Unfair Trade? Empirical Evidence in World Commodity Markets Over the Past 25 Years

Abstract

Since the 1970s, commodity prices have fallen in international markets at the same time that consumer pries have risen. The price of coffee declined 18 percent on world markets between 1975 and 1993, for example, but the consumer price for it increased 240 percent in the United States. Explanations for such diverging patterns remain largely unexplored in current economic literature. The author examines the spreads between international and domestic commodity prices, explains why they have increased, and analyzes their implications for commodity-exporting countries. He finds that the spreads have increased dramatically because of the asymmetric response of domestic consumer prices to movements in world prices. In all major consumer markets, decreases in world commodity prices have systematically been transmitted to domestic consumer prices much less than have increases. This may have cost commodity-exporting countries more than $100 billion a year because it has limited the expansion of demand for commodities in these markets. The asymmetric response, which has been attributed to trade restrictions and rising processing costs, appears to be caused largely by the behavior of international trading companies. Many of these companies are large enough to dominate most commodity markets. Surprisingly, although mainstream economists have suggested imperfect competition in international trade at both the producer and the consumer levels, they have not yet pointed it out at the intermediary level. Free trade requires that all players sing the same tune : competition. The author recommends a special effort to understand the determinants of consumer prices and the role of intermediaries at both wholesale and retail levels -starting with the collection of information about the activities of international trading companies. This effort would require the involvement of the World Bank and the World Trade Organization, because they have the resources to undertake such an operation worldwide. Only a better understanding of how these companies operate will remove the suspicion of unfair trade in international commodity markets.