ANALYZING COLLECTIVE TRADE POLICY ACTIONS IN RESPOSNE TO CYCLICAL RISK IN AGRICULTURAL PRODUCTION: THE CASE OF THE INTERNATIONAL WHEAT MARKET

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1 ANALYZING COLLECTIVE TRADE POLICY ACTIONS IN RESPOSNE TO CYCLICAL RISK IN AGRICULTURAL PRODUCTION: THE CASE OF THE INTERNATIONAL WHEAT MARKET YOUNGJAE LEE Department of Agrultural Eonoms and Agrbusness Lousana State Unversty AgCenter 242A Martn D. Woodn Hall Baton Rouge, LA Phone: Fax: E-Mal: P.LYNN KENNEDY Department of Agrultural Eonoms and Agrbusness Lousana State Unversty AgCenter 181 Martn D. Woodn Hall Baton Rouge, LA Phone: Fax: E-Mal: Seleted Poster prepared for presentaton at the 2016 Agrultural & Appled Eonoms Assoaton Annual Meetng, Boston, Massahusetts, July 31-August 2 Copyrght 2016 by Youngae Lee and P.Lynn Kennedy. All rghts reserved. Readers may make verbatm opes of ths doument for non-ommeral purposes by any means, provded that ths opyrght note appears on all suh opes.

2 ANALYZING COLLECTIVE TRADE POLICY ACTIONS IN RESPOSNE TO CYCLICAL RISK IN AGRICULTURAL PRODUCTION: THE CASE OF THE INTERNATIONAL WHEAT MARKET Abstrat: Ths study shows how ylal rsk and olletve trade poly atons an umulatvely worsen nternatonal food pre spkes. By usng spatal Computable General Equlbrum (CGE) and Eaton and Kortum s trade model, ths study offers the followng onlusons. At frst, the ylal shok n agrultural produton mght ause agrultural and food pre spkes n the nternatonal agrultural and food markets. Seond, export restrtons and mport responses an worsen food pre spkes and dsrupt trade flows n nternatonal agrultural and food markets. Fnally, the effet of these olletve trade poly atons and resultng food pre spkes n nternatonal agrultural and food markets do not dsspate even after agrultural produton has reovered. Key words: olletve trade poly atons, ylal rsk, export restrton. JEL odes: F10, F13, F14, F18, O19, Q17, Q54. Cylal varaton n agrultural produton, whh s worsenng as a result of lmate hange (Avnery, et al., 2011 and Baldos and Hertel, 2013), has attrated growng onerns resultng from reent food pre spkes n nternatonal agrulture and food markets. 1 Aordng to Food and Agrulture Organzaton (FAO, 2009), strong food demand generates below-trend gran stok supples n many ountres, whh leaves nternatonal food seurty more senstve to ylal rsk n agrultural produton. Anderson et al., (2006) states that nternatonal agrulture has aheved mmense eonom beneft through redued barrers to free trade sne 1994 when the Uruguay Round Agreement At was sgned by 123 ountres almost all trade nludng agrulture. 2 However, the nreasng vulnerablty of nternatonal agrultural and food markets to ylal varaton n agrultural produton appears to be entng some agrultural exportng ountres to mplement dstortve trade poles to nsulate ther domest markets from nternatonal food demand. Ths new trend qukly aught worldwde attenton beause t an ontrbute to rsng food pres n developng ountres and result n food seurty onerns aross the nternatonal agrultural and food market. Kulyk and Herzfeld (2015) observed that t s qute ommon among food exportng ountres to mplement export restrtons durng food pre hke perods. 1

3 Whle agrultural and food exportng ountres ould nsulate ther domest market from food pre spkes by mplementng export restrton suh as export tax, quota, or a omplete export ban, agrultural and food mportng ountres, whh have mplemented freer trade poly sne Uruguay Round Agreement, ould try to absorb food pre spkes by redung mport tarffs (or fnanng mport subsdes). Sne these poles generate fnanal burden to onsumers, most developng ountres suffer from nreasng food seurty rsk when faed by perods of nreasng food pres. As Ivan and Martn (2008) and Martn and Anderson (2012) state, those food pre spkes an have large mpats on poverty n developng ountres. Reognzng suh olletve aton problems, few studes have attempted to analyze the effet of ylal unertanty n agrultural produton and onsequent dstortve trade poles on agrultural and food pre, trade, and welfare. Tanaka and Hosoe (2011) reognzed the rsk of produtvty shoks n re exportng ountres and export restrton on re an mportng ountry. By usng stohast CGE model wth a Monte Carlo smulaton, Tanaka and Hosoe (2011) quantfed the welfare mpats of produtvty shoks and export quotas of maor re exportng ountres on the Japanese re market and found lttle evdene of Japan sufferng from suh shoks. Yu et al. (2011) quantfed trade poly responses to hgher world agrultural ommodty pres for a broad range of agrultural rops nludng grans, olseeds, soybean, rapeseed, sunflower, palm, and peanuts. By usng a set of mult-ountry, mult-ommodty, and partal-equlbrum models, Yu et al. (2011) onfrmed that over all, that trade poly responses n varous ountres nreased pres of all agrultural ommodtes, although the mpat on total net trade vared by ommodty. Based on the fndngs of these prevous studes, ths analyss attempts to desrbe how produtvty shoks and onsequent olletve trade poly atons affet food pre and trade flow n a theoretal ontext. In dong so, key eonom varables suh as pre elasttes of mport demand and export supply wll be smply treated as exogenous varables. Ths study fous on how food pre s affeted by supply shoks and trade poles. In aadema, t s ommon for eonomsts to try to explan relatonshps between events suh as supply shok and pre or trade poly and pre. In ths ontext, Martn and Anderson (2011) tred to explan the relatonshp between 2

4 pre and exogenous supply and poly shoks. However, Martn and Anderson (2011) used a oneptual form model suh that the model dd not quanttatvely ndate the mpat on food pre of supply and poly shoks. As Martn and Anderson (2011) supposed n response to supply shoks, agrultural exportng ountres mpose or rase an export tax or tghten export restrtons (or lower any export subsdy), whle agrultural mportng ountres redue ther tarffs or other mport restrtons (or ntrodue or rase mport subsdes) to redue the rse n ther domest pre. One thng I emphasze n real ontext s that agrultural export and mport of eah ountry are dfferent. As a result, an mportng ountry s trade poly response to offset the mpat of supply and poly shoks ourrng n an exportng ountry wll generate a dfferent mpat on nternatonal agrultural and food markets even though both sets of ountres try to redue the mpat of the shok on ther market to the same extent. For example, Egypt n 2012 mported wheat from three dfferent groups of exportng ountres, whh aounted for 53% of Egypt s total wheat supply. 27% of total mports orgnated from the nonexport restrton large wheat exportng ountres group whh nludes Australa, Canada, Frane, and U.S., 24% from the export restrton large wheat exportng ountres group whh nludes Argentna, Russa, and Ukrane, and the reamng 2% from the non-export restrton small wheat exportng ountres group whh nludes Belarus, Brazl, Lthuana, Moldova, and Romana. The remanng 47% was produed domestally. Consder a possble senaro where the export restrton large and small ountes group harges an export tax on ther wheat export and Egypt responds to ths export tax by fnanng a proportonal rate of mport subsdy on ts mports, then Egypt an offset the mpat of export tax mposed by Argentna, Russa, and Ukrane. However, these two olletve poly atons have serous mpats on the rest of the world. Martn and Anderson (2011) all t a lass olletve-aton problem and ndate that almost 30 perent of the observed hange n the nternatonal pre of wheat durng an be explaned by these olletve trade poly atons. In order to explan the olletve-aton problem, ths study uses a spatal CGE model and Eaton and Kortum s trade model wth trade data matrx obtaned from FAO n The obetve s to provde a omprehensve framework to understand the nternatonal wheat market under ylal unertanty and 3

5 ensung olletve trade poly atons. Ths study takes nto aount rsk fators n the form of a wde range of produtvty shoks to world wheat supples. Spefally, ths study nludes geographal restrtons nto the model beause trade eonomsts emphasze that trade dmnshes dramatally wth dstane and pres vary aross loatons, wth greater dfferenes between plaes farther apart (Eaton and Kortum, 2002 and Waugh, 2010). Ths study s organzed as follows. Frst, the general eonomy and household onsumpton s desrbed usng a spatal CGE model. Seond, the lnkage between ylal flutuatons n agrultural produton and food pre and trade flow s explaned usng Eaton and Kortum (2002) spatal trade model. The next setons provdes an overvew of the nternatonal wheat market fousng on reent pre surges under perods of ylal unertanty. Forth, fve dfferent ounterfatual analyses are presented n order to quantfy the mpat of ylal shoks n agrultural produton and hanges n border proteton rates by both exporters and mporters. Ffth, the analytal results of these analyses are then dsussed wth some onlusons offered n the fnal seton. General Eonomy and Household Consumpton The model development starts wth the struture of a CGE model as desrbed by Tanaka and Hosoe (2011). The model s extended to reflet ylal shoks, resultng exportng and mportng ountry responses to shoks nludng geograph osts n whh 27 regonal aggregatons are made for agrultural produng, exportng, and mportng ountres. Large wheat exportng and mportng ountres represent eah ndependent regon and small wheat exportng and mportng ountres are one ndependent regon dependng on spef geography. The Afran regon nludes 11 small wheat exportng and mportng ountres, the Ameran regon nludes 8, the Asan regon nludes 17, the European regon nludes 32, and the Oeanan regon aounts for 1 ountry. So, 27 regonal aggregatons nludes a total of 91 wheat exportng and mportng ountres (see Table 1). Eah regon has 8 dfferent setors, and two fators of labor and aptal n ts produton atvty (see Table 2). [Approxmately Here for Table 1] 4

6 [Approxmately Here for Table 2] Eah setor s represented by a perfetly ompettve proft-maxmzng frm wth a Leontef produton funton for gross output and wth a onstant elastty of substtuton (CES) produton funton for value-added omponents (see Fgure 1). Among the value-added omponents, aptal s assumed to be mmoble among setors n order to model relatve short-run phenomena under unforeseen shoks n all ounterfatual senaros exept for senaro 5 for whh I wll dsuss later, presumng a stuaton where produtvty shoks are observed after alloaton of aptal has been determned. In ontrast, labor s assumed to be moble among setors. Internatonal fator moblty s not allowed. These fators are assumed to be fully employed wth flexble fator pre adustments. [Approxmately Here for Fgure 1] Gross outputs are dvded nto domest outputs and omposte exports usng a onstant elastty of transformaton (CET) funton. The domest goods and omposte mports are aggregated nto omposte goods usng a CES funton as assumed by Armngton (1969). The omposte mports onsst of mports from varous regons at that tme when omposte mports absorb geograph osts and exporter s trade dstorton osts. Also, the omposte exports are deomposed nto exports to varous regons at that tme when the omposte exports reflet ylal shok and absorb mporter s response. The elastty of substtuton represents the smlarty of goods dfferentated by the orgn and destnaton of trade. Share parameters n the CES funtons are albrated to reprodue the atual trade flows of wheat. Exhange rates are flexbly adusted so that the urrent aount balane remans onstant n U.S. dollar terms n all regons. Composte goods are used for onsumpton by the representatve household, as well as for government, nvestment, and ntermedate nput. Food ommodtes are aggregated to make food omposte, whh ontrbutes to utlty wth non-food tems (see Fgure 2). Ths struture desrbes substtuton among foods n household onsumpton wth a CES funton. If the ommodty s non-food, t dretly nfluenes utlty. [Approxmately Here for Fgure 2] 5

7 Ths study onduts omparatve stat analyss onsderng the followng senaro fators: 1) ylal flutuaton n wheat setor; 2) non-dfferentated export restrton mposed by a part of net wheat exportng ountres; 3) non-dfferentated mportng response by hgh nome net wheat mportng ountres; 4) non-dfferentated export restrton mposed by all net wheat exportng ountres; and 5) longrun resoure alloaton reovers nternatonal wheat produton whle mantanng export and mport dstortve trade poles. Cylal Rsk, Food Pre and Trade Flow Assumng that the gross outputs n 27 regons s a ontnuum and produton effeny vares aross regons and setors, then a good x an be ndexed by x [0,1] n the ontnuum and a ountry s effeny n produng good x an be defned as z x. The ost of a bundle of nputs s the same aross ommodtes wthn a ountry beause wthn a ountry nputs are moble aross atvtes and beause atvtes do not dffer n ther nput shares. However, n short-run, the farmng setor annot fully respond to unexpeted shoks, whh an be absorbed only by pre adustments. Now, let us assume that an exportng ountry s nput ost s wth onstant return to sale, then the ost of produng a unt of good x s dsussed n the prevous seton, geograph osts and trade restrtons an be aounted for n the model. Then, the pre of good x produed n ountry and onsumed n ountry an be defned as follows: (1) p x d ( 0 t p s ) t p, z x / z x. As where d s a geograph dstane, 0 p t s ntal level of export restrton mposed by exportng ountry before produtvty shok happens, and t p s export restrton mposed by exportng ounty after produtvty shok happens. s 1 e / e 1 where m x e m s pre elastty of mport demand of mportng 6

8 ountry and e s pre elastty of export supply of exportng ountry and 0 1 x s s the ndene of export tax borne by mportng ountry. Smultaneously, mportng ountry an respond to an export tax by redung mport tarff (or fnanng mport subsdy). Takng mportng ountry s response nto aount the pre for good x an be redefned as follow: (2) p x d t, z x 0 0 t p t where t s t t 2 p where t 0 s an export tax mposed by exportng ountry and p t 0 s mporter s response. If there s no trade dstorton before produtvty shoks happens, then t 0 p t 0 1, mplyng that the mportng ountry should fnane mport subsdy to respond to the export tax. However, f exportng and mportng ountres are already mplementng trade dstortve poles before a produtvty shoks happens, then 0 1 t and t 0 1 p, mplyng that mportng ountry an redue mport tarffs to respond to the export tax. However, both ases generate a fnanal burden on mportng ountry. If mportng ountry proportonally responds to the export tax, then the pre of good x n mportng ountry wll be redued as follows: (3) x p d. z x Importng ountry mports not only from exportng ountry but also from another exportng ountry k. Therefore, f mportng ountry proportonally redues mport tarffs (or fnane mport subsdy) on all mports, then the pre mported from ountry k s as follows: (4) p x k k d ( 0 k t s ) t. z k x 7

9 Equatons (2) and (4) show that p k x n equaton (4) s less than x p n equaton (2). Therefore, trade flow of good x from exportng ountry to mportng ountry redues whle trade flow from exportng ountry k to mportng ountry nreases. Cylal Rsk Now, let us examne how ylal flutuaton n agrultural produton affets food pre and trade flow. Eaton and Kortum (2002) assumed n ther trade model that ountry s produton effeny s the realzaton of a random varable Z drawn ndependently from ts ountry-spef probablty dstrbuton. The extreme probablty theory provdes a form for the probablty dstrbuton, F z, that makes a smple expresson for the resultng dstrbuton of pres alled the Type II extreme value dstrbuton as follows: (5) z T z F Pr[ Z z] e, where T 0 and 1. The dstrbuton s ndependent aross ountres. The ountry-spef parameter T governs the loaton of the dstrbuton. Therefore, a bgger T mples that a hgh effeny draw for good x s more lkely. The parameter s ommon to all ountres and reflets the amount of varaton wthn the dstrbuton. In ths study, the parameter T represents ountry s state of produtvty, refletng ountry s absolute advantage n a trade ontext whle the parameter regulates heterogenety aross goods n ountres relatve effenes, refletng omparatve advantage n a trade ontext. A lower value of, generatng more heterogenety, means that omparatve advantage exerts a stronger fore for trade aganst the resstane mposed by geograph dstane and trade restrton. Food Pre and Trade Flow Sne produton effeny s a random varable, the pre, p n equaton (2) s also random varable. Therefore, the probablty dstrbuton of the random varable, P an be obtaned by substtutng equaton (2) nto equaton (5). If there s a pre p whh s a maxmum level of pre n order to our trade flow 8

10 9 from ountry to ountry, then the probablty dstrbuton of the pre for ountry to export good x to ountry s (6) p t d T e p P p G ) ( 1 ] Pr[. Ths s a probablty that x z t d / ) ( s less than x z /. Equatons (5) and (6) represent nverse relatonshp between produton effeny and pre. Sne other ountres an export good x to ountry, mportng ountry buys good x followng the prnple of the lowest pre. Hene, the dstrbuton for what ountry atually buys s a ont probablty dstrbuton as follows: (7) p e p G 1, where N t d T 1 ) ( s a pre parameter. Eaton and Kortum (2002) obtaned the aggregate pre for the CES utlty funton, assumng 1, as follows: (8) 1/ 1 ) ( N t d T p, ) 1/(1 1. Sne p p t t s t t t and 1 / 1 m x e e s, the aggregate pre an be obtaned as follows: (9) 1/ / 2 N x m p p e e t t t t d T p. Also, sne ountry s average expendture per good x does not vary by soure, trade flow from ountry to ountry s the probablty that ountry exports good x at the lowest pre n ountry. Thus, trade flow an smply be expressed as ountry s ontrbuton to ountry s pre parameter as follows:

11 (10) X X T ( d t) t T d N k 1 T k kd k 0 p t t 2 0 p k 0 t 2 t e 0 m p t e t / e x 1 m t k / e x 1 k p. Equatons (9) and (10) an be used to dentfy the mpat of produtvty shok and olletve trade poly atons on pre and trade flow gven geograph dstanes, produton osts, pre elasttes of mport demand and export supply, and degree of omparatve advantage. Furthermore, these two equatons an be used n a set of varous ounterfatual analyses to dentfy the mpat of hange n eah ountry s market and poly behavors on the nternatonal market. For example, the mpat of hange n pre elastty of mport demand and/or export supply on pre and trade flow n nternatonal agrultural and food market an be dentfed by usng equatons (9) and (10). Also, the mpat of hange n export tax and/or mport subsdy on pre and trade flow n nternatonal agrultural and food market an be dentfed. However, n ths study the fous s on dentfyng the effets of produtvty shok and onsequent olletve poly atons on pre, trade flow and welfare n nternatonal wheat market. Sne those equatons nlude mult-ountres, the mpat of produtvty shok and olletve trade poly atons that ourred n parts of the world on mult-naton s welfare an be dentfed. Overvew on World Wheat Market Global wheat exportng ountres suh as Argentna, Kazakhstan, Russa, and Ukrane mplemented export restrtve poles and dereased ther export supply to the nternatonal wheat market (Bouet and Laborde, 2010; Martn and Anderson, 2011; Yu et al., 2011; and Kulyk and Herzfeld, 2015). Chna swthed to beng a net mporter of wheat due to trade poly hange n 2009 (Yu et al., 2011). Sgnfant dereases n mport tarffs n Inda led to a hgher domest demand for mported wheat n 2006 and 2007 (Yu et al., 2011). Countres whh dd not adust ther mport poly regmes n ths envronment dereased ther mports of wheat due to hgher pres n the nternatonal wheat market. The nreases n Indan and Chnese wheat 10

12 net mports were more than enough to offset the delnes n wheat mports of other ountres durng the perod of nternatonal wheat market pre hkes. Martn and Anderson (2011) state that almost 30% of the observed hange n the nternatonal pre of wheat durng an be explaned by the hanges n border proteton rates. Yu et al., (2011) also show that those ountres that dd not mplement the poly nterventons enountered an nrease n wheat pre, whle those whh mplemented poles saw a pre delne. Table 3 shows oeffent of varaton of yelds of 10 maor wheat exportng ountres durng the last two deades. As seen, wheat yeld varaton s not least. As a result, the effet of ylal varaton n wheat produtvty on nternatonal wheat market wll be tangble. Dependng on flutuaton of produton, nternatonal wheat pre umped by 144% from $2.78/bushel n 2001 to $6.78/bushel n Ths pre ump mght be due to a negatve produtvty shok as well as onsequent olletve trade poly atons. Durng that perod of tme, Argentna, Inda, Kazakhstan, Russa and Ukrane mplemented export restrton and dereased export supply to the nternatonal market. [Approxmately Here for Table 3] Counterfatual Analyses To quantfy the eonom mpat of ylal varaton n agrultural produton and trade dstortve poles on the nternatonal wheat market, ths study onduts omparatve stat analyses onsderng the followng senaro fators: (1) produtvty shoks our n twenty-fve net wheat exportng ountres; (2) export restrtons on wheat trade mposed by fourteen net wheat exportng ountres nludng Argentna, Inda, Kazakhstan, Russa, and Ukrane; (3) eghteen hgh nome net wheat mportng ountres response to export restrton by redung mport restrton; (4) the other fve maor exportng ountres nludng Australa, Canada, Frane, Germany, and U.S. mplement export restrtons, and (5) nternatonal wheat produton reovers through resoure alloaton but trade dstortve poles mplemented by exportng and mportng ountres stll exst (see Table 1). 11

13 As benhmarked by usng FAO 2012 trade data, trade flow X, domest onsumpton X and domest produton X was alulated. Then by usng equaton (9), the benhmark value of aggregate pre was estmated. In estmatng aggregate pre, the parameter values estmated by Eaton and Kortum for d and were used, t was assumed that pre elastty of mport demand e was equal to pre elastty of export supply x 0 0 e and there s no trade dstorton at the begnnng, t t 1 the total expendture was alulated usng the followng equatons: (11) TE p X. m p. Then, In ounterfatual senaro 1, the yeld shok s ntrodued n twenty-fve net wheat exportng ountres (see Table 1). Then by usng equatons (9) and (10), the ounterfatual aggregate pre and trade flow under yeld shoks s estmated. And then, by omparng the estmates wth benhmark values obtaned from 2012 FAO trade data, the hanges n pre, trade flow, and welfare as hange n total expendture (EV, equvalent varaton) are alulated. In ounterfatual senaro 2, fve large and nne small net wheat exportng ountres mplement export restrtons by hargng export tax n order to nsulate ther domest pre from world pre spkes after yeld shoks happen n twenty fve wheat exportng ountres. In ths senaro, the government revenue of these fourteen exportng ountres s alulated by usng the followng equaton: (12) N GR t p p X, = 1,.,14. In ounterfatual senaro 3, eghteen hgh nome net wheat mportng ountres respond to the export restrton by fnanng mport subsdy to stablze ther domest pre (see Table 1). In ths senaro, the fnanal burden of these eghteen net wheat mportng ountres s alulated by usng the followng equaton: (13) N GR t p X, = 1,,18. 12

14 In ounterfatual senaro 4, the other fve large net wheat exportng ountres that partpate n mplementng of export restrtons by hargng the same amount of export tax to nrease domest supply under hgh pressure on pre, whh ours after nternatonal wheat supply dereases and trade dstortve poles are enated. Then, n ounterfatual senaro 5, the mpat of these trade dstortve poles on pre, trade flow, and welfare are analyzed even after the supply shoks dsappear. In eah senaro, the hanges n pre, trade flow, welfare as equvalent varaton, government revenue and burden are alulated. Analytal Results In order to quantfy the effet of ylal shok on nternatonal wheat market, a set of ounterfatual analyses based on fve dfferent senaros were onduted. For ounterfatual senaro 1, yeld data was obtaned for 1993 to 2012 for twenty fve net wheat exportng ountres. The annual yeld by tme varable s regressed n order to estmate average yeld wthout tme trend. And then, a 95% onfdent ntervals wth mnmum values was alulated. The regresson mean s lower than the smple arthmet mean exept for Slovaka. Ths s beause the annual yeld shows an upward trend durng exept for Slovaka, whh showed a downward trend durng that perod of tme. Kazakhstan shows the largest yeld varaton by 30% whle U.S. and Germany s the smallest by 6% durng the perod of tme. The average yeld varaton s 12% n twenty fve wheat net exportng ountres (see Table 4). In ths study, a negatve 12% yeld shoks s utlzed n the ounterfatual senaros. [Approxmately Here for Table 4] In general, a negatve ylal shok nreases wheat pre and dereases wheat trade n all ountres. However, the magntude of a yeld shok effet on eah ountry s dfferent. As Table 5 shows, effet of yeld shok dretly affets net wheat exportng ountres where yeld shoks happened, whh s then transferred to mportng ountres so that the effet of yeld shok s larger n net wheat exportng ountres than n net wheat mportng ountres. Table 5 shows that yeld shok nreases domest pre, on average, by 17.9% for net wheat exportng ountres whle yeld shok nreases domest pre by 7.4% 13

15 for net wheat mportng ountres. Among net wheat mportng ountres, f wheat onsumpton n a net wheat mportng ountry depends manly on domest wheat, then the effet of shok s smaller. Conversely, wheat onsumpton n a net wheat mportng ountry that depends manly on mported wheat, the effet of a shok s larger. 96% of Chna s wheat onsumpton depends on domest wheat and 94% of Iranan wheat onsumpton depends on domest wheat so that these ountres have a relatvely small effet on the shok whle Brazl (77%), Japan (87%), Korea (99%), and Moroo (96%) heavly depend on mported wheat so that the effet of a shok s larger n these ountres. Also, the effet of a yeld shok on wheat net mportng ountres depends on from where they mport. For example, f a net wheat mportng ountry mports wheat from small yeld varaton ountry then the effet of yeld shok s relatvely small, whle f a net wheat mportng ountry mport wheat from large yeld varaton ountry then the effet of yeld shok s relatvely large. By regon, the effet of a yeld shok s larger n Afran, Asan, and Ameran regons, whle the effet of yeld shok s smaller n European and Oeanan regons. As a whole, the result shows that f average yeld dereases by 12%, then nternatonal wheat pre nreases by 10.95%, domest onsumpton dereases by 6.82%, trade flow dereases by 10.10% and nternatonal welfare measured by equvalent varaton dereases by 8.46%. [Approxmately Here for Table 5] As seen n ounterfatual senaro 1, the yeld shok largely affets net wheat exportng ountres resultng n the mplementaton of export restrtons to stablze domest pre and supply. In order to dentfy the effet of export restrtons on the nternatonal wheat market, a ounterfatual analyss was onduted based on ounterfatual senaro 2. Counterfatual senaro 2 assumes that at frst wheat produton dereases n twenty fve wheat net exportng ountres and then fourteen wheat exportng ountres mplement export restrton by hargng 30% export tax (see Table 1). In ounterfatual senaro 2, the ase of exports restrton mplemented durng the food rss ( ) reported by Bouet and Laborde (2010) was used. As expeted, Table 6 shows that mplementaton of export tax allevates domest pre spkes and onsumpton dereases aused by yeld shoks n these fourteen export restrton mplementng ountres, 14

16 whle aggravatng domest pre hke and trade flow n other ountres. Tables 5 and 6 show that nreasng rates of domest pres are redued from 15.92% to 0.80% for Argentna, from 20.90% to 5.41% for Inda, from 42.31% to 23.93% for Kazakhstan, from 16.45% to 1.34% for Russa, and from 22.88% to 6.86% for Ukrane by mplementng export tax n these ountres, whle nreasng rates of domest pres nrease from 8.7% to 10.9% on average for other ountres. As a result, total onsumpton n fourteen export restrton mplementng ountres reovers, whle total onsumpton n other ountres dereases. The mplementaton of export restrtons worsen pre spkes aused by yeld shoks n 80 ountres, whle ease pre spke only n 11 ountres. As a whole, mplementaton of export restrtons nreases nternatonal wheat pre by 12.55% and dereases wheat trade by 12.61% and derease nternatonal welfare by 8.26% as measured by equvalent varaton. [Approxmately Here for Table 6] As seen n ounterfatual senaros 1 and 2, produtvty shoks and mplementaton of export restrtons nreases nternatonal wheat pre. In order to respond to pre spkes n the nternatonal wheat market, hgh nome net wheat mportng ountres try to mplement mport subsdes. In order to dentfy the effet of hgh nome net wheat mportng ountres responses to pre hke on nternatonal wheat market, a ounterfatual analyss was onduted based on ounterfatual senaro 3. Counterfatual senaro 3 assumes that hgh nome net wheat mportng ountres mplement releasng mport restrtons by fnanng a 30% mport subsdy when faed wth a pre hke n the nternatonal wheat market (see Table 1). Table 7 shows that mplementaton of an mport subsdy eases domest pre spkes and trade flow n these hgh nome net wheat mportng ountres whle worsenng domest pre spkes and trade flow n other net wheat mportng ountres. One thng ths study notes s that the effet of an mport subsdy mplemented by hgh nome net wheat mportng ountres on nternatonal wheat pre and trade flow s relatvely small whle very large on lower nome net wheat mportng ountres. As Table 7 shows, the mplementaton of mport subsdy redues pre spke aused by yeld shoks and export restrton on average by 1% for hgh nome net wheat mportng ountres suh as Italy, Japan, Korea, and Span, whle 15

17 the mplementaton of mport subsdy rases pre spke by 20% for lower nome net wheat mportng ountres suh as Algera, Brazl, Egypt, Indonesa, Iran, Mexo, and Moroo. Furthermore, mplementaton of mport subsdy an worsen pre spkes aused by yeld shoks and export restrtons n 75 ountres whle releasng pre spke only n 16 ountres. As a whole, mplementaton of mport subsdy nreases nternatonal wheat pre by 26.22%, and dereases trade flow by 18.80% and derease nternatonal welfare by 17.03%. [Approxmately Here for Table 7] The prevous results onfrm the umulatve effets of yeld shoks and olletve trade poly atons on the nternatonal wheat market. Although the dstortve trade poles worsen the nternatonal wheat market, the dstortve trade poles an reover ther domest market from ylal shoks n agrultural produton. Ths fat wll enourage other ountres to partpate n mplementng trade dstortve poles to protet ther domest market from ylal shoks n agrultural produton. In ths ontext, a ounterfatual analyss based on ounterfatual senaro 4 was onduted. In ounterfatual senaro 4, fve maor wheat exportng ountres suh as Australa, Canada, Frane, Germany, and U.S. partpate n mplementng export restrton by hargng 30% export tax. As expeted, Table 8 shows that wheat pre nreases and trade dereases n all ountres. Sne these fve ountres represent 55% of total nternatonal wheat trade, f these ountres mplement export restrton then most ountres mght be affeted so that wheat pre nreases and trade dereases n all ountres. Furthermore, nternatonal wheat pre nreases by more than 36% and trade derease by 22%. As a result, f exportng and mportng ountres mplement dstortve trade poles n order to redue the effet of ylal shok n agrultural produton, then these dstortve trade poles wll worsen wheat onsumers n developng ountres by nreasng nternatonal wheat pre and dereasng trade flow umulatvely. [Approxmately Here for Table 8] Lastly, a ounterfatual analyss was onduted n order to onfrm the effet of these dstortve trade poles on nternatonal wheat market after reoverng agrultural produton n ounterfatual 16

18 senaro 5. Table 9 shows that although agrultural produton s reovered n all ountres, the nternatonal wheat pre nreases and trade dereases wth these trade dstortve poles. [Approxmately Here for Table 9] Conluson In the 2000s, food pre spkes n nternatonal agrultural and food market pressured food onsumers n developng ountres. Many household n low nome ountres were fae wth added eonom hardshp. Begnnng from strong demand for agrultural goods from boenergy boom, the ylal varaton on the supply sde have ontrbuted to the reent food pre spke. It s ommon n agrultural markets that a small reduton n agrultural produton auses a large pre effet n the market. Therefore, agrultural exportng ountres try to stablze the domest market when they have a omparable poor produton. Often, they try to mplement dstortve trade poles to restrt agrultural export. The dstortve trade poly makes the nternatonal agrultural market worse by nreasng pre and dereasng trade flow. Ths effet of export restrton on pre and trade flow mght stmulate mportng ountres to respond to nternatonal agrultural and food pre spkes. Although hgh nome mportng ountres an mplement an mport subsdy (or redue mport tarff) to ease domest pre, the response of hgh nome mportng ountres makes lower nome mportng ountres worse beause the response of hgh nome mportng ountres nrease the nternatonal food pre more. Furthermore, sne ths poly generates a fnanal burden or redues government revenue, lower nome mportng ountres fnd t more dffult to respond to agrultural and food pre spkes aused by yeld shoks and olletve poly atons. As a result, food onsumers n low nome ountres suffer more from nternatonal food pre spkes. As ths study onfrmed, these trade dstortve poles affet nternatonal agrultural and food markets even after agrultural produton has reovered. Sne the Uruguay Round Agreement n 1994, the nternatonal agrultural setor has benefted from free trade. However, the reent food pre hke aused from ylal varaton and dstortve trade poly mght threaten the beneft of free trade. 17

19 In ths ontext, ths study tred to ontrbute to a better understandng about how ylal shoks and trade dstortve poles an worsen nternatonal food pre spkes umulatvely. In a way, ths study provdes a dfferent approah n analyzng the reent emergng ssue n agrultural and food markets. The frst part of hs study desrbes the whole global eonomy and utlty to understand what s onerned n nternatonal agrultural and food markets by usng a spatal CGE model. Seond, ths study llustrates the relatonshp between ylal shoks and aggregate pre by usng Eaton and Kortum s spatal trade model. Thrd, the model used by ths study quantfes the effet of ylal shoks and olletve poly atons on pre, trade flow, and welfare. Fourth, pre elasttes effet on nternatonal agrultural market an be tested n ounterfatual senaros by examnng dfferent ranges of pre senstvty n food onsumers and produers. Furthermore, many other mro- and maro-eonom varables affetng nternatonal agrultural and food market an be tested by modfyng the model. Ths study onfrms the followng three ponts. At frst, the ylal shok n agrultural produton auses agrultural and food pre spkes n the nternatonal agrultural and food market. Seond, export restrton and mport responses worsen food pre spkes and trade flow n the nternatonal agrultural and food market. Fnally, the effet of these olletve poly atons on food pre spkes n the nternatonal agrultural and food market does not dsspate even after agrultural produton has reovered. 18

20 Footnote 1. The Intergovernmental Panel on Clmate Change (IPCC) reported on Marh 2014 that extreme lmate and weather events wll, wth hgh onfdene, redue food produton. Footnote 2. Uruguay Round Agreement, spannng from 1986 to 1994 and embrang 123 ountres as ontratng partes, aheved greater lberalzaton of trade n agrulture and brng all measures affetng mport aess and export ompetton under strengthened and more operatonally effetve rules and dsplnes and led to reate World Trade Organzaton (WTO) n

21 Referenes Armngton, P.S A Theory of Demand for Produts Dstngushed by Plae of Produton, IMF Staff Papers No. 16. Avnery, S., D.L. Mauzerall, J. Lu, and L.W. Horowtz Global Crop Yeld Redutons due to Surfae Ozone Exposure: 1. Year 2000 Crop Produton Losses and Eonom Damage. Atmospher Envronment, 45(13): Avnery, S., D.L. Mauzerall, J. Lu, and L.W. Horowtz Global Crop Yeld Redutons due to Surfae Ozone Exposure: 2. Year 2030 Potental Crop Produton Losses and Eonom Damage under Two Senaros of O3 Polluton. Atmospher Envronment, 45(13): Baldos, U.L.C. and T.W. Hertel Global Food Seurty n 2050: The Role of Agrultural Produtvty and Clmate Change. Australan Journal of Agrultural and Resoure Eonoms 58(4): Bouët, A. and D. Laborde Eonoms of Export Taxaton n a Context of Food Crss: A Theoretal and CGE Approah Contrbuton, Dsusson Paper 00994, Internatonal Food Poly Researh Insttute, Washngton DC. Eaton, J. and S. Kortum Tehnology, Geography, and Trade, Eonometra 70(5): FAO, The State of Food Inseurty n the World Rome. < Ivan, M. and W. Martn Implatons of Hgher Global Food Pres for Poverty n Low-Inome Countres, Agrultural Eonoms 39: Kulyk, I. and T. Herzfeld Impedments to Wheat Export from Ukrane, Lebnz Insttute of Agrultural Development n Transton Eonomes (IAMO), Germany. Martn, W. and K. Anderson Export Restrtons and Pre Insulaton durng Commodty Pre Booms, Ameran Journal of Agrultural Eonoms 94(2): Tanaka, T. and N. Hosoe Does Agrultural Trade Lberalzaton Inrease Rsks of Supply-Sde Unertanty?: Effets of Produtvty Shoks and Export Restrtons on Welfare and Food Supply n Japan, Food Poly 36(3): Waugh, E.M Internatonal Trade and Inome Dfferenes, Ameran Eonom Revew 100(5): Yu, T-H., S. Tokgoz, E. Wales, and E. Chavez A Quanttatve Analyss of Trade Poly Responses to Hgher World Agrultural Commodty Pres, Food Poly 36(5):

22 Table 1. Lst of Countres n Fve Counterfatual Senaros. Country Regon Senaro 1 Senaro 2 Senaro 3 Senaro 4 Senaro 5 (25 Countres) (14 Countres) (18 Countres) (19 Countres) (25 Countres) Albana Europe Algera Large Importer Argentna Large Exporter Yeld Shok Export Tax Export Tax Yeld Reover Armena Asa Australa Large Exporter Yeld Shok Export Tax Yeld Reover Austra Europe Yeld Shok Yeld Reover Azerbaan Asa Bangladesh Asa Belarus Europe Belgum Europe Import Subsdy Bhutan Asa Bolva Amera Export Tax Export Tax B & H Europe Brazl Large Importer Bulgara Europe Yeld Shok Yeld Reover Burund Afra Canada Large Exporter Yeld Shok Export Tax Yeld Reover Chle Amera Chna Large Importer Export Tax Export Tax Colomba Amera Croata Europe Yeld Shok Yeld Reover Cyprus Europe Import Subsdy Czeh Europe Yeld Shok Yeld Reover Denmark Europe Yeld Shok Yeld Reover Euador Amera Export Tax Export Tax Egypt Large Importer Estona Europe Yeld Shok Yeld Reover Ethopa Afra Export Tax Export Tax Fnland Europe Yeld Shok Yeld Reover Frane Large Exporter Yeld Shok Export Tax Yeld Reover Germany Large Exporter Yeld Shok Export Tax Yeld Reover Greee Europe Import Subsdy Hungary Europe Yeld Shok Yeld Reover Inda Large Exporter Yeld Shok Export Tax Export Tax Yeld Reover Indonesa Large Importer Iran Large Importer Export Tax Export Tax Ireland Europe Import Subsdy Israel Asa Import Subsdy Italy Large Importer Import Subsdy Japan Large Importer Import Subsdy Jordan Asa Kazakhstan Large Exporter Yeld Shok Export Tax Export Tax Yeld Reover Kenya Afra Kyrgyzstan Asa Latva Europe Yeld Shok Yeld Reover Lebanon Asa Lthuana Europe Luxembourg Europe Import Subsdy Madagasar Afra Malaysa Asa 21

23 Mexo Large Importer Moroo Large Importer Nepal Asa Export Tax Export Tax Netherlands Europe Import Subsdy New Zealand Oeana Import Subsdy Nger Afra Export Tax Export Tax Ngera Afra Norway Europe Import Subsdy Oman Asa Pakstan Asa Yeld Shok Export Tax Export Tax Yeld Reover Paraguay Amera Yeld Shok Yeld Reover Peru Amera Phlppnes Asa Poland Europe Yeld Shok Yeld Reover Portugal Europe Import Subsdy Korea Large Importer Import Subsdy Moldova Europe Romana Europe Yeld Shok Yeld Reover Russa Large Exporter Yeld Shok Export Tax Export Tax Yeld Reover Rwanda Afra Saud Araba Asa Import Subsdy Serba Europe Slovaka Europe Yeld Shok Yeld Reover Slovena Europe Import Subsdy South Afra Afra Span Large Importer Import Subsdy Sr Lanka Asa Sweden Europe Import Subsdy Swtzerland Europe Thaland Asa Tunsa Afra Turkey Europe Uganda Afra Ukrane Large Exporter Yeld Shok Export Tax Export Tax Yeld Reover Unted Kngdom Europe Import Subsdy Tanzana Afra Export Tax Export Tax Unted States Large Exporter Yeld Shok Export Tax Yeld Reover Uruguay Amera Yeld Shok Yeld Reover Venezuela Amera Yemen Asa Zmbabwe Afra Note: B&H s Bosna and Herzegovna. 22

24 Table 2. Lst of Regons, Setors, and Fators n the Model. Regon Setor Fator Algera M Wheat F Labor Argentna X Other grans F Captal Australa X Other agrulture F Brazl M Proessed wheat F Canada X Other food F Chna M Manufaturng Egypt M Serves Frane X Transporton Germany X Inda X Indonesa M Iran M Italy M Japan M Kazakhstan X Korea M Mexo M Moroo M Russa X Span M U.S. X Ukrane X Other Afra (nludes 12 subregons) Other Amera (nludes 8 subregons) Other Asa (nludes 17 subregons) Other Europe (nludes 31 subregons) Other Oeana (nludes 1 subregon) Notes: X ndates large wheat exporters, representng 85% of world wheat exports. M ndates large wheat mporters, representng 45% of world wheat mports. F ndates food ommodtes used for the food omposte. 23

25 Table 3. Coeffent of Varaton n Wheat Yelds of Ten Large Net Wheat Exportng Countres. Argentna Australa Canada Frane Germany Inda Kazakhstan Russa Ukrane U.S. C.V

26 Table 4.Mean and Varaton n Wheat Yeld n Wheat Net Exportng Countres from 1993 to Mean Argentna Australa Canada Frane Germany Inda Kazakhstan Russa Ukrane US Arthmet Regresson t-value Mn a Max b Δ% Mn Δ% Max d Mean Austra Bulgara Croata Czeh Denmark Estona Fnland Hungary Latva Pakstan Arthmet Regresson t-value Mn a Max b Δ% Mn Δ% Max d Mean Paraguay Poland Romana Slovaka Uruguay Arthmet Regresson t-value Mn a Max b Δ% Mn Δ% Max d Note: a Mn represents a mnmum value n regresson mean n 95% onfdent ntervals. b Max represents a maxmum value n regresson mean n 95% onfdent ntervals. Δ% Mn represents perentage hange from regresson mean to Mn. d Δ% Max represents perentage hange from regresson mean to Max. 25

27 Table 5. Counterfatual Senaro 1. Negatve Yeld Shoks n 25 Net Wheat Exportng Countres A ΔP ΔX ΔX ΔX EV ΔGR Algera M Argentna X Australa X Brazl M Canada X Chna M Egypt M Frane X Germany X Inda X Indonesa M Iran M Italy M Japan M Kazakhstan X Korea M Mexo M Moroo M Russa X Span M Ukrane X U.S. X Afra (12) Amera (8) Asa (17) Europe (31) Oeana (1) ROW (1) World Note : ΔP represents a perentage hange n aggregate wheat pre n ountry. ΔX represents a perentage hange n total wheat onsumpton n ountry. ΔX represent a perentage hange n domest wheat onsumpton n ountry. ΔX represent a perentage hange n mported wheat onsumpton n ountry. ΔX represent a perentage hange n total wheat produton n ountry. A see Appendx I. 26

28 Table 6. Counterfatual Senaro 2. 30% Export Tax by 14 Countres A ΔP ΔX ΔX ΔX EV ΔGR Algera M Argentna X Australa X Brazl M Canada X Chna M Egypt M Frane X Germany X Inda X Indonesa M Iran M Italy M Japan M Kazakhstan X Korea M Mexo M Moroo M Russa X Span M Ukrane X U.S. X Afra (12) Amera (8) Asa (17) Europe (31) Oeana (1) ROW (1) World

29 Table 7. Counterfatual Senaro 3. 30% Import Subsdy by Hgh Inome Net Wheat Importng Countres A ΔP ΔX ΔX ΔX EV ΔGR Algera M Argentna X Australa X Brazl M Canada X Chna M Egypt M Frane X Germany X Inda X Indonesa M Iran M Italy M Japan M Kazakhstan X Korea M Mexo M Moroo M Russa X Span M Ukrane X U.S. X Afra (12) Amera (8) Asa (17) Europe (31) Oeana (1) ROW (1) World

30 Table 8. Counterfatual Senaro 4. 30% Export Tax by 19 Net Wheat Exportng Countres A ΔP ΔX ΔX ΔX EV ΔGR Algera M Argentna X Australa X Brazl M Canada X Chna M Egypt M Frane X Germany X Inda X Indonesa M Iran M Italy M Japan M Kazakhstan X Korea M Mexo M Moroo M Russa X Span M Ukrane X U.S. X Afra (12) Amera (8) Asa (17) Europe (31) Oeana (1) ROW (1) World

31 Table 9. Counterfatual Senaro 5. Yeld Reorver n 25 Net Wheat Exportng Countres A ΔP ΔX ΔX ΔX EV ΔGR Algera M Argentna X Australa X Brazl M Canada X Chna M Egypt M Frane X Germany X Inda X Indonesa M Iran M Italy M Japan M Kazakhstan X Korea M Mexo M Moroo M Russa X Span M Ukrane X U.S. X Afra (12) Amera (8) Asa (17) Europe (31) Oeana (1) ROW (1) World