Commodities in International Trade: Commodities in International Trade: Current Trends and Policy IssuesCurrent Trends and Policy Issues

Implications for Caricom CountriesImplications for Caricom Countries

Olle Östensson, UNCTADOlle Östensson, UNCTAD

www.unctad.org/infocomm

www.natural-resources.org/minerals

Commodities: an attempt at a typology

• Physical characteristics– Homogeneous quality– Can be shipped in bulk– Low degree of processing

• Economic characteristics– Few barriers to entry– Productivity gains tend to be passed on– Fluctuating prices

Commodity groups

Shares of world exports, 1997

- manufactures: 75.1%

- food items: 8.6 %

- fuels: 7.8 % (1980: 24%)

- ores and metals: 3.3 %

- agricultural raw materials: 2.4%

- non-classified, including non-monetary gold: 2.8%

Growth rates, 1980-97

8.1 %

4.5 %

-0.8 %

3.8 %

3.4 %

Change of shares in world commodity exports

• Developed countries 59% 66%

• Developing countries 33% 29%

• United States 12% 12-13%

• European Union 28% 39%

1970-72 1998-991970-72 1998-99

• Developed countries 75% 70%

• Developing countries 16% 26%

• United States 12% 12-13%

• European Union 46% 42%

Change of shares in world commodity imports

1970-72 1998-991970-72 1998-99

As a group, developing countries have become less reliant on

commodity exports

However, out of 140 developing countries, 83 depend on

commodities for more than half of their export income, almost the

same number as in 1990.

Nonfuel commodities’ share of exports, %

90-92 97-99Antigua and Barbuda 6 44Barbados 28 31Belize 88 84Dominica 67 47Grenada 66 74Guyana 88 65Jamaica 80 74Saint Kitts and Nevis 47 48Saint Lucia 66 65Suriname 95 82

Trinidad and Tobago 7 10

Share of export earnings of three most important commodities, 97-99

Antigua and Barbuda 2.6 Fish, Alc beverages, WoodBarbados 19.4 Sugar, Alc beverages, FuelsBelize 52.5 Sugar, Bananas, FishDominica 34.1 Bananas, Oil of coconutsGrenada 23.2 Spices, Fish, Wheat+flourGuyana 91.0 Gold, Sugar, BauxiteJamaica 61.2 Alumina, Sugar, BauxiteSt Kitts and Nevis 36.6 Sugar, BeveragesSt Lucia 55.7 Bananas, Fresh fruit, PepperSt Vincent and Gren 68.5 Bananas, Wheat+flour, RiceSuriname 84.5 Alumina, Rice, FuelsTrinidad and Tobago 51.2 Fuels, Non-alc bev, Sugar

Dynamic and stagnating sectors

• Changing consumption habits• Improved storage and transportation

– For example, tropical fruits, fishery products

• Changes in the organization of trade– Direct contacts between exporters and retailers allow

adaptation to consumer preferences

• Technological change and substitution– Mainly for raw materials

• Agricultural protectionism– Dynamic sectors least protected

Changing consumption habits - food

In rich countries– Health concerns– Convenience - less time to cook and prepare– Desire for variety– Environmental awareness– Rising incomes– Tourism

In poorer countries– Increasing incomes– Current low levels for basic foods– Increased calory intake– Also, “globalization” of consumption

Example of a dynamic specialty item:“Organic products”

• Markets less than 2 % in general but in Austria, Switzerland, Denmark, 5 to 10 %

• Increasing rapidly – in UK by 40 % per year• Import demand likely to remain high• 80 per cent of organic products imported into the UK

Commodity prices in constant US$, 1980-2002

0

20

40

60

80

100

120

Combined index Tropical beverages Food Agricultural raw materials Minerals and metals

Commodity prices in current U$, 1980-2002

0

50

100

150

200

250

300

Minerals and metals Tropical beverages Food Agricultural raw materials Minerals and metals

Margin increasing between international and retail prices

• Widened since 1970s, and at an accelerating rate since 1980s

• Margin greater in countries where there is more concentration

• Cannot be attributed to costs

• Also, for same products, with similar retail prices, producers in developing countries receive less

Developing countries and agricultural commodities

Why is agriculture important to developing countries?

• 2,500 million people in developing countries depend on agriculture, and most of them are poor

• Comparative advantages are clear

• A window of opportunity in a new round?

0% 5% 10% 15%

1970-72

1996-97

Main developing country agricultural exports (% of

agricultural exports)

Traditional commodities are losing importance

New dynamic sectors have emerged

Obstacles to increasing food exports

Border measures• Tariffs• Seasonal limits• Minimum import prices• Health and safety

standards

Other obstacles• Domestic support• Oligopolistic markets• Importing firms’ standards• Exporters’ (un)competitiveness

Agricultural tariffs:

- Agricultural tariffs (average 62 %) much higher than for manufactured products (average 5 %)- Complicated – mixed with TRQs, ad valorem and specific tariffs, complex technical relationships- Multitude of preferential rates- Tariff escalation especially for meat, sweeteners, vegetable oils

High tariff sectors

• Tobacco, meat, dairy and sugar

Low tariff sectors

• Fruit, vegetables and fish BUT

• Few TRQs, minimum prices, vary with prices

How important a barrier are tariffs?

• 1970-72 to 98-99, successful countries had few, if any preferences: share increased from 9 to 12 %

• ACP countries and LDCs had preferences: shares declined from 8.4% to 2.4% and from 4.7% to 1%, respectively

Health and safety standards

Official• SPS and TBT bring

discipline• HACCP generally

accepted• Implementation costly• Management skills

required

Unofficial• Importing firms’

requirements• Determined by consumers’

tastes and public opinion• Quality, traceability• Implementation costly• Standards vary

Subsidized exports from developed countries displace developing

countries in their own and third country markets

Total support to agriculture in OECD in 2001 was $311 billion; support per farmer was US$ 33,000 in Switzerland, US$ 20,000 in the E.U., Japan and the United States

A useful comparison (billion US$, 2000)

0

50

100

150

200

250

300

350

1

Support toOECDagriculture

OECDagriculturalexports

FDI indevelopingcountries

Developingcountries' debtservice (1998)

ODA

Increasingly, traditional developing country products are processed and/or branded in developed countries, and

re-exportedDeveloped countries are accounting for larger shares of tropical product exports. US exports of coffee and coffee products continue increasing and reached a record level of $250 million from about $175 million five years ago. (Largest exporter Brazil and all of sub- saharan Africa - about $2 billion each)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970-72 1990-92 1998-2000

Sh

are

in v

alu

e co

coa

trad

e

Chocolate

Cocoa beansCocoa products

Developing country exports

Developed country exports

Losing out in the value-added:the example of the cocoa sector

The evolution of productivity:Change in yield 1980-2001, %

-10

0

10

20

30

40

50

Fruits

Rice

Sugar

can

e

Tobacc

o

Veget

ables

Developedcountries

Developingcountries

The gap is closing:Yield in developing countries in

% of developed

020406080

100

1980

2001

Changing market structures• At the national level:

– liberalization: foreign entrants, foreign product competition, increased price risk exposure

– pressure to meet exigencies (eg. HACCP)

• At the level of international trade– growing concentration of trade: mergers

– cheaper finance and good logistics are now key factors

– need for greater capital resources and more skills

• At the level of consumer demand– increasing importance of supermarkets

– globalization of consumption patterns

– new demands linked to production technology (e.g. organic foods)

Value chains are changing• International trade:

– Firms becoming larger and vertically integrated– Mergers and acquisitions– Disappearance of traders

• Retail sector– Global supermarket chains

• Liberalization of agriculture in developing countries

• Closer integration of trade and production– Impact on not only WHAT to produce but HOW and

by WHOM

Policy issues• International community

– Reduce agricultural protectionism and subsidies– Harmonize standards– Allow protection of crucial sectors for single commodity exporters and

food importing countries – Establish safety nets against catastrophic price falls– Provide market information

• Governments– Integrate subsistence farmers in the monetary economy– Facilitate access to credit, regulatory frameworks– Improve transportation and storage– Complement liberalization with institution building– Improve information flows

Policy issues, continued

• Enterprises– Identify dynamic markets– Upgrade business skills and product quality– Raise productivity, particularly in small-scale

farming– Build competitive marketing and distribution

networks– Use market-based risk management techniques

Market issues and prospects

• Bananas– Stagnation of demand in traditional consumer

countries, new markets becoming important

– Organic bananas

– EU banana regime ends in 2006

– No tariffs for LDCs in EU in 2006

• Fish– Rapid growth in demand

– Compliance with standards costly

Market issues and prospects, continued

• Sugar– Falling prices (countries exporting to free market lost

1.4 billion US$ 1998-2002)

– Subsidized production and exports in developed countries

– No tariffs for LDCs in EU in 2006

• Spices– Rapid growth in demand

– Easy to enter market, risk of oversupply

Developing countries and mineral commodities

Why is mining important to developing countries?

• Little employment - but 13 million people work in small scale mining

• Production-consumption linkages weak – but locally important

• Fiscal linkages provide opportunities for funding development

Developing countries’ share of world minerals and metals

exports, %

0

5

10

15

20

25

30

35

40

45

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Share non-precious metalsand minerals

Share gold

Developing countries’ share of world minerals and metals

imports, %

0

5

10

15

20

25

30

35

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Some success in the last decade, taking into account

• The share of developing countries in production is higher than in exports (increasing imports)

• Their share in investment is higher than in production

• Their share in exploration is higher than in investment

Factors behind the success

• Comparative advantages are allowed to work

• Changed investment climate in developing countries

• Changed financing methods

• Security of supply issues politically dead

• Environmental concerns

International trade regime for minerals

• Developed countries apply zero or near zero tariffs on mineral commodities, developing country tariffs decreasing

• However, anti-dumping actions are common

Investment climate

• Most developing countries have updated legislation on FDI, on mining or on both

• Nationalizations unlikely

• Political stability

Financing methods

• Project lending

• Gold loans, commodity bonds (not very common now)

• Equity capital (easy until a few years ago)

Political factors in developed countries

• No subsidies to domestic mining

• Privatization of state owned mining companies

• Zero environmental tolerance

• Mining banned on large areas of land

Policy issues: mineral commodities

• For mature mineral economies: diversification• For new mineral economies: attract and retain

investment• For both groups:

– ensure an equitable distribution of revenue

– channel government income to investment in human capital

– maintain macro-economic stability in the face of price and volume variations

Market issues and prospects

• Bauxite/alumina– New bauxite mines in new places

– Chinese competition on bauxite for non-metallurgical uses

– Energy costs for alumina refineries, mainly brownfield investment

• Gold– Low prices, official reserves still a threat

– Financing for small ventures problematic