ie oecd project

8/7/2019 IE OECD Project

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Trade effects on Agricultural subsidies by

OECD countries impacting india

Prepared by

Kothandaraman Rengarajan, Roll No 43, EPGDIB 2010-2011

Supriya Sen

Jyoti Prakash Choudhary

Peeyush Thakur

Objectives:

Enumerate trade effects on subsidy policies in OECD countries

on India

Trade liberalization impact on poverty reforms in india


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Title :

Trade impact on agricultural subsidy in OECD c affecting india

Executive Summary

The case study shows that due to elimination of subsidies in OECD countries the world crop prices are expected to rise.

The results confirm that the depressed world prices can be corrected by removal of OECD subsidies, but the challenge for

India remains: How much can these price corrections benefit the farmers? Indias domestic price response to this world

price change is very small for rice and wheat and slightly better for cotton and sugar. On the production front, with

reduction in subsidies and rising of the world price, the production in OECD countries would decline, but it is not very

clear if this would have a discernable effect on Indias production. In response to the rise in world price, this paperconcludes that this change would have almost negligible impact on Indias production for rice and wheat and a marginal

increase in the production of cotton and sugar. The welfare impact on small farmers based on these changes is also

estimated. The important fact to be observed in this study is that the developed countries policies protecting their

farming sector critically affect the lives of billions of people who depend on agriculture in developing countries.

Objectives:

Trade liberalization impact on poverty reforms in india.

Enumerate trade effects on subsidy policies in OECD countries on India

Rich countries Strtegies:

Rich countries use a combination of domestic market interventions and border protection orexport subsidies as a part of their domestic policies.

Developed countries such as the United States and the European Union (EU) resort totrade distorting policies to make their crop more competitive both groups maintainhigh domestic prices for producers, stimulate production, and thus distort prices in theworld market.

The distorting effects of international trade can be distinguished between consumersurplus, producer surplus and tariff revenue approaches.

Case approximation:

The four parts of this approximation are:

1. the estimation of the world price effect of removal of OECD (Organisation for EconomicCo-operation and Development) distortions;

2. the estimation of the effects of changes in world prices on domestic prices through aprice transmission model;

3. The estimation of the impact on domestic production through a supply responsemodel;

4. The estimation of changes in supply and welfare on the poor small farmers.

What AoA did to india:

The main objective of WTO (World Trade Organization) agreement on agriculture (AoA) wasto encourage fair trade in agriculture by removing the trade distorting measures. It wasexpected that implementation of AoA would raise international prices of agriculturalcommodities and would improve the exports prospects of the country like India. However,contrary to this, the world prices had declined sharply, became even lower than thedomestic prices, creating a more favourable imports rather than exports.

Before continuing the Case study, let us analyse the welfare effect on Export subsidy and import subsidy and then relate

the case study to this effect.

Welfare Effects of an Export Subsidy by Rich countries impact on India


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Suppose there are only two trading countries, one importing (USA) and one India(india). The supply and

demand curves for the two countries are shown in the adjoining diagram. PFT is the free trade equilibrium price.At that price, the excess demand by the USA equals excess supply by the exporter.

The quantity of imports and exports is shown as the blue line segment on each country's graph. (That's thehorizontal distance between the supply and demand curves at the free trade price) When a large India

implements an export subsidy it will cause an increase in the price of the good on the domestic market and adecrease in the price in the rest of the world (RoW). Suppose after the subsidy the price in the USA falls to

and the price in the India rises to . If the subsidy is a specific subsidy then the subsidy rate would be

, equal to the length of the green line segment in the diagram.

The following Table provides a summary of the direction and magnitude of the welfare effects to producers,consumers and the governments in the importing and exporting countries. The aggregate national welfare

effects and the world welfare effects are also shown. Online, or with a color print-out, positive welfare effects

are shown in black, negative effects in red.

Welfare Effects of an Export Subsidy

USA India

Consumer Surplus + (E + F + G) - (a + b)

Producer Surplus - (E + F) + (a + b + c)

Govt. Revenue 0 - (b + c + d + f + g + h)

National Welfare + G - (b + d + f + g + h)

World Welfare - (F + H) - (b + d)

Export Subsidy Effects on:

Indian Consumers - Consumers of the product in the India experience an decrease in well-being as a result ofthe export subsidy. The increase in their domestic price lowers the amount of consumer surplus in the market.


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Refer to the Table and Figure to see how the magnitude of the change in consumer surplus is represented.

Developing country like india would be greatly impacted on the OECD agricultural subsidy

Indian farmers Farmers in india experience an increase in well-being as a result of the subsidy. The increase

in the price of their product in their own market raises producer surplus in the industry. The price increase also

induces an increase in output, an increase in employment, and an increase in profit and/or payments to fixed

costs. Refer to the Table and Figure to see how the magnitude of the change in producer surplus is represented.

Due to high price increase, international prices are much more than Domestic price of india , causes

export to be not worth.

Indian Government - The government must pay the subsidy to exporters. These payments must come out ofthe general government budget. Who loses as a result of the subsidy payments depends on how the revenue is

collected. If there is no change in total spending when the subsidy payments are made, then a reallocation of

funds implies that some other government program is cut back. If the subsidy is paid for by raising taxrevenues, then the individuals responsible for the higher taxes lose out. If the government borrows money to

finance the subsidy payments, then the budget cut back or the tax increase can be postponed until some future

date.

Regardless of how the subsidy is funded, though, someone in the domestic economy must ultimately pay for it.Refer to the Table and Figure to see how the magnitude of the subsidy payments are represented.

India as country - The aggregate welfare effect for the country is found by summing the gains and losses to

consumers and producers. The net effect consists of three components: a negative terms of trade effect (f + g +

h), a negative consumption distortion (b), and a negative production distortion (d). Refer to the Table and Figureto see how the magnitude of the change in national welfare is represented.

Since all three components are negative, the export subsidy must result in a reduction in national welfare for the

India. However, it is important to note that a redistribution of income occurs, i.e., some groups gain while others

lose. The likely reason governments implement export subsidies is because they will benefit domestic exportingfirms. The concerns of consumers must be weighed less heavily in their calculation since the sum of their losses

exceeds the sum of the producers' gains.


USA Consumers - Consumers of the product in the USA experience an increase in well-being as a result of theexport subsidy. The decrease in the price of both imported goods and the domestic substitutes increases the

amount of consumer surplus in the market. Refer to the Table and Figure to see how the magnitude of the

change in consumer surplus is represented.

USA Producers - Producers in the USA suffer a decrease in well-being as a result of the export subsidy. Thedecrease in the price of their product on the domestic market reduces producer surplus in the industry. The price

decrease also induces a decrease in output of existing firms, a decrease in employment, and a decrease in profit

and/or payments to fixed costs. Refer to the Table and Figure to see how the magnitude of the change in

producer surplus is represented.

USA Government - There is no effect on the USA government revenue as a result of the exporter's subsidy.

USA - The aggregate welfare effect for the country is found by summing the gains and losses to consumers,

producers and the government. The net effect consists of three components: a positive terms of trade effect (F +

G + H), a negative production distortion (F), and a negative consumption distortion (H). Refer to the Table and

Figure to see how the magnitude of the change in national welfare is represented.


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Although there are both positive and negative elements, the net national welfare effect reduces to area G which

is positive. This means that an export subsidy implemented by a "large" India in a perfectly competitive

market willraise national welfare in the USA.

This result has inspired some economists to argue that the proper response for an USA when its trading partner

implements an export subsidy is simply to send along a thank you note.

It is worth noting here that the WTO allows countries to impose countervailing duties to retaliate against its

trading partners when it can be shown that an India government has used export subsidies.

Click here to learn more about the effect of CVDs.

However, it is also important to note that everyone's welfare does not rise when there is an increase in national

welfare. Instead there is a redistribution of income. Consumers of the product will benefit, but producers and

payers of government taxes will lose. A national welfare increase, then, means that the sum of the gains exceedsthe sum of the losses across all individuals in the economy. Economists generally argue that, in this case,

compensation from winners to losers can potentially alleviate the redistribution problem.

Click here to learn more about the compensation principle.


World Welfare - The effect on world welfare is found by summing the national welfare effects in

the importing and exporting countries. By noting that the terms of trade gain to the exporter is equal to the terms

of trade loss to the importer, the world welfare effect reduces to four components: the importer's negative

production distortion (B), the importer's negative consumption distortion (D), the exporter's negative

consumption distortion (f), and the exporter's negative production distortion (h). Since each of these is negative,

the world welfare effect of the export subsidy is negative. The sum of the losses in the world exceeds the

sum of the gains. In other words, we can say that an export subsidy results in a reduction in world

production and consumption efficiency.
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