Distortions to Global Agricultural and Food Markets

Market distortions in global trade occur when a govern­ ment creates policies that increase or lower prices of imported and /or exported goods. When prices are distorted, consumers pay either less or more than they would have if the price-altering policies were not in place. In agricultural and food mar­ kets, governments tend to create pricealtering trade policies especially when global agricultural and food prices rise dramatically. The latter happens most often when the supply of the crop or food product is disrupted, whether by governmental “food-security” mea­ sures, weather, or new policies, such as incentives that motivate farmers (and downstream operators) to allocate crops for biofuels rather than for food. When politicians seek to shield con­ sumers from the effects of price increases by increasing export taxes, global price volatility often worsens. Other countries may respond with similar measures, so that market distortions in individual countries combine to generate sudden global price spikes that alter patterns of food production and consumption and create political turmoil. In particular, rapid increases in the prices of staple commodities (such as wheat, corn, and rice) have a disproportionally severe effect on the world’s poorest people. The “disarray in world agriculture” that market distortions create has manifested itself in overproduction of agricultural products in high-income countries and underproduction in lowincome countries. This also means that there has been less international trade in such products than would occur under the counterfactual scenario of free trade. In 2004, country-specific agricultural policies accounted for an estimated 70% of the global welfare cost of all merchandise trade distor­ tions, even though the upstream farm production contributed only 6% of global trade and 3% of global GDP. Although many countries have recently begun to adjust their agricul­ tural and trade policies in order to mini­ mize their adverse global impact, these reforms have not kept up with the pace of globalization in the non-agricultural sectors of the world economy. Economic development is typically associated with some sectors within a country growing and some declining faster than others. Historically, such changes have often led governments to intervene via a broad array of policy instruments: distortions to input markets (largely subsidies, plus controls on land use), production quotas, marketing quotas, target prices, price subsidies or taxes in output markets, and border mea­ sures that directly tax, subsidize, or quantitatively restrict international trade. Such measures, along with mul­ tiple exchange rates, account for at least three-fifths of governmental agri­ cultural assistance globally. Because trade measures also tax consumers (and welfare costs are proportional to the square of a trade tax), these mea­ sures are responsible for an even larger share of global welfare cost and agri­ cultural welfare-reduction indexes.