Category Archives: Non-Tariff Barriers

Why high oil prices will dampen international trade

Contra Paul Krugman, who says that “higher fuel prices are putting the brakes on globalization,” David Jacks, Christopher Meissner, and Dennis Novy argue in their Vox column on trade costs that oil prices won’t have much impact:

In their survey of trade costs, Anderson and van Wincoop (2004) find that the tariff equivalent of international trade costs is about 74%. Transport costs only make up a third of these trade costs. The rest consists of border-related costs such as informational barriers, tariffs and red tape. Even if oil prices directly feed through to transport costs, the impact on overall trade costs is limited.

Here are Anderson and van Wincoop:

We combine 9-percent time costs and 10.7 percent U.S. average direct transport costs for our representative full transport cost of 21 percent (1.107∗1.09-1).

Both costs are relevant, as higher oil prices have caused container ships to cut their top speed by 20% to save fuel. The 10.7% figure for direct transport costs comes from a paper by David Hummels, in which he estimates an all-commodities trade-weighted average transport cost for freight shipping. The US average is 10.7%.

But Hummels’ estimates are the product of a cross-sectional data set for 1994. Back in those days, oil was about $15 per barrel. There is no reason to believe that freight costs will remain confined to an approximately 10% share when the price of oil increases tenfold!

Jeff Rubin, author of a widely cited CIBC study, says that “the cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel.”

Jacks, Meissner, and Novy may be right that demand for shipping will induce productivity-enhancing technological innovations, but I thought that was the story of The Box. In the short run, at least, high oil prices mean that international trade will shrink – the world is bigger and spikier.

End biofuel subsidies

Kim Elliott says that precise estimates aren’t key to the biofuels debate: “Whether biofuels are responsible for 75 percent of the recent food price hikes, as Don Mitchell contends, or 30 percent, or even just 5 percent, tax incentives and subsidies for biofuels make no sense.”

Doha and the food crisis

Agricultural liberalisation in the European Union and the US is good for several reasons, but it will not help moderate the food crisis. A key component of the proposed Doha agreement is a substantial reduction in agricultural subsidies. This would reduce the supply of grains from some countries that subsidise them and increase it from other countries, especially in the Cairns group. The net effect on supply would be negative.

— Jagdish Bhagwati and Arvind Panagariya in the FT.

Against biofuels

Kim Elliott dares anyone to defend US biofuel subsidies:

The assertion by American officials that biofuels have contributed only 2-3 percent to the rise in food prices is consistent with estimates of the impact on food prices in the United States, where most foods are processed and the value of the crop in the final retail product is a tiny fraction. In poor countries, where minimally-processed staple grains make up a much larger share of calories consumed, the impact of recent food prices is much larger.

Nor is it true, as asserted by congressional defenders of ethanol subsidies, that corn-based ethanol cannot have a large effect on food prices because it uses feed corn, which people do not eat. That is true, but people do eat poultry, eggs, and dairy products from animals fed on corn; increased production of corn also means reduced production of other crops, thus raising their prices, and high corn prices lead people to substitute other food products, again putting upward pressure on other crop prices.

Against biofuels

C. Ford Runge and Benjamin Senauer attack ethanol in FA:

Although controversy remains over how much of the food price increase since 2006 can be attributed to biofuels, their effects cannot be overlooked. In 2008, 30 percent of the U.S. corn crop will be used for ethanol. Although economic growth in developing countries (especially India and China) and poor crop conditions in certain parts of the food-exporting world (such as Australia) are part of the explanation for rising commodity prices worldwide, neither offers constructive opportunities for policy redirection. By contrast, the panoply of subsidies, tariffs and mandates protecting the biofuels sector, especially in the United States and the European Union, is ripe for reform…

The policy response to these pressures, in both rich and poor countries, has not been encouraging. Rather than reducing the mandates, subsidies, and tariffs that buttress the ethanol industry, the U.S. government has larded new agricultural legislation in Congress with further subsidies and shifted blame to other countries (or to economists). The one token reduction came in the recent farm bill, which trimmed the ethanol subsidy from 51 to 45 cents per gallon–hardly a significant change…

Biofuels… [threaten] both food security and the natural environment. It is now time for governments to respond, not with more trade distortions and subsidies, but by ending the failed policies that have created an artificial industry that is emptying the stomachs and purses of the world’s poor.

The ag subsidies exacerbating this food crisis

Kim Elliott highlights a policy instrument readily available to policymakers to address the food prices crisis:

While it is hard to know exactly how much biofuels are to blame for rising food prices, especially for wheat and rice, subsidies for biofuel production are one of the few policy levers available in the short run to relieve demand pressures. So it’s odd that a new World Bank analysis of responses to rising food prices prepared for the Development Committee stops short of recommending changes in the aggressive promotion of biofuel use. Most of the note focuses on ways that developing countries can cope, and that the World Bank and donors can help. The short discussion of bio-fuels focuses on the bank’s role in “informing the discussion” only to conclude:

Trade-offs between energy security, climate change and food security objectives need to be carefully monitored and integrated into both food and bio-fuel policy actions.

This rather tepid response overlooks the many scientific analyses that raise serious questions about the environmental benefits of the current generation of biofuels, especially corn-based ethanol. It has long been known that substituting corn-based ethanol for gasoline does little to cut greenhouse gas emissions because producing it is so resource-intensive. A literature review from the Congressional Resource Service concluded that using corn ethanol cuts net greenhouse gas emissions by only about 20 percent because of the heavy use of fertilizers and pesticides, which are themselves energy-intensive and cause water pollution besides.

Worse, recent research published in Science magazine suggests that when land-use changes are taken into account, production of corn-based ethanol actually leads to a net increase in greenhouse gas emissions…

[I]n the midst of the current crisis, and given the new evidence on the perverse effects on the environment, continuing to subsidize and promote the use of food crops for fuel is simply unconscionable.

Given the success of the ethanol lobby in spite of harsh criticism from economists over the years, I have little hope that policymakers will acknowledge the error of their ways even in the midst of this crisis.

Debunking ag liberalization myths

The IMF’s Stephen Tokarick dispels some agricultural trade liberalization myths in the latest issue of the JEP:

The implicit or explicit argument that often follows hard upon the heels of the inflated estimates of the size of high-income country farm “subsidies” is that the support to farmers in high-income countries is extremely damaging to poor, developing countries— even more damaging than tariffs levied against developing-country exports. However, the effects of liberalizing trade in agricultural products is likely to be both smaller and more heterogeneous than such statements suggest. Some low-income countries are net exporters of agricultural products; others are net importers. The degree of substitutability between foreign and domestic agricultural products also varies substantially.

Those who oppose agricultural trade liberalization have their own favorite misstatements. One common claim often made by European trade negotiators is that if high-income countries cut agricultural tariffs worldwide, this step would erode the special treatment— often called “trade preferences”—that high-income countries currently make available to many of the lowest-income countries. As a result, they argue that the lowest-income countries could end up worse off as a result of agricultural trade liberalization. However, analysis shows that the magnitude of this effect, if it exists at all, is likely to be very small, and not nearly enough to counterbalance the more positive benefits of agricultural trade liberalization.

Of course, if you are a regular reader of Trade Diversion, you already knew that Oxfam’s big numbers conflate subsidies with tariffs and quotas, liberalization won’t have massive benefits for LDCs, the effects will be heterogeneous, and liberalization gains will exceed preference erosion losses.

Here’s a previous episode of myth-busting.

Obama on farmers

As a senator from Illinois, Obama loved the corn lobby, argues Emmanuel. But perhaps as president, Obama would be enjoy a broader base of support and not have to mollify the farm lobby? Then he’d push sensible economic policies?

Look at this gem Tim Lee found:

Encourage Young People to Become Farmers: Obama will establish a new program to identify and train the next generation of farmers. He will also provide tax incentives to make it easier for new farmers to afford their first farm.

I realize that no politician would say this, but the fundamental problem in agriculture is that there are too many farmers. We prop up farms that should have gone out of business a long time ago for no good reason. Why on Earth would the federal government want to spend money encouraging people to go into an already over-staffed industry? Will we also have a program to encourage people to go into the typewriter-repair business?

Less egregiously, Obama proposes a $250,000 subsidy payment cap, but the White House is pushing for $200,000.