Trade in food: It’s the competition, stupid

I have written four posts about trade in food and agriculture commodities.

In the first one I gave an overview of the changing role and scope of international trade. Global food production increased with over 50% between 1986 and 2009. Meanwhile the trade in food for direct human consumption has increased from 15% of total production in 1986 to 23% in 2009, thus about one fourth of food production is traded. Half of the net exports 2010 were originating from just five countries. 

Rich countries are increasingly using land in other regions for their food production. Trade fills an important role for moving produce from areas with excess to areas with deficit. There are, however, many mechanisms in trade which leads countries not to produce food even if they could do so. Europe has let almost 100 million hectares of farm land revert to forest or lying idle, while European farmers buy protein rich feed stuffs from developing countries and European food industries buy palm oil from Malaysia and Indonesia. Europe could produce those within its own territory. Only a quarter of the trade is with crops which could not be grown in the importing country.

The increase in trade has big environmental repercussions as well as a big social and cultural impact. For instance, the large flows of agriculture products embed a lot of nutrients such as nitrogen and phosphorus. This means that soils in the exporting areas are depleted while importing regions suffer from eutrophication, algal blooms and dead seas.  In the second post I argue that the increasing distance makes it easier for market actors to externalize costs and more difficult to citizens and the political system to influence the way things are produced. Trade is not only a response to market demand, it creates demand and therefore recreates the need for it; trade becomes its own justification. 

Competition drives farmers in to more and more specialization and larger scale in order to cut costs. This leads to that farms go into monocropping and, ultimately, economies of scale will turn whole landscapes to one or a few lines of production/commodities. The implication on bio-diversity is huge and ironically some of these bread baskets are increasingly becoming food deserts. The harmonization of standards which follows liberalized trade has a number of non-desirable side effects, and will lead to sub-optimal production in most parts of the world.

On the level of the individual farmer trade is keeping up the pressure. In the third post, I explain how mechanization has crushed the comparative advantage of poor countries and poor producers. Poor farmers can only be competitive in crops which have not yet been successfully mechanized, such as coffee, tea, flowers, avocados and green beans. Because of productivity gains in developed countries, agriculture prices dropped by some 60% in the period 1960-2000. As the productivity of the poorest farmers remained much the same, it is obvious that they have lost out. Their value of production, regardless if they eat it themselves or sell it, has gone down considerably, making them poorer both in relative and absolute terms. 

The fourth post starts on a positive note with my experiences from linking African small-holder to global organic markets. Only limited numbers of farmers can benefit from that, however. First because poor farmers are only competitive in a limited number of crops and second because only a small share of the farmers will benefit from linking into modern value chains (be they organic, fair trade or normal) - and it will be those with the greatest assets. Of the farmers forced off their farms, some will become farm laborers at the farms of the more successful, or in huge agri-business plantations, others will only get a better life if there is some place for them to go – but in many places the prospects in the cities are not too promising and the future as an economic migrant is uncertain.

The effect of of trade is complex and depends on a variety factors, which makes it difficult to generalize. The theory of comparative advantage which underpins the arguments for international trade builds on assumptions that do not hold in today’s global economy. Capital and labour is highly mobile between countries through global value chains while the agriculture sector is highly inflexible, and mobility of agricultural labour and capital is low.  Meanwhile, self-sufficiency is not feasible for all countries and agriculture protection measures may have extraterritorial impacts that can harm food security of others, i.e. when countries exports surpluses with subsidies, they might undercut local producers.

Of course there are many other aspects of trade, for instance if it is based on a fair exchange. There are clear signs that trade is not only based on difference in production factors or endowments but also in power, leading to a unequal exchange. For instance, there are more people engaged in producing coffee for the Swedish market than the total number of people employed in the whole Swedish food and agriculture sector. This is obviously only possible because the work of the coffee picker is valued very low.

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It is difficult to sum all this up. Large scale trade in agricultural goods has clearly a number of huge disadvantages. And the economic blessings are mixed. There are some potential positive aspects, such as the possibility to move goods to areas of shortage, the possible improvement of diets and a better ecological adaptation of farming. Modern food trade doesn’t, however, deliver much in terms of those advantages. 

The higher proportion of food that is globally traded, the bigger dependencies will be created when regions that could produce their own food cease to do that. More and more people will be structurally dependent on global trade. The possibility to move food from areas of surplus to areas of shortage (food aid) should be a backup measure which will not be supplied by the market but by governments. The food security argument for global trade is therefore not valid. 

Fresh fruits and vegetables and high protein food, such as meat, is nowadays readily available for those that can afford it. Meanwhile, it is hard to argue that global trade in foods have improved diets for most people if we look at what people actually eat. 

As for the ecological adaptation argument, there seems to be some merit in this as considerable areas of marginal land has been taken out of production and reverted to forests. But as the mechanization and specialization continues the ecological conditions in agriculture deteriorates rapidly, so any possible advantages are erased by much bigger damage.

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In order to get a better understanding and perhaps a strategy for intervention, I believe we should disentangle the components of trade. There is a physical component, the movement of goods, there is a profit component, i.e. trade will only take place if there is a potential profit in it (which is why food aid is not trade but public distribution), there is a component of competition and there is a component of exchange (that is I exchange my labor, or other goods for the stuff I want to buy).

All components have their set of issues. The displacement of nutrients is a problem with the movement of goods, regardless if there is a profit motive or not. Profit and the terms of exchange are related to accumulation of capital and terms of trade and therefore with the whole economic hierarchy of societies.

The carrot for trade is profit, but the much bigger driver is the stick of competition. On the level of the individual basic actor in the food system, the farmer, the main influence of trade is competition. It is competition that drives mechanization and structural transformation of the farm sector, it is competition which makes it necessary for farmers to externalize costs to the environment, to workers or to livestock. It seems to me that reducing competition would be an important objective for a food trade policy.