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Monday, March 19, 2007

Free-trade's uphill battle

One of the few things that most (not all) economists agree on is that free trade is preferred to restricted trade. There are situations in which trade restrictions might be superior to free trade but they are very rare.

The concentrated costs of free trade, manifested in domestic producers going out of business, throwing life-time workers into the pool of the unemployed, and a general sense that free trade is not fair is almost always more than offset by the wide-spread and mostly unobserved benefits of reduced prices, greater variety, and availability. This is the main reason free trade gets a bad rap.

This puts this story from corn e-digest in perspective:
Fears over an impending U.S. ethanol trade agreement with Brazil lowered corn prices last week, says Ray Grabanski, President and the Principal Owner of Progressive Ag risk management services, Fargo, ND.

"The rapid increase in ethanol for fuel is what is driving the U.S. corn market," says Grabanski. "The comments by President Bush that he'd like to cooperate with Brazil on ethanol and that he has a set of proposals that they're looking at made the corn market nervous. Any additional negative news about ethanol will continue to lower the market."

Currently the U.S. has a 55 cent/gal. tariff on foreign ethanol and a 51 cent/gal. ethanol blending tax credit, says Grabanski. Any change in those two policies could dramatically lower the potential prices U.S. farmers receive for corn, he says.

"It just wouldn't make sense to reduce the tariff on ethanol and have the taxpayers pay to blend in foreign ethanol," he says. "Ethanol is the one good thing we have going right now in many rural areas, and any alteration in ethanol policy could change all that."
I don't begrudge the corn industry disseminating valuable information about the expected future prices of corn. This service is very important because it helps farmers make better decisions about what to plant today. However, it still seems the story implicitly asks for the retention of the odd trade restrictions on ethanol.

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