I have been asked to use my experience in Mexico to discuss International Trade and Comparative Advantage. I will be using the U.S. tobacco companies and tobacco farmers in developing countries as examples to my discussion. I will be addressing the following five questions.
Explain why the U.S. would subsidize the short run costs of production for tobacco farmers in foreign countries and do these practices guarantee the tobacco farmers a profit in the short run/long run?
Subsidies are payments by governments to private industry which effectively lower the costs of production, making it cheaper to operate in a particular area (International Debate Education Association (IDEA)). The U.S. would subsidize the short run costs of production because they are then not obligated to do business for an extended time. By only providing short run costs the U.S. could change the amount of subsidies and/or change the demand of the product and not be locked into any price or amount of product.
This practice does not guarantee farmers a profit in the long run. In fact the farmers in this situation are very unsure of the future subsidies they can expect.
How does this practice shift the equilibriums (price and output) for tobacco and domestic food items?
Tobacco (or rather the products it is developed into) is a 'demerit good' i.e. it tends to be overconsumed as consumers are unaware of the full (e.g. health) costs they will suffer (IDEA). The tobacco industry will never function as a perfectly competitive market; it is naturally dominated by a small number of large firms. There is an inherent temptation to collusion in such oligopolies. Furthermore, removing subsidies would not lead to increases in price large enough to deter demand, as most of the price paid by the consumer is tax (IDEA).