Government trade restrictions and international price volatility

Abstract

National governments dislike food price volatility to varying extents. When some of them use trade measures to insulate their domestic market from international food price fluctuations, that volatility is amplified. This in turn prompts more countries to follow suit. However, when both food-exporting and food-importing countries so respond, each group becomes less capable of preventing domestic price volatility. This paper examines empirically the extent of insulation in both groups of countries, and also in high-income versus developing countries. It also provides an estimate of the contribution of such government actions to international food price spikes. A multilateral agreement to limit such government responses would reduce the need for all countries to so intervene, and allow more-efficient generic social protection policies to deal with the most vulnerable cases.