Globalization Helps Feed the World

However, not every vineyard in California exports to Scotland, and not every distillery in Scotland exports to California. Although trade can be generated by a love for variety, as demonstrated by Paul Armington, generally, for a winery in California to export to Scotland, the price of that wine in Scotland must be lower than similar wines from Scotland (if those even exist) and other countries. Critically, what matters to consumers in Scotland is the price they actually pay for the California wine given its quality. This price includes the cost of producing the wine, a markup, and the transportation and other trade costs associated with delivering the wine to Scottish consumers.

If Spain, a country with lower trade costs to Scotland, also exported wine to Scotland, California would need to produce a similar wine at an even lower production cost than the Spanish wine to make up for the difference in trade costs if Scottish consumers wanted to import it. Therefore, only the most productive segment of California wineries will export to Scotland as they can overcome their trade cost disadvantage with Spanish (and other) wineries. This concept of selection into trade was pioneered by the modern economist Mark Melitz and is crucial for understanding the relationship between trade and productivity.

In this essay, I will explain several major economic forces that shape agricultural trade (and trade more broadly), paying particular attention to how trade relates to productivity. Productivity describes how efficiently firms—farms, in our case—create outputs from inputs. We can think of this relationship as being governed by technologies, which include machines, farming techniques, new seed varieties, and other practices that can increase the efficiency of one or several inputs used in production. First, I will argue that exports are a large revenue source for US farms and that trade helps the US agricultural sector become more productive. I’ll then explain how trade benefits US consumers by reducing prices and hedging production risks. In the next section, we’ll discuss the global benefits of trade. Finally, I’ll finish with a brief discussion of agricultural trade policy, including how Donald Trump’s trade war with China hurt US agricultural exports and why reducing trade costs is better policy than other productivity-focused policy instruments.

Over the 20th century, US agriculture has experienced large increases in output and productivity, which have helped US farms to feed both US and global consumers. Many economists rightfully focus on the central role of research and development, both public and private, in promoting productivity gains in agriculture. The 20th century experienced a huge increase in the use of tractors, pickers, genetically modified crops, pesticides, and other technologies that increased productivity by reducing the overall use of inputs such as land and labor in agriculture. Figure 1 shows indexed estimates from the US Department of Agriculture for total agricultural output and total factor productivity in agriculture. Total factor productivity can be thought of as the changes in production that can’t be explained by changes in particular agricultural inputs, like land, fertilizer, seeds, labor, and other resources. However, as productivity in agriculture has increased, employment in agriculture has drastically decreased, from about eight million workers in 1950 to only two million in 2020. The United States has become more open to trade with the passage of agreements such as the General Agreement on Tariffs and Trade in 1947 and subsequent agreements such as the North American Free Trade Agreement (NAFTA) (substituted in 2020 by the United States–Mexico–Canada Agreement, or the USMCA).

Technologies that boost productivity not only increase the efficiency of US agriculture but also give it an advantage in export markets. Exports today make up a substantial share of US gross agricultural production, as shown in Figure 2. Since around 2010, the United States has exported over 40 percent of the value of its agricultural production.

Trade also increases the incentives for farms to produce more efficiently. A US farm exporting soybeans to China must produce soybeans at a low enough price to be cheaper than Chinese soybeans and other exporters selling to China after trade costs. This encourages US farms to adopt technologies and practices that increase productivity. In most cases, these exporting farms also sell in the US market, which incentivizes US farms to adopt more-efficient technologies or switch their production toward crops they are better at producing. The United States has nontechnological advantages in terms of the quality of its agricultural land, but US farms also take advantage of genetically modified varieties of soybeans, which boost yields. Additionally, US farms are much larger than Chinese farms, which permits agricultural practices that decrease the average cost of producing soybeans. In 2018, over 93 percent of US soybean acres used genetically modified varieties, and many producers used advanced technologies, such as tractors with GPS-guided autosteering. Compared with China, the large size of US farms enables American producers to justify the high capital costs of these initially expensive technologies. These productivity differences mean that Chinese consumers benefit from paying the price of producing US soybeans and the trade costs to get the soybeans across the Pacific Ocean to China.

Many of the agricultural technologies that give US farms a productivity advantage over many global competitors also rely on trade in their production processes. For example, John Deere tractors rely on globally sourced parts for components, such as computer chips, which are crucial for GPS-guided autosteering and other functions. So, increased trade costs from tariffs or supply disruptions likely get passed on to farmers, which would in turn increase production costs for agricultural products that rely on John Deere tractors.

Given that the United States is relatively geographically isolated—except to export to Canada and Mexico—US farms typically need a sizable productivity advantage to export to distant markets. Figure 3 shows a simple comparison between the yields (output per hectare) of the United States and the rest of the world for four of the United States’ major exporting crops: corn, soybeans, cotton, and wheat. The vertical axis in Figure 3 shows the percentage difference between the US output per acre for a specific crop and the world output per acre for the same crop in each year going back to 1961. US yields for corn have been consistently almost double the world yield over the past 60 years, whereas US yields for cotton and soybeans have ranged from about 50 percent above the world yield in 1960 to about 25 percent above the world yield in 2022. For these crops and many others that the United States exports, we can clearly see how the United States is likely the lowest cost importer, even after trade costs, for a number of countries.

It is worth discussing why wheat is a major US export crop despite US yields lagging behind the world average in recent years. For example, Mexico has yields about two times higher than the United States, yet in 2022, Mexico imported about $1.59 billion in US wheat. First, if the demand for wheat in Mexico can’t be satisfied by domestic production, then Mexico will still import wheat even if it is more productive than its trading partner. Second, since Mexico is a large country, the wheat-consuming regions in the south may find it cheaper to import wheat from US ports in the Gulf of Mexico than to buy Mexican wheat shipped from the northwest across the Sierra Madre mountains. Third, farmland in Mexico that is highly productive for wheat may also be productive for an even higher-value crop, such as avocados or year-round blackberries. This is not the case for US wheat farmers in South Dakota or Nebraska. After considering these factors with favorable trade agreements like NAFTA/USMCA, sending specialty products to the United States from Mexico in exchange for US wheat makes more sense.

Over the 20th century, agricultural trade has allowed US farms to build on their natural advantages in climate and soil, and it has incentivized them to continue adopting productivity-increasing technologies and practices to win global market share. Trade openness in agriculture has not only made exports central to the financial well-being of US farms but has also benefited US consumers in important ways.

Trade has been a boon for US consumers, providing them with lower food prices and expanding the variety of foods they can purchase. In the same way trade costs give Canadian wheat an advantage in the Canadian market, trade costs give US agriculture an advantage over imports in the US market. Even so, imports in common products, like wheat or rice, help keep US consumer prices low through competition. If two bags of rice are of similar quality but one is cheaper, all else being equal, consumers prefer the cheaper bag regardless of its origin. That’s not to say that people in the United States don’t often make a point of buying local foods, but these preferences typically come at a higher price.

In this paper I have also discussed a second mechanism by which trade can impact domestic food prices by incentivizing increased productivity. Farms that produce efficiently enough to compete in export markets also often sell in the US market, which drives down the price domestically. Moreover, competition in both imports and exports keeps prices in the United States low. Although trade likely doesn’t have as large an impact on productivity increases as, say, research and development in new agricultural technologies, trade does incentivize the use of these technologies through competition, and that has benefitted consumers through lower prices. Moreover, trade can increase the returns to the research and development process, which will lead to new varieties and technologies.

Figure 4 shows how groceries (food purchased for home consumption) have declined as a share of overall US personal consumption expenditures over time. In 1960, about 19 percent of US personal expenditures went toward food consumed at home. That share has declined over time and settled at around just over 7 percent after the year 2000. This indicates relatively slower nominal growth in food prices than in other expenditure categories and signals rising US incomes, which may allow consumers to purchase more food at restaurants (outside the home) and spend their additional income on products besides food.

Figure 4 also demonstrates that as our incomes increase, the amount of food we consume and what foods we consume change in important ways. If I only made $30,000 a year, I would likely eat a lot of instant ramen because it is cheap. If my income doubled to $60,000 a year, I wouldn’t consume twice as much instant ramen. Instead, I would probably want to eat something better, which I can now afford with my higher income. So, if I had been eating 6 cups of instant ramen a week when I made less money, I probably would eat less than 12 cups a week after my income doubled. This reflects what economists call the income elasticity of demand, which describes how our demand for products varies with changes in our (real) incomes. In the case of food, as our real income increases, our demand for additional food increases less than one-to-one with the increase in our income. The types of food we demand also change as our incomes increase; we shift our consumption away from instant ramen toward more valuable food, such as produce and meats.

Some of the effects of rising US incomes can be seen in what food we choose to import. To take an example often touted by Fred Hochberg, former president of the Export–Import Bank of the United States, increased trade with our NAFTA/USMCA partners has permitted a large increase in US consumption of avocados, which we import from Mexico. Avocados are not a necessity; we import them because high real incomes in the United States allow us to. Although some regions in the United States produce avocados, US yields tend to be more volatile and lower than Mexico’s, as shown in Figure 5.

As incomes rise, US demand for specialty products that other countries can produce more efficiently is likely to increase as well, avocados being only one example. Scott Lincicome also notes in an essay for this series that US demand for international cuisines has expanded. This reflects our access to specialty products from other countries and our changing tastes as the United States welcomes new cohorts of immigrants. Figure 6 shows that US exports and imports of agricultural products have broadly increased since 1990. Imports over this period have increased by over 300 percent in value—the Department of Agriculture notes that US imports tend to focus on higher-value products and fruits and vegetables that help smooth out seasonality in US production. For example, in the summer, US grocery stores will stock domestic blackberries, but in the winter, blackberries are likely imported from other sources where they are in season. This means that US consumers are willing and able to pay a small premium to purchase blackberries year-round, which reflects our rising real incomes.

Like smoothing out seasonality in production, agricultural trade can also decrease US consumers’ exposure to agricultural production risks, such as floods, fires, and droughts. The COVID-19 pandemic provided several examples of how trade can help mitigate risks for consumers. Scott Lincicome, Gabriella Beaumont-Smith, and Alfredo Carrillo Obregon highlighted how trade helped mitigate the baby formula shortage during the pandemic.

The meat industry also demonstrates how trade can help mitigate domestic supply disruptions. During the pandemic, meat-packing plants were subject to high COVID-19 risks due to crowded working conditions, and several plants suspended operations due to outbreaks. Farmers and packers took several steps to reduce the impact of these temporary closures, including keeping animals on feed lots and drawing down frozen storage. Nevertheless, US prices rose, likely due to these issues. Higher US prices for meat then offered an opportunity for countries such as Brazil and Argentina to export meat to the United States.

In Figure 7, we can see that imports of beef and chicken increased during the pandemic. The vertical axis shows indexed quantities of imports to the United States, where 2019 serves as the base value of 100. During the COVID-19 pandemic, beef import quantities increased about 10 percent, and chicken imports increased even more over their 2019 baselines.

Imports ensured that US consumers continued to have access to chicken and beef products even as domestic supply chains experienced increased risks from COVID-19. Trade openness allows high prices in the United States—in this case, for meat—to incentivize foreign producers to export meat to the United States, filling the demand that domestic production can’t meet. This process also helps bring prices back down as more foreign countries export to the United States, increasing the available meat supply in US markets. As the production shock subsides and prices continue to decline, domestic producers will be able to again leverage their natural advantage in trade costs over foreign producers to regain market share.

We have focused on three major ways in which agricultural trade benefits US consumers. First, trade reduces the prices consumers must pay by incentivizing domestic farms to produce efficiently and increasing competition from imports. Second, trade provides consumers with access to various products they wouldn’t otherwise have, such as avocados and out-of-season produce. Finally, trade in agriculture helps reduce consumers’ exposure to production risks. These forces, however, are not unique to the United States and in the next section we will discuss agricultural trade from a global perspective.

Before discussing the global impacts of agricultural trade, it is important to highlight some cross-country differences in agriculture and food consumption. First, rich countries tend to have more-productive agricultural sectors, lower levels of agricultural employment, and more trade in agriculture than their poorer counterparts. Second, richer countries don’t tend to increase their overall consumption one-for-one with increases in gross domestic product (GDP) per capita. Moreover, as GDP per capita increases, the composition of the food supply changes to higher-value products. These forces reflect that the income elasticity of demand for food is less than one. This means that if my real income increases by 1 percent, my consumption of calories will increase by less than 1 percent, holding prices constant.

Figures 8 and 9 show cross country evidence of how food consumption changed with GDP per capita in 2021. Both graphs use a measure from the UN Food and Agriculture Organization of available food supply in each country. This imperfect measure of aggregate consumption is expressed as kilocalories per person per day, and each point represents a country observed in 2021.

Figure 8 shows that income increases are not associated with proportional increases in food consumption; instead, as incomes increase, food becomes a lower share of expenditures across countries even as overall expenditures grow. Moving from the poorest country to the richest country—an increase from roughly $400 per person in a country like South Sudan to around $100,000 per person in countries like Switzerland—is only associated with a roughly 50 percent increase in the food supply as measured by kilocalories available per person per day. Figure 9 shows that the composition of the food supply also changes with GDP per capita: The poorest countries receive approximately 2 percent of their calories from meat, whereas the richest countries receive over 5 percent of their calories from meat.

Trade primarily benefits the global economy by lowering prices that consumers pay, which in turn increases the real incomes of consumers. For agriculture, when food prices decline due to trade, real incomes for consumers increase, and they likely spend a substantial portion of their increased incomes on nonagricultural products, as reflected in Figure 8. These increases also disproportionately benefit the poorest countries, which are closer to subsistence levels of income. Additionally, if global incomes continue to rise, the composition of agricultural trade may change with larger flows of higher-valued products, such as meat, as suggested by Figure 9.

Trade can allow the gains from technological innovations in one country, like the United States, to benefit countries that it trades with through lower prices, as shown by Jonathan Eaton and Samual Kortum. Trade can also help increase the global set of individual countries’ productivities through specialization in producing certain products based on that country’s comparative advantage. However, there is also evidence that trade encourages technology adoption, which can increase productivities in specific countries and sectors. As real wages increase due to exposure to trade, farmers face pressure to adopt more labor-saving technologies. Trade in agricultural inputs, like fertilizers, also decreases their cost and promotes their use over more traditional and less-efficient techniques. Trade can also foster the sharing of ideas and production techniques, as pointed out by James Bacchus in an essay for this series. Finally, increased agricultural trade, through the mechanisms we have already mentioned, can promote a country’s development into higher income sectors.

Trade is also an important component of international food security, which was a key concern of policymakers during the COVID-19 pandemic and Russia’s invasion of Ukraine, a major grain exporter. In the case of COVID-19, we have already discussed how trade helped alleviate supply chain issues related to meat in the United States. However, trade can also help alleviate supply issues globally. Similarly, in the case of Ukraine, which produces large quantities of wheat, corn, and sunflower oil, international markets have so far averted the worst-case scenarios predicted earlier in the conflict. Trade leverages increased supply in other countries, and in conjunction with international aid, it has helped avoid shortages. Ukrainian production has begun to recover as well.

A country’s trade openness is at the end of the day a matter of policy choice. Free trade is welfare increasing overall, but that does not mean everybody always wins. Rather, governments negotiate trade agreements with other countries while considering their domestic constituencies, including consumers and producers. Although consumers and many producers benefit from trade through lower prices, larger markets, and increased access to inputs and technology, less productive firms might lose market share when exposed to import competition. Trade can induce specialization that requires workers to change sectors, which has short-run consequences even if there are potentially long-run gains. However, even with these caveats, protectionism in the form of tariffs, quotas, export restrictions, distorting subsidies, and other policy tools may have a number of unintended consequences.

Figure 10 shows the destinations of US agricultural exports and the sources of US agricultural imports by country group. These groups include NAFTA (Canada and Mexico), the EU28 (which here includes the current 27 European Union member states and the United Kingdom), China, and the rest of the world.

The first thing to notice in Figure 10 is that agricultural imports and exports between the United States and its NAFTA/USMCA partners have increased drastically since the agreement’s signing in 1992. The United States has trade agreements with 17 other countries in the “rest of the world” category, which has also experienced substantially increased agricultural trade flows since 1990. Finally, agricultural exports to China greatly increased after the country acceded to the World Trade Organization (WTO) in 2001. Still, US agricultural imports from China are a relatively small share of overall imports. The signing of NAFTA and China’s accession to the WTO mark large reductions in trade costs between these countries and the United States, and as we would expect, we see trade flows increase.

However, trade policy frequently increases trade costs rather than lowering them. Even though tariff rates have decreased globally with the creation of the WTO, there are still tariffs on most products, and many countries have increased their tariffs in recent years. Returning to our example of avocados, if the US government increased the tariff on avocados from Mexico, then US producers could increase their prices because the full price of avocados from Mexico would include the higher tariff rate. This could increase avocado production in California, but it would force US consumers to pay higher prices for avocados grown either domestically or in Mexico.

Although the direct effects of tariffs are important, the US-China trade war during the Trump administration had noticeable indirect effects on US agriculture. Starting in 2018, the Trump administration levied tariffs on steel, aluminum, and other manufactured goods in the name of national security. Then, Trump introduced additional tariffs on Chinese imports. Setting aside the negative effects of these tariffs on US firms that use steel and aluminum in production or imports from China, China (and other affected countries) responded with its own tariffs on US products, many of which were agricultural, including US soybeans. The exports panel in Figure 9 clearly shows the impact of these retaliations on US agriculture, as exports from the United States to China dropped over 50 percent year over year in 2018. In response to the $12 billion decline in exports in 2018 and the $7 billion difference in exports in 2019 (compared with 2017), the Trump administration paid farmers $28 billion in market facilitation payments to compensate the industry.

While the market facilitation payments to farmers under the Trump administration are an explicit example of vote buying, trade barriers have been a classic policy area in which firms can engage in rent-seeking activities. Anne Krueger demonstrates how a cap on imports can incentivize firms to use resources (mostly labor) to compete for the rights to import, which is unproductive. Some of the ways companies, including farms, might compete for these rents are by employing lobbyists, making campaign contributions, or locating their jobs in politically important areas. The labor and other resources devoted to rent seeking could otherwise be producing goods and services, resulting in an economic loss.

In times of crises or perceived crises, policymakers sometimes resort to the mercantilist policy of placing bans on exports. Several countries employed this response after the start of Russia’s land invasion of Ukraine. Researchers have found that these export restrictions increase global price volatility, as trade plays a crucial role in price stabilization globally, even during times of crisis. However, export restrictions likely reduce domestic prices temporarily at the expense of long-run investments and countries’ access to trading partners. This collective-action problem highlights the importance of international institutions like the WTO in facilitating trade cooperation.

In addition to tariffs, quotas, and export bans, governments have more subtle tools to restrict trade, often called nontariff barriers. These barriers can appear to be harmless regulations, but they also impose costs on importers. One of the great accomplishments of the EU’s common market is a reduction in these barriers within the EU. Since the European project started, the 27-country bloc has worked toward uniform standards, removed tariffs between member countries, and experienced steadily decreasing trade costs. However, even though the EU has reduced barriers between its members, it does have barriers to specific products that affect trade flows and even distort the production of firms located in its trading-partner countries. Vincent Smith, Justus Wesseler, and David Zilberman argue that the EU’s aversion to genetically modified crops likely negatively impacts the ability of African countries that export to the EU from adopting these new technologies. These regulations likely harm agricultural productivity in Africa and threaten efforts to make agriculture more resilient and sustainable. Additionally, even seemingly harmless requirements such as country of origin labeling increase packing costs for importers and domestic producers, therefore raising the price paid by consumers.

Trade is not the only way to increase productivity and lower prices for consumers of agricultural products. Instead, governments could, in theory, subsidize the use of technologies they think will increase productivity without decreasing barriers to trade. Obie Porteous compares the effectiveness of subsidizing fertilizer use versus reducing trade barriers in Africa and finds that reducing trade costs is more efficient than subsidies. Decreasing trade costs incentivize the highest productivity regions to produce while also lowering the price of fertilizers and incentivizing their use, which benefits consumers in his model but reduces agricultural revenues as prices decrease. Subsidies for fertilizer use do increase the use of fertilizers, but the costs of the subsidy swamp any gains to farmers and consumers.

However, Porteous’s findings also point to why subsidies are a common policy option even though they decrease welfare on net. His model shows that with subsidies, farmers experience revenue gains while consumers enjoy price reductions, but the cost of the subsidy may be obscured from voters as it appears only through taxation, which generates the welfare decrease.

Policies that increase the quality of transportation and information networks can also lower trade costs. For example, the United States could consider policies that would allow its persistently low port performance to improve, such as adopting automation technologies. The ports of Tacoma, Washington, and Oakland, California, are two of the least efficient ports in the world, according to the World Bank’s 2023 performance index. This increases the total trade costs of goods moving through them. To use a historical example, the laying of the transatlantic cable in 1866 between the United States and the United Kingdom allowed producers in one country to more effectively meet demands in the other. This change lowered the costs associated with using merchants to facilitate transatlantic trade. Economists have estimated that this shift was equivalent to lowering tariffs from 6 percent to zero. In addition, other private innovations have meaningfully lowered trade costs, including the shipping container, introduced in 1956. Although tariffs, quotas, and regulatory compliance are not the only components of trade costs, they are important and frequently used policy tools that can hinder the free flow of goods and services across borders.

As with many policy settings, the benefits of trade openness to consumers are dispersed—a few dollars on this product, a few cents on that product—whereas the costs of trade openness are often concentrated in firms that lose out to import competition. These firms tend not to go quietly, leveraging political influence to maintain their existing protections or lobby for new ones. Similarly, the benefits of subsidies are often concentrated, with a few firms benefiting at the expense of millions of taxpayers and consumers. As a new Congress and administration are set to take power in 2025, they would be wise not to forget the benefits of agricultural trade, both for US farmers and consumers, and to resist the temptation of protectionism.