Friday, July 20, 2007

Trade Distortions

This will be the last post for today. I promise. I'm just trying to get caught up, and there's been a lot of interesting things to post about at the same time I've been doing workshops here.

Whenever I try to teach about trade, I try (not always successfully) to talk about the impact of all kinds of trade distortions. Students usually understand tariffs easily enough. When a tax is paid to bring an item into a country, that is an additional cost incurred and is reflected in the price paid by the consumer. A little harder for some of them to understand are non-monetary barriers represented by quality requirements applied to foreign goods and numerical quotas. They usually understand how numerical quotas reduce supply, thereby increasing scarcity and artificially driving up the price. Quality issues are different because nations frequently impose quality controls on product produced domestically. Is this a distortion? One can argue.

But the hardest distortion for students to understand is frequently the subsidy. It is sometimes hard for students to see that the country that is subsidizing an activity is actually charging its own citizens to provide goods/services at a lower price. That may not be an issue if the consumption is domestic. It can be an issue if it has impact in the international market place.

Earlier this week, The Wall Street Journal published an article on how the Global Fishing Trade Depletes African Waters (subscription required). (However, you may find it somewhere on line by typing the title into your browser.)

The article explains how fishermen in Mauritania are suffering because fishing fleets from other nations are over-fishing the waters they depend on for their livelihood. Larger nations (China, Russia and Spain are mentioned) pay fees to the Mauritanian government for the right to fish in their waters. But often, those same countries provide subsidies to their fishing fleets. The subsidies reduce the cost of operation. This in turn can reduce the price of the product. This in turn can increase demand. You and your students can take it from there. The Mauritanian fishermen apparently receive no subsidies or other support. Consequently, their incomes are affected. This is a great article with lots of discussion possibilities.

Your comments are welcome, as always.

Posted by TSchilling at 3:17 PM | Comments (0)

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