Political Economy of Altering Trade Restrictions in Response to Commodity Price Spikes

• Author: Jayanthi Thennakoon
• DOI: http://doi.org/10.1111/rode.12152
• Published date: 01 May 2015
• Date: 01 May 2015

Political Economy of Altering Trade Restrictions in

Response to Commodity Price Spikes

Jayanthi Thennakoon*

Abstract

A model is developed to explain trade policy interventions in response to commodity price spikes. The

model predicts that government preferences for averting losses for domestic interest groups lead to changes

in trade distortions. In particular, trade interventions in response to downward price spikes are predicted,

which is consistent with the proposal for a Special Safeguard Mechanism (SSM) in the World Trade

Organization (WTO). Higher tariffs are likely in a noncooperative setting, and higher export subsidies will

emerge in response. An efficient cooperative trade policy can be achieved in a repeated game setting and

with possible involvement of the WTO.

1. Introduction

The price volatility in international food markets in the late 2000s has rekindled inter-

est in the trade policy community as to the role for—and contribution of—alterations

in trade restrictions when food prices spike. Even though upward price spikes have

attracted the most attention, low prices also have received much publicity following

the debate in the Doha Round of multilateral trade negotiations over an agricultural

Special Safeguard Mechanism (SSM) being proposed by some developing country

members of the World Trade Organization (WTO).

The issue of commodity price volatility has been a controversial part of the agricul-

tural trade liberalization agenda. It has often been a key political obstacle to trade

reforms because price volatility poses significant economic challenges to consumers,

producers, and national government finance ministries. During a downward price

spike, governments have responded by increasing import restrictions in food-

importing countries and export subsidies in food-exporting countries (or restricting

exports less). By contrast, during an upward price spike, importing countries tend to

reduce import restrictions and exporting countries raise export restrictions (Anderson

and Nelgen, 2012). The larger the number of countries so altering their trade meas-

ures, the more other countries also choose to intervene (Martin and Anderson, 2012).

As evident from upward price spikes during 2007–08 and 2010, governments have

tended to formulate trade policies to avert losses for food consumers. The proposed

SSM is viewed by its proponents as an instrument allowing developing countries to

deal with issues associated with a downward price spike or an import surge and

address certain nontrade concerns, namely food and livelihood security and rural

development (WTO, 2003, 2010). Even though nontrade concerns for averting losses

for domestic interests groups are important in trade policy determination particularly

* Thennakoon: Global Food Studies, University of Adelaide, Level 5, 10 Pulteney Street, Adelaide, SA

5005, Australia. Tel: +61-8-83136226; E-mail: jayanthi.thennakoon@adelaide.edu.au. The author wishes to

thank Kym Anderson for constructive discussions, helpful suggestions and feedback, and also gratefully

acknowledges financial support from the Australian Research Council and Australia’s Rural Industries

Research and Development.

Review of Development Economics, 19(2), 434–447, 2015

DOI:10.1111/rode.12152

© 2015 John Wiley & Sons Ltd