Commodities in International Trade: Current Trends and Policy Issues Implications for Caricom Countries Olle Östensson,

1. Commodities in International Trade: Current Trends and Policy Issues Implications for Caricom Countries Olle Östensson, UNCTAD www.unctad.org/infocomm www.natural-resources.org/minerals

2. 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

3. 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 %

4. Change of shares in world commodity exports • Developed countries59% 66% • Developing countries 33% 29% • United States 12% 12-13% • European Union 28% 39% 1970-72 1998-99

5. Change of shares in world commodity imports • Developed countries 75% 70% • Developing countries 16% 26% • United States 12% 12-13% • European Union 46% 42% 1970-72 1998-99

6. As a group, developing countries have become less reliant on commodity exportsHowever, out of 140 developing countries, 83 depend on commodities for more than half of their export income, almost the same number as in 1990.

7. Nonfuel commodities’ share of exports, % 90-92 97-99 Antigua and Barbuda 6 44 Barbados 28 31 Belize 88 84 Dominica 67 47 Grenada 66 74 Guyana 88 65 Jamaica 80 74 Saint Kitts and Nevis 47 48 Saint Lucia 66 65 Suriname 95 82 Trinidad and Tobago 7 10

8. Share of export earnings of three most important commodities, 97-99 Antigua and Barbuda 2.6 Fish, Alc beverages, Wood Barbados 19.4 Sugar, Alc beverages, Fuels Belize 52.5 Sugar, Bananas, Fish Dominica 34.1 Bananas, Oil of coconuts Grenada 23.2 Spices, Fish, Wheat+flour Guyana 91.0 Gold, Sugar, Bauxite Jamaica 61.2 Alumina, Sugar, Bauxite St Kitts and Nevis 36.6 Sugar, Beverages St Lucia 55.7 Bananas, Fresh fruit, Pepper St Vincent and Gren 68.5 Bananas, Wheat+flour, Rice Suriname 84.5 Alumina, Rice, Fuels Trinidad and Tobago 51.2 Fuels, Non-alc bev, Sugar

9. 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

10. 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

11. 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

14. 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

15. Developing countries and agricultural commodities

16. 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?

17. Main developing country agricultural exports (% of agricultural exports) New dynamic sectors have emerged Traditional commodities are losing importance

18. Border measures Tariffs Seasonal limits Minimum import prices Health and safety standards Other obstacles Domestic support Oligopolistic markets Importing firms’ standards Exporters’ (un)competitiveness Obstacles to increasing food exports

19. High tariff sectors Tobacco, meat, dairy and sugar Low tariff sectors Fruit, vegetables and fish BUT Few TRQs, minimum prices, vary with prices 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

20. 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 How important a barrier are tariffs?

21. 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 Health and safety standards

22. 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

23. A useful comparison (billion US$, 2000)

24. Increasingly, traditional developing country products are processed and/or branded in developed countries, and re-exported Developed 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)

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

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

27. The gap is closing:Yield in developing countries in % of developed

28. 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)

29. 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

30. 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

31. 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

32. 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

33. 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

34. Developing countries and mineral commodities

35. 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

36. Developing countries’ share of world minerals and metals exports, %

37. Developing countries’ share of world minerals and metals imports, %

38. 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

39. 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

40. 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

41. Investment climate • Most developing countries have updated legislation on FDI, on mining or on both • Nationalizations unlikely • Political stability

42. Financing methods • Project lending • Gold loans, commodity bonds (not very common now) • Equity capital (easy until a few years ago)

43. 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

44. 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

45. 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