How Trade Agreements Influence Global Food Prices

n recent years, global food prices have become a pressing concern, impacting economies and households worldwide. The interconnected nature of the global food system means that trade agreements and policies have a significant influence on what consumers pay for their groceries. Over the last 10 years, food price inflation has been a consistent issue, prompting questions about why food prices are so high and what factors contribute to price volatility in the food trade.

Trade policies play a crucial role in shaping the landscape of food security and price dynamics. This article examines how trade agreements affect global food prices, exploring the impacts of trade liberalization, export restrictions, and import policies on the global food system. By analyzing these interconnected trade effects, we aim to shed light on the complex relationships between international trade and food price fluctuations, providing insights into the reasons to open markets and the challenges faced in maintaining a stable and affordable food supply for populations around the world.

Trade Liberalization and Food Prices

Trade liberalization has had a significant impact on global food prices, influencing both the availability and affordability of food worldwide. The World Trade Organization (WTO) and World Bank have been promoting the concept that international market access plays a crucial role in development, especially for developing countries. This approach has led to the removal of trade restrictions and the reduction of tariff and non-tariff barriers, which has had both positive and negative effects on food security.

Benefits of open agricultural trade

Open and transparent markets in international trade can help alleviate the effects of shocks and ensure food security. Trade openness has been consistent with food security by lowering food prices, which benefits everyone, including those suffering from the most serious food insecurity. This approach has also led to a more diversified diet, making poor classes less vulnerable to food unavailability or price fluctuations in specific foods.

Trade helps countries, especially Least Developed Countries (LDCs), to increase both the total amount of calories supplied and diversify the available food for consumption. A well-functioning global value chain in the agro-food sectors creates opportunities for producers in developing economies, contributing to local economic development .

Risks of over-reliance on imports

While trade liberalization has its benefits, it also comes with risks. Trade openness has lowered the level of food self-sufficiency and has made the food supply more dependent on imports. This dependency is supposed to make the food supply less secure, especially considering that agriculture is incompatible with free trade due to its innate role in managing ecological and natural resources at both national and global levels.

Reducing foreign dependency on food could significantly abate the conveyance of international market shocks to indigenous markets. From the perspective of farmers, the reduction of price volatility under the autarky system improves their price forecast, which increases farmers' expected utility levels.

Balancing trade openness and domestic food security

Balancing trade openness with domestic food security is a complex challenge. The International Covenant on Economic, Social and Cultural Rights recognizes freedom from hunger as a fundamental right and mandates parties to take measures to ensure this right, including equitable distribution of the world's food supply.

However, economies that do not, or cannot, provide support to their agricultural sectors are disadvantaged in international trade and risk becoming more food insecure. Export subsidies for agricultural products, in particular, have a highly distorting effect on international food markets.

To address these challenges, maintaining open trade, including within regions, to allow food to flow from surplus areas to those in need is crucial. Additionally, increasing trade financing and reinforcing supply chains is vital to addressing the current food price shock. The World Bank and other multilateral development banks play a key role in increasing trade financing for agricultural commodities and other food products, as well as supporting countries for critical logistics and infrastructure upgrades.

Export Restrictions and Global Markets

Motivations for imposing export controls

Governments implement export controls to address various policy objectives, both economic and non-economic. Developing countries often use export restrictions to promote downstream industries by reducing the cost of industrial inputs and diversifying their economies towards more processed goods. Export taxes are also favored by developing countries as a simpler method of raising government revenue compared to more complex forms of taxation.

During periods of crop shortfalls and sudden increases in world prices of staple crops like rice or wheat, governments may impose export restrictions to control domestic inflationary pressure. Both developed and developing countries sometimes use export restrictions for political or social reasons, with national security being a prominent non-economic rationale.

Ripple effects on global food supplies

Export restrictions have significant impacts on global food markets. The recent invasion of Ukraine by Russia and the subsequent disruption of agricultural exports from both countries has led to a surge in export restrictions worldwide . This has cast a shadow over future food price developments and food supply in net-food-importing countries, especially in the context of already record-high global food prices following COVID-19 .

Export bans, quotas, taxes, or licenses function as beggar-thy-neighbor policies, further increasing world market and consumer prices in third countries. During the 2007-2008 food crisis, changes in countries' export restrictions caused international prices to be 40% higher for rice, 19% for wheat, and 10% for maize .

Recent export bans on products such as rice, wheat, and citrus fruits have led to estimated price increases of 12.3%, 9%, and 8.9%, respectively. Even for products where the exporters imposing restrictions are not among the top 5 world exporters, the impact on prices can be significant due to inelastic demand.

WTO rules on agricultural export restrictions

World Trade Organization (WTO) rules on agricultural export restrictions tend to disadvantage net food-importing countries. The General Agreement on Tariffs and Trade (GATT) contains a general prohibition of quantitative restrictions on imports and exports, but it includes exemptions for temporary export restrictions applied to prevent or relieve critical shortages of foodstuffs.

The WTO Agreement on Agriculture (AoA) includes consultation and notification requirements for members imposing new export prohibitions or restrictions on foodstuffs. However, these obligations do not apply to developing countries unless they are net exporters of the commodity concerned.

At the 2015 Nairobi Ministerial Conference, trade ministers adopted a decision abolishing agricultural export subsidies and setting new rules for other forms of farm export support. This decision contributed to progress on Sustainable Development Goal 2.b, which commits governments to correct and prevent trade restrictions and distortions in world agricultural markets.

Import Policies and Price Transmission

Tariffs and quotas

Import policies, particularly tariffs and quotas, play a crucial role in shaping global food prices. Governments often impose tariffs on agricultural imports to protect domestic industries and raise revenue. However, these measures can lead to higher prices for consumers. Tariffs on agricultural products tend to be higher than those on non-agricultural goods in over 90% of countries. This disparity is often due to the perception of agricultural products as "sensitive" for national security reasons.

Effects of import liberalization

Import liberalization, which involves removing quantitative restrictions and reducing tariffs, can have significant impacts on food prices and economic efficiency. By reducing the price of importable goods, liberalization promotes resource reallocation towards more efficient production of exportables. It also expands consumption possibilities by reducing prices and increasing the variety of imported goods available to consumers. However, the benefits of trade liberalization may not always materialize, especially in Sub-Saharan African countries, due to partial reforms or natural barriers to trade.

Managing price volatility through trade policy

Trade policies can be used to manage price volatility, but their effectiveness is debatable. During periods of high international food prices, governments may impose export taxes or import subsidies to offset consumer welfare losses. Conversely, when prices are low, they may use export subsidies or import tariffs to compensate producers. However, these policies can have unintended consequences. A recent study found that insulation policies roughly doubled the impact of initial global price shocks on wheat and rice, quadrupling the volatility of world prices. Surprisingly, these policies often increase domestic price volatility in many countries, contrary to policymakers' intentions.

Conclusion

Trade agreements have a significant influence on global food prices, shaping the landscape of food security and affordability worldwide. The interplay between trade liberalization, export restrictions, and import policies creates a complex web of effects on food markets. Open agricultural trade has benefits like lowering prices and diversifying diets, but it also carries risks such as over-reliance on imports. Balancing these factors is crucial to maintain food security while reaping the advantages of international trade.

Managing price volatility through trade policy remains a challenge, with measures often leading to unintended consequences. The impact of export restrictions on global food supplies underscores the need for careful consideration of trade policies. As the world grapples with food price fluctuations, it's essential to foster cooperation and transparency in international trade. This approach can help ensure a stable and affordable food supply for populations around the globe, while also addressing the unique needs of both developed and developing nations in the ever-changing landscape of global food trade.