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Issue paper

The impact of changes in the fundamental drivers of trade – Productivity, trade costs, and trade policies. Background paper for The State of Agricultural Commodity Markets (SOCO) 2022

Countries’ varying natural resource endowments are vital in explaining international trade. Traditional trade theory suggests that differences in technology and factor endowments lead countries to specialize and export certain goods or services in which they have a comparative advantage.

The computable general equilibrium (CGE) model simulations used in this paper aim to explain agricultural trade patterns and show how agricultural trade would change in response to productivity, infrastructure and institutions improvements and trade cost changes from regional and global trade liberalization. A set of nine scenarios is used to explore the effects of productivity, transport costs, non-tariff barriers (NTB), and border measures changes on agricultural and food trade and related welfare implications.

Policies driving agricultural productivity growth such as investments in research and development, economic reforms that strengthen incentives for farmers, rural education and extension, and improved infrastructure are shown to reduce the yield gap and improve productivity. Lower trade costs help comparative advantage play out, resulting in gains from trade. Measures taken to increase trade integration in Africa and Asia will be important for economic growth and development in these regions.

Policy Theme