[Lloyd:] Microphone up here, so I don't need to speak up. [LAUGHTER] That's four hundred and eighty, what we're doing... right, okay, so you're doing trade at the moment in lectures, and er, Bob has asked you to collect some data on er, world trade in wheat and cotton, is that correct?... Right, so erm, what's happened to, to world trade over time, say in the last century, what major changes have taken place in world trade?... Is the composition of world trade still the same?... Matthew?
[Matthew:] Erm, to be honest with you, I couldn't tell you. [LAUGHTER] The first opportunity I got to look at this stuff is on Sunday on the library
[Lloyd:] Right, anybody else want to help Matthew out? I mean are we still trading as much agricultural goods, or as much manufacturing goods as we
[speaker003:] Because as a percentage in the erm, as a percentage of trade, agriculture has gone down hasn't it?
[Lloyd:] Right, okay, yeah, that's true. What's happened to trade in manufacturers
[speaker003:] That, that's increased as part of the trade in services, as a percentage of total trade, and they've increased while agriculture's beginning to decline.
[Lloyd:] Okay, so, I think what we can say is that agricultural trade in absolute terms has probably risen
[speaker003:] Mm
[Lloyd:] over, over the century, er, although as a proportion, agricultural trade has fallen as a proportion of total trade, right, and that reflects a number of influences. Why might er, agricultural trade increase in absolute terms?...
[speaker003:] Increased productivity.
[Lloyd:] Yes, okay.... Anything else, I mean something fairly straightforward, nothing too tricky.
[speaker003:] Incomes increasing.
[Lloyd:] Yes, incomes have risen, what else has risen?... The number of people on the planet.
[speaker003:] Mm
[Lloyd:] That needn't necessarily increase trade across countries just bec could possibly become er, more self sufficient. However, rising populations have been an underlying influence for increasing trade in, in all products, not just in er, agricultural products. Er, certainly in sort of, transportation technology, the easier it is to trade, the more trade there will be, and transportation technology has increased dramatically over this year, so we can now ex exploit the comparative advantage that other countries have in particular commodities, whether they be agricultural or manufacturing, quite simply because transport costs are no longer prohibitive. At one point you know, there was no point buying wheat from the United States, alright, because although they had a comparative advantage in production, the costs of transportation were prohibitive and in essence we can produce it cheaper over here than the er, the import cost of foreign produced wheat. Okay, so er, transport technology has certainly been important in er, increasing trade. As has, as have rising incomes and rising population. Okay, so what acc what may have accounted for agriculture's decline in relative terms in world trade?
[speaker003:] Erm, in undeveloped countries, the demand for food is generally
[Lloyd:] Mhm
[speaker003:] And, the more er, developed countries you get, the less trade there's likely to be towards developing countries, who actually become more industrialized then the market leaders generally become more.
[Lloyd:] Yes, that's right, I mean [clears throat] as we get wealthier, we want to consume er, more manufactured goods basically. Manufactured goods tend to have income elasticities greater than one, so when we buy more of those, then it's quite likely that we'll actually be erm, importing more of those. Right, why might we be importing more manufactured goods? What factor I mean we could become self sufficient in all our, in all our manufactured goods.... What's one of the major reasons for growth in manufactures?
[speaker003:] Greater trade in manufactures.
[Lloyd:] Mm... then why aren't we self sufficient in, in say,manufacture manufactured goods, why do we import cars from Germany, as well as producing cars ourselves?
[speaker003:] Because of demand, because of the demand exists in the first place
[Lloyd:] That's right, why, why does that demand exist, what we, what are we demanding?
[speaker003:] More variation of product.
[Lloyd:] Yes, more product var variety. Alright, as we tend to, as each is observed empirically, as we, as we get wealthier, not only do we want to consume more of some good, but we want to consume different varieties of some, of some good. So what do we call simultaneous import and export of a similar good, the same good?
[speaker003:] Intra-industry trade.
[Lloyd:] Yes,in intra-industry trade, alright, which is different from inter-industry trade, where we're trading food er, food for manufactures, intra-industry trade is where we simultaneously import and export what is essentially the same good. Alright, intra-industry trade has become very, very important in terms of erm, world, world trade in, in general. Right, we like to prod we like to consume different varieties. Right. But can you think of another reason why, erm, why we import erm, goods that are similar to the goods that we produce at home? It certainly is variety, sort of, if you think of that as being a demand side influencing the consumers demand more variety. Can you think of a supply side reason?... What happens if you increase, say there's one country that is exporting to all countries of the world, alright, its production may well be very large therefore, er, what benefits might that have?
[speaker003:] Economies of scale.
[Lloyd:] Yes, economies of scale. Alright, so manufactured goods are a class of goods in which it's easy to differentiate the product, right. Very easy, because the goods are essentially differentiated alright. Although a car, if you think of a car being a car, we know as consumers that one car is not exactly the same as another car, very easy to put power steering on the car or to put go faster stripes on a car, you can differentiate the product very, very easily, alright. As a result, and because consumers like variety, it's likely that they'll want to er, consume different types of what, what is essentially the same, the same good. Compounding that influence is the fact that economies of scale in manufacturing production, alright, are non-trivial. They're, they're important. Like we can produce, we can reduce the unit cost of car production dramatically by increasing the s increasing the size of the plant, alright, and so even if, this is one reason why we don't, why street trade has risen dramatically in manufactures, it's because in manufactures there are powerful erm, economies of scale effects, alright. And so even if we could produce Mercedes Benz over here alright, we probably wouldn't alright, unless all Mercedes Benz production were specialized over here, production has become a lot more specialized in manufacturing, where you just have large plants producing erm, the entire world production of that particular erm, product. So, you know, all erm, Toyota Corollas or something are produced in Derby and those cars made in Derby will not only satiate the U K demand, but they'll also be exported to all other countries in the world, including Japan itself. Alright, so, economies of scale are a major driving force in er, increasing erm, trade in manufactures, and most of that increased trade in manufactures is intra-industry trade. Okay, so, perhaps the other side of that coin might explain why agricultural trade, right, has declined in relative terms alright. Income elasticities of demand for food tend to be less than unity, can we differentiate agricultural products?
[speaker003:] No.
[Lloyd:] No, there's just not the scope. Alright, you know, a potato is a potato is a potato. Although there are, you can differentiate the products but it's much er, much more difficult to do so, there's much less scope.
[speaker003:] The differentiation affects mostly the service factor anyway doesn't it the retail
[Lloyd:] That's right, that's right, yes, how we consume these products, yes, I mean, you're right, so a potato is a potato is a potato, but if it's pre-packed, graded and washed, that is sort of intrinsically different from er, er, sort of, mouldy, scruffy old potatoes that you could buy at a greengrocer. Alright, and that, that's where most of differentiation of food products erm, has emanated from, it's not changing the food product itself, right, because it's very difficult to do that, but it's the combination of food products and marketing services that erm, characterizes the differentiation.... Food commodities. Okay so, [clears throat] income elasticities are less than one for agriculture, whereas they're greater than one for manufacturing er, much less scope to differentiate in agricultural products, much more scope to differentiate in manufactured goods. How about economies of scale? Do you think there's, there are economies of scale in agricultural
[speaker003:] Not, erm, not in the sense that there are in manufacturing because erm, simply from the fact that, in the scale of production, isn't really erm... it's not under the farmer's influence as much as manufacturing production is under the erm, certain enterprise's influence, because it's er, risky
[Lloyd:] Yes.
[speaker003:] weather conditions, things like that, so he can't increase the scale of production at his own will, and therefore can't exploit the economies of scale which can give an increase in production.
[Lloyd:] That's right, yes, I mean that's [clears throat] that's very true, and, and another point that underlines the fact economies of scale in agriculture, I mean there are... there are economies of scale to a certain degree as you, as you said there, Matthew, but there's certainly not er, erm, they're not as large as the, as the economies of scale in, in manufacturing, primarily because in agriculture you effectively need land, alright, to increase erm, your output. Alright, and you, because that, that means of geo of the geographical constraint which isn't present in er, most industrial erm, plants I mean, you know, a very large, say in the plant at Toy Toyota, er, that's in Derby. It probably covers about three hundred acres, and that serves world demand for, for one, for one car. You know, three hundred acres is a fairly medium, a fairly small farm in the U K. Alright, in order to satiate the demand for wheat in the world, we'd need a farm, you know, the size of Wales, or something, or bigger than that, the size of Europe, or half the size of Europe, alright, so the, because of the, the nature of agricultural production, economies of scale just aren't, aren't there. You know, we start to run into dis-economies of scale er, much sooner.... That's simply because we're, production is dependent upon physical factors rather than machinery okay. So this meant, these sort of er, theoretical reasons may well explain a change in composition of, of world trade rela agriculture's relative decline, manufacturing's relative rise. I mean, I've got some statistics here erm. Okay, erm, before the First World War, agriculture's share of world trade was over fifty percent, a half of our, of all world trade prior to the First World War was agricultural products, alright. Today, it's less than fourteen percent.
[speaker003:] Sorry could you repeat that please.
[Lloyd:] Yes, before the First World War, over half of all world trade was in agricultural goods, whereas now, there's less than fourteen percent. So there's a marked decline there. Okay, erm, what other factor is, is often attributed to agriculture's of trade, or decline in agriculture's erm, composition of world trade? Something that GATT is trying to, to sort out. Yes, protectionism is often erm, suggested as the major reason why er, agricultural trade, is er, has declined so much. Protectionism since the Second World War, particularly, erm, has grown rapidly, however, there was, you know, we, agricultural protectionism isn't a thing erm, isn't a, a recent phenomenon, agricultural protectionism was around in the U K er, in the last century, eighteen twenties, erm, the, the corn laws, as they, as they were called, that was erm, a major, major set of tariffs on imports of er wheat primarily into the U K, prior, prior to that erm, in the seventeenth century, in sort of sixteen hundreds, alright, the U K used to be a net exporter, of our wheat, and we had a comparative advantage in those, in those times. And er, in actual fact our wheat exports were taxed alright, as a means of raising revenue, primarily, that's why they were taxed erm, a very easy way to obtain government revenues. So protectionism, I mean there's still protectionism if you're taxing your exports, it's a t so protectionism is, is not er, a recent phenomenon, however, the extent of protectionism has risen dramatically in this century, particularly since the Second World War. Okay, so why might protectionism erm, affect world trade?
[speaker003:] Erm, because the governments are trying to protect domestic industries through and erm, they are trying to do this by actually physically blocking imports so domestic consumers have to, have to buy from domestic producers rather than from abroad to stop the domestic industry declining.
[Lloyd:] Right, okay, I mean, essentially that's it. If you're supporting your own domestic agriculture, right, what are you doing, you're increasing your self sufficiency, if you're increasing your self sufficiency er, you may well be erm, well you will be substituting for import, what was, what's imported is now produced domestically alright, so the demand for imported agricultural goods will decline. Okay, it is often argued that, I mean this is the principal reason why agricultural trade hasn't been in the GATT negotiations, because agricultural er, protectionism has been enshrined in domestic agricultural policy,govern policy makers will say, we are protecting er, our own domestic industries right, because we, because of er, erm, deleterious effects that would be imposed, or the burdens that would be imposed on domestic agriculture if we didn't, we don't think that the fabric of the rural society could withstand the reversion to laissez faire in agricultural goods. It, it's a domestic policy, hands off, it's got nothing to do with international trade at all, it is purely a domestic policy and that is essentially the argument that is erm, prevented agriculture erm, from sort of slipping through the GATT net. Alright, it's domestic policy, it's got nothing to do with international trade, it shouldn't er, be included in international trade. Clearly, there's a very naive and simplistic view of, of er, protectionism. Protectionism in any form will affect tr will affect trade and er, but nevertheless the agricultural lobbies have been sufficiently strong to withstand pressure from GATT to include agriculture in, in the negotiations. If you bear in mind that virtually every other product is, has been able to er, to be accommodated within GATT, it shows that the agricultural lobby is pretty damn powerful, alright, not only in this country, but throughout the world erm, to prevent that, you know, much more so than steel, coal, cars, computers, any of those industries that you might think oh, pretty powerful lobby groups, er, haven't got a patch on the farmers, but er... right, okay, so those reasons may count for erm, for protectionism, er, sorry, for er, the relative de decline of er agricultural trade. What other effects does protectionism have on agricultural markets? Alright it reduces trade in agricultural products, but it has other effects?
[speaker003:] Over time it makes the domestic industry less competitive.
[Lloyd:] Yes, very true.
[speaker003:] If there's more competition, it makes if there's the same amount of protection amongst er, rival countries, it's not their hard luck, but if they're trading competitively enough.
[Lloyd:] Yes, I mean, any protectionism, right will reallocate resources, alright, away from the most efficient uses of resources and toward inefficient uses of resources. That's what protectionism is, just reallocation of resources. Alright, so supporting agriculture right, means losses elsewhere in the economy, and this is why protectionism is always a bad, is always a bad thing in terms of net welfare. Alright, although the farmers are benefiting alright, from protectionism alright, you know, we're, we as tax payers and consumers, are diverting er, resources into agriculture away from somewhere else. Alright, and because that, protectionism is required to do that, we must be taking resources away from more efficient industries and putting them into, into agriculture. Like, instead of, you know, spending erm, in the hundreds of millions of, or billions of pounds that we spend on agriculture, supporting agriculture, we could use those resources to produce a lot more of other goods. Alright, so a pound spent in agriculture, alright, is much less, is worth a lot less than a pound spent elsewhere, right, cos farmers are relatively inefficient. I know in the free market, resources will be allocated, erm, in an optimal way, in that those, er, those sectors that, that are the most productive, in economic terms, you know, they can produce more output per unit input, alright, those sectors that can do that will get the resources. Alright, what's happening now, is that we're taking resources away from those efficient sectors and giving it to inefficient agriculture. Now, there are good reasons why we might want to do that, but in economic terms you'll reduce the net welfare of the economy, or the world simply because you're diverting resources away from efficient modes of production into inefficient modes of production.
[speaker003:] It's quite a shortsighted policy, if you look at the er, because, if you erm, if you introduce subsidies to actually protect the domestic industry then that's often going to cause retaliation from other countries and therefore effectively sealing off any trade, any effective trade at all, and consequently because there's no competitive pressure on the domestic industries, they're not going to feel the need to make themselves more productive, which they would do when there was competition. So therefore, the decline is just going to become a natural part of agricultural
[Lloyd:] That's right, that's right, and er, you know, we see this in, in all sorts of sectors, where you know, protectionism has effectively prohibited trade. You know, you've only got to go to Eastern Europe and China, you know, these places have been completely erm, insulated from any world trade. They've been heavily er, subsidized. What happens when you open up the market twenty years down the line, you realize that these industries are dinosaurs, they're using technology that's thirty years out of date. Right, now that hasn't happened to quite the same degree in, in agriculture, because a lot of agriculture erm, the protectionism that we've given is in terms of high, high prices. Alright, and so there's an incentive for these small producers, alright, to maximize their yields, alright, because the more they produce the higher income they, they'll have. Alright, so how do they maximize their yields? Well, they erm, they use the latest techniques, agriculture hasn't become, er, hasn't stagnated in the presence of protectionism, because there's always been an incentive there for farmers to maximize their yields. You know, they haven't been given erm, er, an income regardless of what they produce. Alright, this was, this was often the, the case say er, Eastern European industries where they just sort of said right, okay you're, we're going to subsidize this erm, plant that produces cars
[speaker003:] [clears throat]
[Lloyd:] alright, there were no, there were very few production targets, if there were production targets, erm, er, they were very low, essentially the support that Eastern European car manufacturers got was, was not coupled right, to production. Whereas the support the farmers received right, has always been coupled to production, so the more they produce, the more support they get, the higher, the higher their incomes. And as a result there's always been erm, an incentive there to increase agricultural production. How do they do that, well, they employ the latest technology cos, they you know, U K farmers are some, are some of the most erm, er, well they use some of the most highly capital intensive techniques of production. You know, using artificial insemination techniques, they're using erm, some er, designer er, seeds for their er, for their crops, they're using scientifically engineered agro-chemicals, they're using state of the art machinery, and they're, they're using those, that technology to increase output because the more they produce, the more support, or the higher their, their income will be. Alright, so they haven't become
[speaker003:] [clears throat]
[Lloyd:] they haven't become dinosaurs in the same way as the Eastern European car manufacturers might have done. Erm, so we've got, resources are always going to be taken out of the most efficient sectors if we, if we use protectionism. What happens, what other effects have there been as a result of protectionism in agricultural trade? Trade is reduced relatively, but it's had impacts on, on the world market. What has the world market become? What's, what's happening to prices?
[speaker003:] artificially inflated
[Lloyd:] Well, well, domestically yes, that, that's true. Domestic farmers receive high, higher prices, but what happens to, to the world market?... That's good, erm, yes, there's a, there's a continuing debate as to whether agricultural prices have fallen, right, but it appears that agricultural prices have in have indeed fallen over the, over the last century. Right, there's been a decline, if you think back to our, that marketing we did in agricultural transformation process, one of the results of that model, was that the prices of agricultural goods relative to manufactures would fall over time right. And this seems to, this seems to have occurred. Erm, I've got some more statistics here that er... right, I mean there have been, the reason why it's difficult to pick out trend, long-run trends in agricultural prices is because, in very sort of, erm, short periods throughout any long, long sample alright, there will be very high agricultural prices. Alright, simply because erm, there is, inelastic demand alright, and if there's a very bad crop throughout the world, prices will suddenly just, just sky-rocket for, for one or two years, so that makes it difficult to pick out an underlying trend because sometimes agricultural prices are very, very high. But by and large when we take out these very unusual or exceptional years, agricultural prices do seem to have fallen. Erm, let me just see in the report... if you look at the nineteen eighties erm... yes, between nineteen eighty and nineteen eighty nine, the volume of agricultural trade, alright, grew by twenty six percent, alright, now that was a third of the growth of manufactures, alright, manufactures were growing by nearly ninety percent over that period, alright. During that same period, food export prices fell by eleven percent alright, whereas manufactured export, prices of manufactured exports rose by twenty percent.
[speaker003:] How much did it fall by?
[Lloyd:] Eleven percent. Okay
[speaker003:] Manufactured goods?
[Lloyd:] Rose by twenty, twenty percent.... Okay. Protectionism also leads to price volatility on, on world markets. Why, why might protectionism lead to volatility?... If we think, if we assume there's a, a world, a world market for say, wheat, right. Wheat's growing virtually throughout, throughout the world right. If there's a supply side shock, erm, if we take bad weather in say the northern hemisphere, that's going to affect prices, but because there are some producers who sell on the world market who come from the southern hemisphere, right, perhaps, there's good weather in the southern hemisphere, and that's, because there's a larger geographical area over which erm, production is spread, it's less likely that we, we're going to see major fluctuations in supply right, and as a result it's less likely that we're going to see major fluctuations in price. Now, if you contrast that with the protectionist case, we say, virtually in the whole of western Europe, Japan, erm, to a lesser extent America, but the main consuming areas for say a commodity like wheat right, they're all self sufficient. Let's assume they're all self sufficient, the world market essentially becomes a residual market, it's not the market place where everyone goes any longer, it's the market where just a few people will go. Those countries that are not self sufficient, who can't afford to have erm, er, expensive agricultural support policies in place. Because the, the market becomes much smaller, right, there is, world trade in agricultural products has fallen relatively speaking, right, as a result, that market is going to be very, very volatile, it only takes say er, bad harvest in Argentina, or er, Australia, in one country, that doesn't have support programmes, to affect the world market substantially, because that one supplier is now relatively large, because most major erm, countries are self, are now self sufficient. So the world market is a bit of misnomer, it's not a world market, right, it's a residual market. Right, comprising the erm, the suppliers and consumers of all those countries that don't have, that aren't self sufficient. And seeing that most countries are self sufficient either through, well primarily through protectionism, in that, that market's going to be very volatile, it's going to very susceptible to changes in output from one region or partic or, or one country. And this is why, one of the reasons why we've seen, we've witnessed increased price volatility over the last forty years right, it's because world markets have tended to become much more residual, much less world, much less worldly. Why's that been the case? Well, it's because protectionism has meant, has led to self sufficiency in the main, er, in the main consuming countries.... Okay right, erm, tell me, tell me something wheat and cotton. You were asked to collect some data on wheat and cotton. What er, what have you found out then?...
[speaker003:] For wheat, er total world, world trade has increased over the last thirty years, from er, it's there somewhere, er, from about sixty, from forty one thousand three hundred and seventy seven thousand metric tonnes to er... to about eighty four thousand four hundred and four thousand metric tonnes
[Lloyd:] Right.
[speaker003:] somewhere in that region, so it's increased a lot, but trade say in Europe has, has decreased in wheat over that period.
[Lloyd:] Okay, so we've been saying that, I mean clearly, I mean that, that's good evidence to suggest that world trade in absolute terms in agricultural goods is, is increasing, but as a proportion of world trade erm, it's er, we know, we know that, we know that it, it's falling. Right now, I've got some data here which says, let's just have a look... er... well the important point is that, oh yes, okay, erm, I'll just read this out [reading] developed countries dominate most aspects of world agricultural trade, as exporters or importers, they were involved in eighty seven percent of all world trade in nineteen eighty eight. Now, some fifty percent of this commerce takes place among developed countries. Over, of which, half, over half is accounted for by intra-EC transactions, under the Common Agricultural Policy []. Right so nearly ninety percent of all world trade right, occurs between developed countries.
[speaker003:] Can you just repeat those figures again, please.
[Lloyd:] Yes, eighty seven percent right, in nineteen eighty eight of world agricultural trade was between developed countries. Erm... right now, half of that, erm, eighty seven percent of world agricultural trade, half of that is accounted for, right, by intra-EC trade in agricultural goods. Okay, so the European Community, there, there are a lot of world ag a lot of world trade, right it's not world trade, it's trade within the European Community, right, and that trade has been stimulated by the Common Agricultural Policy. Right, so although world wheat trade has risen there, okay a lot of that world wheat trade will have been the U K selling wheat to Germany and er, Germany selling wheat to, to the U, to the U K. Alright, so a lot of that world trade will be intra-EC, not what we would think of as, as world trade, because they're both very inefficient producers, they're just selling er, inefficient products to one another. Right, erm, I think yes, we'd better, we'd probably better leave it there. What I recommend you, you look at, I don't think it's on your reading list, no it's not, it's not on your reading list, but there are copies of it in the library. You get a very good feel for, for world trade and the problems that are currently in the news at the moment with GATT, it's a book entitled Current Issues in Agricultural Economics, right, Current Issues in Ag Econ it's edited by er, the one and only Tony Rayner and er, David Coleman, so Rayner and Coleman are the editors,
[speaker003:] How do you spell Rayner?
[Lloyd:] [spelling] R A Y N E R [], and that's your head of department in case erm, so if you look in that book in chapter four, right, there's er agricultural trade and the GATT, if you look er, if you read that chapter, it'll give you all the information you need to know about erm, agricultural trade, erm, how it's changed, what the costs, there are a lot of estimates of the costs of agricultural protectionism, and as the benefits to liberalization of er, of trade, and also it gives er, a view of erm, er the Uruguay round of GATT. Why, why agriculture has been introduced in, into, into the GATT negotiations after forty, after forty years. Why has it taken forty years for agriculture to be incorporated. But I think there's a couple of copies in the, in the library erm, because this, this book's often used in other, in other years. If you just have look at that chapter four, that will give you a, some good erm, some good information, some, some good statistics. Right, okay, I think we'll wrap it up there, thanks very much.