The Economics of Export Bans

By Alex Tabarrok.

"India recently banned the export of non-Basmati rice. What are the economics of export bans? An export ban will tend to decrease the world supply thereby raising world prices but some of the previously exported goods will flow to the domestic market reducing domestic prices, which is the typical reason for an export bans.

FT: India’s ministry of consumer affairs said on Thursday it would prohibit exports to “lower the price as well as ensure availability in the domestic market”. Rice prices in India have risen 11.5 per cent over the past year and 3 per cent over the past month, according to the ministry, reflecting a 35 per cent year-on-year surge in export volumes between April and June.

As noted, in the very short run, an export ban will reduce domestic prices as export stocks flood the domestic market (although even here we have to be a bit careful as a temporary ban could lead to distributors storing–“hoarding”–grain in the expectation of a lifting of the ban). As producers adjust to the lower price and start to produce less, however, the quantity supplied will decrease and domestic prices will rise from Psr to Pban, as shown in the diagram.

Even in the long run the domestic price (Pban) will be below the free trade price (Pft) so the export ban helps domestic rice consumers, i.e. increases their consumer surplus (the green area). India has a lot of rice consumers who vote so the goal here is obviously political. The export ban, however, hurts rice producers, i.e. producer surplus declines (the hatched area). Moreover, producer surplus declines by more than consumer surplus rises so the net effect of the export ban is to reduce domestic welfare.

Rice producers in India are often small family farmers and the government tries to help these farmers with other policies like subsidies so the export ban goes against the grain of other government policy. Moreover, the decline in rice producer incomes will hurt rural incomes more generally. Thus, the export ban protects urban consumers at the expense of typically poorer rural farmers and is likely to increase inequality.

In the long run, an export ban means a smaller farm sector. An export ban is like prohibiting a hotel from raising prices during seasons of high demand. That’s nice if you can get a room but it means fewer hotels. In other words, more hotels will enter the market if they know that they can offset low profits in periods of low demand with high profits in periods of high demand. In the same way, preventing farmers from selling at high prices reduces farmer profits which reduces long run entry and production.

The United States had an export ban on crude oil for 40 years. It’s sometimes said that the export ban was non-binding because the US was a big oil importer. I suspect, however, that the export ban reduced the speed of the fracking revolution. The US export ban also lead to a lot of bizarre mispricing. The ban didn’t apply to refined oil products, for example, so the US went more heavily into refineries and over-produced refined oil products even when (on the margin) exporting crude oil at market prices would have been more profitable.

The Indian government does hold buffer stocks of rice. Strategic reserves have their own problems but it might have been better to draw on the strategic reserve rather than ban exports. Rice and circuses for the capital city at the expense of rural farmers is not a good long run strategy for economic development."