Yesterday, India announced that it would no longer allow exports of cotton, and so instantly the price of cotton spiked, since India is the world’s second largest producer.Nomura’s Rob Subbaraman warns…
The more commodity prices rise, the greater the risk that countries focus on their own short-term self interests, thereby further exacerbating the rise in global commodity prices. By hoarding and banning commodity exports or lowering import tariffs, a country can increase its own local supply of commodities. However, this blunts the market-clearing price mechanism in equating supply with demand. In other words, such trade measures reduce the incentive for local consumers to ration demand for the commodity in question, but also reduce the incentive for local producers to increase supply. If many countries start doing this, in aggregate, it can exacerbate the global supply-demand imbalance, pushing global prices even higher – as was the case in 2004-08.
Trade tinkering in commodities could spread to food and energy as well.