Global Food Security 1 (2012) 157–166

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Global Food Security

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journal homepage: www.elsevier.com/locate/gfs

Government trade restrictions and international price volatility

Kym Anderson a,b,n,1

a School of Economics, University of Adelaide, 10 Pulteney Street, Adelaide, SA 5005, Australiab Crawford School of Public Policy, Australian National University, Canberra, ACT 2601, Australia

a r t i c l e i n f o

Article history:

Received 30 May 2012

Accepted 6 November 2012

Keywords:

Food price stabilization

Domestic market insulation

Trade-distorting measure

24/$ - see front matter & 2012 Elsevier B.V. A

x.doi.org/10.1016/j.gfs.2012.11.005

þ61 8 8313 4712; fax: þ61 8 8223 1460.

ail address: kym.anderson@adelaide.edu.au

e author is grateful for referee comments, for

e Nelgen, and for financial support from the

rld Bank, and Australia’s Rural Industries

tion. Views expressed are the author’s alone.

a b s t r a c t

National governments dislike food price volatility to varying extents. When some of them use trade

measures to insulate their domestic market from international food price fluctuations, that volatility is

amplified. This in turn prompts more countries to follow suit. However, when both food-exporting and

food-importing countries so respond, each group becomes less capable of preventing domestic price

volatility. This paper examines empirically the extent of insulation in both groups of countries, and also

in high-income versus developing countries. It also provides an estimate of the contribution of such

government actions to international food price spikes. A multilateral agreement to limit such

government responses would reduce the need for all countries to so intervene, and allow more-

efficient generic social protection policies to deal with the most vulnerable cases.

& 2012 Elsevier B.V. All rights reserved.

1. Introduction

The upward spike in international food prices in 2008 causedpanic in numerous developing countries. It may have evencontributed to the recent political revolutions in several Arabcountries. Two further price spikes have since occurred, in late2010/early 2011 and in the second-half of 2012 (see Fig. 1).Having three international food price spikes in less than 5 years isunprecedented in modern history, and justifies the attentionpolicymakers have been giving to its national and global foodsecurity consequences. That in turn warrants further analysis ofthe contributors to the spikes.

Apart from the immediate political and poverty crises it cancause, food price volatility is also undesirable from a long-runeconomic viewpoint. This is because unexpected commodity pricefluctuations reduce consumer and investor confidence in allcountries, thereby potentially lowering global economic growth.They also cause swings in the economic welfare of net sellers offood versus net buying households, and hence also between netfood-exporting and food-importing countries.

Understanding the causes of international food price volatility isan important first step toward reducing this global problem. Muchhas been written and spoken about possible causes of the most-recent fluctuations in those prices, including in the mass media and

ll rights reserved.

discussions with Will Martin

Australian Research Council,

Research and Development

in international fora such as the G20 (FAO et al., 2011). Weather isobviously one possible supply-side contender, and climate changemay be adding to the frequency and severity of extreme weatherevents. However, since growing seasons vary across the globe and thevarious crops grow in different months of the year, internationaltrade and consumer substitutability normally can even out their neteffect on the international price of food. Speculators are sometimesblamed, although their contribution as a group is usually the oppositebecause – if they are to be profitable and remain in business – theytend to buy when prices are low and sell when they are high.A problem can arise though if global stocks are depleted while pricesare still rising—which Wright (2011) argues convincingly was one ofthe main contributors to the 2008 food price spike.

The purpose of this paper is to highlight another contributor tothe volatility of international food markets, namely nationalgovernments’ agricultural trade policies. Those policies contributein two ways: through ‘thinning’ the international market for foodin normal years; and through ‘insulating’ domestic markets from,and thereby adding to, international price swings in abnormalyears. Over the past half-century the former has been a conse-quence of rich industrial countries protecting farmers relative tomanufacturers and poor agrarian countries doing the opposite(for reasons explained in Anderson (1995, 2010)). The latter is theresult of fluctuations in food trade restrictions, stemming fromthe fact that national governments dislike domestic food pricevolatility. When some governments alter the restrictiveness oftheir food trade measures to insulate their domestic markets frominternational price fluctuations, the volatility faced by othercountries is amplified. That reaction therefore prompts morecountries to follow suit, which not only further amplifies but alsolengthens the duration of each price spike. The irony is, however,

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Source: FAOSTAT at www.fao.org.

K. Anderson / Global Food Security 1 (2012) 157–166158

that when both food-exporting and food-importing countries sorespond, each country group undermines the other’s attempts tostabilize its domestic markets. That is, what seems like a solutionto each country’s concern if it were acting alone turns out to beless effective, the more other countries respond in a similar way.

This paper first explains the basic national and global econom-ics behind both types of trade policy contributions to thevolatility of international food prices. It then reviews empiricalevidence on trends and fluctuations in the extent of those policyinterventions, and the evolution through time of their market,welfare, inequality and poverty effects. It highlights the substan-tial role that trade restrictions continue to play in ‘thinning’international food markets, and the roles that fluctuations inthose trade restrictions have played in amplifying substantiallyinternational price volatility and yet reducing very little domesticfood price volatility. The final section examines national andmultilateral policy options for reducing the contribution of tradepolicies to global food price volatility, and for improving theeffectiveness of social protection policies to deal with the mostvulnerable households whose food security would otherwise beadversely affected by food price spikes.

2 True, production and export subsidies in food-surplus countries expanded

international trade, but in practice that was always dwarfed by the trade-

restricting effects of food-deficit countries’ protectionist policies.3 Conversely, a global shock that expanded supply on the international food

market and caused its price to slump may trigger the opposite reaction by

governments concerned for the welfare of their farmers. That is, food export taxes

may be lowered in food-surplus countries and tariffs may be raised in food-

importing countries, again to ensure only a fraction of the change in the

international price is transmitted to those countries’ domestic markets. In that

scenario the response by governments lowers the producer tax equivalent/raises

the producer subsidy equivalent of any such trade measure, and does the opposite

to consumer incentives.

2. Global economic effects of national trade policies

Consider first the ‘thinning’ argument, which grew in impor-tance up to the 1980s but has since diminished somewhat withtrade policy reform, and then the ‘insulating’ argument which hasnot diminished despite the trade reforms of the past threedecades.

2.1. The ‘thinning’ argument

If rich industrial countries protect their farmers from importcompetition more than they assist their manufacturers and produ-cers of other tradables, that policy choice encourages domestic foodproduction and discourages domestic food consumption in thosecountries. It thus reduces demand and so lowers the relative price

of food and reduces the volume traded in the international foodmarketplace.2 If poor agrarian countries do the opposite, forexample through taxing farm exports or protecting manufacturersfrom import competition, that discourages domestic food produc-tion and encourages domestic food consumption in those develop-ing countries. That in turn lowers the relative price of food in thosecountries and so also reduces the volume traded in the interna-tional food marketplace. These two country groups’ trade policiesthus reinforce each other’s impacts on that international market.They also reinforce each other in discriminating against net sellersof farm products in developing countries—including in thosecountries whose governments choose not to adopt anti-agricultural trade policies.

The important point in terms of price volatility is that suchpolicy regimes, in addition to reducing the volume of food tradeacross national borders, also tend to lower the price elasticities ofaggregate excess demand and excess supply in the internationalfood marketplace. This ‘thinning’ of the international food marketthus makes its price more volatile in the face of any given-sizedglobal supply or demand shock. It also means that there are fewerlogistics in place for shipping food than would be the case underless-restrictive international trade regimes, so the world is less ableto cope when more shipments are suddenly needed in crisis times.

2.2. The ‘insulating’ argument

As for the ‘insulating’ aspect of farm trade policies, it is againhelpful to think of the world as having just two country groups,namely food importers and food exporters. Suppose a severeweather shock at a time of low global stocks causes the interna-tional food price to suddenly rise. Those national governmentswishing to avert losses for domestic food consumers may altertheir food trade restriction so that only a fraction of that price riseis transmitted to their domestic market. For example, imposing orraising an export tax or an equivalent quantitative restriction onfood exports would mean the domestic price in a food-surpluscountry would rise less than the border price. Similarly, loweringany import tax on food would mean the domestic price in a food-deficit country would rise less than the border price. Hence it isnot surprising that governments, in seeking to protect domesticconsumers from an upward spike in international food prices,consider a change in trade measures as an appropriate loss-averting response. That response raises the consumer subsidyequivalent/lowers the consumer tax equivalent of any such trademeasure, and does the opposite to producer incentives.3

However, if such domestic market insulation using trademeasures is practiced by large countries, or by a sufficiently largenumber of small countries, it turns out to be not very effective inkeeping domestic price volatility below what it would be in theinternational marketplace if no government so responded. To seewhy this can lead to ineffective outcomes, it is helpful to refer toFig. 2, which depicts the international market of food. In a normalyear, the excess supply curve for the world’s food-exportingcountries is ESo and the excess demand curve for the world’s

Fig. 2. Effects of offsetting export barrier increases and import barrier reductions

in the international market for food in response to an exogenous supply shock

from ES0 to ES1,

Source: Author’s depiction.

4 Conversely, if the exogenous weather shock was of the opposite sort (a

bumper harvest) which depressed the international price even after purchases by

stockholders, and if governments sought in that case to protect their farmers from

the full force of the price fall, the international price fall would be accentuated to

the benefit of food-importing countries.5 In the case of opposite changes to trade measures, aimed at protecting

farmers from a slump in international food prices, it is net buyers of food who are

inadvertently harmed by such trade policy responses, and all food sellers rather

than just the poorest are helped—and in proportion to their marketed output,

thereby adding to farm income inequality.

K. Anderson / Global Food Security 1 (2012) 157–166 159

food-importing countries is EDo. In the absence of any trade costssuch as for transport, equilibrium in a normal year would be at Eo

with Qo units traded at international price Po.An adverse season in some exporting countries at a time when

global stocks are low would shift the excess supply curveleftwards to ES1. If there were no policy responses, the equili-brium would shift from Eo to E1, and the international price andquantity traded across national borders would change from Po

and Qo to P1 and Q1.However, if the higher price prompts governments to alter

their trade restrictiveness, there will be additional effects.On one hand, suppose some of the food-exporting countries

choose to impose or raise an export tax. That would move theexcess supply curve further to the left, say to ES2. This would movethe equilibrium to E2 and raise the international price further, to P2,but the domestic price in those export-restricting countries wouldbe Px which is below P1. Such a reaction thus provides partialinsulation in those exporting countries from the initial exogenousshock to the international market. Furthermore, their combinedactions reduce aggregate exports to Q2 and cause the internationalterms of trade to turn further in their favor, because of theadditional reduction in available supplies on the internationalmarket. That means, however, that food-importing countries facean even higher international price, at P2 instead of P1.

On the other hand, suppose some protective food-importingcountries were to reduce their barriers to food imports in responseto the international price rising from P0 to P1. That would shift theexcess demand curve to the right, say to ED0. In that case the newequilibrium would be at E0, involving Q0 units traded at interna-tional price P0. That response would provide partial insulation inthose food-importing countries from the initial exogenous shock tothe international market: their domestic price would rise by onlyMN instead of by ME0 in Fig. 2. However, the combined actions ofthose importing countries cause the international terms of trade toturn further against them.

What if both country groups intervene, each seeking to at leastoffset the effect on their domestic price of the other countrygroup’s policy response? In practice, the more one group seeks to

insulate its domestic market, the more the other group is likely torespond. The example of such actions shown in Fig. 2 involves thecurves shifting simultaneously to ES2 and ED0, in which case theinternational price is pushed even higher to P3 while the domesticprice in each country group would be lower by E3E1. That is, in thatparticular case the domestic price (and the quantity traded inter-nationally, Q1) would be exactly the same as if neither countrygroup’s governments had altered their trade restrictions—yet therewill be the appearance of successful intervention, because theinternational price will have risen more than the domestic price tothe extent of E3E1. The terms of trade would now be even better forthe food-exporting country group, and even worse for food-importing countries. Aggregate global welfare would be the same aswhen neither country group so intervenes. However, there would bean economic welfare transfer from food-importing to food-exportingcountries, via the terms of trade change, equal to area P1E1E3P3,4 Forthat terms-of-trade reason one might expect large exporting coun-tries to intervene more than large importing countries.

Clearly, both such attempts at price insulation exacerbateinternational price volatility, and yet together they may do littleor possibly nothing to assist those most harmed by the initialprice change caused by the exogenous weather shock.

More than that, this use of trade measures can be inefficient andpossibly inequitable, and it may even add to global poverty despiteits motivation being to reduce the risk of a rise in national poverty.To see that in the case of an upward spike in the international price,note that an import tax is the equivalent of a consumer tax and aproducer subsidy, hence lowering it also reduces the extent towhich the measure assists producers of the product in question.Similarly, an export tax is the equivalent of a consumer subsidy anda producer tax, so raising it not only helps consumers but alsoharms farmers. If farming is discouraged, the demand for labor onfarms falls, and with it the nominal wages of unskilled workers notonly in farm jobs but also in non-farm jobs—and more so the moreagrarian is the economy and the more flexible is the labor market.Thus while poor households may benefit on the expenditure sidefrom a measure that reduces the extent to which the cost of foodconsumption would otherwise rise, they could be harmed on theearnings side if they are sellers of food or suppliers of unskilledlabor. Such trade policy responses therefore could add to ratherthan reduce poverty (Ivanic and Martin, 2008; Aksoy and Hoekman,2010). That in turn could add to food insecurity, since food securityrefers to not only national availability but also economic access toand effective utilization of food (Pinstrup-Andersen, 2009; Barrett,2010). Whether in fact it does so is an empirical question that canbe answered fully only with a global economy-wide model that hasnational household income and expenditure details included for allcountries (and no global model yet has that detail).

In the case of a small food-exporting country unable toinfluence its terms of trade, an increase in export restrictions islikely to reduce its national economic welfare, because suchmeasures distort domestic production in addition to loweringthe consumer price of food. Trade measures are wasteful too if itis only the poorest consumers who need to be helped, since atrade measure affects all food consumers in the country and inproportion to their expenditure on food.5 That is, altering

K. Anderson / Global Food Security 1 (2012) 157–166160

restrictions on trade is far from the first-best way for a nationalgovernment to prevent food insecurity from increasing for itsmost vulnerable households when international food prices rise.

Do et al. (2012) argue that, if many countries were to use adomestic social protection measure instead of a trade measureto assist the poorest households when prices spike, that policyresponse too would exacerbate the international price spike ifthose taxed to finance the transfer would have otherwise spentless of that revenue on food than the much-poorer recipients ofthe transfer. The point needs to be stressed, though, that theextent of intervention via a targeted social protection measurewould be far smaller than via a trade measure that helps all

consumers rather than just the most vulnerable—and, in addi-tion, that taxes food producers and so adds a by-productdistortion cost and reduces the global supply response to thefood shortage.

Of course if the government’s aim is to avert losses in realincome for non-poor consumers as well, the first-best policyinstrument would involve a bigger treasury outlay than if it wastargeted just on the poorest households. Even so, a consumersubsidy would be more efficient (and have less of an impact onthe international price) than a trade measure to achieve thattransfer. That is true even is all the tax revenue for that purposehad to be raised from trade taxation, and even if from taxing onlytrade in this food item (Corden, 1997, Chapter 4).6

3. Empirical evidence

There is now a considerable body of evidence to suggest thatnational food trade policies are having a non-trivial impact inincreasing the volatility of international food markets and,through that mechanism, adversely affecting global food security.This section provides a brief review of pertinent studies thatcollectively lead one to that conclusion. It begins with evidenceshowing that the global pattern of trade policies since the 1950shas ‘thinned’ international food markets and, even ignoring theimpact of that on volatility, has contributed to global poverty andthereby global food insecurity. It then turns to evidence showingthe extent to which countries’ trade policies ‘insulate’ theirdomestic food markets, the impact of that on international foodprices, and hence the effectiveness of those national policies inpreventing a rise in domestic food prices when internationalprices spike.

3.1. How much have trade policies ‘thinned’ the international food

market?

Most countries have some forms of taxes or quantitativerestrictions on imports of some products, and many developingcountries have also taxed or quantitatively restricted some oftheir exports. Less commonly, countries occasionally will sub-sidize exports or imports too. In addition, it was not uncommonbefore the 1990s for developing countries to operate multipleexchange rate regimes, which also had a strong anti-trade bias.And any domestic producer or consumer price subsidies or taxeson tradable products also alter volumes of trade.

For decades agricultural subsidies and protection from importsin high-income (and some middle-income) countries have beendepressing international prices of farm products. The Haberler(1958) report to GATT Contracting Parties forewarned that suchdistortions might worsen, and indeed they did between the 1950s

6 The literature on the political economy of using trade policy for loss aversion

reasons tends to rule out the use of more-efficient instruments by focusing only on

border measures. See, for example, Freund and Ozden (2008) and Tovar (2009).

and the early 1980s in East Asia, North America and WesternEurope (Anderson et al., 1986). Meanwhile, the governments ofmany developing countries have directly taxed their farmers overthe past half-century. A well-known example is the taxing ofexports of plantation crops in post-colonial Africa (Bates, 1981).At the same time, many developing countries chose also toovervalue their currency, and to pursue an import-substitutingindustrialization strategy by restricting imports of manufactures.Together those latter measures indirectly taxed producers ofother tradable products in developing economies, by far the mostnumerous of them being farmers (Krueger et al., 1988, 1991).Thus the price incentives facing farmers in many developingcountries have been depressed by both own-country and othercountries’ agricultural price and international trade policies.

This disarray in world agriculture, as Johnson (1973) describedit in the title of his seminal book, means there has been over-production of farm products in high-income countries and under-production in low-income countries. It also means there has beenless international trade in farm products than would be the caseunder free trade, thereby thinning markets for these weather-dependent products and thus making them more volatile. Using amodel of world food markets as of 1990, Tyers and Anderson(1992, Table 6.9) found that high-income country pro-farmpolicies lowered international food prices by 20 percent, but thatmost of that was offset by developing countries’ anti-agriculturalpolicies. They also found that high-income country policieslowered the volume of international food trade by 25 percent.However, developing countries’ policies did likewise, and thecombined effect was to shrink global food trade in 1990 by 56percent—making it very much more susceptible to exogenousglobal supply or demand shocks.

During the past 25 years, however, numerous countries havebegun to reform their agricultural price and trade policies: sincethe latter 1980s high-income countries have steadily loweredtheir assistance to farmers and have decoupled some of thatsupport from production, while developing countries have gra-dually lowered their farm export taxes and their import tariffs onmanufactures. One effect is a convergence toward zero in theestimated nominal rate of assistance (NRA) to farmers, which isthe percentage by which gross earnings from farming in eachcountry exceed (or, if negative, fall short of) what they would inthe absence of national agricultural price and trade policies (seeFig. 3).7

Despite the comprehensiveness of those trade reforms, theyhave raised only very slightly the global extent to which farmproducts are traded internationally: the share of primary agri-cultural production exported globally, including intra-EuropeanUnion trade, rose from 13 percent to just 16 percent in the twodecades to 2000–2004 (Sandri et al., 2007). One reason for thissmall aggregate global response is that high-income countrieslowered not only their import restrictions but also their exportsubsidies. A second reason is that while developing countriesphased out their farm export taxes, they also raised their tariffs onfarm imports. As a result, international food markets are notmuch ‘thicker’ now than they were a quarter-century ago.

According to global economy-wide modelling results reportedin Valenzuela et al. (2009), however, liberalization of remainingtrade barriers as of 2004 would raise the share of farm productionexported globally by another four percentage points. Thus plentyof scope still remains to ‘thicken’ international food markets andthereby make them less volatile. Such liberalization also would

7 The weighted average across products within countries, and across coun-

tries, is obtained using the value of agricultural production at undistorted prices as

weights.

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Fig. 3. Nominal rates of assistance to farmers, high-income and developing countries, 1955–2010.

Source: Updated from Anderson (2009), drawing on estimates in Anderson and Nelgen (2012).

K. Anderson / Global Food Security 1 (2012) 157–166 161

lower global poverty, according to more-detailed modelling thatdraws on those global economy-wide model results (Andersonet al., 2010, 2011). Global food security would thus be boosted byboth of those effects of further trade liberalization—even beforetaking into account the ‘insulating’ feature of current food tradepolicies, to which we now turn.

3.2. How much have trade policies ‘insulated’ domestic food markets

from international price volatility?

The above empirical evidence focuses on trends in trade-distorting policies. Another feature of those food market inter-ventions is that their impact on NRAs is negatively correlatedwith international food price movements. NRAs fluctuate con-siderably around trend, and not only in extreme price spikeperiods. Fig. 4 shows the extent of that negative correlation forthe three key grains, even after averaging across as many as 82countries.

It is possible to estimate the proportion of any internationalprice fluctuation that is transmitted to domestic markets within12 months. It is also possible to obtain a crude back-of-the-envelope estimate of how much trade policy responses exacer-bate international price spikes.8

Anderson and Nelgen (forthcoming) have estimated a short-run elasticity of transmission of the international product price tothe domestic market for the three key grains. Following Nerlove(1972) and Tyers and Anderson (1992, pp. 65–75), they use apartial-adjustment geometric distributed lag formulation to esti-mate elasticities for each product for all focus countries for theperiod 1985–2010. Specifically, they assume that associated with

8 Both of these estimates rely on the assumption that there are no trade costs.

Insofar as transport and related trade costs are positive and independent of the

product’s price, our estimates may overstate the extent of policy-induced

insulation.

the border price ptn there is a ‘target’ domestic price pt , toward

which policy ensures that the actual domestic price, pt, movesonly sluggishly. Changes in this target price might respondincompletely, even in the long run, to corresponding changes inthe border price. If all prices are expressed in logarithms, thetarget domestic price then has the following relationship with theborder price:

pt ¼ p0þfLR pn

t�pn

0

� �ð1Þ

where fLR is the long-run price transmission elasticity and thevalues of p0 and QUOTE are the domestic and border prices in thebase period. In the short-run, the actual domestic price adjustsonly partially each year to any change in the target domesticprice:

pt�pt�1 ¼ d pt�pt�1

� �ð2Þ

where the parameter d gives the fraction of the ultimate adjust-ment that takes place in 1 year. By substituting (1) into (2) toeliminate the unobservable target price, the following reducedform, which is suitable for fitting to data, is obtained:

pt ¼ d p0�fLRpn

0

� �þ 1�dð Þpt�1þdfLRpn

t

¼ aþbpt�1þcpn

t ð3Þ

where, again, if the current US dollar prices are expressed inlogarithms, the short-run (1-year) elasticity of price transmission,call it fSR, is simply d times the long-run elasticity. Thus theestimate of the short-run elasticity is the regression coefficient cand the long-run elasticity estimate is c/(1�b).

Table 1 summarizes the estimates. The average of estimatesfor the short-run transmission elasticity over the 25 years to 2010ranges from 0.73 for soybean down to just 0.43 for sugar. Theunweighted average across these ten key farm products is 0.56,suggesting that within 1 year, barely half the movement ininternational prices of farm products is transmitted domestically

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Fig. 4. Grain NRAs and their international price, 82 countries, 1970–2011 (left axis is international price in current US$ from World Bank (2012), right axis is weighted

average NRA in percent). (a) Rice, (b) Wheat and (c) Maize.

Source: Anderson and Nelgen (2012).

K. Anderson / Global Food Security 1 (2012) 157–166162

on average. These estimates are consistent with a recent study byMinot (2011) of 11 Sub-Saharan African countries. Despite using asomewhat different methodology, he estimated short-run pricetransmission elasticities for key staple foods that averaged 0.63.Earlier multicountry studies by Conforti (2004) and Tyers and

Anderson (1992, Appendix 2) generally got short-run estimatesbelow 0.5.

Using their stochastic model of world food markets and theirestimated price transmission elasticities (based on price data fromthe previous 25 years), Tyers and Anderson (1992, pp. 227–228) ran

Table 1Global average short-run price transmission elasticities, akey foods,

1985–2010 (weighted average across all of the 82 countries for

which NRAs are available, using value of national production at

undistorted prices as weights).

Source: Estimated by Nelgen (2012) using Eq. (3) and data from

Anderson and Nelgen (2012).

Rice 0.49

Wheat 0.55

Maize 0.63

Soybean 0.73

Sugar 0.43

Cotton 0.57

Milk 0.51

Beef 0.66

Pig meat 0.51

Poultry 0.68

Unweighted average, 10 products 0.56

a The proportion of a change in the international price that is

transmitted to the domestic market of a country within a year,

estimated using Eq. (3) in the text.

K. Anderson / Global Food Security 1 (2012) 157–166 163

200 repeated simulations with random weather shocks. They foundthat the coefficient of variation of international food prices wouldfall from 34 to 10 percent if all countries agreed in 1990 to ceasetheir domestic price-insulating practices and instead maintainconstant ad valorem trade tax rates. In most of the 16 developingeconomies they considered, the coefficient of variation for domesticprices (the standard deviation divided by the mean) would fallsubstantially if all countries refrained from using the type of priceinsulating prices they had used in the past quarter-century. In anumber of these cases, such as Bangladesh, Thailand and SouthAfrica, the reductions in domestic price instability were estimated tobe dramatic, with the coefficient of variation in Bangladesh, forinstance, falling from 26 to 8 percent. In the few cases where thecoefficient of variation of domestic prices was estimated to rise, theincreases were much smaller. Given that the extent to whichvariations in trade barriers are used to insulate domestic foodmarkets from international food price volatility appears to havebeen no less in the past 25 years than in the generation prior to1990, the coefficient of variation of international food prices couldwell fall by one-third if all countries agreed today to cease theirdomestic price-insulating practices. And recall that this is additionalto the contribution that trade liberalization could make to reducinginternational food price volatility through ‘thickening’ internationalfood markets (discussed above in Section 3.1).

3.3. How much do trade policy responses exacerbate international

price spikes?

With the help of some simplifying assumptions, it is possibleto estimate without a complex stochastic simulation model theextent to which government trade policy reactions contribute toan international price spike such as in 2008 or in 1974 forindividual commodities. Martin and Anderson (2012) point outthat this can be done by assuming a homogenous product whoseglobal market equilibrium condition, assuming perfect competi-tion and zero trade costs, is

Xi

Si pi

� �þvi

� ��X

iDi pi

� �¼ 0 ð4Þ

where Si is the supply in country i; pi is the country’s domesticprice; vi is a random weather-related exogenous production shiftvariable for that country; and Di is demand in country i (assumedto be not subject to shocks from year to year). Assume further thatborder measures are the only price-distorting policy interventionto be used, in which case we can define a single variable for the

power of the trade tax equivalent, Ti¼(1þti) where ti is country i’srate of tax on trade.

Totally differentiating Eq. (4), rearranging it, and expressingthe results in percentage change form yields the followingexpression for the impact of a set of changes in trade distortionson the international price pn, assuming (this is relaxed below) thatthe policy changes are independent of the exogenous supplyshocks:

pn¼

PiHivi þ

Pi Higi� GiZi

� �T iP

i GiZi� Higi

� � ð5Þ

where pn

is the proportional change in the international price; vi

is an exogenous stochastic shock to output such as might resultfrom above or below average weather; Zi is the price elasticity ofdemand; gi is the price elasticity of supply; Gi is the share, at theinternational price, of country i in global demand; and Hi is theshare of country i in global production. That is, the impact on theinternational price of a change in trade distortions by country idepends on the importance of that country in global demand andsupply (Gi and Hi), as well as the responsiveness of its productionand consumption to price changes in the country (as representedby gi and Zi).

If it is assumed that output cannot respond in the short run,and that inventory levels are low enough that stock adjustmentshave limited effect (as is typically the case in a price spikeperiod—see Wright 2011), then gi¼0. If one further assumes thatthe national elasticities of final demand for the product (Zi) arethe same across countries, then the right-hand term in Eq. (5) –the contribution of the change in trade restrictions to the inter-national price change, call it T – reduces toX

i

GiT i ¼ T ð6Þ

That is, T is just the negative of the consumption-weighted globalaverage of the T

0

is.However, if the changes in trade restrictiveness are not

independent of the exogenous supply (or any other) shocks, then

pn¼ Tþ RþðT n RÞ ð7Þ

from which it follows that R¼ pn�T

� �= 1þ T� �

R, where R refers tothe rest of the influences on pn. In that case, and if the interactionterm is distributed proportionately, the contribution of thechanges in trade restrictiveness to the international price change,in proportional terms, is T= TþR

� �.

Estimates of those indicators are summarized for the keygrains in Table 2. For rice, the cumulative proportional declinein the Nominal Assistance Coefficient, where NAC¼1þNRA/100,is shown in the first row of Table 2 to be 0.37 between 2006 and2008. The comparable numbers for wheat and maize are 0.12 and0.08, respectively. According to World Bank (2012) data, theinternational price of rice increased by 113 percent between2006 and 2008, and the prices of wheat and maize by 70 and83 percent, respectively (middle rows of Table 2). Thus theseestimates suggest that altered trade restrictions during the 2006–2008 period caused international prices to be higher by 0.40 forrice, 0.19 for wheat, and 0.10 for maize (bottom third of Table 2).The unweighted average of these three, at 0.23, is the same as for1972–1974 (first column of Table 2), although the price spikeswere somewhat larger then.

It is possible to apportion those policy contributions betweencountry groups, given each group’s share in global consumptionand the consumption-weighted change in its members’ Ti0’s.Table 3 reports the contributions of high-income versus develop-ing countries, and also of exporting versus importing countries.During 2006–2008, developing countries were responsible for themajority of the policy contribution to all three grains’ price spikes,

Table 2Contributions of policy-induced trade barrier changes to changes in the international prices of key agricultural products, 1972–1974 and

2006–2008.

Source: Anderson and Nelgen (forthcoming).

1972–1974 2006–2008

Consumption-weighted proportional decline in NAC, that is—Ta

Rice 0.56 0.37

Wheat 0.30 0.12

Maize 0.21 0.08

Proportional international price rise, pn

Rice 3.00 1.13

Wheat 1.57 0.70

Maize 1.35 0.83

Proportional contribution of changed trade restrictions to the international price changeb

Rice 0.27 0.40

Wheat 0.23 0.19

Maize 0.18 0.10

a T is the negative of the weighted average of proportional changes in national NACs over the period, using national shares of global

consumption valued at undistorted prices (Gi0 ’s) as weights, where NAC¼1þNRA/100.b The proportional contribution of altered trade restrictions is T = Tþ R

� �, where R is ‘other’ influences and is derived from the equation

pn¼ Tþ Rþ TR

� �, from which it follows that R¼ p

n�T

� �= 1þ T� �

.

Table 3Contributionsa of high-income and developing countries, and of importing and exporting countries, to the proportion of the international

price change that is due to policy-induced trade barrier changes, 1972–1974 and 2006–2008.

Source: Anderson and Nelgen (forthcoming) with the left column coming from bottom one-third of Table 2.

Total proportionalcontribution

High-income countries’contribution

Developing countries’contribution

Importing countries’contribution

Exporting countries’contribution

1972–1974Rice 0.27 0.04 0.23 0.10 0.17

Wheat 0.23 0.15 0.08 0.18 0.05

Maize 0.18 0.14 0.04 0.06 0.12

2006–2008Rice 0.40 0.02 0.38 0.18 0.22

Wheat 0.19 0.09 0.10 0.07 0.12

Maize 0.10 0.05 0.05 0.03 0.07

a Expressed such that the two numbers in each subsequent pair of columns add to the total proportion shown in column 1 of each row.

Table 4Comparison of the domestic price rise with the rise in international grain prices net of the contribution of changed trade restrictions, rice, wheat and maize, 1972–1974

and 2006–2008 (percent, unweighted averages).

Source: Anderson and Nelgen (forthcoming)

International price rise Domestic price rise

Including contribution of

changed

trade restrictions

Net of contribution of

changed

trade restrictions

All

countries

Developing

countries

High-income

countries

Importing

countries

Exporting

countries

1972–1974Rice 300 220 59 72 27 57 63

Wheat 157 121 64 77 55 58 103

Maize 135 111 49 48 52 48 75

2006–2008Rice 113 68 56 48 74 45 72

Wheat 70 56 77 65 81 62 87

Maize 83 75 73 62 82 75 68

K. Anderson / Global Food Security 1 (2012) 157–166164

whereas in 1972–1974 the opposite was the case except for rice.As for exporters versus importers, it appears exporters’ policieshad the majority of the influence, other than for wheat in the1970s, but importers made a very sizeable contribution as well.

In the light of these estimates, how effective were changes intrade restrictions in limiting the rise in domestic prices? The

proportional rise in the international price net of the contributionof changed trade restrictions is R/(TþR). That fraction, whenmultiplied by the international price rise shown in the middlepart of Table 2, is reported in the second column of Table 4, whereit is compared with the proportional rises in the domestic price inour sample of countries. The numbers for 2006–2008 suggest

K. Anderson / Global Food Security 1 (2012) 157–166 165

that, on average for all countries in the sample, domestic pricesrose slightly more than the adjusted international price changefor wheat, and only slightly less for maize and just one-sixth lessfor rice. The extent of insulation during the 2006–2008 spike wasgreater in developing countries, which is consistent with thefinding from the middle columns of Table 3 that their policy-makers contributed more to the price spike than governments ofhigh-income countries (although countries are weighted equallyin Table 4, unlike in Table 3 where shares of global consumptionare used to calculate weighted averages). This recent experiencecontrasts with the early 1970s, when high-income countries weremuch more insulated than recently. The extent of domestic pricerises was greater in exporting than importing countries, exceptfor maize in the 2006–2008 spike. These results suggests that thecombined responses by governments of all countries have beensufficiently offsetting as to do very little to insulate domesticmarkets from this recent international food price spike.

4. Policy implications

The above estimates support the a priori reasoning in Section 2that national trade restrictions add non-trivially to internationalfood price volatility in at least two ways: through ‘thinning’international food markets, and through ‘insulating’ domesticfood markets from international price fluctuations. Togetherthose policy attributes magnify the effect on international pricesof any shock to global food supply or demand.

The solution to the first (‘thinning’) problem is simple eco-nomically if not politically: it is for countries to open further theirmarkets to food trade. The political difficulty and the adjustmentcosts associated with doing that are minimized if countries canagree to liberalize their food and agricultural markets multi-laterally, and to do so at the same time as non-agriculturalmarkets are liberalized. That was what happened in the UruguayRound, and it is what has been aspired to by members of theWorld Trade Organization (WTO) via their Doha DevelopmentAgenda (DDA). After more than a decade of negotiating, the DDAhas come to a standstill, but there is still hope that the talks willbe revived. Meanwhile, various plurilateral negotiations onoptions for regional integration and free-trade areas are underdiscussion, but the benefits from them are always far smaller thanthose from a multilateral agreement and often agriculture is thesector liberalized least (Anderson, forthcoming).

The optimal solution to the second (‘insulating’) problem alsoinvolves the WTO. In a many-country world, it is clear from theabove analysis that the trade policy actions of individual coun-tries can be offset by those of other countries, potentially to thepoint that the interventions become ineffective in achieving theirstated aim of reducing domestic food price volatility. This is aclassic international public good problem that could be solved bya multilateral agreement to restrain the use of variable traderestrictions and instead use domestic measures to avert losses forsignificant groups.

One of the original motivations for the Contracting Parties tosign the General Agreement on Tariffs and Trade (GATT, WTO’spredecessor) was to bring stability and predictability to worldtrade. To that end the membership has adopted rules to encou-rage the use of trade taxes in place of quantitative restrictions ontrade (Article IX of the GATT), and has managed to obtain bindingcommitments on import tariffs and on production and exportsubsidies as part of the GATT’s Uruguay Round Agreement onAgriculture. However, those bindings continue to be set wellabove applied rates by most countries, leaving plenty of scope forvarying import restrictions without dishonoring those legal

commitments under WTO. Meanwhile, there are no effectivedisciplines on export taxes, let alone bindings.

In the current Doha round of WTO negotiations there areproposals to phase out agricultural export subsidies as well as tobring down import tariff bindings, both of which would contri-bute to global economic welfare, the ‘thickening’ of food andagricultural markets, and thereby more-stable international foodprices. However, proposals to broaden the Doha agenda to alsointroduce disciplines on export restraints have struggled to dateto gain traction. A proposal by Japan in 2000, for example,involved disciplines similar to those on the import side, withexport restrictions to be replaced by taxes and export taxes to bebound and gradually phased down. A year later Jordan proposedeven stronger rules: a ban on export restrictions and, as proposedfor export subsidies, the binding of all export taxes at zero.However, strong opposition to the inclusion of this export itemon the Doha Development Agenda has come from several food-exporting developing countries, led by Argentina (whose farmexports have been highly taxed since its large currency devalua-tion at the end of 2001). This reflects the facts that traditionallythe demandeurs in WTO negotiations have been dominated byinterests seeking market access, and that upward price spikes areinfrequent. Yet the above analysis reveals the need for symmetryof treatment of export and import disciplines in the WTO.

Moreover, developing countries have added to the WTO’s DohaAgenda a proposal for a Special Safeguards Mechanism (SSM) thatwould allow those countries to raise their agricultural importbarriers above their bindings for a significant proportion of farmproducts in the event of a sudden international price fall or animport surge. This is the exact opposite of what is needed by wayof an international public good to reduce the frequency andamplitude of downward food price spikes (Hertel et al., 2010).Evidence provided by Anderson and Nelgen (forthcoming) for themid-1980s suggests that if food-importing countries were toexercise that proposed freedom when international prices slump,food-surplus countries would respond by lowering their exportrestrictions – thereby weakening the efforts of the food-importingcountries to insulate their domestic markets from the interna-tional price fall – and further depressing that price.

If WTO member countries were to liberalize their food tradeand bind their trade taxes at low or zero levels, and assumingthere would still be occasions when international food pricesspike, what alternative instruments could they use to avert lossesfor significant groups in their societies? A standard answer fromeconomists is that food security for consumers, most notably foodaffordability for the poor, is best dealt with using generic socialsafety net measures that offset the adverse impacts of a widerange of different shocks on poor people – net sellers as well asnet buyers of food – without imposing the costly by-productdistortions that necessarily accompany the use of nth-best tradepolicy instruments for social protection. That might take the formof targeted income supplements to only the most vulnerablehouseholds, and only while the price spike lasts.

In the past this standard answer has been rejected by devel-oping country governments, who claim that domestic measurescannot be triggered quickly enough, or are too costly fiscally oradministratively. However, recall that in half the cases consideredabove, governments reduce their trade taxes, so even that inter-vention could be a drain on the finance ministry’s budget in thosecases. Moreover, the digital information and communicationtechnology revolution has made it possible for conditional cashtransfers to be provided electronically and thus quickly as directassistance to even remote and small households, and even to themost vulnerable members of those households (typically womenand their young children—see, e.g., Fiszbein et al. (2009), Adatoand Hoddinott (2010), and Skoufias et al. (2010). Many middle-

K. Anderson / Global Food Security 1 (2012) 157–166166

income countries already have such mechanisms in place forsocial protection purposes, and it will become ever-cheaper forpoorer countries to do likewise as electronic banking spreads inthe years ahead.

It is time to move away from traditional national governmenttrade policy reactions to food price spikes not only because,collectively, they are not very effective in stabilizing domesticprices, but also because they add to international price volatilityby reducing the role that trade between nations can play inbringing stability to the world’s food markets. As well, every timeexporters restrict their trade when prices spike, it provides food-importing countries with another reason to become less import-dependent/more protectionist, thereby adding to the ‘thinning’problem. Those adverse aspects will become ever more importantas climate change increases the frequency and severity of extremeweather events—and if current biofuel policy responses to itcontinue to strengthen the link between food and volatile fossilfuel markets, as Hertel and Beckman (2011) suggest is distinctlypossible.

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