Question

You need to read Article 2 ““Our farmers need a better deal”: Study shows true cost of trade barriers” to answer questions below. Part (a) Article 2 specifically mentions: “A NEW AgriFutures Australia-funded study shows that farm subsidies and import barriers abroad lowered Australia’s net farm incomes by 15 per cent and reduced its farm exports by 29 per cent.” Use the concept of supply and demand to explain the paragraph above, especially why farms subsidies abroad lowered Australia’s net farm income and reduced its farm exports. [6 marks] Part (b) Use the concept of supply and demand to explain the paragraph above, especially why import barriers abroad lowered Australia’s net farm income and reduced its farm exports. [6 marks]

Hint for both Parts (a) and (b): you can assume that the world consists only of two countries: Australia and a country called the Rest of the World. The two countries initially trade freely with each other and Australia exports its farm products to the Rest of the World. Then analyse what happens when the Rest of the World provides a production subsidy to its farmers or impose an import tariff on its imports of Australia’s farm products.

Article 2 (Source: Beef Central, April 20, 2020) “Our farmers need a better deal”: Study shows true cost of trade barriers A NEW AgriFutures Australia-funded study shows that farm subsidies and import barriers abroad lowered Australia’s net farm incomes by 15 per cent and reduced its farm exports by 29 per cent. The report by Kym Anderson and Ernesto Valenzuela explores the impact of international agriculture subsidies on Australia, a non-subsidising agricultural export country. The report shows that in the four years to 2018 the average nominal rate of assistance to farmers rose for all OECD countries by one-tenth (from 21pc to 23pc), and for the EU28 by slightly more (by one sixth, from 21pc to 25pc), between 2014 and 2016-18. Aggregate agricultural nominal rate of assistance by country 2014 and 2016-18. (% weighted average using value of production without assistance as weights) *Indonesia refers to 2015 in place of 2016-18. Source: OECD (2019). The report shows that import barriers (tariffs and tariff rate quotas) remain the dominant protective policy instrument globally, but domestic support through budgetary transfers has grown in relative importance this century. In 2014, such transfers accounted for a little over one quarter of the cost of these policies to Australian net farm incomes and agricultural exports. All but one-quarter of the impact on Australian agriculture of global farm support measures are due to policies of the EU, Japan, China and Korea. Australia’s red meat, wheat and dairy industries are the most adversely affected by farm policies abroad, but rice and cotton exports also are negatively impacted, especially relative to their production size. The aggregate value of farmer assistance is highest in China and the EU, followed by Japan, the United States, Indonesia and Korea. AgriFutures Australia Senior Manager, Business Development, Jen Medway said the findings would equip industries, policy makers and governments with the knowledge to negotiate better trade deals for Australian farmers, fishers and foresters. “We’re increasingly connected with, and competing against, our farming peers across the globe and there’s no better time for the Australian agricultural community to reassess the impacts of global trade policies. Even small wins can have significant flow-on effects to producers on the ground.” Report author Kym Anderson said the report’s key recommendations highlighted the important role of government trade negotiators in ensuring Australian agricultures’ global competitiveness. ...

Answer 1

a) The protective policies by the rest of the world where import barriers are imposed on agricultural products from Australia, increases the price of these products from Australia compared to the situation when no such barriers were imposed on Australian agricultural products. So increase in price leads to fall in demand and exports of Australian products.

Also these foreign countries provide subsidies to their domestic agricultural products. But the Australian agricultural products are not subsidised. So this increases the price of Australian agricultural products compared to that of foreign countries. This also leads to fall in demand and exports of Australian agricultural products.

b) Import barriers such as tariffs have been imposed on Australian agricultural products by Rest of the world. This leads to increase in the price of Australian agricultural products in the markets of foreign countries. So the demand of Australian agricultural products will decrease in the market of rest of the world and its exports income will decrease.