[speaker001:] So you're doing trade at the moment in er agricultural economics I think Bob has asked you... to... prepare some data on er wheat and cotton... trade. Before we come on to to look at that, can somebody tell me what's happened to world trade say in the last century, what are the major trends in world trade? Right O K yeah, that's the first thing to note, yeah world trade has increased dramatically... any other features?... what's happened to the composition of world trade?
[speaker002:] Manufacturers has had an increase trade
[speaker001:] Right O K yeah [clears throat] that's the other major erm... feature is that agriculture's share of world trade [clears throat] has declined and manufacturing... er... share of world trade has increased and I've got some er... some numbers here... [clears throat] erm... so it says [reading] before the first world war agriculture's share of world trade was over fifty percent, today it is less than fourteen percent []... okay, so agriculture's share in world trade is declining and has been declining er essentially over the [clears throat] the last sort of seventy years or so.... [cough] Right, okay any other features about world trade, it's been growing in volume, er, composition has changed,... anything else... how about the prices of agricultural goods?... are there any characteristics?...
[speaker002:] as quickly as the manufacture of goods
[speaker001:] Right okay yeah the produ there... in actual fact they're, they're relati, yep, you, you're correct in that they... [clears throat] they may well have risen, right, over that period... erm... but relative to manufacturing prices they have fallen... erm... let's just see if there might be some data in there er... erm... I thought I had some. I thought I had some information here on prices... I can't seem to find it... no [sniff]... [sigh] no, can't find it, never,... never mind... I've got some... figures here... that looks at erm... the growth in in trade,... er... it's quoting, it says... [reading] between nineteen eighty and nineteen eighty nine... the volume of agricultural trade grew by twenty six percent... [] alright, [clears throat] [reading] however that was... that represented one third of the growth in manufacturers []... [cough]... so agricultural trade is rising... but it's rising much less rapidly than manufacturers... here are the prices, at the same time, so between nineteen eighty and nineteen eighty nine... er food export prices fell... the prices actually fell... from eleven percent,t, by eleven percent... whereas the unit value of manufactured exports, so essentially the prices of manufactured exports... [clears throat] rose on average by twenty percent... okay... so over the, over that period... agricultural prices were actually falling in real terms but if we widen... erm... s the window... that we're looking at, erm,... agricultural prices probably haven't fallen... er say... over the post war period or... if we er go back to the beginning of the century, agricultural prices probably haven't fallen... erm... but relative to manufacturing they certainly have... okay. So what can account for er... this changing composition... of trade?... Why, for example are... as manufactured trade increasing in importance?....
[speaker002:] Can this be just because er incomes have risen?
[speaker001:] tt right, yeah, incomes have risen throughout the world... [clears throat]... and that impacts... both on... the demand for agricultural products and also the demand for manufactured products... but what do we... know about demand elasticities... for those two products, income elasticities... [cough]... what's the income elasticity of manufactured goods?... [clears throat]
[speaker002:] Greater than one... less than one.
[speaker001:] Yeah, that's right... income, income elastic manufactured goods,... as a result... manufactured erm sectors will be growth sectors simply bec, because as income... per capita rises, people spend proportionately more of their increased income on manufactured goods... and as a result... we witness a marked increase... in trade in manufactures. We would only need to witness a marked increase in trade... and there will certainly be an increase in demand... why do you think trade has increased?... and trade isn't a necessary condition... it's just that trade has tended to grow at the same time as... erm... as demand is growing. Why might trade be growing?
[speaker002:] Because of transport
[speaker001:] Okay, yeah... better transport technology... a hundred and fifty years ago it was impossible t... erm, to transport meat across the Atlantic... it's er, very straightforward now... so the advent of different types of, er, transport technology and improved transport technology... erm, has made tr, facilitated trade... okay. Any other reasons?... The increase in trade in manufactured goods has taken a particular... form of trade. There was intra industry trade, yeah good... so what is intra industry trade? Yep, its as, yeah, the simultaneous import and export... of a similar good, or the good of as, of the same industry. Right so we could think of erm, cars for example erm, you know we both export cars and import cars.... okay Why do you think that intra industry trade has risen, say over the last fifty years?... Then why aren't we self sufficient in car production?
[speaker002:] People want more choice unclear
[speaker001:] Right That's right. As people get wealthier... right, one of the, they not only demand more goods, but they demand a wider variety of what is essentially... or what can be classified as the same good.... clearly a... Skoda is markly... different from a Jaguar... right, but as far as, er, classifying trade goes, they'll both go under automobiles... right [clears throat]... okay. One of the main reasons why intra industry trade has risen, right, is not only that consumers want to purchase different varieties and different qualities... of the same good... erm... that it, it's very easy to differentiate the product in manufactured goods... right. We've only got to put a go faster stripe... on a Skoda and chan, change the wheels and we've got a different product [sniff] [LAUGHTER] we've got a diff, yes, we've got a fast skip as opposed to a slow one,... alright. So because we can differentiate manufactured products very easily, and because consumers want differentiated products, alright... get increase in demand... for manufactured goods... right. The reason why trade has risen, one reason is because, erm, transport costs have declined in real terms... and secondly w, why... can you think of anything else that may have increased trade in manufac [clears throat] manufactured goods?
[Adrian:] Better technology in production.
[speaker001:] [sniff] mm [sniff] Okay, so what, what are you er, hitting on about there Adrian?
[Adrian:] Better use of machinery and tractor and erm farmers are at risk of I know that manufacturers who could have to progress these capital to get better returns.
[speaker001:] That's right, I mean we, we've got decreasing... erm, oh sorry, increasing returns to stay off decreasing costs. [cough] Right now with manufacturing... er in manufacturing, there are economies of scale, huge economies of scale... this is why we find look at cars again... that Toyota plant in Derby... produces all the Toyota Corollas or whatever for the whole world, it's not just for the U K market... alright. So... cars produced in Derby are exported... back to Japan [cough], right cos all the, all the er production of that one car, is focused in one plant, why is that the case? It's because there are economies of scale, alright, now if there are gains to be had from specialisation... right, and consumers want specialised products... and the best thing to do is to, erm, focus production in a single location... right, for lots of different... variants of this product... right. So we see massive car plants... right. Why are they so large, because their economies of scale to be reaped... right... companies are trying to erm, to accrue those economies of scale... right, cos if they don't, they'll go out of business, because their competitors... alright... will produce, erm, a superior or a lower price product... okay. [clears throat] So that's been very important, economies of scale are very important in the... erm, the growth of manufacturing trade, which is essentially an increase in intra,in intra industry trade, as, as opposed to inter industry trade which is... erm... the simultaneous import and export of... er products from different industries like...... produce capital goods, so cars... and in return you will import... erm... food products... but the... majority of the increase in world trade has come from this intra industry... variety. Can I just turn over... let's look at th the other side of that coin, right, because it has... all the explanations... er as to why agriculture, agricultural trade has declined in relative terms... right. Let's just think about [clears throat] well first of all the incoming elasticity argument... right, manufactures greater than one... agriculture less than one... right, that's one reason why agriculture is a declining sector... right, it's also a declining sector in world trade for the same reason... that it has got a low income elasticity... whereas manufacturing had a high income... elasticity... [cough]... now, consumers like variety... in food just as much as they like variety in manufactured goods... alright, but what's the problem with agricultural goods?... they're essentially homogenous alright... wheat is wheat [clears throat] sugar is sugar.... Now although we can differentiate the products... er agricultural products, we can only do that... at the very final stage in processing,... by and large, where there's much less scope after product differentiation... right, at the er the raw material erm level, which is where most agricultural trade continues... er, most trade in agricultural products is in the raw commodity, not the refined commodity... the refining, there might be the processing and the manufacturing, tend to occur in the country of consumption and not in the country of production... a number of complicated, erm political reasons... erm [clears throat]... alright, but the but because there isn't the scope for product differentiation... alright, we haven't witnessed an increase in intra industry trade in agricultural goods whereas we have done... for manufactured goods because there is scope for intra industry trade... er... yeah scope for product differentiation. Okay what about economies of scale?... Are there economies of scale in agriculture?... Are they in to the same extent, or lesser extent than manufacturing?
[speaker002:] experience the optimistic small
[speaker001:] That's right, I mean why di why have we got the structure of agriculture as we have, you know why [clears throat]... why do we still have an atomistical industry... right, it's not just a, a freak of nature, there are economic laws, erm,... and opinion... that s, that structure the industry and it's because you just don't get economies of scale staying in agriculture. If you did get economies of scale then we wouldn't see... small, erm,... small independent producers... right we, we'd see a, an increase in the concentration of the industry, like we have witnessed in virtually every other sector
[speaker002:] Not like the population grows faster than the food so
[speaker001:] mhm
[speaker002:] the population would demand more manufactures because food can't keep up
[speaker001:] Say that again, Marthus
[speaker002:] Marthus said that food production cannot keep up with the population increase
[speaker001:] Right mhm
[speaker002:] And so the population increase would they wouldn't be able to.
[speaker001:] That's right, that's what you said in... in you saying that populations were going, growing geometrically agricultural production was going arithmetically, as a result a population crash is inevitable, alright, but we know that isn't true [sniff] right, because what, when Marthus was writing, erm, Marthus was writing just before in the agricultural revolution in the U K so... agricultural technology hadn't improved very much in... sort of five hundred years right, but in the next hundred years [clears throat] agricultural production, erm, or productivity grows far faster than erm,... than population. Marthus didn't actually foresee this erm, this leap in from technology and as a result he was basing his predictions on past trends so if past trends had continued would have been, he w, he would been correct but because erm, agriculturalists started to erm, use technology... and at that time it was a very sort of low technology, but nevertheless it would, would've production dramatically... you know, you don't think of drainage as being particularly high tech but it can [clears throat] increase the, the yield on a crop sort of four or five times and so si simple drainage systems would be introduced... erm... ro rotations were being introduced, again rotations you think of being fairly straightforward but... erm... prior to the agricultural revolution rotations weren't used... rotations can improve the fertility of the soil and er yields as well right [clears throat] okay, so... agriculture produces a homogenous product, by and large and er as there isn't the scope, the product differentiation, and there isn't the scope for specialisation... because we'd need a farm... the size of Europe to feed the world with,w with wheat. Now clearly [sniff] it makes no sense you might be up to [clears throat] producing the Toyota Corollas in a three hundred acre plant, erm, near Derby... right but we can't employ the same techniques in production... er when we're making agricultural why not... well essentially we're using land, we're using land intensively... alright... and there comes a point when, erm you reach dis-economies of scale and start... er accruing dis-economies of scale in agricultural production and that scale of plant is very, very small... but after about... well it depends what type of production... er what type of product you're making but, you know, there aren't many farms over five thousand hectares, now five thousand hectares is a huge farm, it's massive... alright... but it still only produces a fraction of, say U K output... cos there's several million... hectares of erm [someone coughing] but the reason why you don't see these very large farms is that... you just don't reap the economies of scale... alright, because essentially we need land... erm... and you're farm gets so big that it would take you half the day to drive your combine harvester over to the, the other side of th your farm... just to erm, to harvest the, the wheat... right.
[Helen:] Hasn't there been a move into much larger farms now?
[speaker001:] Oh yes, there ha, I mean there are economies of scale in agriculture, it's just that they're, the scope of them... er, is less than er the scope in manufacturing... so I mean, farms used to be a lot smaller and throughout this century, this last century we've witnessed an increase in farm size... alright, but the... I think the optimal, the optimal farm size... is... erm, I think it's about three hundred hectares... okay, er... erm, with three hundred hectares you'll produce a, a pretty squit proportion of erm total output... but farms used to be... sort of one, two, three, ten hectares in size as we've gone through the farms have amalgamated and increased in size and that's primarily due to economies of scale..., but there are a great deal of economies to be reached, once you've got a combine harvester, once you've got big machinery... alright. You can't really improve your productivity much beyond that.... So if you just look at this... the arguments for... er... manufactured, or the increase in manufacturing... er trade... alright... are exactly the opposite to erm, that explain the decrease in erm, the relative decrease in agricultural trade... okay.... Any other... one other factor that might be important in, er explaining this relative change composition of trade between agriculture and manufacturing?... something that's in the news at the moment... mm yes get us at a much more... er... er effective role in reducing tariffs on manufactured goods than it has on agricultural goods... and it's only in this last round of G A T T talks, the Uruguay round... that agriculture has been brought into the frame... alright.... Prior to erm Uruguay round negotiations, agriculture was always excluded from the negotiations... right, whereas manufactured goods have been in there from the start, and as a result we've seen a reduction in tariffs... right, on manufactured goods... that's not to say that erm, [clears throat] protectionism on manufactured goods has fallen, it has in certain cases but not in all... cases. What's happened is that [cough] [sniff] policy makers 've... shifted the emphasis instead of protecting tariffs... they're protected using long... long tariff barriers... right which are a lot more invisible to er, to G A T T... don't come under... erm... G A T T regulations, what those tariffs do... nevertheless, tariffs have, have come down in manufactured goods... right, erm, since the second world war when G A T T was er, was established. But because agriculture hasn't been in G A T T or up until recently hasn't been in G A T T agricultural protectionism has grown throughout that period... right. Why might protectionism... diminish trade?
[Helen:] Increases confidence
[speaker001:] Okay,wh what do you mean there Helen?
[Helen:] Erm,
[speaker001:] Okay so that will inhibit consumption consumption essentially That's right, this is the, this is the effect. Whether ther there's a... there's a t two pronged effect the first of which is that high tariffs... consumption because prices are higher and therefore consumption will fall... and secondly, if high prices are also charged farmers to domestic farmers... right then they'll increase their output. Now if they increase their output... alright... that will displace imports... alright, so protectionism leads to... self sufficiency and by and large self sufficiency is protectionism's raison d'etre, that's why it's there... right it's to increase domestic output of this particular product... [clears throat]. Does anybody know why agriculture wasn't in... erm... the G A T T it's never,t... discussed in the G A T T why it hasn't er included in... like manufacturing is... reason why that is?
[Adrian:] Too political
[speaker001:] Yes, you're right. What do you, what do you mean by that Adrian? That's right it's a poli politically sensitive erm... er, sort of industry... right not only is there the element of strategic there's a strategic dimension... right which political importance... right, erm and also... er,s an electoral, specifically electoral dimension. There's also this thing which is called agricultural fundamentalism... right and the... most developing c, most developed countries, most of the population... live in urban areas... and the... they see erm... er rural areas as being sort of the backbone of society, sort of the... salt of the earth type of... element in society that although they don't participate in themselves... would like to maintain... right and so even consumers may well be... would not want see erm agriculture... obliterated from er, from their country... right because they like the products that erm... that agriculture produces and they think that... you can of erm... destroying of the agricultural industry would, would pose an unacceptable burden on the fabric of rural society... and as a result are quite happy to see... protectionism... er fo, for that industry. Now whether that's true or not I don't know. I think... erm... the tide is changing to a certain degree er on that point, but agricultural fundamentalism as it's called erm,... tt is quite an important er aspect is political... erm... is political motivation for a support or for protectionism... okay. [cough] Erm... right so because trade in er trade in agricultural goods has fallen, one one of the reason for that is because there's been a lot protectionism on... er agricultural goods... the other side of that coin is that protectionism in manufactured goods has has fallen... okay. Right [clears throat]... why should we be bothered about... protectionism... y'know... why is G A T... so important... presumably there must be gainers as well as losers... from protectionism so... the gainers and the losers... domestic farmers... gainers or losers?
[speaker002:] Gainers
[speaker001:] Good, they're the gainers.... Domestic consumers... right losers okay... tax payers?
[speaker002:] Losers
[speaker001:] Yep, losers Sorry Yeah, it depends, yeah it depends wh what type of system of support you actually employ... er some systems of support... burden tax payers other him... er. The general say the tax payers... er also lost... erm... third country exporters?
[speaker002:] Losers
[speaker001:] Yep they're losers, big losers... erm... third country importers? No they they'll probably benefit in actual fact... right there are som there are... third countries don't all suffer... right... exported third country you will suffer but if you're an importing third country you will benefit... right. Now agricultural... [clears throat]... erm... one of the reasons why agriculture hasn't been included in the G A T T is because... governments... right from all sorts of countries have said hands up why agricultural policy, this is a domestic policy, it's got nothing to do with international trade, right there's no international dimension to it... right, you can't... come in here and t tell us that we're... erm disbanding these protectionist measures... right. It's a domestic policy, hands off... right and this was one of the arguments... one of those potent arguments that they've used in the last forty years... right but it's incredibly naive... because any domestic policy will have an international dimension... I remember the about... European Community... right but it wasn't for the operation of the common agricultural policy... countries in the European Community would be net importers of agricultural goods as we were... ten years ago... bec... because er of protectionism we've now increased our self sufficiency to the point where were a net exporter of agricultural goods... what implications has th does that have for international trade?... Well if we're... producing more of our own goods, we are importing... less of somebody elses... alright and if we actually become a net exporter... then... we've... erm closing down the markets... of third country exporters... right so not only do we er consume less of er New Zealand lamb than we might do otherwise, right. Because we're... er a net exporter of lamb... we're also u erm try enter into the, the markets where New Zealand... is er, is exported to Australia... alright. So domestic policies will always have an international dimension to them... alright, there are a large number of beneficiaries and losers erm to this policy er to protectionism... alright. Now just to give you some numbers... erm... on er who gains and who loses... right... erm...... right... for the world as a whole... right, erm... the study conducted by...... right... nineteen eighty nine... I looked at the cost of some benefits from agricultural support alright, in nineteen eighty six to nineteen eighty seven... in just one year [clears throat] one crop year... alright. Now it says on average for, and then essentially we looked at the three main... support of erm... protectionist powers, like the E E C, U S A and Japan... right, and they said that on average... alright... for every one dollar benefit... alright... for every one dollar benefit, one agricultural support,... right it actually costs... right... one one fifty dollars... of the general [clears throat]... statistics in order to give a pounds worth of support to domestic farmers, we... er have to... find one pounds fifty... right.... With any protectionism, right, when you, when you, when you protect something that you're doing, you're... erm, you're introducing a distortion... a distortion in the system which leads to a misallocation of resources... alright. That is effectively we're paying this extra fifty pence... right... resource misallocation... we there is always what's called a dead weight loss... right to intervention, right it's an inefficiency loss or an efficiency loss, due to the fact that we're asking t, in this case farmers, right to using, use resources but farmers aren't the most efficient people in resources but in to erm, high tech computer... companies, alright... and if we gave pounds worth of support to a high tech computer company they would be able to produce more value as a result of that pound er than if we gave one pound to a farmer, simply because... erm... that, sort of the high tech industries are more productive, they're more efficient. Agriculture isn't particularly efficient... economic sense... technically efficient but not efficient. Right, so let's just get back to some numbers... erm [clears throat] looking at the European Community... right, the producer benefits... alright, the European Community... common agricultural policy produces benefits thirty three point three... billion dollars presumably... yes, billion dollars. Thirty three billion dollars of support [clears throat] goes to erm... er European farmers, right. Consumers... a thirty two point six billion dollars... right, this is every year, this is nineteen eighty six, eighty seven... right. So consumers... foot the bill... right, to the extent of thirty two point six billion dollars. Yeah, into consumers... in terms of higher product prices
[speaker002:] Right
[speaker001:] why consumers pay... er in the European Community, it's because we paying them two or three times more for our food than we would do if we purchased it on the world market... erm [clears throat]. However tax payers are also involved... right. Net cost to tax payers is fifteen point six billion, right. Although we do erm get some revenues... from er import tariffs, as agriculture is increased its production and we've become more self sufficient, right, we're importing less, right so we get smaller and smaller tariffs... right and tax payers pay erm... y'know... your V A T for example, where do you think your V A T's going?... Seventy per cent of it is going into farmer's pockets, right, even on goods like m m manufactured goods, we pay V A T on... er manufactured goods and that V A T pays for our contribution to the European Community... and most of that contribution, about seventy per cent of it, goes to farmers... tt erm, right so the next economic costs... to European Community right are fourteen point nine billion... alright that's the size of the dead weight loss... that's the inefficiency... right, of agricultural support... right, losing fifteen billion dollars a year, right, just... going down the er, the Swanny... okay [clears throat]... Just a couple of point just before we er... before we close. [clears throat] What effect does agricultural support have on world prices?... Does it increase world prices? Reduce world prices?... Make them more stable or more volatile? Well t, in general, I mean there are some types of support, er... more susceptible to but in general.
[speaker002:] Reduces
[speaker001:] Yeah, it reduces world prices, why why does it do that?
[speaker002:] Erm... it allows domestic farmers to produce their so they go on to the world market and they've got everybody else these things
[speaker001:] That's right. That's right... you know, we as consumers hav, consuming more of our own products, more of our own agricultural products, therefore we're importing less... right. As a result, supply supply is increasing... right in the face of re falling demand, right demand falling off because prices have are high. Simple supply and demand right now but this is the demand who say European Community... as is the supply term... erm what we call excess demand occurred... rest of the world.... [clears throat] Are we slap a tax on, tariff... on there that reduces consumption... right, what with world prices, world prices they used to be here... they're now down here... alright. Effec essentially... supply we we've got over s, over supply and that brings down agricultural prices, erm... and so wor world prices tend to be a lot lower than they would would have been in the absence of support.... Now just to give you... some figures... I mean [flicking through pages] same tariff that's the world price supplied... the rest of the world, in fact the tariff on it... show them that the operation of a a tariff can affect erm world prices... and... just to give you some idea... erm... ah, can we just you know when we were talking about the net economic costs... well they're within the European Community, those costs. We can add also to the fact that fifteen billion dollars a year... right, is lost by er third country exporters, alright so we still add another fifteen on there... per year that is [clears throat] erm... errr oh yes, same study again... erm... suggest that in nineteen eighty six, eighty seven the year they look looking at, over forty percent, right of support to U S farmers, forty percent, nearly half of all support to U S farmers, quote merely offset the losses created by policies of other industrialised countries alright... so nearly half of the support given to farmers in the U S... alright we t to get them to stand still in in er... in numerative terms, right. Because the European Community have been heavily heavily subsidising its farmers... right, they were having in order farmers were too successful, we've had wine lakes, we had erm... er... butter mountains, we had to get rid of that, that was subsidised on the world market, as a result of that world market prices would come down... right... and that induced the agricultural government sorry the er American government to support its agriculture... right and these chaps estimate that nearly half of the support... given to the U S farmers merely offset their losses caused by essentially European Community and Japan subsidising their farmers. Prices are also made a lot more volatile... right simply because the world market becomes a residual market, instead of everybody buying and selling through the world market... right, if virtually everybody becomes self sufficient, the world market becomes a bit of a misnomer... right, there isn't such a thing as a world market in that in that particular case... it it may just be a few very small countries trade on the world market, it becomes very small market and therefore prone to supply erm fluctuations in any one country and as we know, supply fluctuations on inelastic demand causes price volatility. So prices have tend to have fallen on world markets for agricultural goods because of support right, and they've also become a lot more volatile and that, and that is the er the source of the international frustration with erm... the common agricultural policy and this is why we've got agriculture er being introduced into the G A T T. Not only does it impose huge costs on domestic tax payers and consumers, it also in incurs erm... a large cost on third country exporters, right now if you think that most of those countries may well be developing countries and agricultural output is their only source of foreign exchange... erm... then er the policies of the rich countries in the West... are erm... a actively... erm... hindering the development prospects of developing countries... alright and that may not be the desired intention. Okay, thanks very much.