Fertilizer Import Bans, Agricultural Exports, and Welfare : Evidence from Sri Lanka

This paper quantifies the value of fertilizer for agricultural production and trade in a developing economy where agriculture is centrally important by using an unprecedented natural experiment whereby the government of Sri Lanka imposed an abrupt and unexpected ban on the imports of all chemical fertilizers in May 2021. The analysis combines novel high-frequency firm-level trade data, detailed agricultural ground production data, crop yield estimates from state-of-the-art remote sensing techniques, an d dynamic event study designs. The findings show that the fertilizer ban led to dramatic declines in agricultural production, fertilizer imports, and exports of fertilizer-dependent crops. Using a quantitative trade model, the paper finds that the ban’s welfare effects were equivalent to a 1.5 percent income reduction on average, with losses disproportionately concentrated on landowners (whose income is tied to agriculture) relative to workers and on regions specialized in the cultivation of relatively fertilizer-intensive crops. The findings quantify the equilibrium value of fertilizer in agriculture, an important estimate for any fertilizer-related policy (such as fertilizer subsidies) and for the public debate on the costs and benefits of environmental regulation more generally.