Trade Barriers and the Price of Food
Anthony Faiola discusses the “New Economics of Hunger” and “Where Every Meal is a Sacrifice” in articles that capture both the insights of Tyler Cowen and Dani Rodrik. From the latter article:
Like most of the world’s poorest nations, Mauritania is caught in a global food trap, producing only 30 percent of what its people eat and importing most of the rest. As prices skyrocket, those who can least afford it are squeezed the most as the world confronts the worst bout of food inflation since the Soviet grain crisis of the 1970s. Strong global demand and limited supplies are key factors driving up prices, but perhaps just as important is a massive disruption in the free flow of global trade. In recent months, food-producing countries from Argentina to Kazakhstan have begun to slam shut their doors to protect domestic access to the food they grow. Agriculturally challenged countries are left out in the cold.
As Tyler argues:
The damage that trade restrictions cause is probably most evident in the case of rice. Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 percent of the world’s rice production is traded across borders; that’s unusually low for an agricultural commodity. So when the price goes up — indeed, many varieties of rice have roughly doubled in price since 2007 — this highly segmented market means that the trade in rice doesn’t flow to the places of highest demand.
Dani, however, objects:
Cowen argues that freer trade in food commodities such as rice would boost global supplies and help reduce prices. He is probably right about the first, but not about the second. The effect of freer trade on domestic food prices depends on whether a country is a food importer or exporter. Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality. Trade works by relieving the relative scarcity of goods. The key here is the term “relative.” Food importing countries are food scarce countries, and as they open up to trade, the relative price of food falls. But if you are Thailand or Argentina, where other goods are scarce relative to food, freer trade means higher relative prices of food, not lower. And all the induced efficiency benefits and short- vs. long-run effects that Cowen talks about have no bearing on this conclusion: in the end some countries have to be net importers, and others net exporters.
From the former piece by Faiola:
As prices rose, major grain producers including Argentina and Ukraine, battling inflation caused in part by soaring oil bills, were moving to bar exports on a range of crops to control costs at home. It meant less supply on world markets even as global demand entered a fundamentally new phase. Already, corn prices had been climbing for months on the back of booming government-subsidized ethanol programs. Soybeans were facing pressure from surging demand in China. But as supplies in the pipelines of global trade shrank, prices for corn, soybeans, wheat, oats, rice and other grains began shooting through the roof.
In addition to some very good reporting from Mr. Faiola, it is nice to see a reporter get the economics right as well.