Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Exploring the Economic Impact of Changing Climate Conditions and Trade Policies on Agricultural Trade: A CGE Analysis

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Exploring the Economic Impact of Changing Climate Conditions and Trade Policies on Agricultural Trade: A CGE Analysis

Article excerpt

Agricultural trade will play a significant role in the future contribution of the agriculture sector to local and global economic outcomes, including economic growth, rural employment, and food prices. Trade outcomes will be affected by changes in production that result from productivity effects associated with climate change. In addition, government intervention in markets may also have significant effects, both on production incentives for farmers and, ultimately, on the competitive conditions in international markets. This paper explores the ways in which changing global agricultural productivity and policy patterns affect economic outcomes.

In the face of expected increased temperature stresses, variable water availability, limits to arable land and continued population growth, debates about how to ensure global food supply will meet future demand are intensifying. In the future, changing climate conditions may alter the relative productivity of regional agricultural production and, as a result, affect the trading patterns. Trade can play an important role in enabling products to move to areas of shortage. At the same time, the trading system is also affected by direct and indirect policy interventions. Policy decisions related to public support for agriculture and trade policies will influence outcomes by affecting the decisions of farmers, consumers, and traders and by altering the relative competitiveness of products on the marketplace.

Complex global models are increasingly being used to understand how economic and agricultural systems interact. Purely biophysical models are likely to underestimate the shifting between crops that occurs due to farmers' responses to changes in land and crop prices. However, models that ignore biophysical relationships and focus mainly on economic responses may overestimate the importance of price changes (Baldos and Hertel 2013). The challenge is to develop models that capture the essential relationships of both natural systems and economic systems while incorporating links between the two. Some authors examine these relationships by focusing on the natural resource endowments of countries or regions (see for example, Anderson and Strutt 2014).

Economic models are being extended to incorporate different types of land so that they reflect land use choices, particularly the conversion of forest into agricultural land (Gouel and Laborde 2018; FAO 2017). The heterogeneity of land within countries-and its influence on the way climate change affects land use-has also received a lot of attention (see for example, Ahammad and others 2015; Nelson and others 2013). The analysis in this paper is based on a largely economic model that includes differentiated land uses, allowing some aspects of the biophysical constraints to be reflected in the results. In particular, the model allows for limited possibilities to transform forest land into agricultural land and crop land into grazing land (and vice versa), with the total supply of land highly inelastic. This extension of the model is essential to evaluate the effects of climate change on the global distribution of agricultural production.

This paper focuses on the specific question of how trading relationships and climate change effects interact to determine trade patterns over time. Time lags associated with the effect of policy decisions are also important in terms of how agricultural and economic systems adjust to changing environmental and economic conditions. Some policy decisions, such as investments in research and development, will have longer-term effects on agricultural productivity and resulting compara- tive advantages. Other decisions, such as the imposition of tariffs, will have immediate economic effects and may also have lingering effects once tariffs are removed. Long-term scenario studies of agriculture have become increasingly important to understanding the trade-offs inherent in policy decisions and the current and future effects that result from these changes. …

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