I. Introduction and General Topics



Module 1





Trends in World and Agricultural Trade



Yon Fernández de Larrinoa Arcal and Materne Maetz

Policy Assistance Division





PURPOSE

This module provides a brief overview of recent trends in trade in general and agricultural trade in particular as a background to the policy discussion in later modules.

CONTENTS

1.1 Recent trends in world trade

1.2 Recent trends in agricultural trade

1.3 Conclusions

KEY POINTS

Trade mainly takes place between developed countries, although developing countries increased their share of global trade in the 1970s and the 1990s. The share of least developed countries has fallen further in the past two decades.

Agricultural trade, though increasing in absolute terms and relative to agricultural production, is of declining importance in total trade.

The role of transnational corporations in trade has been growing and they now account for an estimated 40 percent of world trade.

Prices of agricultural commodities have fallen both in real terms and relative to the prices of manufactured goods. They are also highly volatile.

The forthcoming WTO negotiations provide developing countries with an important opportunity to improve their market position and to better capture the advantages of trade liberalization.

1.1 RECENT TRENDS IN WORLD TRADE

1.1.1 The volume of trade flows

Trade as an engine of growth

Trade has been a common activity since the Stone Age. From exchanging animal furs for grain, to the development of currencies and the first bonds in the Middle Ages, trade has increased throughout history along with transportation improvements. Trade development gained a new impetus after the Industrial Revolution. Between 1720 to 1971 world trade increased 460 times or 2.7 percent annually.

Between 1948 and 1997, trade grew at an annual rate of 6 percent while world production only increased at 3.7 percent per annum. The ratio of imports and exports to GDP in developed and developing countries increased from 17 percent to 24 percent and from 23 percent to 38 percent respectively between 1985 and 1997. Trade also increased at a faster annual average rate than the world economy. The latter grew annually at a rate of 3.1 percent and 2.0 percent during 1980-90 and 1990-95 respectively while trade increased by 5.3 percent and 6.8 percent over the same periods. The increase in trade has been accompanied by a shift from bulk commodities to more processed commodities which have a greater share of value-added.

Figure 1: World trade and industrial production growth rates

Source: Rostow,W.W. 1978.

Reasons for strong trade growth

Several reasons explain this increasing trend:

one explanation for this dramatic increase of trade is the extraordinary breakthroughs that occurred in transport, communication and information technologies. The new technologies made trading easier and reduced considerably trading costs. For example, between 1930 and 1960 the cost of air transport fell by more than 80 percent and that of telecommunications by more than 98 percent. The reduction in the cost of computing was comparable between 1960 and 1990;

this increase is also the result of intense and lengthy negotiations to improve the trading environment. Negotiations have taken place at the international level (UNCTAD, GATT and later WTO) and at regional level (regional trade agreements). They have facilitated the continuous reduction of tariffs between 1976 and 1994 and the progressive reduction or elimination of non-tariff barriers to trade.

1.1.2 The structure of world trade flows

Trade flows dominated by developed countries...

Trade between developed countries represents the bulk of international exchange. Trade between United States, Japan and the European Union (EU) accounts for around one-third of world trade while one-fifth of world trade occurs among EU members. Asia has seen its share increase since the 1980s.

Africa and Latin America have a much smaller share of trade than other continents. Internal trade within these continents is minimal, their trade taking place mostly with developed countries.

The establishment of regional economic blocs has increased trade between neighbouring member countries. Regional blocs facilitate the flow of commodities among members by reducing trade barriers and increasing the speed and quantity of transactions. This has been especially the case of MERCOSUR in Latin America, ASEAN in East Asia, NAFTA in North America and the EU in Europe.

Box 1: Export flows in 1994 as percentage of world exports

Destination Exports in % of world Exports World Eastern Europe Western Europe North America Japan Australia New Zealand Africa Latin America Asia (excl. Japan) Eastern Europe 3.3 1.0 1.5 0.1 0.1 0.0 0.0 0.0 0.3 Western Europe 41.5 1.6 27.8 3.4 0.9 0.3 1.2 1.1 4.0 North America 15.4 0.1 2.8 5.7 1.4 0.3 0.2 2.2 2.6 Japan 9.4 0.0 1.5 3.0 0.0 0.2 0.2 0.4 4.0 Australia/ New Zealand 1.4 0.0 0.2 0.1 0.3 0.1 0.0 0.0 0.5 Africa 2.2 0.0 1.2 0.3 0.1 0.0 0.2 0.0 0.2 Latin America 4.5 0.0 0.8 2.1 0.2 0.0 0.1 0.9 0.3 Asia (excl. Japan) 21.4 0.4 3.5 4.4 2.6 0.3 0.4 0.5 8.8

Source: UNCTAD. 1995. Handbook of International Trade and Development Statistics.

Figure 2 illustrates export flows in 1994. Box 1 shows export flows between some major groupings as a percentage of total world exports. The importance of the three main trade poles is confirmed not only with respect to their trade with other groups but also in terms of their internal trade flows.

...though trade growth faster in developing countries

Trade growth has been stronger in developing than in developed countries during the 1970s and since 1990. Figure 3 depicts this evolution. Even during the world recession of 1992-93, developing countries continued to increase their trade while world trade, and particularly trade by developed countries, contracted. In contrast to this relatively good performance of developing countries, the least developed countries have seen their trade grow slower than world trade. Their share in total trade was reduced from around 0.9 percent in 1980 to below 0.5 percent in 1995.

Figure 3: Recent evolution of trade for various country groupings

Source: WTO. Annual report 1998. International Trade Statistics.

1.1.3 Institutional aspects of world trade

The development of world trade has been accompanied by the establishment of a number of international institutions.

At the global level, trade issues have long been discussed at the General Agreement on Tariffs and Trade (GATT) and at the United Nations Conference on Trade and Development (UNCTAD).

GATT

GATT was created in 1948 to establish the rules for international trade. In the framework of GATT, a number of negotiation rounds were organized, the last of which, the Uruguay Round, culminated with an agreement that led to the creation on January 1, 1995 of the World Trade Organization (WTO).

UNCTAD

Created in 1964, UNCTAD is the main UN arena for discussing in an integrated manner problems related to development, trade, international finance and investment, technology and sustainable development.

At the commodity level a number of organizations have been created to regulate markets. The most well-known inter-governmental organization of this type is OPEC, the organization of oil producing countries.

Commodity agreements

As regards agriculture, a number of commodity agreements have been concluded to regulate markets. The objective of these agreements has often been to seek to stabilize prices and limit competition by establishing quotas for member countries.

The most important and currently active agricultural commodity agreements are:

rubber;

jute and jute products;

sugar;

cocoa;

tropical wood;

olive oil; and

wheat.

The development of world markets has also been accompanied by the emergence of new mechanisms such as futures markets which have contributed to the reduction of market fluctuations.

1.1.4 The role of transnational companies in world trade

Concomitant with rising trade and the establishment of these intergovernmental institutions, there has been a major expansion of transnational corporations.

Absolute importance of TNCs

A transnational corporation is a private profit-making organization that performs activities of production, distribution, and research in more than one country. The flexibility to move production around the globe is one of its key features. The WTO estimates that, in 1995, one-third of international trade was conducted by transnational corporations. This proportion is believed to have reached 40 percent today.

Reasons for TNC growth

Globalization of the world economy, liberalization processes, measures to attract foreign direct investment (FDI), structural adjustment policies and the decline in international transport and communication costs have been crucial in assisting the spread of transnational companies. These favourable conditions enabled transnationals to grow fast and acquire a prominence in production and international trade. This has contributed to increased interdependence of economies. Freer and speedier capital transfers have also contributed to this development. Trans-national corporations are also a way to respond to imperfect international markets where transactions are very costly because of the need to ensure the quality of the produce purchased and the difficulty to enforce contracts signed with foreign operators.

A large proportion of international exchange by transnational companies takes place inside a given corporation (or between branches of this corporation). It therefore does not use the mechanisms of competitive international markets. The prices used in these transactions are often substantially different from market prices and can be used as an instrument to transfer income to countries where tax rules are more favourable.

Implications for WTO

A rapidly growing share of international trade is therefore de facto taking place outside the scope of WTO and may not be in conformity with the principles that determine its rules. Some WTO members have already raised this issue - several reports have been prepared by WTO experts - but no decision has yet been taken by the Organization on this important matter.

Box 2: Transnational companies - some figures

It is estimated that there are around 40,000 transnational corporations. The first 500 are large companies and control 70 percent of world trade as well as 80 percent of the foreign investments of transnationals. It is believed that 40 percent of world trade is conducted by transnationals. In 1995, 29 percent of world GDP was produced100% by the 200 largest transnational corporations. These corporations have succeeded in taking a leading position in a number of agricultural commodities: 20 control the coffee trade, six of them hold 70 percent of wheat trade, one controls 98 percent of the production of packed tea. In recent years, transnationals have changed their strategy and shifted from production to financing, trading and research activities, subcontracting many production stages.

Source: EFTA. 1998. Anuario de Comercio Justo, 1998-2000.

1.2 RECENT TRENDS IN AGRICULTURAL TRADE

1.2.1 Evolution of flows of agricultural commodities

The value of exports and imports of agricultural commodities has increased considerably after 1970. Much of this growth has been driven by increased import demand from middle-income developing countries. Policy reform implemented under Structural Adjustment Programmes supported by the World Bank and the International Monetary Fund has contributed to this trend in developing countries after 1980. Another reason for the growth of trade flows is the creation of trade blocs that led to an intensification of agricultural trade among their members. Figures 4 and 5 illustrate the evolution of trade of agricultural commodities.

Figure 4: World agricultural imports and exports Figure 5: Share of world merchandise exports by sector (%) Source: FAO. Statistical Database. Source: WTO. 1998. Annual Report.

Share of agricultural trade decreasing

Agricultural trade has grown more slowly than that of manufactured goods, but at a similar rate to mining products. Figure 5 shows how the relative share of agriculture and mining in world merchandise exports decreased in the 1990s. Thus, while the share of agricultural trade decreased by 1.3 percentage points between 1990 and 1997, that of manufactured goods increased by 3.4 percentage points. This evolution can be in part explained by the increasing proportion of products originating from agriculture that are being traded as processed food or manufactured products.

However, as can be seen from Figure 6, agricultural trade generally grew faster than production. There is great variation among commodities in the share of output that is traded. Box 3 provides information on this share for some of the main agricultural commodities, ranked according to the value of the trade to production ratio.

Figure 6: World agricultural trade and output

Source: WTO. Annual report 1998, International Trade Statistics.

Nearly all of the ten most traded agricultural commodities - relative to their production - are essentially produced by developing countries and represent for many of these countries the main source of foreign exchange. This makes these countries extremely vulnerable to variations in the markets for these commodities.

Box 3: The most traded agricultural commodities. percentage of trade to total production

Products 1961 1970 1980 1990 1996 Cocoa * 108 104 113 128 148 Coffee 60 89 85 91 94 Rubber 107 95 88 81 77 Tobacco 27 26 33 32 57 Veneer Sheets 28 27 32 41 45 Sugar (Raw Equivalent) 58 48 50 40 43 Vegetable Oils 17 21 31 37 40 Tea 52 51 46 42 38 Fish, Seafood 29 34 29 33 36 Cotton Lint 40 33 35 28 30 Soybeans 16 29 33 24 27 Peas 4 5 7 16 25 Bananas 18 18 19 20 25 Wheat 21 19 23 19 20 Milk, Skimmed 4 11 15 9 15 Bovine Meat 6 8 10 11 12 Poultry Meat 3 3 6 6 12 Cassava 3 6 15 20 10 Pigmeat 4 4 5 6 8 Rice (Milled Equivalent) 4 3 5 4 5 Potatoes 1 1 3 4 5 Eggs 4 2 3. 3 2 Plantains 0.21 0.36 0.31 0.59 0.46 Yams 0.00 0.04 0.12 0.12 0.08 Sugar Cane 0.02 0.01 0.01 0.01 0.01 * The case of cocoa illustrates the importance of re-exports of certain commodities. In this case an important share of trade is re-exports of cocoa paste and powder by the Netherlands.

Source: FAOSTAT.

The most traded basic food commodity relative to its production is vegetable oil. Wheat is the cereal whose trade represents the largest share of total production (around 20 percent). This share is small in the case of rice (around 4 percent) because the largest world producers (China, India) are also its largest consumers.

Not surprisingly, the least traded commodities, relative to their production, are bulky food commodities such yam and plantain, and highly perishable commodities like sugar cane.

1.2.2 Evolution of prices of agricultural commodities

A number of developing countries are highly dependent on exports of certain agricultural commodities (e.g. cocoa, coffee, tea or rubber) which constitute a major determinant of income and an important source of foreign exchange. This is particularly true for least developed countries for which primary commodities (mainly minerals and tropical agricultural products) make up to 70 percent of total trade.

Fall in price levels...

The trend followed by prices of most agricultural commodities has been a dramatic fall with the exception of bananas during the 1980-1990 period. The prices of sugar, agricultural raw materials, beverage crops, cereals and meat fell by 50 percent or more over the same period. This implies that developing countries specializing in agricultural exports have had to export more to maintain a steady flow of income. After 1988, this negative trend came to a halt and prices have remained more stable since then.

...and price volatility

As can be seen from Figure 7, there has been a considerable variation of prices of major agricultural commodities during the period 1980-1998. Stable and remunerative world prices for these agricultural commodities are essential in order to secure a stable and sufficient income needed by these countries to invest for their development.

Figure 7: Indices of real prices of agricultural commodities (1980=100) Note: Basic foods: cereals, meats, dairy products, sugar, fats, oils and oilseeds

Source: Commodities Division, FAO

1.2.3 Terms of trade between agricultural commodities and manufactured products

The commodity terms of trade can be defined as the purchasing capacity of one good in terms of another. The evolution of the terms of trade between agricultural commodities and manufactured products provides information on the capacity for agricultural commodities to be exchanged favourably with manufactured products, i.e. how much can be imported of manufactured products by exporting one unit of agricultural commodity.

Deterioration in terms of trade

Between 1980 and 1998 international prices of agricultural commodities fell by about 35 percent while those of manufactured products increased by 40 percent. The terms of trade between agricultural commodities and manufactured products deteriorated considerably, falling by more than 50 percent (see Figure 8 below).

Figure 8: Terms of trade between agricultural commodities and manufactured products (MUV)

MUV: Manufacture Unit Value of industrial economies.

Source: UNCTAD, 1995, Handbook of international Trade and Statistics.

1.2.4 The largest agricultural traders

Most agricultural trade is between developed countries

Developed countries largely dominate trade of agricultural commodities. Among the ten largest exporters of agricultural commodities, Brazil is the only developing country. The other nine are developed countries of which six are EU members. Similarly, the ten main importers of agricultural commodities are all developed countries (see Figure 9).

Consequently, it is clear that most of the trade in agricultural products occurs among developed countries, a major part being intra-EU trade (around one-fifth of world agricultural trade). In 1997, intra-EU agricultural exports had a value of US$178 billion. Meanwhile, intra-Asia agricultural trade had a value of only US$74 billion while intra-North America trade was US$30 billion.

Figure 9: Ten leading exporters of agricultural products

Source: WTO. Annual report 1998, International Trade Statistics.

1.3 CONCLUSIONS

There has been a considerable increase in trade flows since the end of World War II. Today, around one-third of world output is traded internationally. Technological breakthroughs in transport and communication and international agreements leading to more liberal trade policies are some of the reasons behind this trend. Increased flows of commodities have been accompanied by the rapid growth of capital, and to a lesser extent, technology movements. Movements of labour have not followed the same trend, because of increasing barriers to the free movement of workers.

Trade among developing countries remains rather small and represents only a minor share of total world trade although it has increased.

Although trade grew faster during the 1970's and 1990's in developing than in developed countries, the latter are responsible for the bulk of international exchange. Transnational corporations have been particularly active in trade and their importance has grown. In 1998, they accounted for an estimated 40 percent of the exchanges taking place in the world.

Within this context of rapid growth of trade, agriculture has lagged behind. Despite sustained growth of trade in agricultural commodities, the share of these commodities in world trade has been progressively reduced. This evolution can be explained in part by the increasing proportion of products originating from agriculture that are being traded as processed food or manufactured products. The fact that the Uruguay Round Agreement envisages lower tariff cuts in agriculture than in other sectors may reinforce this trend.

Developing countries produce a large proportion of the most actively traded agricultural commodities. For many developing countries, these commodities are the major source of foreign exchange.

Prices of agricultural commodities have dropped dramatically between 1980 and 1998, in contrast with the increase in the prices of manufactured goods. The terms of trade between agricultural commodities and manufactured products fell by more than 50 percent over this period. This has also contributed to the relatively slower increase of trade in agricultural products compared to products produced by other sectors measured in value terms. It has also meant that developing countries dependent on agricultural exports have had to increase their agricultural exports in order to buy the same amount of manufactured products.

An opportunity for developing countries

Forthcoming negotiations under WTO are an important opportunity for developing countries to improve their market position in order to better capture the advantages of trade liberalization. For this, they will need to be well informed and organized.

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