Exchange rates and multicommodity international trade: insights from spatial price equilibrium modeling with policy instruments via variational inequalities

In this paper, we construct a multicommodity international trade spatial price equilibrium model of special relevance to agriculture in which exchange rates are included along with policy instruments in the form of tariffs, subsidies as well as quotas. The model allows for multiple trade routes between country origin nodes and country destination nodes and these trade routes can include different modes of transportation and transport through distinct countries. We capture the impacts of exchange rates through the definition of effective path costs and identify the governing multicommodity international trade spatial price equilibrium conditions, which are then formulated as a variational inequality problem in product path flows. Existence results are established and a computational procedure presented. The illustrative numerical examples and a case study are inspired by the impacts of the war against Ukraine on agricultural trade flows and product prices. The modeling and algorithmic framework allows for the quantification of the impacts of exchange rates and various trade policies, as well as the addition or deletion of supply markets, demand markets and/or routes, on supply and demand market prices in local currencies, and on the volume of product trade flows with implications for food security.

Automated summary

In this paper, a multicommodity international trade spatial price equilibrium model is constructed, specifically for the agricultural sector, taking into account exchange rates and policy instruments such as tariffs, subsidies, and quotas. The model considers multiple trade routes with various modes of transportation and transport through different countries. The impacts of exchange rates are captured through effective path costs, and the governing conditions for multicommodity international trade spatial price equilibrium are identified. The model allows for quantifying the effects of exchange rates, trade policies, and changes in supply and demand markets on prices and trade flows, with implications for food security.