Looking at the graphs above, if we assume we produce only what we need in the domestic market and do not trade (autarky), price and quantity will be in equilibrium at QE and PE. In the world market, if we produced exactly what we needed domestically, our world trade will be 0 at PE. Now let assume the world price P1 is greater than our domestic price of PE for a commodity like wheat. At this new price, our domestic demand decreases due to the high price, while production increases and we export this excess supply from of Q1 to Q2 (exporting to X1) at this profitable world price. However, when the world price drops, say to P2, suddenly our domestic demand goes up, yet our supply will be low, therefore, we turn to the world market to import from Q3 to Q4.
Now that we are faced with uncertainties created by COVID-19, maintaining a balance of trade and trade relations has become that much more important to our economy.
While trade at times can feel like it’s more a hindrance, we first should consider how it works and why, before we judge it, as it’s not a simple process. Trade is vital to all of Canadian agriculture, whether it’s producers, industry, or consumers. Producers profit from selling excess supply abroad, the industry benefits from being able to act as an intermediary of products across borders, and consumers can enjoy global products as if they were locally produced. I highly doubt many would think we would benefit if we got rid of trade, but the question is, is the current trade system working in our best interests?
It is! It may not be perfect, but the current international trade regulation is working in our favour for the most part. The reason being that we are an exporting nation who need trade to create balances. Like in life, in trade there are advantages to doing one thing well, rather than many things just alright. Trade allows us to specialize and profit, while importing goods or services to balance out the specialized basket we have in trade. We clearly observe this in the agricultural world of food production.
Without getting too into the balance of trade, economies of scale, or even specialization, international trade allows us to meet demand with supply. Western Canada produces excess amounts of grains, oilseeds and pulses, and relies on the export market (producing more than QE). This export demand allows the agriculture industry to carry on producing at the scale they do and remain profitable. Without open trading, producers would either need to reduce their production to meet domestic market demands (QE), sell their product at a much lower price (selling at PE or even P2 instead of P1), or switch to another commodity to produce. By having access to the world market, we can continue to produce what we produce well while filling the global demands.
Looking at the graphs above, if we assume we produce only what we need in the domestic market and do not trade (autarky), price and quantity will be in equilibrium at QE and PE. In the world market, if we produced exactly what we needed domestically, our world trade will be 0 at PE. Now let assume the world price P1 is greater than our domestic price of PE for a commodity like wheat. At this new price, our domestic demand decreases due to the high price, while production increases and we export this excess supply from of Q1 to Q2 (exporting to X1) at this profitable world price. However, when the world price drops, say to P2, suddenly our domestic demand goes up, yet our supply will be low, therefore, we turn to the world market to import from Q3 to Q4.
For consumers of a developed nation, we want to keep to trade open, as it grants us access to a plethora of goods at lower prices then we could produce domestically. Open trade has given us access to items that cannot be produced in Canada, from exotic spices to staples like bananas, chocolate and coffee. Open trade allows consumers access to these products or ingredients that either cannot be produced locally or cannot be produced at a low enough price. I would hate to imagine during our self-quarantine losing access to inexpensive coffee, or the number of imported ingredient we are relying on right now, which offers diversity in our recipes. I don’t want to imagine what this COVID-19 self-isolation would look like if suddenly coffee and chocolate was no longer available, it might not be on your essential list, but sure is on mine, right behind toilet paper!
While not a set of agricultural commodities, many of our nations are relying on the trade of essential health care products. This included trade or masks, gloves, ventilators, pharmaceuticals, and medical-grade chemicals for many of our essential drugs. Without trade, many of our nations would be worse off, as these are specialized products, which are often imported from nations like China, who can produce for a much lower cost and more efficiently.
We have open trade thanks to trade agreements. The World Trade Organization (WTO) includes 164 countries that are connected through relatively open agreements, which are designed to help keep an even playing field. Here are the basics about the WTO.
With all of the good that comes from being an open trading nation under the WTO, there are times when it seems like the structure in place is only letting us down. Currently, we are experiencing numerous changes in our politics, environment, and now global health, in which the balance and comradery of trade are vital. As a nation that is known for its reliable and safe agricultural production and one that relies on trade, we must understand the world-trading playing field going forward.
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