Commodity Agreements, International

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Commodity Agreements, International


International commodity agreements (ICA’s) are essentially multilateral instrumentalities of governmental control that support the international price of individual primary commodities, especially through such arrangements as export quotas or assured access to markets. Accordingly international commodity agreements are to be distinguished from commodity study groups, which are entirely lacking in operational responsibility; from international cartels of a nongovernmental character; and from the Combined Food Board (1942–1945) or the International Materials Conference (1951–1953), which involved international allocative machinery for a considerable number of primary commodities during periods of war-induced shortage. The proposed definition also excludes the following “near” forms of international undertakings: (1) bilateral bulk-purchase agreements; (2) multilateral control arrangements governing the market outlets for manufactured products, such as the International Cotton Textile Agreement negotiated in 1961; (3) arrangements for sectoral integration, in the pattern of the European Coal and Steel Community or the Common Agricultural Policy of the European Economic Community; (4) plans for a commodity-reserve currency; (5) proposals for international food reserves; and (6) measures for the reduction of tariffs or nontariff restrictions against the international movement of goods or services. International commodity agreements, in their modern form, may be dated from the Brussels Sugar Convention (1902), under whose terms the major contemporary exporters of beet sugar undertook to support the international market by abandoning national systems of export subsidies. The most important agreement of the 1920s was the Stevenson Rubber Scheme, implemented by the British and Dutch governments on behalf of their respective colonial territories in Malaya and the Netherlands East Indies. This scheme, which resulted in a sharp but short-lived price increase (Whittlesey 1931), was frankly restrictionist in character, and experience under it was the major reason for certain safeguards incorporated in chapter 5 of the Havana Charter for an international trade organization (United Nations 1947).

Since the end of World War ii, agreements have been successfully negotiated for wheat, sugar, tin, coffee, and olive oil. The International Wheat Agreements (IWA) of 1949 and 1953, and the postwar International Sugar Agreements (ISA) are prototypes, respectively, of two forms of commodity agreements—the multilateral contract and the variable export quota. Floor and ceiling prices were established for sugar and enforced essentially by regulating the permissible exports of member countries; the sugar agreement provided, further, that stocks in exporter hands neither exceed nor fall short of stated percentages of export quotas. An entirely different instrumentality was used for wheat. Importers agreed to accept specified quantities if the price fell to the minimum level stated in the agreement, and exporters agreed to provide specified quantities to member countries whenever the price was at the contract ceiling. At prices between the floor and the ceiling, the wheat agreement was to be essentially inoperative. In the tin agreement (ITA), successively higher price thresholds were specified, at which a buffer-stock agency (a) had to purchase, (b) might purchase, (c) could not purchase or sell without specific authorization, (d) might sell, and (e ) was required to sell. The agreement also provided for imposition of export controls after buffer accumulations exceeded specified amounts. The major sanction involved in the agreement for coffee, negotiated at a prolonged conference in 1962, was the certificate of origin, to be required of importing countries as a means of limiting their takings from any exporters electing to “go it alone.”

Historically, U. S. policy with respect to international commodity agreements has been characterized by a certain degree of ambivalence. Avoiding agreements on industrial raw materials subject to wide fluctuations in demand, it has, until very recently, participated only in agreements in which the United States has predominantly a producer interest, notably the International Wheat Agreement. Even in the case of sugar (of which the United States remains a net importer), it has acted more in a producer than in a consumer capacity; too large a differential between domestic prices and those prevailing abroad would embarrass the continuation of the domestic sugar-control system. From time to time the United States has toyed with the idea of an agreement for lead and zinc, as a means of terminating an existing system of unilaterally imposed import quotas, which was the source of considerable irritation in trade relations with Mexico, Peru, Australia, and Canada.

Prerequisites for negotiation. Empirically, if not in theory, the following would seem to be among the primary conditions to be met if an international commodity conference is to materialize into an agreement:

(1) Inelastic demand. Clearly, if close substitutes are available, supporting the market price of any individual commodity is certain to have immediately and sharply adverse effects. The existence of synthetic rubber explains the complete lack of any postwar agreement for the natural product; restrictive agreements for individual oilseeds are ruled out by the existence of a considerable list of alternative seeds, as well as by competition from butter; but sugar has lent itself to a continuous succession of agreements since 1937.

(2) Reasonably stable market shares. Since export quotas generally divide up markets proportionately to the national shares prevailing in some base period, difficulties arise whenever there are either abrupt or longer-term shifts in the proportions contributed by various producing countries. The progressive displacement of exports of raw cotton from the United States by those originating elsewhere, compounded by the development of synthetic fibers, precluded the successful negotiation of an international cotton agreement in the postwar period, and the rising volume of exports from African countries seriously complicated the negotiation of the International Coffee Agreement of 1962.

(3) Distress price levels. As is best illustrated by the breakdown in negotiations for a revised sugar agreement in 1951 and for a cocoa agreement in 1963, exporting countries are not prepared to accept the necessary compromises unless prevailing prices are extremely low.

(4) Mixed producer–consumer interest. The longest-lived agreements currently in effect involve commodities concerning which the major industrial countries have rather mixed motives. Thus the United Kingdom is interested, as an importing country, in relatively low prices for sugar; but as champion of the Commonwealth countries in the West Indies as well as Oceania, the United Kingdom does not wish world sugar prices to fall to disastrous levels. In pre-Castro days, the United States sought a higher price for Cuba’s sugar shipments to non-U.S. destinations than did even the Cubans, who were rather more impressed with the desirability of maintaining export volume. Even the new agreement for coffee reflects some mutuality of producer and consumer interest within the major importing countries: no domestic sources of supply exist, but the temperate zone industrial nations are broadly concerned for the well-being of less developed countries in tropical regions of Latin America and Africa, which supply most of the world’s coffee exports.

Obsolete principles versus realities. Prominent in the chapter of the Havana Charter dealing with intergovernmental commodity-control agreements were provisions purporting to benefit the consumer, especially via (a) equal representation for importing and exporting countries; (b) participation by all countries “substantially interested” in the particular commodity; (c) the checkreins of publicity in the form of an annual report; and (d) the assurance of increasing market outlets for supplies originating in the regions of most efficient production.

A wide gulf separates the principles underlying these provisions from the hard realities of the agreements actually negotiated in the postwar period. The U.S.S.R. continues to vote in the International Sugar Agreement and the International Wheat Agreement as an exporting country, although the dynamics of international trade are such that it has recently become a heavy net importer of both. Under present circumstances, the United States, while not itself a member of the ITA, in effect imposes a ceiling on international tin prices by regulating the rate at which tin disposals are made out of that nation’s strategic stockpiles. Similarly in the case of wheat, the international market has been governed less by the IWA than by oligopolistic pricing practices on the part of the Canadian Wheat Board and the U.S. Commodity Credit Corporation. Membership of a host of nations in present-day international commodity agreements may merely complicate the processes of administration and decision making, while in at least one instance—the decision of the United Kingdom not to affiliate with the IWA of 1953— the absence of a major wheat-importing country may have had a salutary effect in moderating the exercise of oligopolistic power.

The Organization of Petroleum Exporting Countries (OPEC), established in 1960, is a special case. It violates, thus far without challenge, the Havana Charter provisions requiring consumer representation. It utilizes a process of collective bargaining— not with importing countries, but with producing and marketing companies largely controlled by citizens of the advanced industrial countries, notably the United States, the United Kingdom, the Netherlands, and France. Perhaps the time is becoming ripe for a truly international undertaking concerning petroleum. An internal system of prorationing in the United States, on behalf of domestic producing groups, has already, and inevitably, given rise to a system of import controls, and a strong case can be made for having import quotas enforced by a multilateral, rather than a unilateral, instrumentality. Germany, Italy, and Japan, for example, have very little direct control over petroleum supplies but are major consumers and importers. The further fact that the petroleum-exporting countries include relatively wealthy members of the less developed world, while poorer members are heavily dependent on petroleum imports, also argues for a degree of restraint in the exercise of bargaining power by the OPEC.

Economic effects . The international commodity agreements suffer from the various limitations that characterize all efforts to support artificially the market position of individual commodities. In particular, price targets tend to be set too high, long-run elasticities in demand as well as in supply tend to be underestimated, and cost structures tend to be built up so that any favorable effects on producer income are at best transitory. Longevity in the agreements, accordingly, is not necessarily a virtue and in the case of sugar has been achieved only by making inoperative the key provisions governing export quotas during periods (especially of high prices) when agreement on market shares has proved impossible.

It has been argued that stabilization of the price paid for only a portion of world export sales tends, broadly, to destabilize the price of the remainder (Johnson 1950). The general case for this theoretical position has not, however, been definitively proved. An important consideration is the inelasticity of demand in the stabilized portion of the market relative to that in the unstabilized sector. Thus, the assurance of adequate supplies of sugar to the United States and of wheat to the United Kingdom, under successive international agreements or national control programs, has tended, on balance, to be stabilizing.

Moreover, while it is generally true that prices in national markets tend to fluctuate less widely than those of commodities sold without protection in residual “free” markets, it by no means follows that free market prices as a group are necessarily less stable than prices of primary commodities subject to world market conditions (i.e., primary commodities for which prices throughout the noncommunist world tend to differ chiefly by transportation costs together with nominal tariffs). Chiefly for reasons of supply inelasticity, compounded in the case of cocoa by demand inelasticity and in the case of natural rubber and wool by rather wide cyclical fluctuations in demand, cocoa, natural rubber, and wool have historically tended to be among those commodities experiencing the widest fluctuations in market price. While sterling-area producers are dominant exporters of all three, and the foreign-exchange reserves of the sterling area accordingly tend to fluctuate in keeping with their current market strength or weakness, none has been governed by an agreement in the postwar period. Moreover, the fact that the price swings experienced by these commodities have by and large been reversible has led the major exporting countries to introduce various devices—from national marketing boards, through variable export taxes to prepayment of producers’ income taxes— that do have the effect of “stabilizing” producer income from year to year (although not the nation’s total foreign-exchange earnings). This approach represents an adjustment toward living with instability (Nurkse 1958).

Controls over the market price of individual commodities have undesirable side effects, politically as well as economically. The severity of export quotas imposed under the tin agreement from December 1957 through September 1960 appears to have had a long-term effect on productive capacity; when export restrictions on tin were relaxed, output failed to revive in step with a strong recovery in consumption, and, accordingly, this commodity provides a classic example of the irreversible supply curve. One possible lesson to be learned from the Cuban experience under Fidel Castro is that there is a relationship, subtle and indirect rather than overt, between economic forms of market control and a degree of political tyranny. Such a philosophy was shared by the supporters of the Anti-Corn-Law League in nineteenth-century England, who built their case on a presumed linkage between freer trade and world peace.

Current pressures favoring agreements. Serious disadvantages notwithstanding, the number of international commodity agreements has been tending to proliferate, and there are good reasons for expecting that trend to continue. For one thing, the United States has moved, by a succession of moderate steps, from a position of doctrinaire opposition to these agreements to one where official policy has become that of willingness, in the words of President Kennedy, “to cooperate in serious, case-by-case examinations of commodity market problems.” Such agreements tend to be strongly favored by the less developed countries as a means of “stabilizing” (i.e., raising) the foreign exchange earned by their major exports. In Europe, international market-sharing arrangements have enjoyed the active support of French authorities for more than a decade. The German Federal Republic, as the major importer of agricultural commodities within the European Economic Community, favors agreements as instrumentalities for maintaining a place for overseas suppliers within the Common Market. On similar grounds, an agreement for grains has also received some scholarly support (Coppock 1963). Moreover, the United Kingdom, which has until recently relied on a policy of cheap food imports together with a program of direct payments to its domestic agricultural producers, has begun to develop a series of agreements with major overseas suppliers of grain and meat, in order to reduce the budgetary burden resulting from a combination of direct payments, unrestricted domestic production, and unlimited imports. International commodity agreements have considerable appeal to all external suppliers favorably impressed with the short-term advantages, and prepared to overlook the longer-run disadvantages, of having market outlets assured on a quota basis.

Alternatives. Various efforts have been made to invent mechanisms other than international commodity agreements for transferring purchasing power to less developed countries whose earnings have been either cyclically or chronically depressed. Certain of these alternatives, such as proposals for a commodity-reserve currency (United Nations 1964a), would serve the ends of foreign aid and international monetary “reform” at the expense of undermining the role of the price system as the major instrument of economic management in (relatively) free-enterprise societies. Others, operating through overt financial transfers (United Nations 1964b; Swerling 1964), have the major advantage of leaving the price system largely unaffected as the allocator of economic resources. Finally, the International Monetary Fund—although with considerable reluctance and after some delay (Fleming & Lovasy 1960)—has acted to make one extra tranche (i.e., one-fourth of the nation’s IMF quota) available for compensating shortfalls in export proceeds of less developed countries, when those shortfalls arise for reasons not within the control of the country experiencing the balance-of-payments difficulties (International Monetary Fund 1963). Such an approach has the important virtue of taking into account fluctuations in export volume rather than responding exclusively to variations in commodity prices.

Boris C. Swerling

[See alsoCartels and trade associations; International trade; International trade controls.]


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