Measuring Agricultural Trade Costs: Findings and Recommendations

International trade benefits both producers and consumers. However, agriculture and food products often face larger trade costs compared to other types of goods, when considering the percentage of trade costs to the final price. Higher transaction costs limit farmers’ accessibility to international markets, as well as consumers’ access to variety and food at globally competitive prices.  What market interventions can be taken to ensure consumers can take advantage of the low costs of agricultural production in other countries? How can farmers broaden their markets for goods like grains or specialty crops?

In a new publication titled “Agricultural Trade Costs” NC State Assistant Professor Heidi Schweizer and University of Nebraska Professor John Beghin have identified ways in which the gravity model, a standard model used in the field of international trade, can be used to better capture costs associated with agricultural products. The researchers offer targeted suggestions to improve measurement of trade costs in these markets, as well as forward-looking prescriptions regarding policy and technology.

For example, the World Trade Organization (WTO), created to assist in the global flow of trade, can commit to increasing transparency by providing notifications to all member countries when new restrictions are placed on the importation of agricultural goods. The WTO has a role in sharing critical information to anyone vested in selling food products across borders. One market the WTO could play an active role in managing is GMO, and looking toward the future, gene-edited, foods.

While GMO foods are heavily scrutinized in some markets, especially Europe, gene-edited foods need not follow the same trend. GMO foods have different labeling standards in various parts of the world and have a high-level of disaffection among customers in some markets. Gene-edited foods have the potential to become more accepted and appreciated than GMO foods but will still likely face labelling requirements. Each country considering importing a gene-edited food will have its own policy for labeling or may even refuse to allow the product in-country. These policies might be vague or even contradictory to neighboring country’s requirements. Information about trading gene-edited food will most likely be inconsistent, but the WTO could play a role in collecting, clarifying, and disseminating trade policies amongst its constituents.

Another prescription from Schweizer and Beghin is “integrating components of the transportation system” such as advocating for smart-systems that monitor and report transportation conditions. A smart-system can improve communication among shippers, carriers, and customs agents since they would all be privy to the same information in real-time. With investments, technology can be leveraged to ease bureaucratic processes in international trade and eliminate some inefficiencies that are particularly costly for perishable products.

Finally, fine-tuning the equations used to measure trade costs can provide economists and policy-makers the information they need to make informed decisions about international trade policy. Non-tariff measures are often hard to quantify but additional research can refine estimation methods. Improving the aggregation of these data would be a “breakthrough” for trade economists. The effects of further research could trickle down to the consumers and producers and be financially impactful to both groups.