International Trade Constraints and Commodity Market Models: An Application to the Cotton Market

Abstract

This paper presents a model that accounts explicitly for quantitative controls on international trade. Countries are classified into two groups depending upon whether or not their imports and exports are responsive to world prices, with the result that all adjustment burdens are borne by a subset of the world market participants. The model is tested with pooled time series-cross section data for the cotton market. M s ODELS of world commodity markets differentiate among market participants in a variety of ways. Single-equation approaches make strong implicit assumptions about cross-country similarities in consumer preferences and producer responsiveness, while in other approaches world markets are disaggregated on the basis of time period, income group, or type of economic system. The present paper develops a model that groups countries in terms of the presence or absence of controls on international trade. As Johnson and others have noted,1 quantitative controls on trade are prominent in the trade of many primary products. With such restrictions, domestic prices bear no necessary relationship to international prices, and movements in world prices may be of limited relevance to explaining global consumer and producer behavior. In the model in this paper, countries are classified into two groups depending upon whether their consumers and producers are responsive to international prices. The international market is then seen as one in which the burden of adjustment falls on the producers, consumers, and holders of stocks in the price-responsive countries. The estimation procedure uses a cross-section time-series data set, in which country-specific dummy variables allow for differential behavior among the various trade participants. Cotton is the focus of the paper, as the cotton market is an especially good example of a market with quantitative restrictions: cotton production is dominated by less-developed countries (LDCs) and centrally planned economies (CPEs), and exports are largely determined by the decisions of state trading monopolies. I. A Trade Constrained Model The point of departure in developing the model is to group countries a priori according to whether their consumers, producers and inventory-holders are world price-responsive (R) or non-responsive (N). If x countries are fully insulated from world prices, and z countries are responsive to world prices, the global production-utilization identity can be written as