The effect of China's domestic public storage on world market prices: the case of cotton
China Agricultural Economic Review
ISSN: 1756-137X
Article publication date: 24 August 2021
Issue publication date: 19 October 2021
Abstract
Purpose
During world price spike periods, the government is more likely to apply trade distortions to stabilize domestic prices, but the trade distortions would amplify fluctuations of international market prices. Which type of policy may stabilize the domestic market price, but not disturb the international market? This paper answers the question by taking public storage policy as a case study in the context of trade policy. Specially, this paper tries to identify the effect of domestic public storage on the world market price.
Design/methodology/approach
This article extends a standard theoretical model of trade policy through incorporating domestic public storage policy and makes the model more applicable in the context of China. The extended model is then applied to analysis how domestic public storage policy affects the international market price in the context of trade policy. Finally, a properly identified structural vector auto-regression technique is applied to test the effect of domestic public storage on the world market price by using cotton data from China.
Findings
The theoretical model indicates that China's public storage policy could stabilize the international market price. In order to test the working mechanisms, China's soaring public storage between 2010 and 2014 is employed to identify the effects of China's cotton storage on the volatility of the world price. The empirical findings show that China was able to stabilize the international price of cotton to a non-trivial extent through alteration of its public stockpile.
Originality/value
The first contribution is that this paper extends a standard theoretical model of trade policy to incorporate domestic public storage policy, which enables us to explore the effects of domestic public storage policy on the world price in the context of China. The second major contribution is that this paper provides evidence that, as a large player in the world market, China's public storage policy could stabilize the international agricultural price to a substantial degree.
Keywords
Acknowledgements
The authors are grateful for the helpful comments by the editors and the anonymous referees who have helped to significantly improve this paper. Wenshou Yan wishes to thank for funding from the National Natural Science Foundation of China (Program No. 71903198) and the Fundamental Research Funds for the Central Universities, Zhongnan University of Economics and Law (Program No. 2722020JCT022). Kaixing Huang wishes to thank for funding from the National Natural Science Foundation of China (Program No. 71934003). All errors are our own.
Citation
Yan, W. and Huang, K. (2021), "The effect of China's domestic public storage on world market prices: the case of cotton", China Agricultural Economic Review, Vol. 13 No. 4, pp. 756-780. https://doi.org/10.1108/CAER-12-2020-0300
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited