Agricultural Trade with Production Uncertainty
Uncertainty in agricultural production resulting in loss of natural insurance works against standard gains from trade through comparative advantage. The strength of these two forces determine the final effect of trade on welfare. Even when comparative advantage effects are not strong enough such that free trade is worse than autarky, there exists a tax-subsidy scheme which with trade always makes the country better off than autarky in the absence of an insurance market. Countries with strong comparative advantage in industrial goods where production is less uncertain have no reason to restrict agricultural trade. Countries with strong comparative advantage for agricultural goods have reasons for government intervention which provides insurance. For all countries, some trade (free or restricted) is better than no trade.
KeywordsFree Trade Comparative Advantage World Trade Organization Insurance Market Small Open Economy
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