International Commodity Agreement

After the establishment of UN and its specialized agencies certain other financial institutions like IMF, IBRD and GATT were also set up. Along with them, the_ FAO, WHO and UNICEF were also established. In addition to these, certain other agreements also took place regarding exports of developing countries. Such agreements are given the name of International Commodity Agreements. Such agreements regarding five main items like wheat, sugar, coffee, tin and olive oil took place. These agreements are given the name of Agreements Between Consumers and Producers. Out of these international Commodity Agreements, the agreements of exports and imports of wheat and tin got much more importance. The share of five primary goods whose agreement took place is 10% of the total trade of the primary goods. But the developing countries have always shown dis-satisfaction over these agreements, as these agreements covered minor share of world trade. The formal implementation over international sugar agreement remained in operation till late 1963. However, in the beginning of 1962, it became ineffective as govts. failed to agree over the quotas of sugar. The International Agreement on Coffee remained somewhat successful where the world coffee producers agreed to restrict the exports of coffee for the period of one year. After this, a new agreement regarding coffee was made which will be of a five years period. Here, coffee exporters will agree over coffee quotas to stabilize the price of coffee. The agreement regarding olive oil took place under the Havana Charter. Under this agreement, different domestic steps were to be taken, rather world trade for price stability.

Objectives of Commodity Agreement

1.   The main objective behind world commodity agreement is to
restrict the quantities of exports, particularly the primary goods. Therefore, their producers determine the quantities of their exports which they will export during a year. The purpose behind is to increase export incomes or stabilize them.

2.   These agreements will lead to economic. stabilization as the fluctuations regarding their prices and quantities will come down in their producing countries.

3.   The demand and supply of so many primary exports and imports
are less elastic. As a result, dis-equilibrium rises in their consumption and production. This gives rise to so many negative effects. Hence, these agreements will help to remove these disequilibria and distortions.

4.   These agreements will take place amongst govts. of so many
countries where the quantities of exports and imports under trade and concessionary terms will be determined. Moreover, the national policies which are concerned with production, prices, stocks, trade, foreign assistance and development programmes are also stipulated.

5.   So many countries follow protectionist policies or adopt
preferential treatment with other countries. As a result, the markets of primary goods shrink. But if such agreements are made such like circumstances will not rise.

6.   As these agreements take place between exporters and importers of primary goods. As a result, exporters not only want to stabilize the prices of their exports, but they also wish to have better terms of trade between agri. and industrial goods. While the importers are interested in stabilizing the trade.

7.   There operates the philosophy behind such agreements amongst
developing countries that the terms of trade of primary goods in terms of manufactured is deteriorating. Therefore, the developing countries wish to improve their terms of trade by fixing the quota of their quantities sold. But the imports of primary goods would not let the exporters of primary goods to avail the unlimited benefits. Thus, the Havana Charter’ which allows such agreements to take place, gives equal rights to producers and importers of primary goods. In other words, while making an agreement, neither producers could take away all the advantages , nor the consumers could avail all the benefits. In connection with international agreements regarding commodities, we discuss three main agreements out of them.

1.   Multi-lateral Contract Agreement

Under such agreements it is made compulsory between exporters and importers that they will sell or purchase specific quantities of goods. Again, such quantities are attached with some maximum or minimum price. Amongst these agreements, the most important and the sole agreement is ‘ International Wheat Agreement’. This agreement took place in 1949 where two-third of the world trade of wheat was included. Under this agreement, the maximum price of wheat was set at $1.80 per bushel and the minimum price for the first year would be $1.50 per bushel, while for the fourth and the last year such minimum price would be $1.20 per bushel.

During the first four years of the agreement., the world wheat prices exceeded the maximum determined price. However, the importers of wheat purchased the determined quantities on determined prices from the exporters. Thus, 1949′s agreement benefited the importers of wheat. But after four years when this agreement was re-negotiated in 1953, the exporters of wheat forced to settle the maximum price at $2.05 per bushel, while for the remaining three years the minimum price of wheat would be $1.55 per bushel. BLit UK wished for lower price of wheat, so he left the agreement. Afterwards so many other importers also left the agreement. Consequently, the proportion of world trade of wheat under the second agreement decreased to just 25%, while it was 60% in the first agreement.

When the negotiations started for the Third Agreement in 1959, the concept of guaranteed quantities was abolished. Rather, it was decided that under the agreement the member importers will purchase a specific proportion of their commercial needs of wheat from the member exporters, as long as the price remains in between maximum and minimum determined prices. The agreement was implemented in 1962 when the maximum and minimum settled prices were ,at $2.025 and $1.625 per bushel.

2.   International Buffer Stocks

In this respect, in was stipulated that some institution of the world buffer stocks be set up. Such institution will purchase wheat when world price of wheat falls below some minimum price, while will sell the wheat when world price of wheat exceeds some maximum price. But this institution may face certain problems, as who will provide funds for the operation of this authority. Moreover, it is difficult to predict regardipg future demand and supply conditions. • Again, how international agreement regarding maximum and minimum- price would take place.

Thus, the agreement which took place regarding international buffer stocks is International Tin Agreement’. Following it, not only the tin producing countries will control the export of tin, but they will also set up the buffer stocks. In the beginning, this scheme was in favour of tin exporters. But in 1956, very after two years of launching this scheme, complications arose when there was a drastic fall in tin’s prices at the world level. The managers of the buffer stock allocated all of their funds to purchase tin. But they failed to stabilize the prices of tin. Then world prices of tin were attempted to be stabilized by restricting the exports of tin.

3.    Export Restriction Agreement

Under this agreement, the member countries will have the right to restrict the quantities of their exports. They could do so as long as the prices of exports are not stabilized to some extent. Apparently, this scheme may be like the scheme of an individual producer who wants to restrict his output, and it may not be a ‘joint programme on the part of all the producers or exporters. ‘Moreover, if it becomes a joint programme of all the exporters, it cannot succeed till the importers join it. Moreover, it is not necessary that the costs of all the producers are same. Those producers and exporters whose costs are lower will be prepared to sell at some lower price. While the higher costs exporters may ask for some higher price.

The Intentional Tin Agreement which was discussed earlier has the properties of buffer stocks. The International sugar agreement comes under the agreement of export restrictions as a system of export quotas of sugar was devised here whereby the exporters of sugar will provide sugar under quotas at the pre-determined price. However, such export quotas were different from those quotas which were in operation before World War II where the exporters increased the amount of quotas if the world price exceeded the minimum determined price continuously for thirty days. In case the world open market price falls below the minimum price, the exporters automatically decreased the quotas of exports. Moreover, under such quotas, it was compulsory for the importers to import a certain quantity from the exporting country. Again; the exporters decreased their quantities if the stocks of such products increased.

Cartels in Commodity Trade and Their Welfare Gains and Losses

From microeconomics we know. that “the cartel is such an organisation of sellers which is aimed at minimizing the role of competitive forces in the Market”. Moreover, this organization of sellers.

1.   The cartel stipulates the quotas .of product to be produced and cartel may be domestic as well as international. All the firms in the is aimed at maximizing the profits of sellers. For this they follow the joint policies regarding production, allocation of resources, and prices. The industry may be the members Of cartel, more or less. As i if there are 8 or the cartel, such will be the workirig of the cartel at the domestic level. Again, we have international cartel, as the cartel of oil producing prices, rather sell the tyres on the price settled by the central agency of 10 firms in a tyre industry and they may decide not to compete regarding countries known as Organization Of Petroleum Exporting Countries ( OPEC). This cartel consists of 12 oil producing countries which has control over one-third production of the world oil. As it is having control on a fairly large share of oil, it is a successful cartel. This cartel stipulates the quotas of oil to be produced and exported by its members. Hence it can influence world’s prices.

also having their cartel known as” International Air Transport Association (IATA). Again, there is international cartel of telephone companies known as ” Tele-Coms Cartel”.. Whether the cartels are of goods or services’, they have the following important,properties, as :

2.   The cartel limits the quantity of good to be sold.

sold by its members. It means that in case of OPEC, each member country will have to sell such a quantity which is approved by its cartel agency.

following cartels.

2.       There was a cartel of South Africa, former Russia and Turkey in the

4.       There was a cartel of Canada, Peru and Chile in copper.

6.       In the sale of lead, Canada, Peru and Mexico had the cartel.

1.       In the production of Bauxite and Aluminium, Jamaica, Surinam,

3.       Zaire, Zambia, Norway and Finland were having cartel of cobalt.

5.       There was a cartel of Canada and Venezuela in iron.

7.       There was a cartel of Brazil, Gabon, South Africa and Zaire in the

8.       Canada and Norway were having cartel in nickel.

9.       Canada was having cartel in potash.

10. In the sale of sulphur, there was a cartel of Canada and Mexico.

11. Bolivia, Thailand and Malaysia had cartel in tin.

In addition to commodity controls, the international airlines are
Canada and Australia formulated cartel.

production cof chromium.

production of manganese.

The price of product sold by cartel is settled.

In connection with world trade on commodities we find the

11.  Canada, Bolivia, Peru, Australia and Thailand had cartel in the production of tungsten.

12.   There was a cartel of Canada, Mexico and Peru in zinc.

It is told that it is too ‘difficult to follow the principles of cartel. As a result, the above-mentioned cartels were either short lived or became ineffective. The basic objective of a cartel is to keep the prices of a good artificially high. As a result, most of the cartels are broken very soon, as every member thinks that it can raise its profits just by slightly lowering the price. Particularly, those firms of the cartel whose costs are lower they try to increase sales by lowering the price.

The success of a cartel depends upon the condition that the product sold by it must have less elastic demand. In such situation, the members will not bypass the agreement even if economic conditions change. Again, the income elasticity of demand for the good sold by the cartel must be low. The cartel members must be having greater control over the good sold by it. If the number of firms outside-the cartel are more, the cartel will not be able to implement over its policy measures. As OPEC has a fairly large control over oil. exports, hence it is a successful cartel. But because of discovery of oil resources in Russia, Central Asian States, Norway and England, these countries sometimes resist the policies of OPEC to raise the price of oil. As a result, there exists chances that in the coming days, OPEC might not be as effective as it is today.

The basic objective of cartel is to reduce the role of competitive forces. As a result, the price of good sold may rise, and the quantity sold may be decreased. Thus, the direct welfare effect of such measure will lead to decrease the consumer surplus and the welfare. Whereas the producer’s surplus will increase. The producers will exploit the weak position of the consumers when they charge higher price from the consumers. In this way, the resources will be shifted from the consumers to the producers, or the income distribution will move in faour of the members of the cartel. The OPEC so often goes on to change its price and quantity sold. This is badly affecting- the developing countries as their masses have to pay higher prices of oil as one finds that price per .barrel of oil went to $140 in the month of August 2009. The members of OPEC are earning interest by depositing petro-dollars in the banks of Europe and US. While millions of people are being hard-hit by the rise in oil prices. This is strengthening the capitalism leading to promote domestic as well as international inequalities.

 

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