Why Agricultural Trade Is (or Can Be) a Life-and-Death Matter

Key Points

• Nations engage in agricultural trade to reap the benefits of comparative advantage, providing quantity, quality, and diversity of foodstuffs for individual countries by giving access to products from widely different climate zones with varying availability of land, labor, and capital.
• Price volatility in international markets may dissuade some countries from participating in global food markets, but most shocks to agricultural production are localized and generate far more production, price variation, and food insecurity risks for an isolated nation than in global markets as a whole.
• When governments do insist on intervening in agricultural trade, those interventions should be simple and transparent, using price-related interventions such as tariffs and consumption taxes rather than quantitative restrictions such as import quotas and licenses.

Many arguments are offered against trade in agricultural products. Consuming only locally produced food is widely considered healthier, better for the environment, and generally desirable. It would undoubtedly be good to be able to rely on healthy, wholesome food produced by people we know and who depend on us directly for their incomes and way of life. However, there are also important reasons it makes sense not to rely solely on locally produced food and to reach out to other regions of the world for part of our food and nutrition.

It makes sense to take advantage of the opportunities created by access to agricultural trade for three main reasons. The first is the ability of food trade to raise incomes. The second is food trade’s important role in facilitating adjustments and population movements as economies grow. The third is that trade can reduce income volatility and vulnerability to food insecurity.

Food trade’s ability to sustainably raise a country’s income is particularly important. The gains from trade in food arise because of the many ways in which economies differ. Countries vary enormously, for instance, in the amount of agricultural land per person that they have available. They also differ in the productivity of different sectors. The ability to access a wider range of agricultural products than a country or region can produce by itself generates additional gains.

Trade is also hugely important for facilitating economic growth. As individual incomes grow, patterns of food consumption change enormously. Very poor people consume little other than starchy staple foods. As incomes rise, people diversify their diets, adding more fruits and vegetables, vegetable oils, and livestock products. These changes are frequently difficult to accommodate if the economy relies entirely on domestically sourced food and particularly if people rely on only locally sourced food. Trade can allow changes in diets and facilitate the movement of labor out of low-productivity agriculture.

Many skeptics imply that agricultural trade is an unwanted and unnecessary source of volatility in prices and food security—a source of volatility that can be reduced simply by becoming self-sufficient in food. But this perspective gets the story completely backward. The volatility of agricultural output is almost always greater in an individual country than it is for the world as a whole. Seasonal weather and growing conditions vary enormously across countries—and within them. Agricultural trade can greatly reduce the volatility of output, prices, and food availability, relative to relying on solely locally produced food.

To the extent that governments intervene in agricultural markets, policies should be carefully designed to achieve their goals at the lowest possible cost. Simple, transparent, price-based measures such as tariffs have enormous benefits relative to costly and destabilizing measures such as quotas and export bans. It is also important to choose policies that most directly influence policy targets—choosing, for example, consumption taxes rather than import barriers when the goal is to reduce consumption of foods perceived to be unhealthy.

To read the full report from American Enterprise Institute, please click here.