Major Determinants of World Agricultural Trade

Abstract

Agricultural world trade is heavily impacted by comparative advantage, trade policies, domestic farm policies, gravity factors, and transport costs. Comparative advantage is determined by Ricardian productivity differences and Heckscher-Ohlin (H-O) factor endowment differences. The technological difference serves as a source of comparative advantage. In addition to research and development, institutional factors such as transparency, corruption and bribery, political stability, and business climate can also impact technology and thus comparative advantage. A country with a strong and effective institution will most likely be more productive, and hence, has a greater potential to trade. The other source of comparative advantage is factor proportional differences as put forth by the H-O theorem which states that a country will export a commodity that uses the abundant factor of production intensively. Trade policies such as import-restricting policies (tariffs and quotas), import-augmenting policies (import subsides), export-restricting policies (export taxes and quotas) and export-augmenting policies (export subsidies) are among the common trade policies widely enacted by countries to influence agricultural trade. Countries also extensively subsidize domestic production by providing output price and income supports and input subsidies. Agricultural subsidies by exporting (importing) countries promote production and boost exports (curtail imports). Gravity factors such as transport costs, gross domestic product, regional trade agreement, etc. are major determinants of bilateral trade. This study quantifies the impacts of these factors on agricultural trade. The findings indicate that corruption, political instability, trade policies, and distance significantly lower agricultural trade. In contrast, farm policies, factory endowments, GDP in the exporting countries, GDP in the importing countries, free-trade agreements, and legal enforcements augment farm commodity trade.