New Internationalist

4. Sales Force

Issue 168

new internationalist
issue 168 - February 1987

4. Sales force [image, unknown]
Colonial patterns of trade often survive to the present day - leaving developing countries selling low-priced commodities to the rich world and buying expensive manufactured goods in return.

This is a really nice place you've got here. Tasteful but not ostentatious. Very comfortable.

Well, thank you.

The pastel shades of (petrochemical-based) paintwork with the occasional (Indonesian) batik print And the odd (Indian handicraft) rug scattered on the (polypropylene) carpet. The sound! Flight of the Condor (haunting Andean pipe music) winging its way out of the (Japanese, brushed aluminium) music centre.

Love the blouse. (Nicaraguan) cotton but very nicely cut (in London) and a very striking (aniline-dye-based) purple.

Violet, to you.

Multinational, there's no other word for it

Doesn't sound quite right. What about 'multicultural'?

OK. That too. A living example of the triumph of global trade. Hands across the sea for a mutual embrace and exchange of international skills. An explosion of creativity, fusing and mutating endlessly in a swirling cycle of rebirth and invention...

All right, all right. I do my bit. Trade, as you point out, makes the whole world richer.

It's annoying that some people aren't more grateful for this. In fact Third World countries have been complaining about trade ever since they realized that they were the Third World.

When many of them were colonies it seemed natural enough (to the West at least) that Africa, Asia and Latin America should be the producers of raw materials like cotton or cocoa and that the more developed countries should transform these basic products into such technical feats as duvets and Mars bars.

We, after all, have the machinery and the skilled workforce and they have the sun and the fields and the farmworkers. The West's 'comparative advantage' is in manufacturing so that's where we focus most of our energies.

Fair enough.

No. Unfair enough as it turns out. While free trade might make the world as a whole richer, this says nothing about how this wealth will be distributed. In the event the richer and stronger countries have taken the lion's share.

The developing countries cottoned on to this. And in the 1960s they started to complain vociferously about the way the world's trading system was working.

They said that what are called the 'terms of trade' were working against them - the prices they got for the goods they tended to specialize in (raw materials or 'commodities') were falling behind the prices of the things they had to buy (largely manufactured goods).

Time to put up their prices.

Unfortunately (for them) they don't have much control over these. Commodity prices in a cut-throat international market place are set almost entirely by supply and demand. If too much tin is being produced anywhere in the world the price plummets everywhere in the world. And countries like Bolivia, which specialize in producing tin, find themselves in deep trouble.

But that's the same for everybody. What about the people who make tin cans? If they manufacture too many the price will drop.

True. But nothing like so sharply. Companies like Metal Box which make tin cans also make lots of other things, from plastic bags to cardboard cartons. If too many cans are being produced they can switch to something else. So the prices of manufactured goods tend not to fall so much when the demand for them falls. All that happens is that fewer are produced.

Bolivian tin mines are nothing like so flexible. The miners can only dig out of the ground what they find there - and usually they find tin.

So all they can do is wait for the price to rise again?

If it ever does. Prices tend to jump around a lot in the commodity markets. But in the long term many of the prices have been falling. Tin, for example, is being replaced for food storage by plastics. Copper, which as wiring is at the heart of most electrical systems, is being threatened by optical fibres. Cotton is being replaced by petrochemical-based fibres. Artificial sweeteners are increasingly being used instead of sugar in manufactured food products.

And much of the same kind of substitution is taking place for other commodities. So as the demand for manufactured goods rises the demand for commodities is lagging behind. All in all a pretty gloomy outlook for the primary producers.

Time they got out of commodities into manufacturing. I'd say.

Excellent advice. But not too easy to follow. To start with, the richer countries have had decades of experience in building up the factories, equipment, and capital that make their industries work. The poor countries have less equipment - and less money to invest And they don't have the skilled workforce or management needed to get started.

But even when they do succeed they find something very strange happens. One competitive weapon they have is lower wage rates. So they have a 'comparative advantage' in manufacturing simpler and more labour-intensive goods like shirts or shoes.

As soon as they become successful, however, the Western countries immediately start raising the tariff barriers to protect their own industries.

I thought we all believed in free trade?

So we do. But there are limits to the usefulness of this ideology. And the limits seem to appear precisely when it looks as though some of the benefits of free trade might be distributed towards the poorest countries. Odd, isn't it?

There's a cynical note creeping in here.

I'll try to maintain my usual wide-eyed innocence. But on to the practicalities. There are two major international forums where this kind of dispute can be argued over. The oldest and most important is GATT.

Sounds like a nasty and fatal disease - possibly spread by insects.

It's the General Agreement on Trade and Tariffs. Back at the time of Bretton Woods it was hoped that there would be another worldwide agency, along the lines of the IMF and the World Bank, but this time to watch over international trade. It never materialized. But what did happen were international consultations which came to be known as GATT. These proceed in a series of meetings called 'rounds' - a suitable metaphor given the kind of boxing for position which goes on. The bargaining is about the removal of tariff barriers in order to promote free trade.

So now we believe in it again?

For the time being. All the negotiations are freely entered into. When two countries agree that it would be in their mutual interests they agree to drop the barriers.

This sounds like the place where the poor countries should negotiate.

The negotiations aren't that free because they have to be reciprocal. If Australia does not think it is in its interest to let in shirts from Bangladesh then it won't. Bangladesh doesn't have much to offer in exchange. End of negotiations.

That's not to say there are no concessions to developing countries. There is a scheme called the Generalized System of Preferences which allows tariff-free entry to some goods from developing countries without their having to offer anything in return. But in fact it is neither general nor systematic except in its avoidance of giving preferences on any of the goods - like textiles - which really matter.

A shade cynical, I would say.

Sorry. Let's try and change the subject How about a cup of something? Maybe coffee - with sugar. Do you know you can now buy a whole ton of sugar for just two hundred dollars or so?

Just a spoonful, thanks.

And the price of coffee has been lurching around crazily too. In 1986 it went up to $4,000 a ton when it was thought there had been a bad harvest in Brazil - then slumped to $1,600 when the dealers discovered they had overreacted.

The poor countries decided that they should do something about this kind of nonsense and back in 1964 called together the first UN Conference on Trade and Development - UNCTAD. One of the central demands at this (and at the five subsequent UNCTADs) has been for commodity agreements. The idea being to try and stabilize prices and maintain them at the kind of levels which developing countries need.

Doesn't sound like very free trade.

No, it's not really. But an agreement which evens out the wildest fluctuations in prices is actually in the interests of most people (except speculators). That's why the Western consuming countries have been prepared to talk to the developing country producers.

I suppose all they did was talk.

Now who's getting cynical? In fact there have been agreements at various times for a whole range of commodities - coffee, tin, tea, rubber, cocoa and sugar. But most of them have now collapsed.

This is partly because the US has been arguing more stridently that free trade in the market place should set prices. But there is also a fundamental problem in that the demand for many commodities is now slackening off. So any agreement to try and prop up the long-term price is doomed.

But some poorer countries now export TVs and computers. What about South Korea, Singapore and Taiwan?

True enough. There have been manufacturing success stories - and not just in Asia. Brazil, Mexico and Argentina have all made substantial progress - and we'll come back to them later. But most countries remain in a weak position.

If developing countries are getting less for the goods they sell and paying more for what they have to buy this produces a net flow of money from poor countries to rich.

So if trade is actually taking money away does that mean we should stop altogether?

No. Stopping trade with the poor countries will do nobody much good. What really would improve matters would be for the rich countries, through GATT or UNCTAD, to accept a pattern of trade which gave the developing countries a fighting chance.

Besides, this is such a fascinating collection you have. The carved (Kenyan) head offset against the subtle grey of the (South Korean) computer. The Brazilian shoes, not to mention the peanuts from Senegal. All set into a truly global context by your NI world map ...

CLOSE-UP ON...

Commodities

Since the 1950s the overall pattern has been for the prices of commodities to fall relative to those of manufactured goods. Commodities had a brief boom in the 1970s but resumed their downward path in the 1980s. The graph below plots the ratio of (non-oil) commodity prices to those of manufactured goods - giving 1962 a base year value of 100.1

A group of 48 commodity-exporting developing countries suffered a cumulative loss of $28 billion in export earnings due to the commodity price colapse of 1980-83. The table below indicates what effect this had on balance of payments - showing the losses as a percentage of current account deficits.2

Chile

33%

Cost Rica

35%

Malaysia

68%

Panama

35%

Uruguay

61%

1 Calculated from UNCTAD statistics.
2
Trade and development Report, UNCTAD, 1985

Non-oil commodity prices compared with manufactured prices.

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