Impact of Trade Liberalisation on World Markets-Three Country Model

1. Impact of Trade Liberalisation on World Markets-Three Country Model SUPPOSE WE HAVE A WORLD COMMODITY MARKET (BEEF) WITH ONE EXPORTER (BRAZIL) AND TWO IMPORTERS (EU AND THE ROW). SHOW HOW THE LIBERALISATION OF THE EU BEEF MARKET WOULD IMPACT ON PRODUCERS AND CONSUMERS AND OVERALL WELFARE IN OTHER COUNTRIES.

2. Brazil-Exporter P P Pb S Pb ESb Q Q Q1 Q2 Q3 • Brazil exports Q2-Q1

3. Europe-Importer P P S Peu D IM Q1 Q2 Q Q Q3 • Europe imports Q2-Q1

4. Rest of World-Importer P P S Prow D IMrow Q1 Q2 Q Q3 Q • Rest of the World imports Q2-Q1

5. Three World Model-Brazil, Europe and Rest of World P P P ESb Pw IMeu IMrow IMw Q Q Q world market equilibrium imports imports • World import demand curve is less elastic than EU and ROW world import curves so is much flatter when add the two curves together.

6. Impact of Liberalisation of EU Beef Market P P P ESb P’w Pw IM’w IM’eu IMeu IMrow IMw Q Q Q Q1 Q2 Q3 Q4 Q5 Q6 • Europe-imports increase to Q2 • ROW-decrease to Q3 • New higher world equilibrium price and higher imports

7. Impact on Producers and Consumers and Overall Welfare P • Change in CS: C-A • Change in PS: A+D • Total Change in Welfare: • C+D C ESb B P’w D A Pw E IM’w IMw Q Q1 Q2

8. Summary • By liberalising its beef market Europe is moving away from protectionism, so imports from Brazil increase. • This increases the total world import demand, so there is a new higher world equilibrium price and imports. • If a country is large and tries to raise its domestic price then this will depress the world price. • If a country tries to stabilise the domestic price then this will destabilise the world market price for everyone else if the country is large.