Economic Paper

2310-1385 (online)
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This series examines current economic issues from a Commonwealth perspective. The titles in the series are technical papers of topical interest to specialists concerned with trade, micro and macroeconomics, development economics and related subjects.

Terms of Trade Policy for Primary Commodities

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J. P. Hayes
01 Jan 1975
9780850920949 (PDF)
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  • Foreword

    This study, the fourth in the series of Commonwealth Economic Papers, is a staff study written by officers of the Commonwealth Secretariat, but not necessarily reflecting official Secretariat views.

  • Introduction

    When they met in Ottawa in August, 1973, the Heads of Government of Commonwealth Countries discussed at considerable length “…the special problems of countries highly dependent on exports of agricultural products in primary, semi-processed, and processed forms…”

  • Nature of the Problem

    While the emphasis in this paper is on practical measures to help the developing countries to overcome problems which may arise from unfavourable terms of trade or fluctuations of their export prices or earnings, it is necessary to consider briefly the nature of the problem and the prospects for the coming years. The following pages concentrate on the terms of trade, as they affect development and standards of living in the developing countries. Problems arising from fluctuations of prices of export earnings are considered at the end of this section.

  • Guaranteed Price Agreements (Indexation of Commodity Prices)

    As mentioned on p. 2 above, UN General Assembly Resolution 3083 (XXVIII) calls for a study of “…ways and means whereby unit prices of manufactured imports from developed countries and unit prices of exports from developing countries could be automatically linked.” This simply carries to its logical conclusion the contention of several of the Commonwealth Heads of Government at their 1973 meeting that, as inflation continues to raise the prices of manufactured goods in international trade, countries highly dependent on the export of primary products should be protected against deterioration of their terms of trade.

  • Multilateral Contracts

    The successive International Wheat Agreements provide an example of a looser form of arrangement, embodying agreements by importing countries to buy certain guaranteed quantities at not less than the agreed minimum price, and by exporting countries to sell guaranteed quantities at not more than the agreed maximum price. An agreement of this kind thus makes provision for a price range rather than for a single guaranteed price. Moreover, only about 80-90 per cent of the prospective purchases of the importing countries were covered by the agreements, and some importing countries were outside the agreement, so that there was a residual, unregulated market.

  • OPEC-type arrangements

    The type of international guaranteed price arrangements discussed in the preceding section depends on the willingness of the importing, industrialized countries to take deliberate action to turn the terms of trade against themselves. Developing countries may well prefer to rely on forms of action which are under their own control, and the example of the Organization of Petroleum Exporting Countries (OPEC) in raising the price of a primary product by unilateral, co-operative action has undoubtedly been observed with great interest.

  • International Commodity agreements — export quotas

    OPEC-type arrangements, as considered in the previous section, consist of unilateral co-operative action between exporting countries. By contrast, international commodity agreements, such as the International Coffee, Sugar and Tin Agreements, are agreements between both exporting and importing countries. Membership by importing countries is bought at the cost of the need to secure their agreement on the price targets.

  • International Commodity Agreements — Buffer Stocks

    Tin is another of the comparatively few commodities which have been covered over a long period by an operative international commodity agreement. In the case of tin, the agreement works primarily through a buffer stock, although it has been necessary at times to supplement this by export quotas.

  • International Marketing Boards

    Reference has been made above (p. 19) to the idea of establishing international marketing boards, with a monopoly in the purchase and sale of a particular commodity or group of commodities. Such marketing boards could in principle charge an administered price to importers, which could be stabilized at a desired level (up to the level which would maximize receipts), or linked to an index of import prices of the countries exporting the commodities.

  • Reform of Marketing Arrangements

    At numerous points in the preceding sections, it is suggested that developing countries may have to accept limitations on the quantity of their exports of various primary commodities, in order to secure increase of prices and earnings. Against this, there are widespread impressions in developing countries that both volume and price could be increased if only the channels of trade could be made to operate in a way which would be more favourable to the exporters.

  • Improvement of Market Access

    A major increase in the volume of exports of primary commodities from developing countries, possibly coupled with increases of price, could potentially come from improvement of market access.

  • Limitation or Taxation of Synthetic Substitutes

    In recent years, demand and price for several important agricultural commodities—notably rubber, jute, hard fibres and cotton—have been depressed by the development of synthetic substitutes. Synthetics have been encouraged by periods of scarcity or relatively high price for the natural product. The heavy outlay in the manufacture of synthetics is in the initial construction of the plant: after that, marginal costs of production are quite low, so that the makers of synthetics can, if necessary, compete with the natural product down to rather low prices.

  • Promotional Activities and Research into New or Expanded Uses of Primary Products

    One approach which offers potential benefits to exporting and importing countries alike is through increased promotional activities on behalf of primary commodities. The industrialized countries might consider increased contributions to the costs of such activities.

  • Economic Diversification

    It is a common element of diagnoses of “the commodity problem” that the producers of most primary commodities are collectively handicapped by slow growth of demand (low income-elasticity of demand, particularly in the higher-income countries which constitute the largest markets for many commodities). It follows that a major part of the required increase of export earnings of the developing countries as a group will have to come from goods and services other than the traditional, staple primary products.

  • Compensation for Shortfalls of Export Receipts

    Up to this point, this study has been concerned with policies to increase the export earnings of developing countries, or at least to reduce fluctuations, by measures affecting the volume or price of exports. An alternative approach is through direct, financial compensation for shortfalls of export earnings. This is the approach followed in the IMF Compensatory Financing Facility and suggested in the IBRD staff study of 1965 on the UNCTAD I Supplementary Financial Measures (SFM) proposal, and in the scheme of the European Economic Commission for stabilizing the earnings from exports to the EEC of certain commodities by the African, Caribbean and Pacific countries which have entered into a broad economic agreement with the Community.

  • Conclusions

    It is often said that to ensure equitable and remunerative terms of trade for primary commodities exported by developing countries is purely and simply a matter of political will. Political will is certainly essential - and satisfactory arrangements for many commodities would depend on the requisite political will on the side of the exporting countries as well as of the importers. At the same time, it is necessary to give careful thought to problems of method.

  • Annexes and Tables
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