CEPII, Recherche et Expertise sur l'economie mondiale
Trade Policy Coordination and Food Price Volatility

Christophe Gouel

 Highlights :
  • The countercyclical adjustments of trade policies with food prices are an important contribution to the volatility of food price.
  • We study in a theoretical model the features of an international agreement to discipline their use.
  • Even in cooperation, it is not possible to exclude deviation from free trade as incentive to deviate from cooperation could become too high in free trade in case of large shocks.
  • Given that the distribution of staple food prices is positively skewed, food exporter will occasionally face large incentive to deviate from free trade, thus, disciplining export taxes will be more difficult than tariffs in trade agreements.

 Abstract :
Many countries adjust their trade policies countercyclically with food prices, to the extent that the use by numerous food exporters of export restrictions has occasionally threatened the food security of food importing countries. These trade policies are inconsistent with the terms-of-trade motivation often retained to characterize the payoff frontier of self-enforcing trade agreements, as they can worsen the terms of trade of the countries that apply them. 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: the latter when prices are high and the former when prices are low. Since staple food prices tend to have asymmetric distributions, with more prices below than above the mean but with occasional spikes, a self-enforcing agreement generates asymmetric outcomes. Without cooperation, an importing country uses more frequently its trade policy because of the concentration of prices below the mean, but an exporting country has a greater incentive to deviate from a cooperative trade policy because positive deviations from the mean price are larger than negative ones. Thus, the asymmetry of the distribution of commodity prices can make it more difficult to discipline export taxes than tariffs in trade agreements.

 Keywords : commodity price stabilization | export restrictions | repeated game | WTO

 JEL : F13, Q17, Q18
CEPII Working Paper
N°2014-23, December 2014

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 Fields of expertise

Trade & Globalization