The constant gardener
Commodity Trade
Adam Sneyd,
McMaster University
When a national government chooses to protect its commodity producers from
international competition, does this decision impede the expansion of
national income? How can international trade in food or oil impact a
state's ability to secure supplies of these commodities? If there are only
a handful of powerful buyers, what are the consequences for citizens of
countries that are limited to exporting commodities such as coffee, cocoa,
or cotton? Is a discussion of these matters limited if it focuses on trade
in bulk products without addressing the problems societies face when
people, land, and money are made into commodities (Polanyi 1944)?
Perspectives on globalization and autonomy feature prominently in attempts
to arrive at answers to these related questions. They inform ongoing
political debates over the impacts of international trade in commodities,
and national and international policy options to manage that trade.
This glossary article understands the commodity trade story to be about
continuity, even though barriers posed by territory and distance to
international flows of information, money, and rich people have declined in
the present era of globalization (Scholte and Schnabel 2002). Each of the
principal and related issues pointed to above — national income,
security of supply, commodity dependence, and societal and ecological
impact — implies the importance of place. However, knowledge about
commodity topics such as the oil situation and the plight of impoverished
producers in the Least Developed Countries (LDCs) now spreads rapidly,
shaping price fluctuations and shifting public opinion. States nonetheless
remain at the heart of the matter. To underscore these points, the past
sixty years of developing country efforts to achieve more autonomy through
commodity initiatives are detailed below.
After the Second World War, many policy-oriented economists recognized that
the legacy of colonial trade patterns had not disappeared with political
independence. The economies of many new countries continued to be geared
towards producing agricultural goods and raw materials for export. These
experts developed theories and supported policy options that aimed to
prevent massive commodity price declines such as the price crash that
contributed to the Great Depression (Singer 1989, Innis 1995). John Maynard
Keynes believed that an international agency to stabilize commodity prices
was a necessary component of a lasting international economic order. When
countries attempted to establish an International Trade Organization (ITO),
International Commodity Agreements (ICAs) were near the top of the agenda.
The subsequent work of Raul Prebisch and Hans Singer on declining terms of
trade showed that price stability was only one aspect of overall commodity
pricing problems. In 1958, Jagdish Bhagwati outlined another facet.
Countries dependent upon commodity exports faced a vicious circle when the
world price of one of their commodities was low. The only way to increase
income was to boost production of the good in question, a self-defeating
move that reduced its price further still (Bhagwati 1958). Other thinkers
such as Nicholas Kaldor focused on how the costs of fabrication,
transportation, and distribution made up a high proportion of the final
price of commodities. In his view, this trend diminished the percentage of
the final price that reached direct producers (Kaldor 1983).
By the 1960s, empirical evidence indicated that commodity producing nations
faced price instability, declining prices, and long-term reductions in the
purchasing power their exports afforded. Third World governments sought
autonomy from these forces and used their numerical majority at the UN to
demand management of the commodity trade that would improve their relative
economic positions. They established the UN Conference on Trade and
Development (UNCTAD), and parties to the General Agreement on Tariffs and
Trade (GATT) subsequently accepted the principle of differential and more
favourable treatment for developing country exports. However, it wasn't
until after the Organization of the Petroleum Exporting Countries (OPEC)
leveled the "oil-weapon" in 1973 that the commodity agenda took centre
stage in what came to be known as the North-South debate. The commodity
initiative was a key component of the demand for a New International
Economic Order (NIEO), and it aimed to increase foreign exchange earnings
in the South and enable a greater share of those earnings to be retained
there. Articulated by the Group of 77 (G-77) in 1975 in the Dakar
Declaration, the program sought to create managed supplies or "buffer
stocks" of eighteen commodities of export interest to developing countries.
Stocks were to be managed to secure stable and higher prices. A special
fund was called for to finance these arrangements, and improved measures to
compensate producing countries for price fluctuations were advocated.
Members of the G-77 also wanted a council of associations to oversee ICAs
and coordinate the actions of producer associations such as OPEC.
To secure the General Assembly's support for the NIEO, the G-77 agreed to
postpone commodity questions until UNCTAD IV in 1976. At that conference,
negotiations on an integrated program for commodities (IPC) commenced, and
the need for a "Common Fund" to finance the program was agreed upon. The
South proposed a pricing system whereby each commodity's price would be
tied to price changes in a basket of manufactures. Viewing this proposal as
an invitation to worldwide inflation, the United States became quite
skeptical of the process and raised questions about the high costs the
North would pay for the IPC, the program's scope, and its failure to rely
upon market-based pricing. Negotiations subsequently bogged down. However,
the Common Fund for Commodities did emerge from this North-South battle,
though it did so without receiving sufficient funding for the management of
stocks. Despite calls made by the conciliatory Brandt Commission in 1980
to stabilize commodity prices at higher levels, many ICAs eventually had to
abandon the objective of managing stocks due to insufficient funds. Some
ICAs, such as the agreements for coffee and tin, collapsed altogether.
Consequently, the South's collective attempt to globalize the management of
the commodity trade and achieve the level of autonomy required to transcend
pricing problems and restructure their economies met with little success.
Many oil exporting states and larger rapidly industrializing countries no
longer prioritized commodity issues of interest to the poorest members of
the South coalition.
As embedded liberalism gave way to Thatcherism and Reaganomics, non-oil
exporting countries were selling fewer goods at lower relative prices to
the developed world, and relying upon loans to pay for their increasing
import bills. These trends continue to this day. Even with the expansion of
world trade, the share of non-fuel commodities in total trade has declined
over the past thirty years. Nonetheless, seventeen of the most heavily
indebted LDCs in Sub-Saharan Africa continue to depend upon exports of
non-oil primary commodities for over three quarters of their foreign
exchange earnings (FAO 2004, UNCTAD 2003a). Due partly to their reliance
upon exports in low demand, the LDC's share of soaring global export
earnings fell to 0.68 percent in 2004 (UNCTAD 2004). World prices for many
of their eighteen important export commodities continued to be lower in
real terms than in 1980. Cotton stood at 33 percent of its 1980 value,
while coffee was at 17 percent (FAO 2004). In the case of the latter,
Vietnam's exports flooded the market and depressed the world price, though
overall, low prices remained only one part of problem. The purchasing power
of LDC exports declined by 25 percent during the 1990s, and price
volatility continued to impact the livelihoods of direct producers.
Overall, these issues have caused balance of payments problems and led many
to take on new debts. The autonomy of LDCs facing such adversity has
consequently declined in the recent period, while oil exporters and larger
developing countries seem to have achieved more policy space.
To meet the conditions of further financing from multilateral lenders many
LDCs have removed inefficient national marketing boards for agricultural
commodities. Moves to "get the prices right" have often increased the share
of export prices going to direct producers, though their costs have also
risen as they have lost access to subsidized credit, fertilizers, and
marketing. While this policy option has freed up government resources, the
roots of the LDC commodity crisis have not yet been addressed. Developed
countries continue to dump their heavily subsidized excess production of
sugar, cotton, and other commodities onto global markets, fueling an
oversupply situation. Other factors driving down prices include the entry
of many lower cost producers, the development of new synthetic products to
replace raw materials, and the high tariffs many of the South's
agricultural products face in the North. Given this context, the fact that
LDCs have not moved up the global value chain indicates their precarious
position. They lack control over many of the sites where value is added to
their exports, including processing, shipping, insurance, distribution, and
marketing. Regarding processing, nearly all cocoa bean production occurs in
developing countries, while only 4 percent of all chocolate is actually
produced there (www.maketradefair.org). LDCs face
many barriers to entry in the other areas of value addition, as the
dominance of transnational corporations (TNCs) is well established (Gibbon
and Ponte 2005). The case of coffee demonstrates the LDCs' weakness. Unless
the product has been certified by an organization promoting "fair trade,"
the price paid to producers is often less than 1 percent of the retail
price of a cup (www.maketradefair.org). In
summary, the LDCs' ongoing reliance on commodity exports indicates that
they have failed to diversify their economies and move beyond the legacy of
colonialism. In the era of globalization, these states continue to be
excluded from the benefits of integration while their autonomy has
diminished.
Oil-related issues of energy security and potential environmental
catastrophe have overshadowed LDC concerns on the international commodity
agenda for two decades, though of late voices for change have been more
prominent. UNCTAD has been tasked with identifying the obstacles non-oil
commodity exporters face and articulating the means to overcome them. Based
upon their work, in June 2004 at UNCTAD XI, the Sao Paulo Consensus
included objectives for commodity issues. It sought to move LDC exports up
the global value chain, diversify LDC economies, and enhance their access
to markets in the developed countries. The Consensus called for increased
financial and technical assistance, infrastructure investments, and
transparency to ensure
that these objectives were realized.
Representatives of governments, international organizations,
non-governmental organizations (NGOs), and academics are currently debating
many ways forward, and developing potential solutions. Mechanisms to
compensate countries for price fluctuations and insulate them from future
volatility, including the renewal of the Common Fund's original mandate,
are on the table. The head of UNCTAD's
commodity division has advocated an aid for trade fund to assist with the
costs of diversification and to finance the technical assistance and
capacity building required to move up value chains (Puri 2005). Other
organizations, such as the World Food Programme, have floated schemes aimed
at managing price volatility through insurance and forward pricing. In the
developed countries, the fair trade movement has made inroads amongst
commodity consumers. For their part, NGOs such as Oxfam support a return to
ICAs and the creation of a new institution to manage commodities. Many
NGOs, experts, and governments are also backing a campaign to make trade
fair by eliminating subsidies in the North. Recently these campaigners
claimed some success as the WTO ruled US cotton subsidies and the EU sugar
regime to be illegal. A further initiative spearheaded by UNCTAD envisioned
duty-free and quota-free access to markets in the developed countries for
LDC exports (UNCTAD 2003b, Puri 2005). Countries of the South also
continued to work together to trade more amongst themselves. Many players
consider action on commodity questions to be essential to the achievement
of the Millennium Development Goals articulated at the UN Millennium Summit
in 2000.
Works Cited:
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FAO (Food and Agriculture Organization). 2004.
The state of agricultural commodity markets. Rome:
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Available: http://www.fao.org/es/ESC/en/Index.html
(accessed 28 February 2006)
Gibbon, Peter and Stefano Ponte. 2005.
Trading down: Africa, value chains, and the global economy. Philadelphia:
Temple University Press.
Innis, Harold A. 1995. Staples, markets and cultural change: Selected essays,
ed. Daniel Drache,
Montreal:
McGill-Queen's University Press.
Kaldor, Nicholas. 1983. The role of commodity prices in economic recovery.
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(July):
21-34.
Polanyi, Karl. 1944/2001.
The great transformation: The political and economic origins of our time. Boston:
Beacon Press.
Puri, Lakshmi. 2005.
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Available:
http://www.unctad.org
(accessed 22 August 2005)
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Civil society and global finance. London:
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Available:
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(accessed 22 August 2005)
UNCTAD (United Nations Conference on Trade and Development). 2003b.
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Available:
http://www.unctad.org
(accessed 22 August 2005)
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