Streetwise Professor

August 29, 2008

Unclear on the Concept

Filed under: Economics,Politics,Russia — The Professor @ 4:54 am

In its pique (or should I say rage) over US opposition to its invasion of Georgia, Russia is threatening to cut meat and poultry imports from America:

Russia’s agriculture minister said Moscow could cut poultry and pork import quotas by hundreds of thousands of tons, hitting American producers hard and thereby raising prices for American shoppers.

Er, ag ministry guy, reductions in American exports would arguably harm producers, at least in the short run, but this wouldn’t raise prices for AMERICAN shoppers. Let’s go through this slowly. Reduced import quotas would reduce the demand for American produce, which would REDUCE prices in the US. But reduced imports into Russia, or substitution of more costly or lower quality imports from non-US nations would INCREASE prices for RUSSIANS. Given the acute sensitivity of the inflation issue in Russia, this will hardly be popular, though perhaps in the short run the jingos in Russia will no doubt consider it a patriotic honor to pay higher prices for the benefit of spitting on the Americans. But, the fact that the government simultaneously announced its plans to spend an additional $4.1 billion on agriculture (presumably in the form of subsidies or payments to producers) also strongly suggests concerns about the sensitivity of the food price issue. So, one explanation is that the Russian government is trying to get a boost by thumbing its nose at Uncle Sam, but isn’t sufficiently convinced that this kick-the-dog response is sufficiently gratifying to overcome anger over higher food prices. It therefore devotes billions that could be spent on other things that Russia really needs, like, you know, AIDS medications, roads, etc., to cushion the effect on prices.

The article linked above doesn’t say whether Russia will raise import quotas from other countries to offset the effect of the cuts of the US TRQ (the acronym for the the Russian tariff quota program). If they don’t, Russian prices will definitely rise. If they do, Russian prices will rise somewhat as Russia will buy from less efficient (i.e., more costly) suppliers. But this will also mitigate the impact on American producers, as some sales diverted to Russia will be replaced by sales from America.

One thing for sure is that American consumer prices will not rise in the short run or the long run. In the short run, prices will fall more than in the long run, but long run American consumer prices will not rise.

But thanks for the thought!

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