Export policy and food price escalation

Nadia Rocha, Paolo Giordani, Michele Ruta, 9 May 2012

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International food prices have been a key policy concern in recent times (Evenett and Jenny 2012). Figure 1 shows why. During the periods 2006-7 and 2008-10, international food prices shot up by well over 50%. If we compare these prices with those of the last two decades, the label ‘food crises’ does not seem overblown.

Figure 1. International food prices 1990-2010

While a large number of factors may have contributed to the sudden and rapid spikes in food prices (e.g. reduction in key food stocks, increasing demand in emerging economies, financial speculation, changes in monetary policy in leading economies), several observers have pointed out that trade policy may be part of the problem of escalating prices (see, among others, Anderson 2009 and Anderson et al. 2010).

Export policy, in particular, has been in the spotlight. As WTO Director General Pascal Lamy put it: "In response to the crises, some started looking further inwards, and we saw a whole host of export restrictions flourish. These export restrictions had a domino, market-closing, effect, with one restriction bringing about another" (Lamy 2011). Figure 2 supports this view, clearly showing a positive correlation between international food prices and export restrictions in 2009 and 2010.

Figure 2. International food prices and export restrictions

How does export policy interact with food prices?

Export policy in commodity sectors is often designed to stabilise domestic prices and avoid losses for specific social groups. In a recent paper (Giordani et al. 2012), we show that when trade policy aims at shielding the domestic economy from unfavourable developments in the world market, a complementarity arises between international food prices and export policy. Unilateral actions by exporting countries give rise to a ‘multiplier effect’, similar to the concept familiar in macroeconomic theory, where world food price changes feed into increasing export policy activism.

Specifically, when a shock in the international food market drives up its prices, governments respond by imposing export restrictions to mitigate the price rise in the domestic market. Their simultaneous behaviour, however, has aggregate consequences, thus exacerbating the initial shock. This, in turn, feeds into even more restrictive policies and further price escalation. A similar mechanism could materialise for export subsidies. Low prices of food may lead exporting governments to set export promotion measures to support domestic producers. This policy would lower the world price and induce additional support to exports.

Export restrictions and the 2008-10 food crisis

Between January 2008 and December 2010, exporting countries imposed 85 new restrictions on food products. Table 1 reports the share of world trade covered by new export restrictions in staple and non-staple food products, respectively. The table shows that restrictions were particularly concentrated in staple food products, namely wheat, maize, and rice. What were the determinants of new export restraints? What was their impact on international food prices?

Table 1. Trade coverage of export restrictions

Our evidence supports the view that export policy was an important contributing factor to the global food crisis in 2008-10. Global export restrictions in a product (i.e. the share of international trade covered by export restrictions) are positively correlated with the probability of imposing a new export restriction on that product, especially for staple foods. Large exporters are found to be more reactive to restrictive measures, suggesting that the multiplier effect is mostly driven by this group.

Changes in export restrictions had a significant upward effect on international food prices during 2008-10. A back of the envelope calculation based on the coefficients of our regressions shows that, if exporters had refrained from imposing restrictions, food prices would have been on average 13% lower in the period of observation. While already sizeable, this is a conservative estimate as it averages out across food products where restrictions were important (such as staple foods) and products where they were not.

Food export policy and the WTO

These findings contribute to the broader debate on the proper regulation of agricultural export policy within the multilateral trading system. The export multiplier mechanism in food markets affects global welfare.

  • First, movements in food prices have important redistributive effects – an increase (fall) in the world price of food is a terms-of-trade gain (loss) for exporting countries and a loss (gain) for importers.
  • Second, export policy activism creates the traditional distortions and deadweight losses that lower global welfare.
  • Third, the multiplier effect may also have an adverse impact on welfare through its effect on short-run volatility in food prices.

WTO rules on export measures are weaker than those on import policy. In the Uruguay Round Agreement on Agriculture signed in 1995, member governments from developed countries agreed to introduce in the multilateral trading system commitments to bind agricultural export subsidies. The value of this reform is likely to be more relevant than most people think. This is because, if world prices were to fall again in the future, the incentive to apply export support measures in this sector would certainly re-emerge, along with the associated multiplier mechanism.

Under WTO rules, export taxes are loosely regulated and are, in general, not covered by binding commitments. Members are prohibited from instituting or maintaining quantitative restrictions, but exceptions are allowed in food sectors. Overall, this legal framework gives WTO members a significant discretionary scope in applying export restraints. The introduction of commitments, for instance in the form of negotiated export tax bindings, would smooth the impact of export policy on international food prices – both directly and by inducing countries to develop more targeted policy instruments to protect consumer losses, rather than relying on second-best trade policy intervention.

Authors’ note: The opinions expressed are those of the authors and should not be attributed to the institutions they are affiliated with.

References

Anderson K (2009), "Reducing trade distortions could ease food price volatility", VoxEU.org, 13 November.
Anderson K., W. Martin and S. Nelgen (2010). "Export restrictions and food market instability". VoxEU.org, 9 November.
Evenett, S and F Jenny (2012), Trade, Competition, and the Pricing of Commodities, CEPR e-Report.
Giordani P, N Rocha, and M Ruta (2012), "Food Prices and the Multiplier Effect of Export Policy", WTO Working Paper ERSD-2012-08.
Lamy, P (2011), "International Trade -A Vital Component of the Food Security Picture", Opening Address at the XIII Congress of the European Association of Agricultural Economists, August.
 

Topics: International trade
Tags: export policy, food crises, food prices, protectionism

Assistant Professor of Economics, LUISS Guido Carli University
Nadia Rocha
Economic Affairs Officer at the Economic Research and Statistics Division of the World Trade Organization
Senior Economist, Strategy and Policy Review Department, IMF

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