AGEC 652 Lecture 37 ANALYTICAL CASE STUDY #5 Trade and Welfare Effects of U.S. Cotton Policy

Transcription

1 AGEC 652 Lecture 37 ANALYTICAL CASE STUDY #5 Trade and Welfare Effects of U.S. Cotton Policy I. U.S. Cotton Income Support Policy The U.S. is a major world exporter of cotton. Under the 2008 Farm Bill, the U.S. supported cotton producer incomes through the counter-cyclical payment program (CCP). Cotton was removed from the group of commodities that are supported by the CCP s replacement - the Price Loss Coverage (PLC) program - under the 2014 Farm Bill. At the same time, most major cotton importing countries protect their cotton producers through quantitative restrictions on imports. A. Demonstrate the market, price, and U.S. taxpayer cost effects of removing cotton from the CCP program using the graph below assuming that U.S. cotton exports face an import quota in foreign countries (Rest-of-the-World (ROW) D us S D ROW S ROW us ES ED

2 I. U.S. Cotton Income Support Policy (continued) B. If you were an advisor to the President on trade issues, what would you tell him about the effects of removing cotton from the list of commodities that receive the PLC payments under the 2014 Farm Bill? Would you recommend to the president that cotton should be made eligible for the PLC program under the next Farm Bill? What policy alternative(s) might you recommend and why?

3 II. U.S. Cotton Textile Import Policy A. For many years, the U.S. controlled its imports of cotton textiles with an import quota to protect U.S. cotton textile mills. On the graph below, illustrate the market effects and the income redistribution (welfare) effects of the U.S. cotton textile import quota in the U.S. and in foreign cotton textile exporting countries. Then summarize the income redistribution (welfare) effects of the U.S. cotton textile import quota in the table below using the corresponding letters or numbers for the areas on your graph. D ROW S D US S US ROW ES ED

4 II. U.S. Cotton Textile Import Policy (continued) Then summarize the income redistribution (welfare) effects of the U.S. cotton textile import quota in the table below using the corresponding letters or numbers for the areas on your graph. Change in Consumer Surplus Change in Producer Surplus Change in Gov t Cost/Revenues Net Welfare Effect U.S. World Exporters B. When the WTO agreement was signed in 1994, the U.S. had to remove its import restrictions on cotton textiles. Who gained or lost with the removal of the U.S. import quota on cotton textiles? C. Many U.S. textile plants have closed down in the last two decades and many U.S. jobs in the textile and apparel industry have been lost over that time. Given the above welfare analysis, what may be a major reason why U.S. textile plants are closing? Why are U.S. clothing retailers outsourcing (that is, buying from foreign rather than domestic suppliers) their supplies of shirts, pants, and other cotton textile goods?

5 III. U.S. Cotton Policy Choices Given a cotton import quota by importing countries, analyze the following potential U.S. cotton policies relative to the a PLC policy that would support price (average returns) to producers at price P support (the price achieved under the PLC program): (1) mandatory supply reduction, (2) a minimum price (loan rate) above market price (government surplus purchase program), and (3) an export subsidy. A. Using the graph below, compare the market effects (price and quantity effects) of the 3 policy alternatives compared to a PLC program given a Chinese import quota. D us S D ROW S ROW us ES

6 III. U.S. Cotton Policy Choices (continued) B. Indicate which of the 4 policies you would recommend to the U.S. government in each of the following situations and WHY: (1) The U.S. government does not want its policy to stimulate production in importing or other countries. (2) The U.S. government wants to (a) avoid an accumulation of government cotton stocks and (b) minimize the cost of price support. (3) The U.S. government does not want its policy to raise the prices consumers pay for cotton shirts, pants, and other cotton textiles. (4) The U.S. is a small cotton exporting country. (5) Foreign importing countries decide to eliminate their cotton import quotas so that the excess demand facing the U.S. becomes highly elastic.

7 IV. U.S. Cotton Market Power in World Cotton Markets Assume now that the U.S. is a large cotton exporting country and the Rest-of-the-World (ROW) imports cotton from the United States. Assume further that the goal of the U.S. in this situation is to maximize national welfare through restricting exports of cotton. The national objective function is to maximize the sums of producer and consumer surplus and net government revenue. A. Using the graph below, show how an optimal export tax might accomplish this objective. D US S D ROW S ROW US ES ED

8 IV. U.S. Cotton Market Power in World Cotton Markets (continued) B. If you were asked to calculate the optimal export tax that the U.S. should charge, what specific data would you need? Show mathematically why that is the only data that you need. C. What incentives, if any, might there be for the U.S. to form a world cotton cartel with other smaller exporting countries to restrict world trade? What problems would such a cartel face?

9 D. If the U.S. government refused to work towards the formation of a cartel with other cotton exporting countries, what could producers do to insure that they will be better off through restricting their own supply? Using the graph below, illustrate how this action by producers would work and how it might affect the welfare of consumers, government revenue, and the attainment of the national objective function. S x = ES ED DD 0 0