Correcting Economic Understanding – Banning Ukrainian Imports

Several Eastern European companies imposed import restrictions on agriculture produce from Ukraine. Why this is nonsensical.

Last time we did a "Correcting Economic Understanding", it was quite popular and insightful to many. We are considering making this a feature where we discuss either comments or policies that make little economic sense. If you have questions about any government policies, feel free reach out, comment here or in Substack Chat!

Thank you for reading our work! If you haven’t yet subscribed, please subscribe below:

If you would like to support us further, please consider sharing and liking this article!

---

Introduction

Several Eastern European countries that border or are close to Ukraine have decided to impose import restrictions on Ukrainian agricultural products. The official stated reason behind this decision is that farmers in these Eastern European countries are struggling financially due to what they believe is the influx of produce from Ukraine caused by the lowering of tariffs, which lowered prices of these products, and therefore reduced the farmers’ profits.

Economic theory and empirical evidence can help us understand why this policy is likely to fail in achieving its goal, is harmful to consumers, and damaging to Ukraine.

What are they thinking

Farmers in several Eastern European countries have been protesting, as in the last several months their profits have dropped significantly. The farmers believe that the reason behind this is the implementation of a policy that has opened imports from Ukraine to their countries. Since there has been a big increase in supply of agricultural products to these countries, the Eastern European farmers believe that this must have caused the price to fall. Moreover, farmers and other lobby groups argue that the product being imported is of worse quality and does not abide by strict regulatory and labor standards that are present in their own markets.

By banning or restricting these imports, farmers believe that this will enhance their profits, and although less important for them, improve consumer welfare. The governments have acquiesced to their demands and imposed a ban.

Why are they wrong

Regulations

There's a lot to unpack here. Firstly, we can discuss where the farmers are potentially correct – opening up to trade is more than just tariffs. As we discussed previously, trade agreements nowadays involve far more than just tariffs. Harmonizing regulations, product quality, labor laws, and environmental standards are all important features. These differences can result in 'unfair' competition. If a domestic farmer has to adhere to costlier standards regarding cleanliness than a foreign farmer, importing the foreign product will obviously be cheaper. But these two products are not the same from the social perspective – one adheres to the standards chosen by the local society, while the other doesn't. This is actually one of the main differences between the European Union and the United States on the poultry trade. US farmers have much more lenient standards regarding diseases since they chlorine wash the poultry, killing all bacteria and viruses. The EU on the other hand has strict standards on the health and safety of chickens regarding diseases – the chickens shouldn't be getting sick in the first place.

In the case of Ukraine and the other Eastern European countries, however, it is very unlikely that there are many material differences in the standards of production, especially when it pertains to the production of commodities: goods that are easily interchangeable with other goods of the same type such as agricultural products. There has been very little, if any, evidence that the produce is of worse quality. Moreover, often in commodities, if there is a quality difference, such as in oil, it is easy to adjust the price. If grain coming from Ukraine has more impurities and requires additional work, one can simply offer to pay less (adjust the price for the extra work it requires). Moreover, there haven't been any reports that the production standards in Ukraine are in violation of any relevant Eastern European standards. The import of agricultural products has been occurring for several months now, and complaints did not emerge earlier. Therefore, it is unlikely that we are dealing with 'unfair' competition. 

Commodity Pricing

So why did farmers in Eastern European countries start protesting in the last month? The answer is simple and given by this chart:

Global agricultural commodity prices have fallen significantly from some of the highest prices observed in history. Prices for agricultural products still have a lot to fall to reach pre-pandemic prices. After a period of very high prices and profits, caused by restricted supply and concerns about further supply issues, farmers may have gotten used to these elevated profit margins.

Commodities, such as agricultural products, are not very differentiated products (they're not unique – grain from one supplier is not different from another grain). This means that in a globalized world, the price of commodities is more or less determined globally since commodity purchasers can get the commodity from anywhere in the world. Thus, the only things impacting commodity pricing are production costs, tariffs, and transportation costs. 

To illustrate, suppose a farmer in Country A charges $5 for their grain. If transportation to Country B costs $1, a purchaser in Country B would need to pay $6. Therefore, a farmer in Country B cannot charge more than $6 for their grain, since consumers would buy from Country A. 

From a local perspective, these Eastern European farmers can either sell their produce locally or transport it globally, depending on what prices they're offered in the different markets. Thus, local buyers of commodities have limited impact on pricing – they can only really offer to pay the global price without the transportation cost, since that would make the farmer indifferent between selling locally or to the global market.

Opening the Ukrainian Supply

The resumption of imports from Ukraine had most likely limited impact in the countries near Ukraine but most likely did have some global impacts. By reintroducing the supply of agricultural products to the global market, prices for these goods fell due to increased global supply. 

It is also worth noting that at the same time, many other global supply bottlenecks improved – shipping (transportation costs) became a lot cheaper, allowing for more global competition in the agricultural sector (as mentioned above). Farmers in Eastern European countries might have had a strong, short-lived supply monopoly position since importing from far away was too expensive due to shipping costs, while supply from nearby countries was restricted.

Ukraine Imports – Limited Local Price Impact

So why would opening up to Ukraine have limited impacts on the price of agricultural products in the Eastern European countries. Suppose Ukrainian grain is significantly cheaper to produce for some reasons (their land is more fertile). Now Eastern Europe, along with the rest of the European Union, opens up to imports of agricultural products from Ukraine. Let’s assume the Ukrainian agricultural commodities flood the Eastern European market, since Ukrainian producers can receive higher prices in Eastern Europe for their product. If the price in Eastern Europe starts dropping for these agricultural products, Western European consumers in Germany and France would now be interested in buying those agricultural products from the Eastern European market. This would drive up demand for agricultural products in the Eastern European markets, increasing their prices. Therefore, it would be impossible for the price of agricultural products to fall only in the Eastern European markets. Any major price difference between Eastern and Western European markets would quickly disappear due to the global nature of commodity trade. This suggests that the problem is not an inflow of agricultural products specifically to these Eastern European countries – it's simply the fall of the global price. Whether Ukrainian farmers sell their agricultural products to Eastern Europe, Western Europe or any other region, as long as Ukrainian farmers have access to sell somewhere, the price impact on agricultural goods will be very similar regardless of where they sell (the only difference would be transportation costs). It is worth noting that transportation costs are generally a ‘bad’ cost since it does not generate value to the product. In a perfect world, transportation costs would be zero. 

Interestingly, the rest of the European Union realizes that the policy of banning imports has no benefits and has proposed allowing imports of Ukrainian agricultural products to other European countries, while Eastern European countries would only serve as transit countries.

Consumers

Lastly, let's discuss the impact on consumers. The ban will most likely just slightly increase prices of agricultural products in the Eastern European countries. Naturally, this artificial price increase will lower consumer welfare. Since there are many more consumers than farmers, the welfare effect of this decision will be negative.

Conclusion

The banning of imports from Ukraine is a political, not an economic decision. It will not achieve any of the stated aims of improving outcomes for farmers by raising agricultural prices, because commodity prices are determined globally. The price impact, if any, will be minimal. This is a fortunate outcome since larger price increases would reduce welfare in affected countries by even more. 

The fall in agricultural prices is caused by global supply chain issues easing. Agricultural prices are still elevated but rapidly falling from their recent highs. The prices farmers receive will not change by much due to this ban. And we already have evidence that this policy of banning imports is failing – farmers in these Eastern European countries haven’t benefited much since the ban was instated, and are now demanding further assistance from their governments – subsidies, tax cuts, and credits. These market interventions are all paid for by taxpayers and are almost certainly welfare decreasing – taxpayers will not benefit from this intervention.

The only impact this policy may have is adverse to Ukrainian farmers. Since Ukrainian farmers may now have to sell to further away countries, they may have to cover some of the additional transportation cost. Moreover, physical shipping delays, such as additional border checks and paperwork, caused by the policies of the Eastern European countries might also impact their profits. 

From an economic perspective, this policy has no benefits – only drawbacks.

Cover photo by Chris Larson.

If you enjoyed this article, you may also enjoy the following ones:

Correcting Economic Understanding of US Senators – during the Senate hearing with Federal Reserve Chairman Jerome Powell, several Senators made questionable economic statements.

Housing – Will deregulation fix everything? – would removing zoning laws and housing regulations lead to an increase in housing supply and improve housing affordability.

Causes of Current Inflation (December 18, 2022) – what was behind the inflationary surge during the Covid pandemic?