Increased affluence changes global trade

This week’s Fund Strategy included a comment by me on changing patterns of world trade.

Agriculture has become a relatively niche enterprise in modern industrial economies. However, the latest 10-year Agricultural Outlook from the Organisation for Economic Development (OECD) and Food and Agriculture Organisation (FAO) of the United Nations highlights some important trends*. These apply to the economy and investment more generally rather than just agriculture.

Perhaps the most straightforward is that, in relative terms, agriculture is becoming less important. Everyone still needs to eat but agriculture is accounting for a smaller proportion of world trade and the global economy.

Second, trade is expanding, both in terms of the numbers of countries involved and the extent of trade. This is a key part of the globalisation process.

However, a few big players still dominate trade in agriculture. Back in the late 1980s the largest exporter was America followed by the European Union (EU) 15, Australia, Canada and Brazil. In the early part of this decade the EU had taken the lead followed by America, Brazil, Canada and Australia.

But the pattern is in the process of changing with the rapid growth of the developing world and Asia in particular. South-South trade is becoming increasingly important. In the case of agriculture the report describes the growing presence of Argentina and Brazil as “staggering”. Other key southern exporters include India, Malaysia, Russia, Thailand, Ukraine and Viet Nam. In manufacturing it is clear that China is playing the leading role.

The growing affluence of the developing world is also affecting consumption. One of the clearest indicators is that people in the south are eating more meat. As countries become more affluent their consumption, and meat in particular, tends to rise.

Finally, the report shows how the increasing popularity of biofuels is putting up the cost of agricultural commodities. As biofuel production is increased the amount of land devoted to producing food falls. This has a direct impact on agricultural commodities and an indirect effect on meat as feed prices increase too.

This is also part of a broader trend in which environmental measures could play a role in increasing prices overall. For example, regulation and the promotion of environmental standards incur costs. While there is sometimes room for such measures it is important to recognise that they are not free and they can go too far.

So in some respects the world has not changed as much as many assume. The developed economies still play a dominant role in the world economy. However, as the rapid development of the south continues, particularly in East Asia, this pattern looks set to change considerably.

*OECD-FAO Agricultural Outlook 2007-2016. Highlights are available: here.