Local or Global?

Whatever reason we wish to give for the rise in commodity prices—oil and food, especially–, I think we can safely say that many models point to large players distorting the market, be they hedge funds, Fed interest rates, or countries controlling the resources.

Slowly but surely, I am coming to the opinion that “local” has some advantages over “global.” To illustrate my point, consider how our trade agreement with Mexico was framed, particularly in terms of corn.

NAFTA shifted Mexico’s production from grains to vegetables and fruits, making Mexico much more dependent on the U.S. for grains. One incidental effect of our ethanol subsidy–using corn, for example, to product ethanol–has been to expose Mexico’s vulnerability when it shifted from grains to vegetables and fruits. Suddenly, tortillas are excessively expensive.

Corn was an important crop in Mexico, and corn is now one of those important commodities reaching record high prices.

The market place creates efficiencies. Mexico’s corn crop was subsidized. NAFTA removed those subsidies; we could more efficiently supply the corn. Let Mexico concentrate on fruits and vegetables.

Such efficiencies, while seemingly laudable, create dangers. These efficiencies are celebrated as one of the benefits of globalization. Each country decides on its role in the Ricardian scheme of things. Inefficient redundancies are dropped.

The trouble is: If one major primary producer (the U.S.) decides suddenly to march to a different drummer, the whole parade becomes a chaotic mess. Yes, it may straighten itself out, but the interim consequences are devastating.

I would argue that every country has the right and duty to ensure that it can feed its populace, even if it means subsidies. Trade agreements should not place this duty at risk.

The same argument applies to energy. For decades, we have allowed OPEC to be the primary producer of cheap energy. Each country should pursue as much energy independence as possible. We have talked about our doing it, but the will has been weak.

If you argue that hedge funds seeking a new asset class have created the problem, we are now at their mercy. Whatever the argument, our vulnerability is now exposed precisely because we did not think of energy as a local issue, as something for which we are primarily responsible.