Geopolitical shocks and trade disruptions have made imports less reliable, especially for essential goods like food. This column outlines a framework where trade costs are stochastic, creating a trade-off between efficient but risky imports and secure but costly domestic supply. It argues that when trade is risky, policies that look protectionist can partly act as insurance against shortages, helping explain why food importers support domestic agriculture more.
Global trade has become risky. Geopolitical conflict, trade policy uncertainty, and the risk of shipping disruptions are now on the rise, implying that access to foreign suppliers can fail abruptly. Figure 1 illustrates this shift, depicting the simultaneous rise in geopolitical risk (Panel A) and the sharp increase in harmful trade interventions (Panel B) as classified by Global Trade Alert. Recent studies document how these forces are reshaping trade patterns, supply chains, and policy debates around fragmentation and ‘friendshoring’ (Bosone et al. 2024, Grover and Vezina 2025).
Figure 1 Rising trade risk and the return of protectionism
Notes: Panel A plots the Geopolitical Risk (GPR) Index (Caldara and Iacoviello 2022) and the Trade Policy Uncertainty (TPU) Index (Caldara et al. 2020); both series are 12-month moving averages. Panel B plots the annual count of new harmful trade interventions (black line) from the Global Trade Alert database.
Uncertainty can fundamentally change the gains from trade openness. Imports that look cheap on average may be unreliable in bad states of the world, while more expensive domestic or diversified sources may offer greater security. Thus, reliability is now a key factor in sourcing decisions alongside traditional cost considerations. Recent studies suggest private sourcing decisions may fail to fully account for the economy-wide costs of shortages when disruptions occur (Freeman and Baldwin 2022). In response, policymakers across countries are increasingly considering reshoring production or reducing their exposure to international markets to manage these risks.
This column presents insights from our recent research (Adamopoulos and Leibovici 2025) on how this risk reshapes production, welfare, and policy. We outline a framework where trade costs are stochastic, creating a trade-off between efficient but risky imports and secure but costly domestic supply. Because private firms do not fully price in the aggregate costs of a disruption, there is a role for policy to act as insurance, pushing the economy toward safer supply.
We illustrate the importance of these channels in the context of food security. Agriculture is a key setting because food is essential and hard to substitute. We document that net importers of food are systematically more food insecure. These findings are consistent with recent studies that have highlighted how export restrictions and war-related disruptions can amplify food insecurity for import-dependent countries (Ruta et al. 2022, Bondarenko 2025). We show that these import-dependent countries also protect their domestic agriculture more heavily than exporters. While at odds with specialisation based on comparative advantage, this behaviour is consistent with the implications of our framework, which rationalises protection as insurance against the risk of unreliable trade. Critically, we also find that productivity improvements can help shield economies from the risk of disruptions, mitigating the need for protection as insurance.
Trade risk and optimal policy
In Adamopoulos and Leibovici (2025), we analyse these forces using a quantitative multi-country, multi-sector Armington model of trade with non-homothetic preferences. Goods are differentiated by country of origin, and consumer expenditure shares vary with income.
We extend this environment by introducing aggregate trade risk: trade costs are stochastic, representing the potential for sudden disruptions in access to foreign markets. In the model, producers make sourcing decisions ex ante, before shocks are realised. Furthermore, insurance markets are imperfect, which implies that agents cannot fully hedge against these aggregate disruptions.
This environment generates a trade-off between efficiency and reliability. Low-cost suppliers may be attractive on average but risky; domestic or diversified sources offer safety but at a higher cost. Facing this trade-off, countries ‘self-insure’ by reshoring production or switching to safer trading partners. While this reduces vulnerability, it also lowers the standard gains from trade by limiting specialisation.
Private self-insurance, however, is insufficient. A key insight of the model is that private firms do not fully internalise the risk of trade disruptions. Firms take prices as given and ignore how their aggregate sourcing decisions drive up prices during a shortage. This pecuniary externality means the market effectively ‘under-insures’ against trade risk. Optimal policy corrects this inefficiency. Import tariffs and production subsidies act as insurance mechanisms, incentivising higher domestic capacity than the free market would support.
Lessons from agriculture and food security
Agriculture offers an ideal laboratory to study these forces. Food is essential and difficult to substitute. Unlike manufactured goods where consumers might delay purchases or switch varieties, a disruption in food supply creates immediate and severe welfare losses. This high potential utility cost in adverse states makes the insurance motive particularly acute.
We document three key patterns in the data, drawing on extensive records from the Food and Agriculture Organization (FAO) and the World Bank. First, food import dependence is strongly correlated with food insecurity. As shown in the left panel of Figure 2, countries that rely on staple imports to feed their population tend to report higher levels of food insecurity. This correlation holds even after controlling for income per capita, suggesting that exposure to international markets is associated with greater vulnerability, independent of a country’s development level.
Figure 2 Food insecurity and trade risk
Notes: Left panel plots the prevalence of moderate to severe food insecurity (y-axis) against the cereal import dependency ratio (x-axis); each point represents a country. Right panel shows the frequency of food import disruptions by size, using data on crops and livestock products from FAOSTAT (1961–2023). A disruption is defined as a proportionate decline in the food import quantity index of 20% or more relative to trend.
Second, these risks are substantial. Using long-run bilateral trade data, we find that large disruptions to food imports are not theoretical tail events — they are a recurrent feature of the data. The right panel of Figure 2 documents that sharp declines in real food imports (e.g. drops exceeding 20% relative to trend) occur regularly across countries and over time. This pervasive instability indicates that volatility is an intrinsic characteristic of the global food system, rather than a rare exception.
Third, policy systematically responds to this exposure. We examine agricultural protection using the Nominal Rate of Assistance (NRA), a comprehensive measure of the subsidies and tariff equivalents provided to producers. As shown in Figure 3, net food importers protect their domestic agricultural sectors significantly more than exporters do. On average, importers maintain assistance rates of nearly 45%, compared to just over 4% for exporters. While protecting sectors where a country lacks a comparative advantage appears inefficient through the lens of standard trade theory, these patterns suggest that policymakers may prioritise insurance over pure efficiency.
Figure 3 Nominal rate of assistance, 2000-2011
Note: Data from the World Bank
Indeed, our model can account for these patterns. We show that the observed protection is not necessarily a result of political inefficiency, but a form of optimal insurance. In a risky world, the high welfare cost of a food shortage outweighs the efficiency gains of cheap imports. Consequently, consistent with the data, our model predicts that import-dependent nations use tariffs and subsidies to maintain a safety buffer of domestic production.
Figure 4 illustrates the quantitative link between this vulnerability and the optimal policy response. The left panel shows the cost of exposure: under trade risk, countries with large agricultural trade deficits experience significantly higher consumption volatility compared to exporters. The right panel plots the corresponding intervention: the ‘resilience premium’. Our model predicts that these import-dependent nations find it optimal to raise import tariffs significantly, often by more than ten percentage points, to incentivise domestic production. This finding aligns with the high rates of assistance observed in the data, suggesting that protectionism in agriculture is often a second-best instrument for achieving food security.
Figure 4 Trade risk increases food insecurity and the rationale for protection
Notes: Left panel plots the increase in food insecurity due to trade risk, measured as the ratio of consumption in the open economy relative to the autarky state; net importers (negative x-axis values) face significantly higher consumption risk. Right panel plots the increase in the optimal import tariff when trade risk is introduced relative to a risk-free benchmark; countries with high import dependence optimally raise tariffs the most to insure domestic supply. Source: Adamopoulos and Leibovici (2025).
Crucially, our analysis also points to a constructive alternative to protection. We find that improvements in agricultural productivity significantly reduce food insecurity. By strengthening domestic supply capacity, productivity gains lower the probability of severe shortages and mitigate the insurance motive. This implies that investments in domestic production capability can effectively substitute for trade barriers, reducing the need for tariffs and subsidies.
Concluding remarks
Trade risk fundamentally alters the calculus of global integration. When access to foreign markets is uncertain, the gains from trade depend not just on low prices but on the reliability of supply. Our analysis suggests that policies typically viewed as protectionist distortions, such as tariffs and subsidies, can insulate countries in this environment.
This tension between efficiency and resilience is defining the modern policy landscape. Whether dealing with geopolitical fragmentation or supply chain fragility, policymakers must weigh the benefits of low-cost imports against the danger of sudden disruptions. This is particularly true for goods, final or intermediate, that are critical. Our findings highlight that prioritising resilience is not necessarily a rejection of economic logic but a rational response to risk.
Agriculture provides a paradigmatic example for this shift. The sector demonstrates how high stakes in essential goods drive an uptake of domestic production, whether through protection or enhanced productivity. This dynamic is now visible in energy, medical supplies, and critical technologies. As trade risks persist, the insurance motive driving agricultural policy may offer a preview of how the broader global trading system may evolve.
Source : VOXeu
