1. Simple Economics of Trade and the Gains from Trade, plus outline reasons for policy
2. The Partial analysis of trade - and the importance of the concepts of excess supply and excess demand
3. The WTO & Trade Negotiations:
1. The Uruguay Round Agreement on Agriculture
2. The Current Situation - the Millenium Round
3. A Guess at the critical issues facing the negotiations

1.    Simple Economics of why Trade (and associated specialisation) is a "Good Thing"

Without trade (under conditions of autarchy), this society will choose some particular mix of M and G (say at point A, producing and, necessarily, consuming amounts Am and Ag respectively).  Notice that this choice, whatever it is, necessarily requires that the rate at which these two goods can be exchanged (both on the supply (ppf) side and the demand side of the local domestic market) will be equal to the Autarchy Price Ratio.  Supply price (the slope of the ppf) is equal to the demand price (given by the choice exercised by the society as to which mix of goods to consume).  The market is in balance, and, providing that the ppf and the choices exercised by society include all public goods and externalities), the efficient price.  Supply curves - the price at which succesive amounts of any one good can be produced - necessarily slope upwards for this reason.  (Question -  do demand curves necessarily slope downwards, and does it matter if they don't?).

Trade will only occur if this society meets and negotiates with some different society (with different ppf, and/or different social valuations on the possible products).  If all societies are exactly the same, then trade will neither happen nor be sensible.  Trade relies on differences - so the "level playing field" notion can be very misleading.

When trade happens, a new and different price ratio will be established - the Trade Price Ratio.  This society can now choose a new combination of goods to consume, not totally restricted by its own ppf - it can specialise in the production of the good which is more valuable in trade (good M in this case), and export some of this good (amount Pm(t) less Am) in return for imports of G (amount Cg(t) less Pg(t)).  Amount Ex of M buys amount Im of G on the 'world' market.  So now our society is consuming at point Tc (chosen arbitrarily here to be the same amount of M as before, but more G - unambigously better off.  By how much?

By the value of the additional G consumed, valued at the pre-trade price ratio given by the autarchic price ratio.  Or, by the increased income generated by trade - the value of the exports valued at the trade price ratio.  The two values are not identical - they are measured at different price relatives (real prices).  Which is the most relevant depends on the reasons we need the measurement - but the difference does not invalidate the general principle - people are better off if they specialise and trade.  Otherwise, we wouldn't do it.  And we do, all the time.  Very very few of us, if any, really choose to be totally self-sufficient - life is too short and too miserable if we do.

Restriction of trade or distortion of trading price ratios necessarily makes our society worse off than it otherwise could be.  Q.E.D.

1.b    Why Policy?  Given this argument and logic, why do governments interfere with trade?  Some of the more important answers are as follows:

1. Exploitation of the gains from trade can clearly involve substantial adjustment - moves from A to Tp on the diagram involve restructuring the economy.  Producers of G in this illustration will loose from trade, while producers of M will gain.  Losing prooducers will typically try and defend their historic positions and ask governments to interfere and protect their markets by regulating or preventing competitive imports.
2. Consumption depends on consumers command over resources - this is the way they obtain their incomes.  But their commoand over resources depends on historical accident, and the good luck to be in the right placee at the right time.  These capricious accidents are not always regarded as just or equitable, and people demand that their governments redistribute income or resources to satisfy distributional objectives - assisting the less well off at the expense of the better off.  In particular, it is frequently judged that people should have more or less free access to at least basic education and health (and even a secure food supply) if not to some cultural facilties and experience, regardless of their income or wealth.  Therefore, it is often assumed that government should provide these merit goods and services free at the point of use.
3. Markets sometimes fail:  key failures are externalities (by-products of either production or consumption which are uncompensated or unrewarded, e.g pollution, congestion, or diverse wildlife generated by traditional farming) and public goods - which are non-rival in consumption (my enjoyment does not detract from your enjoyment) and which are non-excludable (I cannot prevent you from enjoying or using them) - eg national defence, pretty landscapes.  Governments can (and should?) take steps to correct these market failures.
4. Markets do not always work smoothly or efficiently - since they need to take account of transactions and negotiations costs, and associated uncertainties (which cost time, effort and resources).  Provision of these services, or assistance with them, is frequently regarded as the job of government.

2.    World Market as an excess-demand (or excess-supply) curve:  The key concepts (see here for a fuller explanation of these points)

• Responsiveness of world prices to changes in trade volumes is pretty critical for an understanding of agricultural and food commodities.
• Depends on the slopes (elasticities) of excess demand curves:  price flexibility  (% change in world price per % change in trade volume (EU exports or RoW imports etc.)) as the inverse of the elasticity:
• EXD = ED(row) *E(Pd/P) * DR/XDR - ES(row) * E(Pd/P) * SR/XDR.
• Which, in turn, depends on:
• domestic elasticities of supply and demand curves
• ratios of total RoW supply and demand volumes to trade volumes
• price transmission elasticities between domestic and world prices (% change in domestic supply or demand price w.r.t. % change in world price), made up of:
• protection coefficient (Pw/Pd) and
• insulation coeeficient (change in Pd / change in Pw)
• The greater the protection and/or insulation, the more inelastic will be the XD curves, and the more responsive will be world prices to changes in trade volumes - which makes world prices more volatile.
• Otherwise, the smaller a country or country group's trade position, the more elastic the relevant XD curve will be - the small country assumption.
• But the whole world cannot consist of small countries:  world markets are necessarily a collection of indivudually small countries, but the world market effects will nevertheless reflect the conditions and policies of these countries.

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3.    The WTO & Trade Negotiations:  (See here for fuller account of the history of the WTO)

• Subsidised Exports (and Import Levies & Quotas) depress world prices - EU (and US) shooting themselves in the foot - greater support => even greater support costs and more support supposed needed against low world prices.
• AND make Excess Demands more INELASTIC (see previous session (AEF372.3) appendix to Ch. 17, Ritson & Harvey (eds.))
• Which means the World Prices are MORE VOLATILE in face of variations in supplies round the world.
• So, it should be in everyones interests to LIBERALISE trade.
• BUT, previously supported farmers would lose, and fear world competition.
• How much might producers loose as a consequence of trade liberalisation, and how much are world markets distorted
• Producer Subsidy Equivalents (PSEs)
• Aggregate Measure of Support (AMS) - Blue Box, versus Green Box, versus Amber Box, versus Red Box.

b.    "The WTO is a rules-based, member-driven organization ó all decisions are made by the member governments, and the rules are the outcome of negotiations among members."  - It is the authority which implements the agreements on rules and procedures already agreed by the member states - which is a definite advance on the GATT, where each ruling and decision was subject to confirmation by a vote amongst the signatories.

These negotiations will continue, but now with the mandate given by the Doha Declaration, which also includes a series of deadlines. The declaration builds on the work already undertaken, confirms and elaborates the objectives, and sets a timetable. Agriculture is now part of the single undertaking in which virtually all the linked negotiations are to end by 1 January 2005.

The single undertaking also includes negotiations under the headings of:

• market access (general - not agriculture specific)
• WTO rules & Dispute Settlement (2 separate headings)
• Services
• Geographic indications (place of origin)
• Environment
• Outstanding Implementation Issues (the miscellaneous catch-all heading)

Without prejudging the outcome, member governments commit themselves to comprehensive negotiations aimed at:

• market access: substantial reductions
• exports subsidies: reductions of, with a view to phasing out, all forms of these
• domestic support: substantial reductions for supports that distort trade

Key dates
Start: early 2000
Formulas and other ìmodalitiesî for countriesí commitments: by 31 March 2003
Countriesí comprehensive draft commitments: by 5th Ministerial Conference, 2003 (in Mexico)
Stock taking: 5th Ministerial Conference, 2003 (in Mexico)
Deadline: by 1 January 2005, part of single undertaking.

d.    DRH Guess at key or pivotal focus of the current agricultural negotiations:  The extent to which international agreements can be allowed to restrict the scope of domestic policies, or conversely, the extent to which domestic policies can be allowed to damage international markets and trade opportunities.  This will probably materialise under four major issues:

• Multifunctionality (for Developed countries which still need to support various agriculturally related activities or populations) - how will they be allowed to do this, and to what extent?  The US and Cairns group are suspicious that this is simplky a smoke-screen for preservation of trade restrictions and traditional domestic support.
• Development Support:  what sorts of policies are going to be allowed for developing countries faced with an apparently inevitable and irresistable political demand to support and protect its declining industry (agriculture)?  In particular, will these policies (closely limited direct income support, for instance) be both financially viable and politically acceptable?  A group of developing countries, including Kenya, Nigeria, Pakistan and Sri Lanka, have put forward a proposal for the "Development Box" to allow domestic policies which seek higher productivity, higher income levels and reduced vulnerability to price fluctuations, and are also seeking exemption from any subsidy reductions for a list of basic food security crops.  Such proposals have recieved a cool reception from the developed countries and from the developing countries within the Cairns group, so far.
• Quality, Health & Safety - sanitary and phyto-sanitary provisions:  under what conditions and according to what criteria can countries restrict or regulate trade to protect consumers (or assuage consumer (or political) anxiety)?  At present, the main criterion is that any restrictions be soundly based on objective scientific evidence, with the key condition that any restriction be universally applied.  However, at least in some western countries, popular opinion is not always convinced by so-called objective scientific evidence, and there may be irresistable political pressure to ban or restrict certain products on the gounds of consumer anxiety or concern, rather than strict scientific grounds.
• Environment:  To what extent are trade restrictions going to be allowed to encourage or even force environmental protection (and animal welfare or labour force protection as well), both at home and abroad?  The present position is that trade restrictions are typically inappropriate and potentially counter-productive in seeking to promote these objectives, even if the objectives themselves are legitimate (as opposed to serving as a smoke screen for traditional producer support and protection).  However, it is not clear that this largely economic argument is accepted by or acceptable to the general electorates