Food Inflation Watch: Birdsall and Subramanian on rising food prices

Food and Free Trade

Each country is trying to keep domestic supplies high on the justifiable grounds of food security. But by holding prices artificially low, export bans keep the market from sending accurate demand signals to domestic farmers. This penalizes farmers, who can't get the full, world price for their produce. That impairs efficiency, and undermines the incentives for investments that can increase long-term supply. Topping it all off, such measures subsidize high-income households, not just the poor.

Moreover, as more countries implement export controls, global supply contracts even further, pushing prices up by at least 10% and possibly much more. A vicious spiral lurks here, as panic- and policy-induced speculative hoarding drives world prices even higher.

Without a collective agreement to undo these restrictions, the world's poor, already at terrible risk, will be even worse off. Industrial countries should eliminate any practices, including all forms of ethanol subsidies and tariffs, that divert food production toward biofuels. In turn, developing-country food producers should eschew export restrictions and allow market forces to help boost agricultural supply. The assurance that all countries will do so should give each developing-country government incentives to better target assistance to the most affected and vulnerable consumers in their own countries.

Unfortunately, the ongoing Doha Round of trade negotiations won't on its own address these problems. And that's not just due to the poor prospects for completing these negotiations in the current environment in the U.S. when the antitrade lurch during the primary season has made even the U.S.-Colombia free trade agreement difficult to ratify.

More important is that in the Doha Round, the key trade policy culprits – biofuel subsidies and export restrictions – are not the focus of negotiations. The round has been devoted to traditional forms of agricultural protection – trade barriers in the importing countries and subsidies to food production in producing countries – which are becoming now less important as food prices have soared and import barriers have declined. While concluding the round would be good for the world and the trading system and would help secure long-run supply incentives for developing country food producers, it makes no immediate contribution to alleviating the current crisis.

It sounds counterintuitive, but the challenge of the food crisis affords a win-win opportunity: to collectively agree to policies that promote trade and efficiency while also boosting agricultural production and reducing the vulnerability of the poorest around the world. The challenge for world leaders is to seize that opportunity.