Tuesday, June 10, 2008

Free Trade and Food

Two articles seem to indicate that there's good news and bad news in the area of trade and food production.

The first article is from last week's issue of The Economist. The article looks at policy choices made in the past, by rich and poor countries, in discouraging agriculture for export. And it examines what can be done to reform the policies that were put in place. Previous policies have, in large part, discouraged exports of basic commodities, such as rice. Yet it is these very products that are in shortest supply right now. Until recently, policies in poorer countries have not encouraged higher production, leaving them vulnerable to higher prices on the grains grown in other, richer countries. Needless to say, agricultural policies in the richer countries that subsidize production and protect markets from competition have not helped. Allowing richer producers to undercut their poorer competitors has contributed to the problem

But there are other conflicting signals. According to the article, when countries cut tariffs on farm goods, their consumers pay lower prices. And when subsidies are slashed, food prices rises. The article cites that fully freeing trade would raise the prices of primary farm products by an average 5.5%, and 1.3% for processed goods. But it also points out that rising prices for products generates other income among non-farm households.

The second article of interest is in today's issue of The Wall Street Journal. This piece (now subscriber content) also discusses the problem with previous policies that basically discouraged agricultural development in many poor countries as a road to economic prosperity. (And it includes an interesting but, in my opinion, too short video about the problems of small rice farmer in Haiti.) The result has been a situation where less-developed nations are not in a position to take advantage of current high prices because of their low production levels. Even countries that are largely rural don't produce enough to feed their own populations, and national policies have not provided a proper infrastructure and institutional framework to allow farmers to increase productivity or take advantage of rising prices.

Both articles led me to the same thought. The good news is "We see a connection between our previous agricultural policies and current food crisis." The bad news is "We still think it's a matter for government to solve." Protectionist policies of the larger developed countries: tariffs to keep out competing agricultural products, subsidies to divert agricultural products to non-food ends, and programs to restrict competition within markets, have all distorted the world market to such an extent as to make unraveling the problem seem rather daunting. To borrow from the last few sentences of the article in The Economist,
"Removing rich-country subsidies on staple goods...may be less useful in the fight against poverty than cutting tariffs would be. The food-price crisis has not hurt the case for freer farm trade. But it has shown how important it is to get it right."

My response to the first sentence is, "Perhaps, but it still doesn't mean they shouldn't disappear." By response to the second and third sentence is, "Spot on."

As for using these articles in your classroom, I think they both show how complicated this process can be, both from an economic and political point. There are significant costs to be faced as the world trade system in agricultural products is reformed. The choices will not be easy. But they are clearly needed. Personally, I would think this is the kind of problem we want to prepare our students to tackle.

I look forward to your thoughts.


Mike Fladlien said...

i have got to believe that removing all trade barriers is the answer...Engle's law is just as pertinent today was it was 100 years ago...

Anonymous said...

As a high school junior in an AP Econ class, I've been taught that one of the tenets of international economics is that barriers to free trade invariably lead to a lack of competition and deadweight losses from those falsely high price. To that end, I find it hard to swallow that the price of primary farm goods would remain at a 5.5% increased price after the removal of inhibitions, at least for very long. Either the importing country's own farms would be able to compete more directly with the foreign farms (as tariffs/subsidies are null for both states), or the two would specialize and trade, one country finally pulling again in farm productivity while the other produced something with a comparative advantage; even though the 'richer' country's farms now have more market power, the industry is primarily a perfectly competitive one, and the increased supply needed to satisfy two countries' food needs should push price down to some sort of equilibrium. Also, as our food prices are already strained to a record high point, going any higher on such contradicting ideas seems unlikely. I also have a thought on your analysis of the first sentence of The Economist quote. While removing tariffs is an unequivocally good idea, removing subsidies in the short run might not. As crude oil prices and their magnitude push the fuel market towards more and more ethanol production, it might be wise to keep a few bastions of rice/food production. These ‘rich’ countries have a foothold in production, and, while it may be a politically unfair and economically unsustainable foothold, in the short run, leaving these countries undisturbed could allow us to survive the food price storm to a degree. Again, this is my first year studying economics, so feel free to rip my arguments apart. (please delete the previous submission -I had a few more ideas to sketch out, and thus wrote them in this second post)