Tuesday, February 08, 2011

Climate Change and World Trade in Agricultural Products

International trade will be a leading example of adaptation to climate change.  Not knowing much about trade in agricultural products, but being worried about extreme weather in places such as Russia and China, I have turned to experts to teach me about climate change's implications for international agricultural trade.

Professor Jeffrey Reimer of Oregon State University was kind enough to write a guest blog post on this key subject. Here it is.

"The fact that climate change and agriculture are now being discussed in the popular press and in the blogosphere means that some of the worst predictions of just a few years ago are starting to come true.

Back when the term “global warming” was just entering our lexicon, it was commonly assumed that agriculture could largely benefit from this change: crops yields tend to rise with more CO2 in the air.

The replacement of the term “global warming” with “climate change” signifies that we now expect much more than just a gradual increase in mean temperature: we now expect that devastating, unpredictable swings in temperature and precipitation could become more common.

Droughts, floods, hot spells, and cold spells have long been the bane of farmers.  All the agronomic advances of the past century have failed to eliminate the extensive inter-annual variability that exists for rainfed crop yields.  This variability in yields could get much worse if even the most conservative estimates of climate researchers come true.

What does this mean for food prices?  It means that they will be much more volatile if we are unable to export crops from regions where they are abundant in a given year, to regions where they are scarce.

It seems unlikely that every region of the world will have a crop failure at the same time, or a bumper crop at the same time.  Therefore, one would imagine that in a (hypothetical) world with costless international trade, food prices would not be volatile.  With international trade, we effectively diversify away from a small set of domestic farmers, to millions of farmers who grow crops in dozens of different agro-climatic zones, and at different times of the year.

The problem is – and the issue that motivated my research with Man Li of the International Food Policy Research Institute – is that international agricultural trade is very far from this “costless” ideal (Reimer and Li, 2010).  Genuine trade liberalization has not occurred for agriculture; market-insulating tariff and non-tariff barriers remain high.  For many countries the food and agricultural sector remains far and away the most protected sector of the economy.

In my research I’ve found that world trade volumes would need to increase substantially if there is just a small increase in yield variability, modeled as a general broadening of the probability distribution for yields (Counterfactual 1 in Reimer and Li, 2009).  As long as the world trading system remains flexible, however, people’s welfare would decline only very modestly in most of the 21 countries in our sample.  I find this using a specially adapted Ricardian comparative advantage trade model based on the approach of Eaton and Kortum (2002).

If trade barriers are enacted such that trade volumes are restricted to current volumes, however, I find that a great deal of suffering is likely to occur, particularly for lower-income food-importing countries (Counterfactual 2 in Reimer and Li, 2009).

While this latter scenario is very troubling, it is also the scenario that may be most realistic.  During the food price runup of 2007-2008, a number of exporting countries actually cut off their supply to the rest of the world.  The following are just a few of the countries that adopted export quantitative restrictions or export taxes: Argentina, China, Egypt, India, Indonesia, Russia, Ukraine, and Vietnam.  This exacerbated the thinness of a world crop market that was already highly insulated, and the result was much suffering and street riots in a number of food-importing countries.

As I write this I am reading in the news that not only are food prices soaring, there is plenty more than can go wrong this year:  China is experiencing a major drought while South Africa is experiencing the worst flooding in decades.  They are both key world food producers.  If China in particular needs to step into the international market to buy food this year (which it traditionally has not had to do very much), it is hard to imagine how high food prices could soar.

International organizations such as the Food & Agriculture Organization (FAO) are pleading for food exporting countries to avoid the export restrictions of 2007-2008.  The FAO is also reminding food-importing countries to have plenty of foreign reserves on hand for when they need to step into the international food market. 

This underscores my point that international trade is a low-hanging fruit by which to address climate change.  It seems clear to me that increased variability is here, and that freer international agricultural trade is a straightforward, low-tech way by which we can adapt to it."


References:

Jeffrey J. Reimer and Man Li. 2009. “Yield Variability and Agricultural Trade.” Agricultural and Resource Economics Review 38(2).

Jeffrey J. Reimer and Man Li. 2010. “Trade Costs and the Gains from Trade in Crop Agriculture.” American Journal of Agricultural Economics 92(4):1024-1039.

Jonathan Eaton and Samuel Kortum. 2002. “Technology, Geography, and Trade.” Econometrica 70(5):1741-1779."


Bio:

Jeffrey Reimer is a faculty member in the Department of Agricultural and Resource Economics at Oregon State University.  His degrees from the University of Illinois and Purdue University.  He is an economist who specializes in international trade and markets.  His recent research examines intermediate input trade, yield variability and agricultural trade, how consumer preferences affect international trade patterns, and how trade costs and barriers affect importing and exporting.  He has worked as a consultant for the U.S. Department of Agriculture, World Bank, International 

2 comments :

Big Russ said...

This article is flawed. Correct me if I'm wrong, but I believe main premise is that we should increase trade liberalization so that we can increase the access to food on a international scale, while also decreasing the price of food. It is my belief that while this would in fact occur the winners in this game would not be the regular, so to speak Joe the Plumbers of the world, but instead multinational corporations and agro-companines. You idea assumes that making food cheaper will increase access for everyone to it. That is WRONG! Due to technological advances, in this day and age the world already produces enough food to feed everyone. The problem within our economic/political systems is that it is not distributed correctly. Unfortunately, while advocating free trade or liberalization MIGHT address the problem volatility, I do not believe that it will do anything to address access to food.

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