Question

1. Working on a farm in the U.S., my family's labor and capital costs are higher than in other developing countries, but not as high as in other countries with more limited agricultural resources. As a result, our cost of production of wheat, for example, is $4 per bushel, whereas China might be able to produce wheat for $3 per bushel, and Great Britain can produce wheat at $5 per bushel. Please describe what would happen to U.S. producers and consumers if 1) international trade was prohibited; 2) a free trade agreement was signed with both countries for wheat; and 3) the U.S. imposed a $3 tariff per bushel of imported Chinese wheat; and 4) a $3 subsidy was given to Great Britain producers (lowering their cost of production to $2).

2. Based on your answer to (2) above, review the arguments against international trade in Chapter 9 and describe which one(s) of these arguments could be made against international wheat trade, from the perspective of U.S. producers. (you do not need to provide an answer for each of the four scenarios, you only need to consider the outcomes of international trade that are detrimental to U.S. producers).

3. Based on your answers to (2) and (3) above, what arguments could you make for international wheat trade, from the perspective of U.S. consumers? (you do not need to provide an answer for each of the four scenarios, you only need to consider the outcomes of international trade that are beneficial to U.S. consumers).

Answer 1

Answer to Question 1 :

Part 1) If international trade was prohibited then the consumers of wheat would have to pay the price of $4 per bushel for wheat as there would be only supply from the farmers growing wheat in the US, and this would mean that consumers had to forego a lower price.

Part 2) If a free trade agreement is signed with both the countries, wheat would be imported from both countries. The consumers would get a higher and lower price and would ultimately choose to buy wheat from China as they would provide the lowest cost. Hence, this would result in loss of demand for both US and Great Britain wheat. Wheat would mainly be imported from China as even if US sellers sell wheat, they would have to supply at a competitive price and face loss.

Part 3) As China provided the lowest price for wheat, it would certainly mean that it would capture most of the local market in US. To stop this from happening, US government could levy import tariff on Chinese wheat of $3 per bushel. This would make Chinese wheat more expensive than US produced wheat and the loca suppliers of wheat in US would offer relatively cheaper wheat. This would make the consumers to buy US produced wheat. As both Britain and China now provide expensive wheat, consumers would not demand as much as they would before.

Part 4) If a subsidy is provided to Great Britain of $3 per bushel of wheat, their cost of producing wheat would become the lowest out of the three countries and hence, demand of Great Britain wheat would rise. This rise in demand for Great Britain's wheat would steal the market from China and local suppliers of US.

NOTE : As per our guideline, in case of multiple questions, only the first question is answered unless specified otherwise.