Commodities, GSP, and Least Developed Countries in Trade

Posted on Dec 22, 2024 in Economy

Commodities in International Trade

From the late nineteenth century, when the first agreements took place in commodity-exporting countries, such goods began to see the need to regulate the market for these products. Commodities have great importance in the context of international trade for two reasons: volatile markets and the economic dependency that you would expect from many developing countries producing and exporting them.

The volatility in commodity prices may be due to causes that affect:

The supply side: Uncontrolled supply (e.g., bad weather on agriculture), lack of coordination between producers and exporters (the result of external control over the exploitation TNC).
The demand side: International economic situation, declining rate of consumption, protectionist policies, technological progress, etc.
Institutional characteristics: Commodities are treated as homogeneous products and markets, although these considerations are further from reality.

Their participation in international trade has been declining over recent decades (except for recent years). It is noteworthy that, contrary to what one may think, there are developed countries where commodity exports represent a large percentage of the total. As such, it should not be viewed solely as a North-South conflict.

Historically, it was believed that after 1948, with the Havana Charter, the basis of rules for trade in commodities began to be defined. Agreements among the major exporting and importing countries for each product were encouraged. Two kinds of agreements were distinguished: some of control (more intrusive) and others less interventionist. Soon, the UN was in charge of the attempts at cooperation in this area, creating a temporary commission in 1947 that would lead to the Commission on International Trade in commodities in 1954. In 1964, the newly founded UNCTAD took charge of everything related to this area (remember that UNCTAD was founded by pressure from the LDCs at the UN, seeking a forum for their issues in the international context). The FAO also played a role as a forum for discussion on commodities. By contrast, the GATT never had clear jurisdiction over this matter. The energy crisis of 1973 made clear the need for international regulation. In response, UNCTAD IV became the first attempt to generalize; an open list of 18 commodities was noticed, in which they had reached agreement on prices.

Types of Agreements on Commodities

The types of agreements on commodities can be divided into four:

International Conventions and Agreements (ICAs): Between producer and consumer countries, of limited duration (five years), renewable if there is agreement on the renegotiation. Generally, they do not work more than one period.
All ICAs are based on some of these objectives:
- Price Stabilization: Instrumented by reservations mechanisms, export quotas, production controls (a measure little used after 1945), multilateral agreements, and promoting the consumption price.
- Promoting long-term commodity: This has two problems: economic policies are usually set, and also the time limit of ICAs collides with the long-term approach to this goal. UNCTAD dedicated the Second Account of the Common Fund for this purpose.
- Stabilization and increased export earnings: Again, no ICAs attach to this objective economic measures to achieve it.
Producing Countries Association: Between producer-exporters. Examples: OPEC (1960), CIPEC (Copper, 1967), and others (other metals, food, and cotton, but with just a couple). They often fail due to a lack of control in the production-export.
Intergovernmental Study Groups: Between producer and consumer countries. Available in: 1) Self-frames, 2) within FAO, 3) within UNCTAD.
Arrangement Informal: Not legally binding agreements.

Today, many countries believe that rather than seeking the stability of commodity markets, it is better to stabilize export earnings from them. To this is devoted Compensatory Financing Facility, the EU systems, and support mechanisms for multilateral financial institutions (e.g., World Bank).

In conclusion, all the problems which affect commodity markets, as raised above, will continue to exist because they will add others that are already beginning to be intuited. And we must bear in mind that the solution to achieve stabilization of the proceeds from the exports of these products can lead to difficulties not predicted (as has been proven through the motions of horizontal diversification of production systems of transnational corporations).

The Generalized System of Preferences (GSP)

The origin of the Generalized System of Preferences (GSP) dates from the early ’60s, when several developing countries requested preferential trade treatment applied by developed countries without reciprocal concessions on their part. In other words, they requested favorable trade treatment for their exports through tariff reductions in developed countries. All this with a triple objective: to increase their export earnings, promote industrialization, and accelerate economic growth rates.

Basic Principles of the GSP

The general principle, requiring preference-giving countries to apply a pattern common to all developing countries.
The principle of nondiscrimination, on which all developing countries should be treated on equal footing, with the exception of the least developed countries (LDCs), which are treated more favorably.
The principle of non-reciprocity, meaning that recipient countries are not obliged to make concessions to the grantors or donor countries in exchange for the more favorable treatment.

Common Elements of GSP Schemes

Currently, the GSP consists of a set of mutually independent schemes, the most important being those of the U.S., Japan, and the EU. However, we can identify a number of elements common to them all:

Donor countries or those giving preferences. They have the power to choose which countries will benefit from the preferential system.
The beneficiary countries of the scheme in question.
The products included in the scheme, which vary according to the national interests of donor countries (including those less detrimental to their production).
The amount of tariff reductions, which are much higher than normal by removing the most-favored-nation clause for developing countries.
Safeguard mechanisms introduced by the donor countries. Among others, escape clauses entitling the donor to suspend the preferential treatment unilaterally or quantitative restrictions on exports from beneficiary countries.
Graduation from preferential treatment. As a recipient country develops, it receives preferential treatment for others less developed.
The rules of origin set by donor countries in order to ensure that the goods in question come from the beneficiary countries and not others.
As noted above, in all schemes, so-called least developed countries receive even more favorable treatment.

The GSP is becoming a permanent feature of the trade policies of donor countries. However, it is necessary to introduce a series of changes to it so it can function in an even more effective manner.

The Least Developed Countries (LDCs)

Measures for the Least Developed Countries began to be adopted after 1971, following the establishment of a list of countries considered as such by the UN General Assembly. These countries were initially 24 but have been expanded to 50 today. At the same time, they have been consolidated as a distinct group within developing countries.

The first resolutions in favor of LDCs resulted in only partial reforms because their recommendations were vague and contained no provisions for their implementation. Hence, on the occasion of the United Nations Conference on LDCs held in Paris in 1981, a Substantial New Program of Action (SNPA) was approved. The program was seen as a specific international development strategy for LDCs: at the national level, SNPA implementation would be left to the LDCs themselves, but at the international level, UNCTAD would be responsible for drawing up provisions for its implementation, coordination, and supervision.

Seven Commitments of the SNPA for LDCs (2001-2010)

The final Program of Action for LDCs for the Decade 2001 produced contains seven commitments:

Promotion of a policy framework focused on humans.
Good governance at national and international levels.
Capacity building of human resources and institutions.
Strengthening the capacity of LDCs.
Enhancing the role of trade in development.
Protection of the environment.
Mobilizing financial resources.

We therefore conclude that the priorities of this program are: the reduction of extreme poverty, enhancing human and institutional resources, improving productive capacity, the expansion of domestic markets to accelerate growth, an increase in the participation of LDCs in world trade and financial flows and international investment, environmental protection, and reduction of malnutrition.