Trade policies and the transmission of international to domestic prices

We look for evidence that countries increasingly insulate their domestic markets for staple grains from global markets when international prices increase. Previous studies have demonstrated that the transmission of international to domestic prices for these products is less than perfect, which reduces the ability of the global trading system to buffer shocks. However, past studies generally assume that relationships between international and domestic prices are constant, and hence that a country’s degree of insulation does not vary over time. To relax this assumption, we use a smooth-transition model, a modified version of the error correction model (ECM). We estimate elasticities of transmission from international to domestic wholesale and retail prices for a comprehensive set of countries for wheat, yellow and white maize, and rice. We find that price transmission from international to domestic prices weakens in many countries and on average when international prices peak, in other words that the insulation of domestic from international prices increases during high-price episodes (such as in 2007/08 and 2022). We also find that this increased insulation cannot be attributed exclusively to changes in border measures such as export restrictions or import tariffs. This suggests that countries are also using measures such as price controls or the release of stocks to insulate their domestic markets for staple grains.