nuts, causing devastating economic misery and most probably death due to poverty.

Back to tariffs Tariffs have fallen since the Uruguay Round, but

the methodology used limited effective tariff reductions, because cuts were on average tariffs (36%), so countries can chose what to cut.

We look at: Tariff peaks (over 15%) In 33 over 200% in some even 1000% mainly

agriculture Tariff escalation, higher tariffs products in

increased level of processing

Doha’s attempt to move against tariff peaks and escalation has not yet worked

Effects They both reduce trade in key commodities Tariff escalation directs exports of developing

countries to products or markets with lower tariffs (lower value added normally), limiting the opportunities of diversification

Tariff escalation reduces the capacity of developing countries to expand their exports beyond raw material products to processed higher value-added goods

Tariff peaks, if combined with tariff quotas, limit imports de facto to levels controlled by the country offering the quotas.

Importance of Agriculture in trade

Eliminating 6 LDC outliers in trade composition

OECD

Non OECD

Tariff escalation helps to realise value added, keeping low value added on exporting countries

For LDCs it improved

Some other facts about trade… help us from China…?

Closing debate on food:

Common beliefsThe Bio debate, your opinion on statements?Bio products are saferBio products are healthierBio products can combat obesityAccording to definition GMOs cannot be bio productsBio products fetch a higher priceBio products ensure smaller farms are viable and supports family farmsLabelling informs consumers

Safety Safety is not higher, but even be lower. Bio products may only be safer because farmers have to

perform more stricter controls, but as bio expands ….? EU checks safety strongly Patogen risk can be higher

Health Not clear. Maybe as residues of some

products lower. Produce may be of better quality

A bad pizza is bad, even if organic components are in.

GMOs cannot be BIO Why? The labelling on GMOs is on a technological

process, not the product. Most products are genetically modified in one why or another. Should we look at process or product?

This is not a globally accepted rule, but generated by lobbyist and not in line with the original FAO definition which only focuses on soil protection and fertility. Some GMOs are proven to be less damaging than conventional farming to the environment.

One of the most common bio pesticides in Europe is a toxic genetically modified dead bacteria, but that degrades better and is less damaging.

Most Agricultural products are genetically engineered

Wheat is an unnatural product, did not exist so long ago.

Most products are coming from genetic manipulation of various types

An approved biotech mechanism, not labeled as GM, is for example particle bombardment to cause mutations. Is this safer? Probably not, thus what are we regulating?

By focusing on a technique and not on the products we are causing considerable damage, wasting public money and ignoring worse techniques.

Bio fetches higher price While production is limited, yes, but much of it has

technologically developed and matches normal farming in yield. Prices then fall.

Big retailers are selling large and cheaper Some bio products are sold as conventional to keep

prices up of bio labelled products (Austrian milk case for example).

False: Bio needs more land and the bigger the better, and farm sizes are increasing.

Smaller farms need more intensive production to survive or a strong brand name (bio is however becoming banal)

Bio is mainly for small farms

Labelling People confuse labelling with a food safety

warning. Food safety standards are the same for all products.

Border controls cost millions to detect GMOs… but techniques only detect known GMOs, mainly approved ones, GM products with non registered genes go through.

The EU wanted to label Biofuels from GM plants….? Where is the DNA in the biofuel???

Other oils from GM plants are labelled, but oil contains no DNA and is not distinguishable… so what are we labelling?

On the other hand, cheese processed with modified bacteria is not labelled GMO.

EU biotech policy Follows mini-max approach leading to a

religious rejection of a technological process rather than the product. Despite strong food safety standards GM technology is blocked also for products with environmental and health value (chemical use in Europe much higher in many products)

Environment, health and food safety are confused and open discussions impossible

But this is human nature: A Friend of mine travels to Poland by car from Brussels, because she is scared of dangers of plane and train travel……….. and is a chain smoker….

We are very spoiled… and very confused/manipulated

Avaaz