The government announced an export ban on meat to stop the increase in prices and to prevent further declines in domestic consumption. What would Adam Smith say about such a policy?
In an attempt to tame price increases and promote the consumption of a product greatly ingrained in the Argentinian culture, the government of Argentina decided to establish a 30-day ban on the exportation of meat. The measure was implemented after the upsurge in the price of beef by nearly 70% in a year caused a significant reduction in domestic consumption. Allegedly, the president considers that people from Argentina should not pay the same price for meat as in “France, China, or any latitude in the world.” Even though other factors like inflation and the devaluation of the country’s currency play a role in both the increase in prices and the reduction of consumption, the government recurred to a policy already employed several times with disastrous consequences.
Will it work this time?
Adam Smith, the founder of economics and champion of international free trade, made specific comments almost 250 years ago on the effect that exportation has on the domestic commercialization of agricultural products. According to Smith, when there is a surplus of a particular commodity in the home market, it will usually be exported. However, he warned that if people cannot export that commodity, they will reduce their production to serve only the domestic market. When that is the case, such a “market will very seldom be overstocked; but it will generally be understocked.” Hence, if ranchers in Argentina do not have the ability to export part of their production, they will end up reducing it. In the beginning, the supply of meat will be greater than the domestic demand. Thus, prices will decline in the short run. However, ranchers will adapt and produce less in the long run, which will increase prices yet again.
Smith asserted that free trade was always the best method to promote production. He argued that “[t]he prohibition of exportation limits the improvement and cultivation of the country to what the supply of its own inhabitants requires. The freedom of exportation enables it to extend cultivation for the supply of foreign nations.” In this sense, the meat export ban in Argentina will reduce the incentive for ranchers to increase productivity or produce in surrounding areas. On the other hand, allowing the free exportation of meat will lead ranchers to produce as much as possible to capture the greater demand from abroad. This will make them figure out ways to increase productivity or breed cattle in areas that before were neglected. Therefore, the free exportation of meat will increase the market’s overall supply and make prices fall.
Who benefits from the export ban?
Restricting the exportation of particular commodities is not a 21st-century trade policy only implemented in Argentina. In fact, even Adam Smith’s Great Britain of the 18th century applied export restrictions for certain products like wool. At that time, prohibitions of exportation were much more burdensome and oppressive, going so far as to imprisoning or cutting off the hands of those who attempted to export banned products. Nonetheless, the intention was always the same: to depress the price of the commodity to that which otherwise would be.
More importantly, the policy was (and still is) a clear privilege for some people at the expense of others. Smith commented that “the prohibition certainly hurts, in some degree, the interest of the growers of wool, for no other purpose but to promote that of the manufacturers.” In the case of the meat export ban in Argentina, reducing the price of meat damages ranchers while simultaneously benefits slaughter factories that only sell in the domestic market. This is because these slaughter factories will suddenly have more supply available than otherwise. At the same time, they will face less competition from those slaughter factories dedicated to exporting meat. Although this benefit may be transitory, it will allow these companies to produce and invest more than in normal circumstances. In that regard, the export ban is no other thing than a blatant privilege for domestic manufacturers to the detriment of other participants in the supply chain.
What should Argentina do?
It is not easy to understand that a country that was always praised for its good conditions to breed cattle is today in the middle of a crossroad in which it must restrict the exportation of meat. Incredibly, even Adam Smith related in his book almost 250 years ago how low was the price of meat in Argentina. He observed that at Buenos Aires, an ox costed “little more than the labour of catching him.” However, after several decades of failed trade policies, meat exports have decreased constantly in Argentina, making the country abandon the ranking of the largest meat exporters in the world.
The recently implemented export ban will undoubtedly fail as well. It will not bring meat prices down in the long run and will likely make things worse. If the government truly wants to reduce the price of meat in Argentina, it should allow exportation so that supply increases. There is no need for prohibitions and regulations. Ranchers will make sure to produce as much as they can. As Adam Smith said about his home country, “[t]hat security which the laws in Great Britain give to every man that he shall enjoy the fruits of his own labor, is alone sufficient to make any country flourish, notwithstanding these and twenty other absurd regulations of commerce.” Following the same logic, the government of Argentina should establish clear rules of the game and get rid of the meat export ban. That will incentivize ranchers to produce more, meat supply will increase, prices will go down, and everybody will benefit down the road.