International Trade The Market for Cardamon in India

1. International Trade The Market for Cardamon in India

2. Indian Market for Cardamom without Trade Assume — • India is isolated from rest of the world and produces cardamom. • The market for cardamom consists of the buyers and sellers in India. • No one in India is allowed to import or export cardamom.

3. The Market for Cardamom (C) in India PC 250500 QC SIndia consumer surplus e PIndia producer surplus DIndia Qe QC

4. The World Price and Comparative Advantage Guatemala and other “rainforest” countries have a comparative advantage in the production of cardamom; India does not. Without trade, PIndia > Pworld With Free Trade, India would Import Cardamom

5. The Market for Cardamom (C) in India Imports PC 250500 Consumer surplus before trade = A SIndia A e PIndia B D SWorld PWorld C DIndia Producer surplus before trade = B+C Production in India Consumption in India QC

6. The Market for Cardamom (C) in India Imports PC 250500 Consumer surplus after trade = A+B+D SIndia A e PIndia B D SWorld PWorld C DIndia Producer surplus after = C Production in India Consumption in India QC

7. Winners and Losers from Trade in India No Trade Free Trade PC PC SIndia SIndia e e A A PIndia PIndia B D B SWorld PWorld PWorld C C Imports DIndia DIndia QC QC Consumption & Production in India Production & Consumption in India With Free Trade… Consumers are better off by B D Farmers are worse off by B Society is better off by D Gains from Trade

8. With Free Trade… Consumers are better off by B D Farmers are worse off by B Society is better off by D Gains from Trade • Trade raises the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers. “In India, Farmers in Debt Reach the Depths of Despair” NY Times, 8/28/07

9. Policy Proposals to Aid… Farmers in Crisis India Should (Re-)Impose Barriers to Trade  The right of governments to raise tariffs on imports and discriminate in favor of their farmers and industries should be reinforced. —Christian Aid  India Should Continue Lowering Trade Barriers But Help Losers: its National Rural Employment Guarantee Act guarantees 100 days of daily-wage employment to all rural Indian families.  Promote Freer Trade by  Subsidies on cotton and other crops in the US and Europe

10. Paying the Sugar Tax Chicago Tribune Editorial, June 20, 2005 “Sugar in the U.S. cost just under 22 centsa pound last week. Outside the U.S., the world market price for sugar was just under 9 cents a pound. There's nothing complicated about that math. Americans pay 13 cents more for a pound of sugar than anyone else does…. It is, in effect, a tax. You pay a 13-cent-per-pound sugar tax every time you buy a candy bar or a cake or anything else that uses sugar. You pay that tax so that 6,000 sugar producers can continue to operate in a protected environment.” FL Sugar Cane MN Sugar Beet

11. How does the government protect sugar cane and sugar beet farmers? Sugar Quota  limits the amount of foreign sugar that may imported into US. Sugar Quota in 2005  2.5 billion pounds per year SOURCE: Economic Research Service, US Dept of Agriculture www.ers.usda.gov/Briefing/Sugar/data.htm US Agribusiness Europe Farmers

12. The US Sugar Market PWorld= $0.09 per lb PQuota= $0.22 per lb Quota = 2.5 billion lbs PSugar ($ per lb) SUS PNo Trade $0.09 SWorld DUS Quantity of Sugar (billions of lbs per year)

13. The US Sugar Market PWorld= $0.09 per lb PQuota= $0.22 per lb Quota = 2.5 billion lbs PSugar SUS ($ per lb) SUS + Quota 2.5 billion lbs $0.22 SWorld $0.09 DUS Quantity of Sugar (billions of lbs per year)

14. Table 205. Per Capita Consumption of Major Food Commodities [In pounds, retail weight, except as indicated] SOURCE: Statistical Abstract of the United States, 2008 Table 2. Population [In thousands] Total Sugar Consumption = (Per capita Sugar Consumption)(Population) = (62.8)(296,940,000) = 18,647,832,000 ≈ 18.5 billion pounds per year

15. The US Sugar Market = 18.5 billion lbs PSugar SUS ($ per lb) SUS + Quota 2.5 billion lbs $0.22 SWorld $0.09 DUS 16.0 18.5 Quantity of Sugar (billions of lbs per year)

16. Demand for sugar is inelastic Academic Literature   25 billion lbs per year

17. was chosen so that the resulting price elasticity was consistent with that found in the literature.

18. Quota Free Trade Consumer Surplus PSugar Loss in CS due to Quota ($ per lb) = $2.8275 billion SUS SUS + Quota $0.22 $0.09 SWorld DUS 16.0 18.5 25 2.5 Quantity of Sugar (billions of lbs per year)

19. Quota Free Trade Consumer Surplus PSugar Loss in CS due to Quota ≈ Americans spend going to baseball games each year. ($ per lb) = $2.8275 billion every year SUS SUS + Quota $0.22 $0.09 SWorld DUS 16.0 18.5 25 2.5 Quantity of Sugar (billions of lbs per year)

20. Quota Free Trade Producer Surplus PSugar Gain in PS due to Quota ($ per lb) SUS SUS + Quota $0.22 $0.09 SWorld DUS 16.0 18.5 25 2.5 Quantity of Sugar (billions of lbs per year)

21. PSugar The loss to consumers exceeds the gain to producers by ($ per lb) SUS SUS + Quota The quota blocks trades for which WTP > PWorld $0.22 DWL Transfer DWL $0.09 SWorld DUS 16.0 18.5 25 2.5 Quantity of Sugar (billions of lbs per year)

23. Owners of Quota Permits  buy sugar for 9 cents and sell it for 22 cents, which transfers $ from consumers to permit owners. PSugar ($ per lb) Opp Cost of producing Sugar Cane in FL > PWorld SUS SUS + Quota $0.22 DWL Transfer DWL $0.09 SWorld DUS 16.0 18.5 25 2.5 Quantity of Sugar (billions of lbs per year)