Trade Costs and the Gains from Trade in Crop Agriculture

World crop markets are often thin and characterized by volatile prices. One reason is that crop yields are highly variable over time and space. International trade can alleviate this problem to some extent but is hindered by restrictive border policies. For example, global average bound tariffs in agriculture are roughly double those in other sectors. Non-tariff barriers are pervasive. Furthermore, in 2007-2008 at least 10 grain exporting countries restricted their exports so as to keep prices low for consumers at home; the inability of other countries to import this grain caused a great deal of suffering. Not only are world crop markets highly insulated, prospects for further trade liberalization are uncertain. Since countries are often quite hesitant to make concessions in exchange for trade liberalization in other countries, it may help to illuminate basic facts about the world crop sector, and get new perspectives on the size and distribution of the gains from trade, by country. In this study we develop a new global simulation model of crop agriculture to address these questions. The model is partial-equilibrium and designed around the salient features of world crop markets: yield variability and high trade costs, the latter of which are caused by policy as well as geography. The resulting framework provides econometric evidence about trade costs, and – since it is a simulation model – can be used to examine the types of questions that heretofore have been the domain of spatial equilibrium and computable general equilibrium models.