INDIA. Tea plantations in southern India. Is Me

The State of Agricultural Commodity Markets 2022


  • Natural resource endowments, such as land and water, contribute to shaping comparative advantage in food and agriculture. Trade ensures food security and helps countries overcome constraints in land and water, meeting their food requirements in terms of quantity and diversity at levels above what domestic production could sustain.
  • Trade helps allocate the production of food and agricultural products to countries with relatively higher resource use efficiency. Globally, trade can result in water and land savings, as production takes place in regions with relatively more efficient water and land use.
  • Trade can generate negative environmental externalities, as production for exports can result in unsustainable freshwater withdrawals, pollution, biodiversity loss and greenhouse gas emissions. However, negative environmental impacts often depend on local conditions and are more pronounced in poorly regulated settings.
  • In the long run, as production will have to increase to meet growing food demand, policies that promote open global food and agricultural markets can help alleviate pressure on natural resources. But trade policies alone cannot easily address environmental externalities. Multilateral trade rules, such as those provided by the WTO framework, together with national regulation, can help address trade-offs between economic and environmental objectives.
  • RTAs are increasingly used to foster sustainable practices through environment-related provisions and to encourage trade partners to adopt third-party voluntary sustainability certification schemes. To effectively address environmental externalities, RTAs should be equipped with legally binding environmental provisions and well-developed institutions.

Natural resources form an integral part of a country’s factors of production and while agriculture also relies on labour, machinery and technology improvements that can help producers cope with resource constraints, land and water remain fundamental inputs. In general, for agriculture and at the global level, trade can be efficiency-enhancing in the use of natural resources. Increases in food production can be achieved with a smaller ecological footprint, compared to a hypothetical situation in which countries would not trade, relying only on their own land and water to produce food.

Resource-use efficiency is not sufficient to ensure environmental sustainability. Negative environmental externalities associated with the agricultural sector can occur both at the local and global levels and trade can also provide an economic incentive for unsustainable practices. Trade agreements can help address environmental externalities. Environmental-related provisions are foreseen under multilateral agreements, such as those under the WTO, and have been increasingly embedded in RTAs. RTAs have evolved from a means to secure market access into a tool to frame deeper ties that expand to other areas, including the environment. Such policies need to be equipped with a robust political and legal framework to be effective in preventing adverse environmental impacts.

Natural resources, comparative advantage and trade

Countries can gain from trade by producing and exporting goods for which they have a relatively lower opportunity cost of production than their trade partners, and by importing those goods for which they have no such advantage. In analysing comparative advantage, economists look at various drivers such as technology and resource availability. For agriculture, differences in natural resource endowments across countries contribute to determining comparative advantage and to shaping trade patterns.x Countries tend to export the goods for which they have a relative abundance of the factors of production needed to produce them and they import those goods for which they face a relative factor scarcity.

For a country, agroclimatic conditions and land and water availability contribute towards determining the volume and composition of agricultural production and its engagement in trade as an exporter or importer of agricultural products. The role of natural resource endowments in shaping trade is exemplified by the concept of “virtual water”, coined in the early 1990s.y, 155 Virtual water is the volume of water used to produce a good, and virtual water trade refers to the amount of water embedded in internationally traded products.z Virtual trade can be thought of as the international exchange of factors of production embodied in the goods traded, for example, land and water, and thus helps understand how the relative availability of natural resources contributes to comparative advantage.156

A study estimates that at the global level, 37 percent of land use and 29 percent of water withdrawals are embedded in the international trade of food and agricultural products.157 Trade accounts for part of the resources used for agricultural production, with the larger part being used to meet domestic demand. For water, the concept of virtual trade is best reflected by a positive association between agricultural trade flows and the relative abundance of renewable water resources. Countries with relatively high-stress levels of renewable water resources tend to import relatively more water-intensive goods and, thus, are net-importers of agricultural products (see Figure 3.1).158

FIGURE 3.1The relationship between water stress and net trade positions, 2018 and 2019

SOURCE: FAO. Conforms to Map No. 4170 Rev. 19 United Nations (October 2020).
NOTE: This figure depicts only high and critical water stress levels based on 2018 data. The level of water stress is determined by the share of freshwater withdrawals from available freshwater resources and is reported by FAO under Sustainable Development Goal indicator 6.4.2. Net trade refers to the trade of primary crops. This figure shows net trade positions (exports minus imports) normalized by total trade (exports plus imports) based on 2019 data.
SOURCE: FAO. Conforms to Map No. 4170 Rev. 19 United Nations (October 2020).

For example, Egypt is a net-importer of food, faces critical water stress and imports a significant share of its cereal needs. This relationship between water stress and net trade position holds for most countries in Northern Africa and the Near East. Nevertheless, this generalization may not be applicable to all countries. Other factors of production – particularly land, but also capital or climatic conditions – can play a crucial role in determining the product-mix and the net trade position.aa, 159, 160 For example, Sri Lanka – a country that faces water stress – is shown to have had a net-exporting position in 2019, which is driven by its tea exports. Other countries – such as Finland, Norway and Sweden – do not face water stress, but can feature as net importers due to agroclimatic conditions, a relatively low per capita cropland availability, or both (Figure 3.1). Finally, water stress conditions can vary significantly within countries, and this is particularly the case for those countries with very large territories.

A positive endowment effect is also found between trade flows and land availability, indicating that abundant land can also constitute a source of comparative advantage. On average and across countries, low relative availability of land tends to relate to a net-importing position in agricultural trade (Figure 3.2). For example, Small Island Developing States, such as Maldives and Trinidad and Tobago, where per capita arable land endowments are limited and insufficient to meet national needs, are net-importers of food and agricultural products. Low per capita arable land endowments in conjunction with low land productivity could also relate to a net-importing position. Few countries have significant per capita land resources in the world, such as Australia, Brazil, Canada, the United States of America and Ukraine, and they feature consistently as net exporters.161

FIGURE 3.2relationship between cropland and net trade positionS, 2019

Source: FAO.
NOTE: Land used to cultivate crops. Cropland includes the total areas under permanent crops and temporary crops, meadows and pastures, and land with temporary fallow. Permanent meadows and pastures are excluded. Net trade refers to the trade of primary crops. This figure shows net trade positions (exports minus imports) normalized by total trade (exports plus imports).
Source: FAO.

While the evidence on virtual land transfers is scarce, findings point to a strong complementarity role between land and water resources in positioning a country as a net food exporter or importer in terms of virtual land and water trade. This is partially due to green water – the part of rainfall that is stored in the soil and available for the growth of plants – that is a key factor of production for many crops destined for export.162 Thus, countries with abundant land resources can also tap into abundant green water resources, which are invaluable in rainfed agriculture.

When supported by adequate policies, trade can help alleviate land and water constraints of countries, meeting their food requirements in terms of quantity and diversity at levels above those that domestic production could sustain. Analysing virtual resource trade flows helps understand the role of water and land in shaping trade patterns. This approach is not without limitations. It can misrepresent complex realities, as surface and groundwater are often not priced as a factor of production, and pricing precipitation or green water is not possible. Similarly, land allocation is not always determined based on market prices. Often, in developing countries, property rights are not well defined, impeding land markets from functioning well. This means that important factors of production may not be adequately priced, which affects the analysis of comparative advantage across countries.163

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