Unfair Trade? The Increasing Gap between World and Domestic Prices in Commodity Markets during the Past 25 Years

Abstract

The early literature on international trade has debated extensively the constraints facing exporting countries in the major commodity markets. This article goes one step further by suggesting that the final demand for these products could not have increased because the declines in world commodity prices were not transmitted or were transmitted imperfectly to domestic consumer prices. In contrast, upward movements in world prices were clearly passed on to domestic prices. As a result, the spread between world and domestic prices almost doubled in all major commodity markets during 1975–94. This asymmetry, seldom discussed in the literature, does not seem to be caused, at least systematically, by changes in trade and tax policies or factors such as transport, processing, and marketing costs. This article argues, therefore, that a special effort should be made to better understand the transmission from world to domestic prices, especially the role of large international trading companies that may have the capability to influence such spreads through one or several stages of processing in most major commodity markets.