Trade policy coordination and food price volatility

Many countries adjust their trade policies countercyclically to food prices, to such extent that the use of export restrictions by numerous food exporters has occasionally threatened the food security of food importing countries. These trade policies are not consistent with the terms-of-trade motivation often retained to characterize the payoff frontier of self-enforcing trade agreements, as these policies can worsen the country’s terms of trade. This paper analyzes trade policy coordination when trade policies are driven by terms-of-trade effects and a desire to reduce domestic food price volatility. This framework implies that importing and exporting countries have incentives to deviate from cooperation at different periods: exporter when prices are high and importers when prices are low. Since staple food prices tend to have positively-skewed distributions, with more prices below mean than above but with occasional spikes, a self-enforcing agreement generates asymmetric outcomes. Although an importing country suffers less in the trade war than an exporting country, this latter has larger incentives to deviate from a cooperative trade policy because positive deviations from mean price are larger than negative ones. Thus, because of the asymmetry of the distribution of commodity prices, it may be more difficult to discipline exports taxes than tariffs in trade agreements.

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 Record created 2017-04-01, last modified 2019-08-29

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