Food and Free Trade
by Nancy Birdsall, Center for Global Development
and Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Wall Street Journal Asia
April 25, 2008
© Wall Street Journal Asia
Costco and Sam's Club, two giant American retailers, just announced that they are limiting purchases of rice by their customers. Meanwhile, in the developing world, the World Bank estimates soaring food prices threaten to put 100 million people back into the ranks of the hungry, threatening to reverse decades of progress that prosperity had achieved.
Rising food prices may well signal the onset of a new kind of era, in which elevated food prices are a long-term reality driven by three key changes: rapid demand for more and more energy-intensive food in fast-growing Asia; the competition that new biofuels are posing for land; and the effect of climate-change-induced drought on global agricultural supplies. And while Asia is one of the dynamos of the world economy, it is also most vulnerable to food price increases: Most of the world's poorest people still live there, and the price of rice, a staple of the consumption basket in Asia, has risen especially sharply in recent days.
The leaders of the world's largest economies have agreed to address the food issue at their next G8 summit in June. What should they do? Food aid will be the first line of help but it can be only a short-term palliative. Countries will have to refocus to boost agricultural supply, including more research and development, and more investment in water and irrigation. But all these will take time to have an impact.
And none will, by themselves, be a long-term solution. To prevent future crises, the fundamental incentives in agriculture need to be fixed. That in turn means efficient and food-friendly trade policies around the world. But not only are we far away from that objective, we are moving in the wrong direction.
Consider two key trade policies that are aggravating the current food crisis. Biofuel mandates in Europe and subsidies in the United States, along with tariff barriers against alternative sources of biofuels, are encouraging farmers to divert food from hungry mouths toward fuel production. Corn-based ethanol production in the United States has increased fourfold since 2000 and now takes up close to 20 percent of total corn production. This not only takes corn—an important human staple and animal feed component in its own right—off the table or out of the trough, but it also leads farmers to switch to corn, thus diminishing supply of other staples like wheat and soy, and driving up those prices as well.
Meanwhile in the developing world, tightened restrictions on exports of foodstuffs are obstructing a long-term solution, even as import barriers come tumbling down. Each country is trying to keep domestic supplies high on the justifiable grounds of food security. But by holding prices artificially low, export bans keep the market from sending accurate demand signals to domestic farmers. This penalizes farmers, who can't get the full, world price for their produce. That impairs efficiency, and undermines the incentives for investments that can increase long-term supply. Topping it all off, such measures subsidize high-income households, not just the poor.
Moreover, as more countries implement export controls, global supply contracts even further, pushing prices up by at least 10 percent and possibly much more. A vicious spiral lurks here, as panic- and policy-induced speculative hoarding drives world prices even higher.
Without a collective agreement to undo these restrictions, the world's poor, already at terrible risk, will be even worse off. Industrial countries should eliminate any practices—including all forms of ethanol subsidies and tariffs—that divert food production toward biofuels. In turn, developing-country food producers should eschew export restrictions and allow market forces to help boost agricultural supply. The assurance that all countries will do so should give each developing-country government incentives to better target assistance to the most affected and vulnerable consumers in their own countries.
Unfortunately, the ongoing Doha Round of trade negotiations won't on its own address these problems. And that's not just due to the poor prospects for completing these negotiations in the current environment in the United States when the antitrade lurch during the primary season has made even the US-Colombia free trade agreement difficult to ratify.
More important is that in the Doha Round, the key trade policy culprits—biofuel subsidies and export restrictions—are not the focus of negotiations. The Round has been devoted to traditional forms of agricultural protection—trade barriers in the importing countries and subsidies to food production in producing countries—which are becoming now less important as food prices have soared and import barriers have declined. While concluding the Round would be good for the world and the trading system and would help secure long-run supply incentives for developing country food producers, it makes no immediate contribution to alleviating the current crisis.
It sounds counterintuitive, but the challenge of the food crisis affords a win-win opportunity: to collectively agree to policies that promote trade and efficiency while also boosting agricultural production and reducing the vulnerability of the poorest around the world. The challenge for world leaders is to seize that opportunity.