The "free trade reduces prices" fallacy, yet again

This time the culprit is Tyler Cowen. In his column for the New York Times today, Cowen argues that freer trade in food commodities such as rice would boost global supplies and help reduce prices.  He is probably right about the first, but not about the second. The effect of freer trade on domestic food prices depends on whether a country is a food importer or exporter.  Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers.  Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality. 

Trade works by relieving the relative scarcity of goods.  The key here is the term "relative."  Food importing countries are food scarce countries, and as they open up to trade, the relative price of food falls.  But if you are Thailand or Argentina, where other goods are scarce relative to food, freer trade means higher relative prices of food, not lower.  And all the induced efficiency benefits and short- vs. long-run effects that Cowen talks about have no bearing on this conclusion: in the end some countries have to be net importers, and others net exporters.

Comments

[paine]

dani
still a loyal reader
but nothing to add
so no comments

don't want
to become one of those nascar like commenters here

ever circling
the same simple slanted oval of a track

lap after lap

ever and always turning
in only one way and one direction

in my case

hard left

ps
i get my need to nascar
out of my system
over at economist's view

[ivan janssens]

If free market policies don't work, we can always increase export subsidies. These should be bad news for protectionist countries like Argentina and India, but good news for food importing countries. Let's try some dumping, like the Chinese did with textile products.

By the way I can see nothing wrong with this:

"Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality."

If this is the result of free rade, then this makes the case for it even stronger than when it just lowered prices. Isn't this what we want? Lower prices for food importing nations and higher prices for food exporting ones?

[dsquared]

Barkley - surely the issue is that there are plenty of countries which are small net rice importers at present but which would become rice exporters if their export controls were lifted, with more or less disastrous consequences domestically?

I also think Dani's chosen misleading examples in Thailand and Argentina - Malawi's a net maize exporter, for example. On the other hand, Tyler's scattergun advocacy of undifferentiated deregulation is really irresponsible - developing countries with food import tariffs ought to get rid of them, but does anyone think that getting rid of EU subsidies to rice production would lower the price of rice?

(I'd also note that you're underestimating the distributional issues in making the claim that " it is the importing countries that are hurting in terms of food shortages and threats of starvation, not the food exporting countries". Notoriously, Ireland was a net food exporter throughout its 19th century famine).

[Barkley Rosser]

dsquared,

I think you had better pony up with your claim about all the might-be net rice exporters who are net importers due to export controls. Who? How many?

As for Ireland, please, that is an extreme example that is mostly good for people getting drunk on green beer and screaming at each other about events of well over a century ago. I do not see Argentina, Ukraine, Kazakhstan, or even India, as an 1840s Ireland, although the state of Bihar in India might be. Are any of these in as much danger as Haiti, Mauritania, or Ethiopia?

[Butter]

"Consider a simple analogy: if the quality of Interstate 95 declined, the price of barbecue in North Carolina might fall, namely because people like me wouldn't drive to go eat there. Yet few people would argue that a nation can do better feeding itself by lowering the quality of its roads or for that matter littering its harbor with dangerous rocks." Ouch! Sorry Dani.

[corvad]

no outside the box thinking, as far as I can see. so many problems with the following suggestion, but for kicks, if poor people can't buy the food produced in their own country because of the commodity boom, how about direct cash transfers/food stamps financed by a Tobin-type tax? if the global market prices food out of the bellies of starving people, food security has to become a human right.

(ducks and runs out of the room)

[Marcel]

If you look at price as pressure it becomes obvious that as you combine the higher and lower pressure then the equilibrium pressure is somewhere in between.

While it may make some type of sense to have this as a desired outcome. If everything is at the same pressure then there need to be no structures in place to preserve imablances. The societal ramifications of pursuing this goal are severe and cannot be discounted.

Also, the idea of trying to pursue price equilibrium, without wage equilibrium, and equilibrium in mobility is a bit of a farce.