ECONOMIC BACKGROUND OF TRADE LIBERALIZATION

- To explain who and how sets the rules of international trading and how the
free trade regime emerges in global politics.
The rules can be set unilaterally by governments or as a result of the international
negotiations, where other actors will play. Governments can intervene with tariff
measures or with non-tariff measures. First refer to elevate the fees of exporting the
national products or collect money as a tax for the production, and the second to
quantitative (quotas, minimum price for import a product) or qualitative (Health and
hygienic measures, certifications) measures such as allowing only a certain amount of
product or specific ones that do not contain certain characteristics to go in the country.
Trade is so important and so deep all around the world that it has modified global
politics. Trade agreements and treaties with reciprocal or most favored nation clauses
between countries are set, resulting in trade wars and social campaigns against certain
products that impact severely our world.
- To be able to describe the main reasons for trade liberalization based on
international economic theory
1. There are gains from trade
2. Trade is mutually beneficial
A. Gains from better utilization of resources ..
FROM SPECIALIZATION according to comparative advantages ..
FROM EXPLOITATION OF ECONOMIES OF SCALE
B. ...access to a broader variety of goods and services
C. .... faster innovation and technology transfer

- To describe grounds for contra-argumentation

However, the theory assumes:
 - The full employment
- Perfect mobility of factors of production within countries
- Immobility of factors of production between countries
- Negligible transport costs
- Perfect competition - allows perfectly efficient allocation of productive
resources in an idealized free market.
- No change in returns to scale
Stolper-Samuelson Theorem:
Factors used intensively in the exporting sector will gain, those employed in the import
competing sector will lose. The prices of the traded goods will be the same across
countries. The labour-intensive country will export the labour intensive good.
- To explain the reasons for trade policies and regulations
Arguments for protection:
Terms-of-trade argument: (There is an optimal tariff rate (low) for which TOT gains
offset losses.)
Infant industry argument: Temporary protection needed to develop CA because of
market failures. In many developing countries, industries that have developed because
of protection have continued to request government intervention to stay in the market.
Example of South Korea: they specialized in technology instead of in rice, that was their
comparative advantage, thanks to government support.
Strategic trade policy: Some sectors have strategic importance Agriculture, air industry,
arm industry, communication, chips… Some markets may be characterized by
imperfect competition: there are only a few big players, and excess profits are made A
subsidy by government to a domestic firm can deter foreign company and raise the
profits of the domestic company by more than the subsidy. This kind of policy can give
you a big global power.
Volatile prices of commodities: millions of people depend on commodities, if their
prices are volatile, their incomes are unstable. This instability depends on weather, new
products, …
Environmental costs: certifications may be required to stop trade of products that
damage the environment.
Other (Fiscal Revenue, Income Redistribution): In some developing countries, the tax
collection system is inefficient
- To explain reasons for multilateral commitment
Some issues are global, and can not be faced alone. Multilateralism helps in this sense
because different players will act together towards the same problem that affects all of
them. It can be food scarcity, peace in the world, basic needs, democracy, climate
change, etc.
COMMODITIES AND THEIR INTERNATIONAL PRICE
- Define commodities and examine the structure of commodity production
and markets.
Commodities are basic products with almost no added value, with very low
technological requirements and low-skilled production. They have huge demand
because are generally agricultural products (coffee, cocoa, wheat, rice), materials (iron,
aluminum, gold) or energy resources (gas, oil), so they are fundamental all around the
world.
Commodities are produced and directly sold without processing. Then they are sold in
standardized contracts, they are turned into more valuable products (sugar cane-sugar,
cotton-textile fiber) and become brands.
- Explain how the international price of various types of commodities is
created and which underlining factors influence it.
The drivers of the commodity prices are supply (new mines, weather, governmental
policies, social instability, problems in the supply chain), demand (new products,
quality, speculators, investors), psychology (speculation can modify hugely the prices,
also as we see prices growing, we continue buying and it gets higher and higher), and
politics.
- Describe how the main instruments for commodity exchange trading
function and what role rationality of our economic decisions plays.
DIFFERENT TYPES OF CONTRACTS
1. Spot market
Cash market - public financial market, in which commodities (or other financial
instruments) are traded and delivered immediately.
2. A forward contract Type of derivative contract Agreement between two parties
to exchange at some fixed future date a given quantity of a commodity for a
price defined today. The fixed price today is known as the forward price.
Example: A farmer raising corn can sell a future contract on his corn, which will
not be harvested for several months, and guarantee the price he will be paid
when he delivers; a breakfast cereal producer buys the contract now and
guarantees the price will not go up when it is delivered. This protects the farmer
from price drops and the buyer from price rises. = HEDGING
3.
- Explain how agricultural companies can hedge out the risks at commodity
exchanges through future contracts.
The two parties will set a price, date quality measure and quantity of the product so the
risks of increase or decrease of prices disappears. As it is standardized, the transaction
costs will be reduced.
- Explain what risks commodification of our world brings.
Critics, however, argue that commoditization can have some negative effects, by
eliminating unique or customized products large corporations come to dominate while
small or craft producers are no longer able to compete.

GLOBAL VALUE CHAINS

- To know conceptual approaches to the value chain analysis and to describe
selected international value chain through this “optic”.
Actors:
1. Input providers (research and technology developers, seeds, fertilizers,
equipment distributors). They sell this to producers, so they can start with their
job.
2. Producers (small, medium or large scale). Depending on the scale they will sell
by their own, they will produce according to buyer specifications or they will
deal with global players.
3. Market processing agents (credit provider, storage provider, transport provider,
value added processors)
4. Trade agents (shippers, port authorities)
5. Government agents (price-setters, custom agents, quality and standards
supervisors)
6. Buyers (retailers and consumers)

- To describe value chain analysis tools and possibilities of intervention

INTERVENTION ENTRY POINTS
The intervention can be done for marketing purposes (product quality and
differentiation) or for ethics purposes (social and environmental standards).
Effective value chain development programs are designed and carried out in a dynamic
process referred to as the project cycle Used for increasing impact and sustainability of
interventions = better design
The cycle comprises five phases:
1. Value chain selection
2. Value chain analysis Primary data – interviews, market observation Secondary data –
government or industry data
3. Competitiveness strategy
4. Design and implementation of the intervention
5. Monitoring and evaluation of the intervention
The purpose of value chain analysis is to provide decisionmakers with evidencebased
information that relate to sustainable development strategies. It is directed to all policy
makers and stakeholders, in accordance with the needs of the EC as an aid provider.
This is done by producing evidence-based elements (supported by indicators measured
quantitatively or based on expert assessments) allowing to answer to 4 framing
questions:
What is the contribution of the VC to economic growth?
Is this economic growth inclusive?
Is the VC socially sustainable?
Is the VC environmentally sustainable?
VCA4D measures key indicators that, when properly assessed and contextualised
through expert discernment, provide fundamental information on a VC’s impact and
sustainability.

MAJOR GLOBAL TROPICAL AGRICULTURAL COMMODITIES AND THEIR

VALUE CHAINS
- Describe and discuss trends in world production and trade with coffee and
bananas.
Coffee is produced mainly in Brazil, Colombia, Vietnam, Indonesia and Ethiopia.
However, the main exporters are Switzerland, Italy, France and Germany. This means
the seconds are the ones that add the value and own the big coffee companies, while the
firsts are only producing. It is important to highlight that these producers are mainly
small farmers (20-25 million people around the world) and that’s why the supply chain
is so instable and badly organized. There are a lot of producers and consumers, but
comparatively few traders that unify the chain.
Coffee is a very cheap product that is sold relatively expensive in developed countries.
This is because the exporting, processing (roasting) and retail is very expensive in first
world countries.
On the other hand, banana’s business is even more monopolistic, that’s why they have a
vertical integration that makes everything easier when it comes to trade. Only one kind
of banana is sold by each supermarket (high competition), while the consumer is not
interested on it, unlike coffee, where consumer choose the specific kind and because of
that each supermarket has plenty on those. The competition in bananas is the retailer
phase of the supply chain, whereas in the coffee the competition is in the consumer’s
phase.
- Explain main differences in the two international value chains.

- Explain mechanisms between international trading practices, big traders

and impact on banana and coffee producers.

- Name some of the most important companies in each value chain.

Nestle (Nescafe), Tchibo (Jihlavanka)
Dole, Oké

LONG-TERM MACRO-ECONOMIC TRENDS IN TRADE

WITH COMMODITIES
- Describe basic tools for analyzing international trade.

- Describe and discuss trends of world commodity prices in last 50 years with
special focus on price volatility.

MANAGING THE IMPACT OF COMMODITY TRADE

- Compare main mechanisms of commodity price stabilization.
Marketing boards: A marketing board is an organization created by many producers to
try to market their product and increase consumption and thus prices.

- Explain main factors for distribution of benefits from international trade.

- Explain relation between prices of commodities and impact on consumers

using example of 2008 Food crisis.

- Explain how the commodities impact on democracy, economy and life of

producers in countries of production.