Is Free Trade Compatible with Global Food Security? Some Lessons from the 2008 Crisis
For the overwhelming majority of economists, the question does not arise. Free trade is supposed to generate maximum prosperity because it is supposed to optimally allocate the planet's scarce resources: locate production where costs are lowest and stabilize supply by allowing for compensation between countries' surpluses and deficits.
This judgment seems to be confirmed by the crisis that occurred in 2008 on international markets: the prices of cereals and vegetable oils more than doubled, provoking urban riots in some forty developing countries. However, this crisis is at least partly linked to policies that disrupted international trade.
In 2008, breaches of free trade exacerbated the crisis
On the one hand, export restriction policies. Faced with rising international grain prices, some exporting countries chose to curb or block their exports in order to maintain prices at a reasonable level on their domestic markets. By reducing supply, these measures contributed to exacerbating price increases on international markets. This prompted other countries to block their exports in turn. This led to a veritable "bubble" of export prohibitions on the rice (see Fig. 1) and wheat markets. After the crisis, many experts and international organizations pointed to export restriction measures as being responsible for the 2008 crisis. They logically proposed strengthening WTO disciplines on this type of measure (current disciplines are extremely weak).
On the other hand, public policies supporting biofuels. These policies have been singled out, particularly the United States' policy, which has resulted in colossal quantities of corn being diverted to the bioethanol sector, thus contributing significantly to the reduction of American exports and the increase in international prices. The international community has been alarmed that cars are being "fed" at the expense of human beings. Support for biofuels takes multiple forms: incorporation mandates (setting a minimum percentage of biofuels in gasoline sold at the pump), but also tax incentives, loans, and subsidies. Incorporation mandates rigidify demand: even when the price of corn rises sharply, significant quantities of corn must be used to produce biofuels. Moreover, given the support it receives, the use of corn to produce ethanol is sometimes a profitable activity in the United States. Any increase in energy prices then automatically leads to an increase in the quantity of corn used by the bioethanol sector, which pushes the price of corn upwards, until it reaches the threshold beyond which its use to produce ethanol is no longer profitable (see Fig. 2). The solution therefore seems to be to remove support for the biofuel sector, in order to break the link between energy prices and corn prices.
Two policies, then: export restriction measures and subsidies for the corn-bioethanol industry in the United States. Both policies significantly contributed to the 2008 crisis on international markets. The marked market dysfunction observed in 2008 therefore seems to be explained by inappropriate policies. Banning these policies should therefore eliminate trade distortions and restore market efficiency.
Except that reality seems a little more complex...
However, free trade cannot be the solution.
Consider the case of export restriction measures. These measures undoubtedly contributed to exacerbating the crisis on international markets. But at the same time, they allowed the countries that implemented them to protect themselves from rising international prices: for example, the ban on exports of non-basmati rice, introduced in India during the 2008 crisis, helped maintain wheat prices on the Indian domestic market, despite the sharp rise in international wheat prices. This is not insignificant since 25% of the world's undernourished people live in India. On a global scale, the effect of export restriction measures on food security is therefore ambiguous.
Experts have simulated what the impact of the 2008 crisis on global poverty would have been if no country had restricted its exports or boosted its imports.[2]They found that the impact on poverty would not have been significantly different from what it actually was in 2008. A surprising, even staggering, result: the status quo in trade policies would have generated as much poverty as the bubble of export prohibitions and panic imports described in Figure 1! This result is, however, quite easily explained if we consider that the same increase in cereal prices generates much more poverty in poor countries than in rich countries: on the one hand, because a greater number of households are barely above the poverty line; on the other hand, because the purchasing power of these households decreases more, cereals representing a larger share of their expenditure. However, in a situation of free trade (and more generally of stable trade policies), when the international price increases, the price increases in the same proportion in all countries (except for transport costs). Which, from the point of view of global poverty, is not an optimal situation. Trade measures taken in response to the crisis are therefore likely to have a beneficial effect on poverty if they result in lower price increases in poor countries, even if this implies higher price increases in rich countries.
The same reasoning applies not to poverty but to food insecurity. In low-income countries, many households with relatively satisfactory food consumption are likely to fall into food insecurity if their purchasing power declines. This happens in the event of a sharp rise in cereal prices, given the weight of these products in their expenditures. Since free trade (or more generally the absence of emergency trade measures) induces a uniform transmission of price increases in all countries, this is not an optimal scenario from the perspective of global food security.
Let us now consider the case of biofuels. We have seen that in situations of tension on grain markets, the use of corn to produce biofuels can be very damaging to food security. The solution usually proposed is to remove support for the biofuel sector. However, let us imagine that the production of ethanol from corn becomes profitable without any support (this is not an unrealistic hypothesis but, according to some studies, a likely scenario).[3]). In this case, would it be said that biofuel production is no longer harmful to food security since it is guided solely by market signals? Of course not. The problem is therefore not linked to the existence of public support but to the fact that the free play of markets can lead to a significant proportion of cereals being used to produce fuel, even in situations of price surges that are harmful to food security. The solution cannot therefore be limited to letting the markets regulate biofuel production. Some form of public regulation is necessary. This could take different forms: capping the quantity of corn that can be used to produce biofuels or governments' right of pre-emption over all corn purchases by the biofuel industry.[4]These measures would only be activated during periods of crisis, that is, when the international price of corn exceeds a threshold defined in advance (and regularly updated).
As a conclusion…
Let us now return to our initial question. Would moving closer to free trade (through trade negotiations) be beneficial to global food security? In light of the lessons of the 2008 crisis, this is doubtful. Some regulation therefore seems necessary. One interesting option would be to prevent or limit the use of corn to produce biofuels when the international price of corn exceeds a certain threshold. Another option (not exclusive of the previous one) relies on trade policies. We have seen that both free trade and the anarchic use of export prohibition measures (as in 2008) lead to rather poor results in terms of food security. But between these two extremes, there are a multitude of more measured trade policies that could perhaps improve global food security. This could, for example, involve only authorizing export restrictions under certain conditions (for example, when the country's domestic price has increased by a certain percentage). In any case, free trade should no longer be considered a desirable horizon in trade negotiations at the WTO or elsewhere, at least when it comes to cereals and other basic foodstuffs.
[1] Headey D (2011). Rethinking the Global Food Crisis: The Role of Trade Shocks. Food Policy 36, 136-146.
[2] Anderson K, Ivanic M, Martin W (2014). Food Price Spikes, Price Insulation and Poverty. In The Economics of Food Price Volatility, Jean-Paul Chavas, David Hummels, and Brian Wright, University of Chicago Press.
[3] HLPE (2013). Biofuels and food security. A report by the High Level Panel of Experts on Food Security and Nutrition of the Committee on World Food Security, Rome 2013.
[4] Wright B (2009). International Grain Reserves and Other Instruments to Address Volatility in Grain Markets. Policy Research Working Paper 5028, World Bank, Washington, DC.
