ASEAN-South Asia Trade: Primary Commodities as a Component in South-South Co-operation 9789814345750

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ASEAN·SOUTH ASIA TRADE

The Institute of Southeast Asian Studies (!SEAS) was es tabli shed as an autonomous organization in 1968 . It is· a regio nal resea rch centre for sc holars and other specialists concerned with modern Southeast Asia, particularly the many-face ted problems of stab ility and security, economic deve lopment, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees com prising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and c ivic organizations. A ten-m an Exec uti ve Committee oversees day-to-day operations; it is chai red by the Director, the Institute's chi ef academi c and administrative officer. The ASEAN Economic Research Unit (AERU ) is an integral part of the Institute, comin g under the ove rall superv ision of the Director who is also the C hai rman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of eco nomi c change and political developments in ASEAN. The day -to-day operations of the Unit are th e responsibility of th e Co-ordinator. A Reg ional Advisory Committee, co nsisting of a sen ior economi st from each of the ASEAN countries , guides the work of the Unit.

ASEAN -SOUT H ASIA TRADE Primary Commo dities as a Compo nent in South-S outh Co-oper ation

RANJIT MALIGASPE

Field Report Series No. 26 ASEAN ECONOMIC RESEARCH UNIT INSTITUTE OF SOUTHEAST ASIAN STUDIES 1991

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recordin g or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1991 Institute of Southeast Asian Studies

The responsibility for facts and opinions expressed in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the Institute or irs supporters.

Cataloguing in Publication Data Maligaspe, Ranjit. ASEAN-South Asia trade: primary commodities as a component in South-South co-operation. (Field report series/Institute of Southeast Asian Studies; no. 26) I. Primary commodities-ASEAN countries. 2. Primary commodities-South Asia. 3. Developing countries-Foreign economic relations. 4. Developing countries-Economic integration. I. Title. II. Series. 1991 sls9 1-209076 DS501 1594 no. 26 ISBN 981-3016-20-5 ISSN 0217-7099 Printed in Singapore by Yetak Services.

CONTENTS

List of Tables Acknowledgement

VII

IX

Overview II

Co-operation Within the Global Institutional Framework

9

III

Improvement of the Production-Marketing Process

15

IV

Intra-Regional Trade

23

Conclusion

33

Notes and References

34

V

LIST OF TABLES

1.1

Economic Indicators of Selected South Asian Countries

3

1.2

Economic Indicators of Selected ASEAN Countries

4

1.3

Primary Commodity Exports of Selected Countries in ASEAN and South Asia

5

Export Earnings from Primary Commodities of Selected Countries of ASEAN and South Asia

6

Share of ASEAN-South Asia in Exports of Selected Primary Commodities

7

Production of Selected Primary Commodities in Developing Countries

16

Non-Tariff Barriers Applied by EC , Japan and USA on Imports from Developing Countries

18

4.1

Exports of Selected Commodities to Other Countries in the Region

25

4.2

Imports of Selected Commodities from Other Countries in the Region

26

1.4 1.5 3.1 3.2

ACKNOWLEDGEMENT

The author is grateful to the Ford Foundation for the funding of the Re searc h Fellowship in South-Southeast Asian Relations which enabled him to complete thi s resea rch at the Institute of Southeast Asian Studies .

I

OVERVIEW

A characteri stic feature of the world trad ing system has been the export of raw commodities from developing economies to developed economies while manufactured commodities from the latter found their way to the former. Up to around 1970, major developed countries experienced three decades of economic growth and consequently a steady development of trade. However, developing countries were unable to fully benefit from thi s trade growth because of their structural position as suppliers of cheap raw material. Since the early 1970s, the world economic scene has been disrupted by major upheav als. The International Monetary System, based on the Bretton Woods Agreement, collapsed and plunged the world financial system into instability. The two oil shocks in the early 1970s retarded economic growth in most developed countries and fuelled inflation. Dev e loped countries gradually resorted to protectionism and developing countries whose economies were already lagging due to low prices for their primary raw materials deteriorated further. Consequently, developing countries gradually increased their attention to other developing countries as trading partners and the concepts of collective self reliance among developing countries or South-South co-operation or ECDC (Economic Co-operation among Developing countries) emerged. South-South co-operation has been often cited as a guaranteed path for economic development. According to Sanjaya La! , "The large volume and ri sing share of SouthSouth trade now coincides with continuing stagnation in demand by the North, and widespread protectionist pressures against manufactures of major export interest to the South. Thus, self-sustaining growth in the South needs to be based increasi ngl y on SouthSouth trade 1. " This article examines co-operation between two regional groups in the south, namely the Association of South East Asian Nations (ASEAN), a well established dynamic set of economies and the South Asian Association for Regional Co-operation (SAARC ) in the trade of primary commodities as a co mponent of South-South co-operation.

2

ASEAN-Sourh Asia Trade

One may wonder at the rationale behind bringing these two groups together, as there are glaring differences between them. Tables l.l and 1.2 demonstrate the basic economic indicators for countries within the two groups. One conspicuous dissimilarity is in the per capita GDP. The lowest per capita GDP in the ASEAN group is that of Indonesia (US$450) which is higher than Sri Lanka where per capita GDP is highest in the South Asia group (US$400). Countries such as Malaysia and Singapore within ASEAN have per capita GDP of US$1 ,8 10 and US$7,940 respectively, whereas countries such as Bangladesh, Bhutan , and Nepa l within South Asia have per capita GDP of less than US$200. The gross domestic sav ings of the ASEAN group is also higher than the South Asia group reflecting their ability to achieve higher leve ls of investment. In addition, the contribution of the agricultural sector to GDP is higher in South Asia, reflecting their slower industrialization process compared to ASEAN. In spite of these dissimilarities there are numerous similarities between the two groups . In both groups there are countries with large populations such as India , Bangladesh, Pakistan , Indonesia, and the Philippines. The population growth rate of these countries during 1980--87 showed a uniform pattern. Their GDP growth was also in a close range during the last decade. Although agriculture's contribution to the GDP of ASEAN countries is slightly lower than that of South Asian countries , agriculture does play a dominant role in the economies of ASEAN countries, except perhaps for Singapore and Brunei . In addition to subsistence farming, large-scale commercial agricu lture, inclusive of exports of primary commodities, were major economic activities of all these countries. This is a very important similarity which will be made use of in thi s study. The dependency ratio for primary commodities in the total foreign exchange earnings of a few countries is examined with reference to Table 1.3 . Of the nine selected countries in these two groups, Sri Lanka has the highest percentage (39.25 per cent) of primary commodities in tota l exports. Nepal , Malaysia and Thailand follow with 35.35 per cent, 32.15 per cent and 29.38 per cent respectively. India and Bangladesh fare lowest with 16.53 per cent and 15.33 per cent respectively. The low percentages of these two countries, which are two of the poorest, could be possibl y due to India 's high domestic consumption of primary commodities and Bangladesh's relatively higher share of meat and fishery exports. 2 Heavy dependence on a few primary commodities make these countries vulnerable to the fluctuations of international demand and s upply factors. According to the International Monetary Fund (IMF), average prices of primary non-fuel commodities fluctuated between 47-111 between 1970--89 (1980 = 100).1 As indicated by FAO, the tem1s of trade for agricultural exports from developing countries dropped from 84 in 198385 to 62 in 1987 ( 1980 = I 00).4 Table 1.4 reveals that in a number of countries of A SEAN and South Asia, export earnings from primary commodities have been falling or stagnant over the years. The instability of these earnings have restri cted the growth of their economies, hampered investment and perpetuated poverty among their populations, especially in the poorest among them such as Bangladesh, Myanmar, Sri Lanka and Nepal. In spite of these drawbacks, these countries could exert market power; as a group, they are the largest producer and exporter of most primary commodities, accounting for a substantial proportion of the world trade. Of the nine primary commodities recorded in Table 1.5, these countries hold an oligopolistic supply position of more than 40 per cent

TABLE 1.1 Economic Indicators of Selected South Asian Countries Bangladesh Population, 1987 (millions) Population growth, 1980-87" Gross Domestic Productb GOP growth, 1980-87 GOP per capita, 1987 (US$)

Bhutan

India

Nepal

Pakistan

Sri Lanka

106.1

1.3

797.5

17.6

102.5

16.4

2.8

2.0

2.1

2.7

3.1

1.5

17,600 3.8 160

250 n. a. 150

220,830 4.6 300

2,560 4.7 160

31,650 6.6 350

6,040 4.6 400

Rate of inflation, 1980-87"

11.1

n. a.

7.7

8.8

7.3

11.8

Agriculture's sectoral percentage in GOP, 1987

47.0

51.0

30.0

57.0

23.0

27.0

Industry 's sectoral percentage in GOP, 1987

13.0

16.0

30.0

14.0

28.0

27.0

Services sectoral percentage in GOP, 1987

39.0

32.0

40.0

29.0

49.0

46.0

Gross domestic savings , 1987•

2.0

n. a.

22.0

11.0

11.0

13 .0

" Percentages b In US$ millions SOURCE: World Bank , World Development Report 1989 (New York : Oxford University Press, 1989).

TABLE 1.2 Economic I n dicators of ASEAN Cou ntries Indonesia Population, 1987 (millions) Population growth, 1980-87" Gross Domestic Product 1987b GOP growth , 1980-87" GOP per capita, 1987 (US$)

Malaysia

Philippines

Singapore

Thailand

171.4

16.5

58.4

2.6

53 .6

2.1

2.7

2.5

1.1

2.0

34,580

19,900

48 ,200

69,670 3.6 450

31 ,230 4.5 1,810

-0.5 590

5.4 7,940

5.6 850

8.5

l.l

16.7

1.3

2.8

Agriculture's sectoral percentage in GOP, 1987"

26.0

n. a.

24.0

1.0

16.0

Industry 's sectoral percentage in GOP, 1987"

33.0

n. a.

33.0

38.0

35 .0

Services sectoral percentage in GOP, 1987"

41.0

n. a.

43.0

61.0

49.0

Gross domestic savings, 1987"

29.0

37.0

22.0

40.0

26.0

Rate of inflation, 1980-87"

" Perce ntages b In US$ millions SOURCE: World Bank, World Development Report 1989 (New York: Oxford University Press, 1989).

TABLE 1.3 Primary Commodity Exports of Selected Countries in ASEAN and South Asia

Commodity Cocoa Coconut oil Coffee Cotton Jute Palm oil and palm kernal oil Rice Rubber Tapioca Tea Timber Other primary products exports Total primary products exports Total exports Total primary products ex ports as a percentage of total exports

Indonesia

Malaysia

Phi lippines

Thailand

Bangladesh

lndia

Nepa l

Pakistan

Sri Lanka

1987

1988

1988

1988

1987

1987/88 (Rs million s)

1985

1986

1989

(US$ 000' )

n. a.

n. a.

n. a.

n. a.

480.00

(US$ millions) (M$ millions) (US$ millions) (Bhat millions) (US$ millions) 75 .00 108.49 549.50

891.00 89.00 n. a.

-

12.96 408.06 48.91

n. a.

n. a.

n. a. n. a.

n. a. 93.00

2,632.00 954.00 2.428.00

34,668.00 25,117.00 19,374.00

31 .00 31.00

3,245.00 n. a. n. a. 5,923.00

12,652.00

14.89 n. a.

28.00

10,845.00

30,448.00

-

275.50

4,470.00

1,168.17

5,255.00

125.30 602.70

6,316.00

156.48

4,900.00

834.90

747 .00

778.05

34,430.00

(US$ millions) (SDR millions) n. a. n. a. n. a.

2,319.00

-

302.00

-

67.40 295.80

84.00

114.10

3.739.56

17 ,768.00

1,419.35

11 8,489.00

183.00

26,027.00

45 ,419.00

918.60

477.30

17 ,135.60

55,260.00

7,074.19

403,279.00

1,194.00

157 ,412.00

128,526.00

3,383.00

1,216.20

21.82%

32.15%

20.06%

29.38 %

15.33%

16.53%

35 .35%

27.14%

39.25%

SOURCES: Central Bureau of Statistics Jakarta, Indonesian Foreign Trade Statistics 1987; Department of Statistics, Malaysia, Malaysian External Trade Statistics 1988; National Statistics Office, Manila, Foreign Trade Statistics of the Philippines; United Nations. International Trade Statistics Year Book 1987 (New York : UN, 1987); Central Bank of Sri Lanka Annual Report 1989.

TABLE 1.4 Export Earnings from Primary Commodities of Selected Countries of ASEAN and South Asia

Bangladesh" Indonesia" b

Myanmar Pakistan

a

Philippines Sri Lanka< Thailand"

a

1987

1983

1984

1985

1986

n. a.

211.4

183.45

152.35

2,295.53

2,659.32

2,385.12

2,690.77

453.52 n. a.

n. a.

n. a.

1,131.00

800.50

854.22

558.29

743 .39

918.60

1,833.20

I ,696.13

1,348.70

1,383.76

n. a. 3,070.79

n. a. 3,437.84

688.70

457.60

2,843.38

3,172.27

183.99 n. a.

n. a. 479.20 n. a.

" In US$ milli ons b In Ky at millions c In SDR millions SOURCES : United Nations, International Trade Srarisrics Year Book 1987; Ministry of Planning Finance of Myanmar; Review of Finance, Economic and Social Condirions fo r 1989/90; Cenrral Bank of Sri Lanka Annual Reporr 1989.

TABLE 1.5 Share of ASEAN-South Asia in Expor ts of Selected Primary Commodities 1986

World Exports (US$ millions) Cocoa Coconut oil Coffee Jute

Exports of the Group (US$ mi llions)

1987 --

Percentage

World Exports (US$ millions)

Exports of the Group (US$ millions)

Percentage

3,149.4

316.8

10.0

2,987.6

417.0

13.9

483.4

396.6

81.6

590.9

482.8

81.7

15,183.1

1,559.0

10.3

10,280.6

964.0

9.3

143.8

117.5

81.8

115.8

93.5

80.9

89.4

3,976.4

3,429.4

85.9

43.2

3,235.0

1,433.7

44.3

Natural rubber

2,944.4

2,633.1

Rice

3,116.9

1,345 .6

Palm oil

1,987.4

1,753.7

88.2

2,132.9

1,897.5

88.9

677.6

485 .7

71.6

664.1

436.5

65.7

2,040.1

951.4

46.6

2,154.9

1,056.5

49.0

Pepper Tea

SOURCE: Food and Agriculture Organization, FAO Year Book 1987.

8

ASEAN-South Asia Trade

for seven items. It is observed that during the period examined, they accounted for over 80 per cent of world exports of natural rubber, palm oil, jute and coconut oil. In pepper it was over 65 per cent, and in rice and tea over 40 per cent of world exports. Of the commodities examined here, it is only in coffee and cocoa that they hold a weaker position of around I0 per cent of total exports. This joint market power may help them to operate from a position of strength in commercial transactions and in international bargaining. This article will analyse the extent to which this strength will assist them to obtain better deals for their primary commodities. For the purpose of this study, countries in ASEAN and South Asia are categorized as one region. The analysis in most instances will concentrate on the major commodities such as cocoa, coconut oil, coffee, cotton , jute, palm oil , rice, natural rubber, tea and timber. This does not, however, preclude the application of many of the generalizations given here to the minor commodities whose export earnings from these countries are generally less than those of the other commodities such as sugar, tapioca, pepper, coconut, maize, fruits and vegetables, etc. Further, this study will not cover fuels , minerals and metals, animal products and fishery products as their trading pattern s may differ from agricultural commodities based on trees and plants. Moreover, steps which individual countries cou ld initiate independently for the development of their primary commodity trade have been left out as they comprise a separate area of study.

II

CO-OPERATION WITHIN THE GLOBAL INSTITUTIONAL FRAMEWORK

World exports of agricultural commodities have been growing at a slow pace while such exports by all developing countries have been rather stagnant. According to FAO estimates, world exports of agricultural commodities, excluding fisheries and forestry products, had risen from US$233 billion in 1980 to US$25 1 billion in 1987 while such exports from developing countries had increased only marginally from US$72 billion to US$73 billion during thi s period though dropping to as low as US $64 billion in 1982.5 Economic upheavals in developed markets, availability of substitutes, protectionism, and fluctuations in the supply of primary commodities are the main factors contributing to this situation . Developing countries of the region could strive to use their combined market power and the resu ltant bargaining power for the dual objectives of obtaining better prices for primary commodities and increasing their export volumes. The strategy should be to co-operate with developed countries within the international institutional framework as they are the more powerful and financially dominant group today.

Barriers The biggest obstacle to efforts to enhance export earnings from primary commodities today is the protectionism practised in the major markets. Protectionist measures practised by the European Community (EC) are the most disruptive. High tariff barriers for agricultural commodities make those originating from ASEAN-South Asia region less competitive. This is especially true of commodities that compete with EC produce suc h as sugar, vegetable oils, and wheat. The heavily-protected, high-cost agricultural commodities of the EC countries are sold in world markets at subsidized prices, thus adversely affecting the more efficient producers of the developing world. Similar tariff barriers exist in the United States, Japan and other developed countries.

10

ASEAN-So uth Asia Trade

Of late, the deve loped countries have been concentrating on non-tariff barriers (NTB s). The General Agreement on Trade and Tariff (GATT) has identified more than 30 of the most commonly used of those NTBs among which are import quotas, minimum import prices, counterv ailing duties, customs valuation systems, sanitary requirements, li censing schemes and voluntary ex port restraints (VERs). These NTB s are less transparent, and consequently the ir impact on primary commodities is difficult to identify. The majority of these are bilateral and in most instances outside the bounds of GATT. A study done by the Asian Development Bank in 1988 reveals the extent of NTB s which countries face in developed markets. The Philippines' export of bananas have to contend with at least six types of NTB s in the EC. Its exports of sugar are subject to five types of NTB s in the United States, six in Japan and five in the EC. Paki stani exports of ri ce to the United States face special customs and entry procedures. Further, the United States requires that rice for consumption be vitamin coated which is not easy for Paki stani exporters to fulfil. The study further po ints out that under VERs, Thailand had to restrict its tapioca exports to the EC in the 1985 from 8.5 million tons to 5.5 tons. 6 The irony is that this restriction does not ex ist fo r com glutton feed exported to EC , a direct substitute fo r tapioca.7 The scope for co-operation among countries in the region to reduce these barriers will depend on co-operation with the North , the developed markets with the purchasing power. Primary commodities fro m the region mostl y reach these markets. These are the countries whose voices are mostly heard in the international fora, and whose thinking could swing institutional dec isions.

Generalized System of Preferences So far, the most ex tensive tariff concessions granted by the developed countries are under the aegis of Generali zed System of Preferences (GSP) introduced in 1975 thanks to the effo rts of the United Nati ons Co nfe rence on Trade and Deve lopment (U NCTAD). Although under the GSP the majori ty of the primary commodities have been granted tariff rates, lower than the Most Favoured Nation (MFN) rates, some commodities vital to the region have not been afforded this fac ility. The United States does not give any GSP status to Malays ian and Indonesian palm oil ,8 perhaps to appease the strong soya bean lobby there. F urther, GSP concess ions granted to certain commoditi es have been subject to quotas. From late 1970s. T hai sugar had been enjoying GSP status in the United States. When the increase in Th ai sugar ex ports exceeded 50 per cent of total U.S. imports, Thail and ceased to be a GSP beneficiary for sugar. Consequentl y onl y about one-tenth of Thai sugar that was fo nnerly exported now enter the United States .9 Countries in the region could use their market power in the specif ic commoditi es to obtain further GSP concessions fro m preference granting countries. However, the GSP also has some limitati ons and it cannot be continued for all countries fo rever.

Multilateral Trade Negotiations In addition to th e GSP granted to th e indi vidual deve lopin g countri es, th ere ex ist Multilateral Trade Negotiations (MTN) tariff cuts that are applicable uni versall y. The seven

Glohallnstitutiona/ Framework

II

Rounds of MTNs under the auspices of GATT including the last Tokyo Round ( 1973-79) brought very little relief for primary commodity exporters. At the Tokyo Round few concessions were noticeable in spices, nuts and tropical fruits but most of the commodities of interest to developing countries have been left out. Moreover, hardly any efforts have been made to dismantle NTBs during the Rounds. The Uruguay Round of Multilateral Trade Negotiations (1986-90) came to a conclusion at the end of 1990. Developing countries inclusive of those in the region have been active participants of the Round. However, this Round also will ultimately have little impact on the trade in primary commodities unless the developed countries agree to phase out the trade barriers and farm subsidies. The indications are that, at present, although the United States is willing to go along with developing countries, the EC is not agreeable. The concern shown by the ASEAN members at the 1990 Asian and Pacific Economic Cooperation (APEC) meeting bears testimony to this fact. 10 Under these circumstances, primary commodity exporters should not be over-optimistic about benefits from the Uruguay Round .

UNCTAD-Common Fund The other forum in the international arena through which countries in the region could press for their demands in the primary commodity trade is UNCTAD. UNCTAD has been in the forefront in the development of the poorer countries through improvement of their trade. Other than the GSP, the most ambitious project under UNCTAD was the Integrated Programme for Commodities (IPC) first mooted at UNCTAD IV in Nairobi in 1976. Thi s was accepted at UNCTAD V in Manila in 1979, and after long years of hard struggle the requisite number ofcountries ratified it in 1986. The heart of the IPC is the Common Fund of US$400 million which would be used to stabilize prices of primary commodities with commodity agreements governing it. It is heartening to note that the 10 core primary commodities which UNCTAD has agreed upon for price stabilization under this programme are cocoa, coffee, tea, sugar, rubber, jute, cotton, hard fibres, tin and copper, all of concern to the countries in the region . Bananas, vegetable oils and tropical timber are among the other eight commodities the Common Fund will add to the list at a later stage. The IPC also will have a second window through which research and development activities in these commodities will be financed. The !PC now awaits the disbursement of funds from agreed donors to finance these operations. With the recent collapse of most commodity agreements, it is doubtful whether more intlow of funds from IPC will revive such agreements and stabi Iize the prices of these commodities. Under these circumstances, countries in the region could be more optimistic over research and development projects through the second window of the I PC. 11

Commodity Agreements International commodity agreements have been in existence for a considerable period and countries in the region have been vociferous members in the majority of these. The International Sugar Agreement, one of the first such agreements to be set up, failed to

12

ASEAN-South Asia Trade

stabilize sugar prices and consequently the present agreement signed in 1984 has no price stabilization clauses and is only a mechanism to collect statistics. Hence sugar exporters in the region such as Thailand and the Philippines should not be over-enthusiastic about benefits from this agreement. The International Cocoa Agreement, since 1987, has been plagued with differences over price support levels and shortage of cash for buying operations. Consequently, buffer stock purchases have been suspended and cocoa prices have fallen to their lowest in 13 years. The agreement is dormant now. None of the cocoa exporting countries in the region were members of the last agreement and in case it is revived it may be useful for them to opt for membership. Coffee as an export commodity is important to Indonesia, Philippines and small exporters such as India and Sri Lanka. The International Coffee Agreement was an attempt to stabilize prices by using a mixture of production quotas, buffer stocks and a range of prices to be stabilized. In July 1989, international coffee prices fell to their lowest in 14 years and, unable to stop the fall any further, the International Coffee Council which is managing the agreement suspended the quota system and declared a free market for coffee. It is predicted that thi s free market would continue for about two years. 12 Hence , little immediate relief can be expected for countries in the region by joint co-operation under the aegis of the Agreement. About 80 per cent of world 's natural rubber is produced in this region . These countries were instrumental in the formation of the Association of Natural Rubber Producing Countries (ANDRC) in 1970, and they campaigned vigorously for the conclusion of the International Natural Rubber Agreement (INRA) signed in 1980. This was renegotiated in 1989 and this is the only commodity agreement in operation now which possesses price stabilization measures. The countries in the region are very active participants in the agreement and much could be expected from their co-operation. About 74 per cent of the world 's jute production is concentrated in Bangladesh, India and Thailand. 13 The International Jute Agreement of 1982 does not encompass any price stabilization measures, but creates the framework for consolidation of the competitiveness of jute and jute products. The International Jute Organization (IJO) which services the agreement had initiated six agricultural , two industrial , and three market promotion projects on jute. 14 As oligopolistic suppliers of jute, these countries could assist substantially in the successful implementation of these projects.

Organizations of Producer Countries In addition to the above commodity agreements where both producers and consumers are represented, there exist organizations of commodity producing countries. Other than the IJO and ANRPC mentioned above, the Asian and Pacific Coconut Community (APCC) and the Pepper Community (PC), both located in Jakarta, have done substantial work for the fulfilment of their respective objectives and their members, the majority of whom are from the region, have been in the forefront of these activities. The tropical timber producers of the region , Malaysia, Indonesia, Thailand and Philippines played valuable roles in getting the International Tropical Timber Organization (ITTO) off the ground.

Global Institutional Framework

13

FAO Inter-Governmental Groups Countries in the region have been active at various commodity groups under the FAO. The FAO Inter-Governmental Group on oils, oilseeds and fats, which include palm oil, and coconut oil exporters as well as consumers of vegetable oils at its meeting in March 1988 expressed its deep concern at the proposed EC Vegetable Oil Tax. 15 Their agitation could have stalled the imposition of this tax even temporarily. The producer countries of palm oil and coconut oil have also countered the anti-lauric oils (i.e. palm oil and coconut oil) campaign at these meetings. Exporting countries such as Malaysia and Sri Lanka played active roles in both these issues. The FAO Inter-Governmental Group on jute and allied fibres at its meeting in November 1988 decided , considering the future demand and supply factors, a suitable indicative price for Bangladeshi jute for 1988/89. 16 This helped producers and consumers to arrive at a fair price devoid of wide fluctuations. The sub-group of exporters of the intergovernmental group on tea at its meeting on May 1987 confirmed its stipulations regarding the minimum quality standard for black tea, and required importing countries to curtail purchases from those who do not adhere to guidelines. 17 Similar inter-governmental groups exist for rice , bananas and hard fibres which are of interest to the region. ·

Compensatory Financing One important question which the developing countries in the region can address to UNCTAD, FAO, IMF and the developed countries is compensation for falling commodity prices. The IMF operates the Compensatory Financing Facility and the Compensatory and Contingency Financing Facility (CCFF) whereby countries with fund-supported adjustment programmes which face balance of payments difficulties resulting from fall s in their commodity prices could receive contingency financing . These facilities have not been sufficient to counter the negative effects due to declines in commodity prices and exporting countries have been demanding increased facilities. The EC operates the STAB EX system whereby developing countries in Africa, the Caribbean and the Pacific (ACP) are compensated financially at times of commodity price shortfalls. The STAB EX transfers which cover 48 agricultural commodities increased from SDR 112 million in 1986 to SDR 202 million in 1987. 18 Similarly the EC operates the COMPEX System to compensate non-ACP least developing countries for shortfalls in export earnings from agricultural commodities. As primary commodities exported from this region are subject to wide price fluctuations, it may be useful for countries in the region to explore the possibility of obtaining similar relief from importing developed countries. As STABEX disbursements are from the European Development Fund, a request could be made for a similar fund for these disbursements.

Group of 77 To make such challenging endeavours, countries in the region should also consolidate their strength in international informal groupings. They were a source of inspiration to the Group of 77 (G77) which came into existence along with UNCTAD I in 1964. 19 The biggest

14

ASEAN-South Asia Trade

achievement of the G77 was the successful conclusion of Global System of Trade Preferences (GSTP) in April 1988. This entails a global exchange of tariff and non-tariff concessions. Forty-six countries, all developing, exchanged concessions under this agreement, and among them were Bangladesh, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Singapore and Thailand. 20 While considerable concessions have been made for commodities, there exists further scope for exchange of concessions in the non-tariff sector. Such exchanges are expected to make a positive contribution to the global trade in commodities among developing countries.

Cairns Group Lastly, as an organization of the informal sector, the achievements of the Cairns group and its potential should not be forgotten. The Cairns group, led by Australia and consisting of Malaysia, Philippines, Indonesia and Thailand among others, have exerted considerable pressure at international fora for liberalization of commodity trade. Its views and representations have been seriously considered by the Group of 77 at its recent meeting at Houston and by GATT at the ongoing Uruguay Round. 2 1 It is appropriate that other primary commodity exporters of the region should join the group to strengthen it, and for it to appear more representative.

III IMPROVEMENT OF THE PRODUCTION-MARKE TING PROCESS

Till now we have examined the global institutional framework available for joint cooperation by the primary commodity exporting countries. Our next objective is to discuss the commodities. Countries in the region could examine the extent of cultivation and production of commodities, processing, pricing, financing, trading systems, etc. and should endeavour to utilize joint efforts for attaining optimum benefits in these areas.

Production The supply of most of the primary commodities is inelastic in the short run. Gestation periods for tree crops such as rubber, oil palm, coffee and coconut are lengthy and therefore supply cannot be easily adjusted to meet demand. On the contrary, the supply of certain commodities such as rice, cassava, sugar, etc. is relatively more elastic. Table 3.1 indicates the change in production of selected primary commodities in developing countries between 1977-1988. The supply of commodities such as sugar, rice, jute and coconut oil have fluctuated during this period. Supply fluctuations affect export earnings and consequently the economies of the countries concerned. If countries in the region could disseminate the information which they possess about future supply movements to the other members, they could jointly effect supply adjustments and thereby minimize price instability. It appears that there is no mechanism for countries in the region to obtain such information from one another regularly. At meetings of FAO inter-governmental commodity groups and inter-governmental commodity associations, such information is made available and steps are taken on the basis of the information. However, these meetings are mostly annual and there is a need for more frequent exchange of information. The organizations responsible for each of the commodities in the countries of the region , such as Mini stries of Agricu lture or Ministries of Primary Industries, etc. should devise a mechani sm to di sseminate such information regularly and adjust production programmes accordingly.

TABLE 3.1 Production of Selected Primary Commodities in Developing Countries

Cassava

a

Coconut oil

1987

1988

1977

1980

1983

1986

117.00

119.5

123 .1 0

131.20

134.90

138.20

2,840.00

3,420.00

3,160.00

2,930.00

10,720.00

n. a.

3,060.00

2,940.00

Cotton

7,617.00

8,072.00

9,893.00

9,981.00

Jute

2,747.00

3,270.00

3, 113.00

6,367.00

3,351.00

n. a.

Palm oil

3,830.00

5,080.00

5,870.00

8,160.00

8,540.00

8,930.00 452.10

Rice Sugar

a

Tea Natural rubber

344.50

373.40

427.40

446.00

429.80

50.92

49.31

57.32

59.96

61.20

1,538 .00

1,629.00

1,815.00

2,039.00

2,125.00

n. a.

4 ,550.00

4,700.00

3,592.00

3,830.00

4 ,025.00

4,450.00

" In million tonnes. All other items are in thousand tonnes. SOURCE: Food and Agricultural Organization Rome, FAO Commodity Review and Outlook, Iss ues from 1980 to 1988/89.

n. a.

The Produ ction-Marketing Process

17

Lack of co-ordination among producing countries could also result in continuous overproduction of a commodity resulting in a steep decline in prices. The best example is palm oil. Between 1977-88, there was a massive increase in the world supply of palm oil. The production of developing countries increased from 3.8 million tonnes in 1977 to 8.9 million tonnes in 1988 (Table 3.1) and a larger part of the increase took place in Malaysia. Malaysian palm oil production increased from 3.3 million tonnes in 1983/84 to 4.8 million tonnes in 1987/88. 22 Overproduction without ascertaining the world's future supply invariably results in lower prices. World average palm oil price fell gradually from US$654 per metric ton in 1979 to US$314 per metric ton in 1987. 23 This situation could have been avoided if the world 's biggest palm oil producers had adjusted their production programmes jointly, taking into account future demand.

Processing Although exports of primary commodities in value-added processed forms have been on the increase in the past, still a considerable proportion is exported in raw form. This reduces the foreign exchange gains of the exporting countries and retards their employment and development of the industrial base. A study done by UNCTAD in 1975 indicates that by processing rubber into tyres , tubes and plates an additional net gain of I :2.16 could be obtained. The same study shows that cotton when converted to fabric gives a value added of I : 1.86. 24 Similarly a joint World Bank and Commonwealth Secretariat study done in 1983 indicates that for tropical timber the gross export earnings of Malaysia, Indonesia, Philippines and also Papua New Guinea in 1978 would have increased by 73 per cent if logs were processed before export. The same study showed that India and Sri Lanka could have raised foreign exchange earnings from tea in 1979 by US$3.49 and US$2.97 respectively per kilogramme by exporting tea in bags rather than in bulk and by US$1.09 and US$0.2 1 per kilogramme respectively by exporting instant tea instead of exporting bulk tea. 25 One obstacle for increased processed exports is the tariff and non-tariff barriers facing such commodities. In the EC, crude palm oil from Malaysia faces a low 4 per cent tariff while processed palm oil has to face a high tariff of 12 per cent. Japan imports tropical logs from Indonesia and Malaysia duty-free but charges an import duty of 17-20 per cent for semi-processed timber.26 According to Ariff, The effective rates of protection often exceed I 00 per cent in primary processing activities in advanced countries , as tariff falls largely on the value added component in processing. Processing of vegetable oils and timber are the two outstanding examples of resource-based activities penalized by trade barri ers both tar iff and non-tariff in developed countries Y

In the same way, non-tariff barriers that restrict exports of primary commodities in processed form exist, and a list applicable to a few commodities is given in Table 3.2. Such discrimination against processed commodities should be canvassed against by aLl countries in the region. Another disability which the countries in the region face in exporting processed products is the non availability of adequate processing facilities and technology. This is

TABLE 3.2 Non-Tariff Barriers Applied by EC, Japan and USA on Imports From Developing Countries Barriers of EC

BTN Code

Barriers of Japan

Fruits, provisionally preserved

DL

DL

11.01

Cereal flours

VL

DL

17.04

Sugar confectionary

VL

-

18.06

Chocolate and other food preparations containing cocoa

VL/HS

Vegetables and fruits prepared or preserved by vinegar and acetic acid

L/BQ/GQ/HS

55.05

Cotton yarn

MFA

57.06

Jute yam

GQ/XR

57 . 10

Woven fabric of jute

XRIBQ!GQ

8. 11

20.0 1

Barriers of USA

GQ!BQ GQ!BQ BQ

HS -

MFA

Symbols: DL: Discretionary Licencing; L: Licencing; GQ : Global Quotas: BQ : Bilateral Quotas; XR: Export Restraints; VL: Variable Levies; HS: Health and Sanitary Regulations; MFA: Multi-Fibre Agreement. SOURCE: UNCTAD lm ·entory of Non Tariff Barriers (TD/8/C. 2/ 115 Rev I and Corrl)

The Production-Marketing Process

19

where the more technologically advanced countries such as India, Malaysia and Pakistan could come to the assistance of the others. Philippines already processes coconuts into downstream products such as fatty acid, methyl ester, glycerine, soaps, detergents, coconut cream, processed foods, etc. Theoretically, this technology and expertise could be made available to countries in the region such as Sri Lanka which still exports more unprocessed products. However, in practice this creates one more competitor for Philippines. The same would happen to India if it imparts the downstream processing technology and expertise in jute to neighbouring countries. Practical obstacles such as these could be overcome to a certain extent through foreign investment. For this to succeed, a sound investment climate with an attractive investment package and liberal repatriation of profits should be established in the home country. Investment Guarantee Agreements between bilateral partners will also assist considerably. These means will help to harness the technological capabilities available in the region for further processing of primary commodities. Joint investment within the region has another benefit. It could be a solution to the shortage of capital which prevents the downstream processing of commodities in the poorer countries of the region. It is said that at 1975 prices , investment costs of a roasting and grinding plant for cocoa are about US$12-13 million. Capital costs of processing cotton would be about US$60-90 million. 28 For such investments from regional countries to be a reality, not only the investment promotion policies of the home country should be attractive but the investing countries too should liberalize their policies towards investment of funds in foreign countries.

Marketing Nations are concerned about the low share of primary commodities' cost in the final price paid by the consumer. This is often attributed to the weak bargaining power of the producing country. Most commodity markets consist of freely competing sellers facing a few large buyers. ln other words an oligopsony prevails. These large buyers are often vertically integrated transnational companies with control over finance, marketing , distribution , shipping, and promotional activities apart from some control over production itself. An UNCTAD study reveals that in 1978, five transnational corporations accounted for 75 per cent of the market share of the developed world 's blending of tea. The same study reveals that in the same year 70 per cent of the share of processing green coffee in the United States market was in the hands of four transnational corporations .29 These multinational corporations account for a substantial portion of developing countries' sales of certain commodities, for example Del Monte (bananas, Philippines) Unilever (coconut oil, Sri Lanka). Due to their heavy concentration in the production marketing process, the final price to the producer country is low. Even if such companies are not operative, primary commodity exporters would still continue to depend on external agencies for shipping, distribution , promotion, financing, etc. and hence their share of the final price would not be at the optimum. The establishment of Multinational Marketing Companies by primary commodity producing countries will increase their concentration in the production marketing process and help them receive a higher portion of the price paid by the final consumer. This type of company has been in operation in Latin America for some time. On the initiative of

20

ASEAN-South Asia Trade

the Union of Banana Exporting countries, six countries formed the COMUNBANA company in 1977 and it has been engaged in the export of bananas to developed markets such as the United States, Switzerland and Greece. The Bogota Group of coffee exporting countries which accounts for about 60 per cent of world exports of coffee had set up Pancafe, a multinational coffee exporting company. 30 At the Economic Cooperation among Developing Countries (ECDC) Meeting held in Caracas in May 1981 with the active support of G77 , it was decided to grant financial and technical support for setting up of such companies in the marketing of primary commodities. So far, agreement has been reached on 25 product groups which have the greatest potential for joint marketing action at the regional level. Among the first twelve groups identified are oils and oilseeds, fruits and vegetables , timber, cotton and coffee , commodities which are of int~rest to this region. 3 1 As the advantages are obvious , countries in the region could venture into formation of such companies which will be involved in a larger concentration of the production-marketing process inclusive of financing, shipping, distribution, promotion, etc. However, a suitable regulatory framework for equity participation and investment in multinational marketing companies would have to be introduced in these exporting countries. Formation of cartels is another method suggested for these countries to retain a larger share in the final price of the product. According to Gordon-Ashworth, among the earliest cartels were the Rubber Production Agreement between Sri Lanka and Malaysia in 1922 and the International Tea Agreement operative in the 1930s. 32 An inherent feature of a cartel is that it endeavours to defeat competition and to control production , distribution, marketing , etc. to its own advantage. If a cartel is to succeed, it should be able to restrict exports and to determine the sale price. However, the experience of the few primary commodity cartels which were in operation show that they were unsuccessful in this endeavour. The agreement between Grenada and Indonesia to regulate and stabilize prices of nutmeg was jeopardized when Indonesia, through its marketing arm ASPIN , commenced selling nutmeg below prices agreed upon Y The understanding between Philippines and Sri Lanka to maintain high prices and control export quantities of dessicated coconut crumbled when low priced products from other supply sources entered the market in large quantities.34 Unlike the case of the Organization of Petroleum Exporting Countries (OPEC) which had initial success , any cartel for primary commodities will be unable to sustain quantity restrictions or artificially higher prices for a long period without retaliation because of substitutes available for primary commodities, the non-essential nature of the commodities, and the inelasticity of supply in the short run . Malaysia and Indonesia, although accounting for over two-thirds of the world 's palm oil production , will be unable to use that market power and maintain an artificially high price for palm oil with export quantities restricted . If they attempt it, suppliers of substitutes such as soya bean oil , sunflower oil, rape seed oil , etc. will out-price them and capture these markets. High prices would also stimulate production in the consumer countries, for example India is making efforts to reduce its reliance on imported palm oil. This is just one example but it is applicable to all primary commodities exported from the region. Hence, establishment of cartels will not help these countries. Engaging in futures trading in commodities has been advocated as a method of

The Production-Marketin g Process

21

minimizing price fluctuations. This method allows traders to sell and buy commodities at an exchange for delivery at a future date. Sellers and buyers hedge their sales or purchases, which allows them to offload the risk in price fluctuations to speculators who are active in the exchange. The highly-developed futures market in Chicago has helped traders in soya bean oil to trade with the minimum amount of ri sk in future price fluctuation s. In thi s region, the only commodity exchange available is the Kuala Lumpur Commodity Exchange (KLCE) where mostly palm oil and palm kernel oil are traded. For futures trading to succeed, the exchange should be engaged in handling a large volume of business so that no single transaction will affect the price. Commodities such as rubber, coconut oil , and pepper where the region has the highest market power are thereby suitable for futures trading. It is reported that at the KLCE overseas companies are granted only restricted membership as trade affiliates. 35 If the commodity exporters of the region are pennitted to trade in a futures exchange, it will help to minimize price fluctuations . A shortage of market information and market intelligence is said to be an existing drawback among primary commodity exporting countries. Exporters sometimes do not possess adequate information on the latest market trends in a product, changing consumer tastes, di stribution and sales channels, health and sanitary regulations, etc. which prevent them from adapting to the changing needs of the market. Most consumers of tea have lately shown a preference for the CTC variety of tea but many exporters of Sri Lanka were slow to respond to this change, and lack of market information was partly responsible. 36 Pooling of information available in the region would have been helpful in this instance. However, there are always di sadvantages to making available market information to competitors. There is also the potential for countries in the region to undertake joint marketing efforts for the promotion of generic products especially in the developed markets where the cost of promotion and advertising is substantial. The International Tea Promotion Organi zation, set up with the assistance of UNCTAD in 1979, was a step in thi s direction. Similar promotional measures could be undertaken under the auspices of existing intergovernmental commodity bodies in the region , namely the Association of Natural Rubber Producing Countries (ANRPC), Asia and Pacific Coconut Community (APCC), Pepper Community (PC) and the International Jute Organization (IJO).

IV INTRA-REGIONAL TRADE

Historically, primary commodities from the region have been exported to developed country markets. Countries such as India, Pakistan, Sri Lanka and Malaysia were under Western domination till the end of World War II , and they were suppliers of cheap raw materials to the colonial masters. This trade pattern continued even after their independence. Even now a good proportion of the region's primary commodities are exported to them. The only new additions are Japan and the newly industrialized countries. However, as the econom ic upheavals during the last two decades would have shown, reliance on only the traditional developed markets may be disadvantageous . An alternative is to concentrate on trade among primary commodity producer countries themselves. Countries of South Asia and A SEAN taken as a unit comprise a huge market. Their total population of about 1.33 billion in 1987 37 makes it a viable unit for concentrated marketing activities. Moreover, the populations of most of these countries are increasing. Altho ugh per capita GNP of some countries such as Bangladesh and Bhutan are low, with the ongoing development plans, they are expected to increase. Their income elasticity of demand for most primary commodities except for essentials such as rice is high . In other words , demand for the commodities is expected to grow fast as incomes increase. The close proximity of these countries could result in transport being cheaper and quicker. Moreover, consumer habits and tastes in these countries are uniform. The sophisticated packaging and health requirements which exporters need to comply with in developed markets are relatively unknown here. Hence countries in the region could realize these advantages inherent among them selves and endeavour to increase trade. Increased trade could be either bilateral or mu ltilateral. Bilateral deals and special trading arrangements for primary commodities or otherwise are nothing new to these countries. Therefore, as a matter of policy, at the highest levels of government, they could grant priority to primary commodity trade between regional countries. However, present trade in primary commodities among countries in the South

24

ASEAN-South Asia Trade

Asia-ASEAN region is not at encouraging levels. Table 4.1 shows the exports of primary commodities from selected countries in the region to regional destinations compared with their total exports. 38 This has to be examined together with Table 4.2 which shows total imports of primary commodities by selected countries in the region along with their imports of such commodities from the rest of the region .39 Indian imports and exports are not discussed here because of the unavailability of data. Singapore is excluded because first , ihe country is not a primary commodities producer. Second, Singapore 's inclusion could have resulted in double counting as for example, a specific quantity of palm oil is exported from Malaysia to Singapore, Singapore re-exports the same. Tea As shown in Table 4.1, Bangladesh and Indonesia exported 27.2 per cent and 24.1 per cent of their tea exports respectively to the region while Sri Lanka exported a low 4.2 per cent. In the latter case it was due to Sri Lanka 's links with traditional markets such as United Kingdom and the continent and its recent concentration on the Middle Eastern markets. Tea from Indonesia and Bangladesh were shipped mostly to markets such as Malaysia and Pakistan. The latter is one of world 's biggest importers and consumers of tea, and had imported 28.1 per cent of its tea requirements from the region. Indian teas have been traditionally exported to the Soviet Union and Eastern Europe and this pattern may not change. Tea cannot be grown in all the countries of this region. However, tea is widely consumed in all the countries of the region. In these circumstances, there is scope for increased exports from the major tea producers to the other countries of the region provided its popularity as a beverage does not decline, and provided the right type of tea which the importer requires such as CTC teas, tea in bags , instant tea, etc . can be adequately supplied.

Coffee For coffee, there were varying percentages: from a low 0.92 per cent from Indonesia to a high 21.9 per cent from Philippines, and a still higher 59.9 per cent from Thailand were exported during this period to the region. In the case of Philippines and Thailand, the figures could be misleading as a large proportion of this coffee was exported to Singapore which, being an entrepot trading centre, would have re-exported a substantial quantity of this. The only importer of coffee in the region was Malaysia which purchased 16.7 per cent of its total requirements from the region. In coffee, almost all the countries in the region are self-sufficient and are sometimes marginal exporters. Hence, large imports from the region or otherwise would not be necessary. This situation emphasizes the fierce competition among exporting countries of the region for external markets for their commodities. Considering the limited demand for coffee within the region it is not possible to envisage an increase in the intra-regional trade.

Cocoa Malaysia is the largest producer and exporter in the region for cocoa. It sent 31.2 per cent of its exports in 1986 to the rest of the region. Here the percentage is deceptive because

TABLE 4.1 Exports of Selected Commod ities to Other Countries in the Region Percentage of Total Exports to the Region

Bangladesh ( 1986)

Indonesia (1984)

Malaysia ( 1986)

Pakistan (1986)

Philippines ( 1986)

Sri Lanka (1984)

-

N

N

1.4

N

21.9

N

Cocao

-

N

31.2

Coconut Oil

-

73.1

92.9

Coffee

-

0.92

-

-

-

-

-

18.0

Cotton Jute

33.0 N

-

1.8

2.9

-

1.3

Natural

-

21.8

12.7

-

N

5.5

Palm Oil & Palm Kernal Oil

-

1.8

39.0 -

4.2

16.2

Rice

Tea

59.9 N

26.2

Maize Timber

Thailand ( 1986)

27 .2

24.1

-

9.3

NOTE: N denotes negligible quantities . SOURCES: Foreign Trade Statistics 1984, Central Bureau of Statistics, Jakarta, Indonesia; External Trade Starisrics 1986, Department of Statistics Malaysia, Malaysia: Foreign Trade Srarisrics o{rhe Philippines, Nation al Statistics Office , Manila, Philippines; Foreign Trade Srarisrics ofAsia and Pacific, United Nations. New York.

TABLE 4.2 Imports of Selected Commodities from Other Countries in the Region Percentage of Total Imports of the Commodity Bangladesh ( 1986)

Indonesia ( 1986)

Malaysia ( 1986)

Pakistan (1986)

Philippines ( 1986)

Sri Lanka ( 1986)

Thailand (1986)

Cotton

44.2

2.5

17.8

-

46.5

65 .8

22.9

Coffee

-

-

16.7

Jute

-

N

N

74.5

N

N

Maize

-

N

91.1

20.8

9.2

99.2

-

N

N

N

-

-

53.5

N

28.1

Rice Rubber Tea Coconut oil

N.A.

Palm oil

N.A.

Palm oil & palm kemal oil

N

N.A. -

-

1.8

39.0

N.A.

-

N

NOTE: N denotes negligible quantities. SOURCES: Foreign Trade Statistics 1984, Central Bureau of Statistics, Jakarta, Indonesia; External Trade Statistics /986, Department of Statistics Malaysia, Malaysia; Foreign Trade Statistics of the Philippines, National Statistics Office, Manila, Philippines ; Foreign Trade Statistics ofAsia and Pacific, United Nations, New York .

Intra-Regional Trade

27

almost the full quantity, namely cocoa to the value of US$71.4 million out of a total export of US$72.5 million, was exported to Singapore for re-export, perhaps after the processing.40 There isn 't any significant importer countries of cocoa in the region. The usage of cocoa as a beverage is limited in these countries. Few possess adequate processing facilities to manufacture downstream products. Almost every country produces cocoa adequately to meet this restricted demand. Hence, one cannot expect an increase in intraregional trade in this commodity. Even if Malaysia and Indonesia increase their chocolate production, intra-regional trade may be limited.

Natural Rubber As seen in Table 4.1, the exports to the region of natural rubber varied from a low 5.5 per cent from Sri Lanka to a high 21.8 per cent from Indonesia. Almost the full quantity exported from Indonesia to the region was absorbed by Singapore for re-export possibly after further processing. Of Malaysia 's 12.7 per cent share of its exports of natural rubber to the region, almost four-fifths were absorbed again by Singapore. Similarly, a high proportion of Thailand 's 9.3 per cent share of natural rubber exports to the region ended up in Singapore. As Table 4.2 demonstrates, Paki stan was the only significant importer of natural rubber in the region, accounting for 53.3% of its imports from within the region, a substantial amount. The larger portion of natural rubber produced in the world is consumed by developed countries for industrial uses and this will continue. In the wake of rapid growth of industrialization in the region , especially within ASEAN and in countries such as India and Pakistan, the demand for rubber will grow. However, most of them are rubber producers themselves. The industrial development of non-rubber producers of the region , namely Bangladesh, Nepal , Maldives, Bhutan and Brunei is relatively slow. In these circumstances, unless there is dramatic improvement in the industrial structures of these countries, it is not possible to foresee an increase in intraregional trade in natural rubber. Malaysia plans to go downstream by making tyres for expmt. Again, how much this will be of help to improving intra-regional trade in rubber products remains to be seen.

Timber During thi s period, the three major timber (rough) exporters of the region, Indonesia, Malaysia and the Philippines, have been shipping very insignificant quantities (less than 3 per cent) of their exports to the markets in the region . Traditionally, Japan and to a great extent the newly industrialized countries in Asia such as Taiwan , South Korea, and China have been the major importers. Almost all the countries in the region, except Singapore, are endowed with adequate quantities of timber for their requirements. Hence, there are no significant importers. These countries also do not possess the requisite industries to absorb large quantities of timber originating from the big suppliers of the region . Hence, prospects for increase in the intake of timber within the region is bleak.

Jute The only significant exporter of jute within the region is Bangladesh and 26.2 per cent of its exports went to countries in the region in 1986. The major buyer was Paki stan which

28

ASEAN-South Asia Trade

purchased 74.5 per cent of its requirements in that year from the region, mostly from Bangladesh. India, Thailand and Nepal are only marginal exporters of jute. The usage of jute was affected by innovative packing and shipping methods including containerization. The low-priced synthetic substitutes have also made inroads to the jute market. Consequently, the demand for jute even from the countries in the region is limited. Unless a sharp increase in oil prices occur, an increase in intra-regional trade in jute cannot be foreseen.

Cotton Pakistan is the only significant exporter of cotton to the region, and it sent 18 per cent of the commodity to the other countries in the region in 1986. All these countries, except India which uses a good proportion of its production for domestic industries, are importers of cotton. All imported substantial portions of their requirements from the region, namely from Pakistan. The percentages were rather high ranging from 65.8 per cent by Sri Lanka, 46.5 per cent by Philippines and 44.2 per cent by Bangladesh (Table 4.2). The question here is whet,her the sole significant cotton supplier of the region, Pakistan, would be able to supply adequate quantities given shortfalls in supply because of bad weather, and consequently resorting to export restrictions. If the supply could be maintained at optimum levels, there exist opportunities for increased demand from countries in the region whose textile industries are flourishing at the moment.

Rice Rice is the major cereal grown in the region and the main exporters were Thailand and Pakistan. They shipped 16.2 per cent and 6.6 per cent of their exports to the region in 1986. Among the major importers was Malaysia which imported 99.2 per cent of its requirements from the region , mainly from Thailand. Bangladesh and Indonesia imported 20.8 percent and 9.2 per cent of their requirements respectively from the region. A good majority of the countries in the region grow rice; for Sri Lanka, Philippines and Indonesia, they become importers only when the crops fail. Further, in the international rice trade , government to government contracts play a dominant role and rice would be just one item in the package of contracts entered into. India, Sri Lanka, Myanmar and Indonesia have in the past resorted to such contracts. In addition, the price and income elasticity of demand for rice is low. Considering these, it is unlikely that an increase in the intra-regional trade in rice is foreseeable in the future.

Maize Thailand was the major exporter of maize with 33 per cent of its exports going into the region in 1986. SmaJI quantities were exported by Nepal. The major buyer was Malaysia which purchased 91.1 per cent of its requirements in 1986 from the region. Maize in its pure form is not used for human consumption to a large extent in these countries. It is used for manufacturing food stuffs, oil and animal feed . Hence any increase in the demand for maize from the region would be the result of an escalation in the demand from those areas, which is not very likely for the present.

Intra-Regional Trade

29

Coconut Oil Philippines, Malaysia and Indonesia are the major exporters of coconut oil in the region. During the period under examination, they exported 1.4 per cent, 92.9 per cent and 73 . 1 per cent of their total exports respectively to the countries in the region. The low 1.4 per cent exported by the Philippines reflects their massive dependence on the U.S. market. Virtually all Indonesian exports were directed towards Singapore. Malaysian exports had been divided equally between Singapore and Bangladesh , the latter being the only significant end-user/buyer in the region. Bangladesh had been purchasing almost aU its coconut oil from Malaysia and smaller quantities from Sri Lanka. The consumption of coconut oil in the region is limited. It is used for edible purposes only in Sri Lanka and in small quantities in India and Indonesia. Bangladesh uses it as hair oil and for limited industrial purposes. As the advantages for coconut oil are mainly as an industrial oil, any increase in intra-regional trade cannot be expected unless coconut oil based industries develop which is very unlikely in the short-run.

Palm Oil Palm oil (inclusive of palm kernel oil) is a substantial foreign exchange earner for Malaysia and to a lesser extent Indonesia. During the period under examination, Malaysia exported 39 per cent of its exports to countries in the region, namely India, Pakistan, and Bangladesh which are the biggest consumers of vegetable oils in the area. However, Indonesia shipped only a small percentage ( 1.8 per cent) of its palm oil to the region. India, which was the biggest importer of vegetable oils in the world till recently, imports palm oil from Malaysia which competes with low priced soya bean oil from the Latin American countries. For soya bean oil , the import duty is 45 per cent whereas palm oil attracts a higher duty of 60 per cent. 4 1 Similarly in Pakistan , there is no import duty on soya bean oil which is directly competing with palm oil, whereas palm oil importers have to pay a duty of 70 per cent. 42 Also in Bangladesh, the tariff structure is such that palm oil importers have to pay an import duty of 50 per cent and a sales tax of 20 per cent, whereas soya bean oil importers pay an import duty of only 20 per cent and a sales tax of I0 per cent. 43 Therefore, although there is a relatively higher intra-regional trade in palm oil than in most of the other primary commodities, discriminatory tariff structures against palm oil has impeded any increase in its consumption in the major markets of the region. Hence, both exporters and importers should strive for a reduction in discriminatory tariffs against palm oil.

Bangkok Agreement and the ASEAN Preferential Trading Arrangement As we saw above, the prospects of increases in intra-regional trade in the main commodities are not very promising. However, a few steps can be taken to remove those obstacles which could impede trade and as we saw in palm oil , one area is the tariff structure. The Bangkok Agreement signed in 1975 by India, Sri Lanka, Bangladesh, South Korea, Laos, Philippines and Thailand was the first attempt by a group of countries in

30

ASEAN-South Asia Trade

the region to expand trade among themselves through tariff liberalization. Philippines and Thailand did not subsequently ratify this. Nepal and Pakistan signed the agreement later at the second round of negotiations in 1985. Under the agreement, participating countries agreed to grant preferences in selected commodities tra9ed among themselves. These preferences could vary among commodities but will be applicable uniformly to all the participating countries. Under this agreement, Bangladesh offered tariff cuts in coconut oil and India on cocoa, natural rubber, cloves and other spices. 44 Sri Lanka availed itse lf of this opportunity and had exp01ted considerable quantities of cloves, nutmeg and other spices to India at very low tariff rates. Other than the Bangkok Agreement, the A SEAN Preferential Trading Arrangement (PTA) introduced in 1979 was the other important step taken in the direction of tariff liberalization. Under this, tariff preference margins ranging from 10-50 per cent were offered by ASEAN members covering about 14,000 items. 45 ASEAN members have not been keen to join the Bangkok Agreement so far, but for any effective improvement in tariff preference among the countries in the region it is imperative that they, and other non-members from South Asia, should be co-opted as members of thi s agreement. However, despite these agreements, liberalization cannot be expected for commodities where the countries are major producers and which are sensitive to their economies, for example palm oil for Malaysia, coconut oil and tea for Sri Lanka. In other words, any tariff liberalization cannot be across the board but must be selectively applied. Both the Bangkok Agreement and the ASEAN PTA had made provi sion for di smantling NTB s among member countries. NTBs have considerable impact on primary commodity trade among countries of the region. Protection of agriculture, requirements of government revenue and balance of payments problems have prompted many of these countries, all of whom are developing and some of whom are least developed, to resort to NTBs such as import restrictions, licensing, licensing fees, compulsory state trading etc. Sri Lanka bans imports of tea unless they are for blending and for re-export. Thailand has quotas and prohibitions for fruits and vegetables. Malaysia prohibits imports of raw sugar. 46 These restrictions are understandable in the context of the countries' natural concern for their primary commodity production and processing, and could continue to stay in spite of the Bangkok Agreement and the PTA.

Finance-Asian Clearing Union For commodity trade to be really effective, proper financing facilities to the trade is a prerequisite. Most countries in South Asia face foreign exchange constraints which restrict their imports. The results are import bans or restrictions or indulgence in imports from developed countries on concessionary finance which may harmful in the long run. Pakistan imports soya bean oil under PL480 from the United States for concessionary terms in spite of the fact that palm oil, which is generally cheaper and which is a perfect substitute, is available within the region.47 To clear the financial hurdles, the Asian Clearing Union was established in 1975 with Bangladesh, India, Iran, Nepal , Paki stan and Sri Lanka as members. The aim of this arrangement was to minimize the foreign exchange necessary for transactions among them. Under the arrangement, members do not have to pay hard currency for individual tran sactions among themselves but only for the final balance

Intra-Regional Trade

31

against them after a given period. This type of arrangement is a boost for trade in commodities and Asian non-members such as the Maldives and the A SEAN group could opt to be members (however, except for the Philippines, other ASEAN countries do not need this). Further, the present facilities at the ACU could be extended to convert it to a Payments Union where members would be able to purchase additional liquidity at times of foreign exchange shortfalls.48 As a further measure to alleviate financial constraints, countries in the region should seriously consider the establishment of a regional export refinance facility. At a meeting of ESCAP ministers held in Bangkok in June 1986, countries in the Asia-Pacific region had requested the Secretariat to explore the possibility of establishing such a facility ; this could be followed up.49

Shipping For trade in commodities among countries in the region to be at optimum levels, it is essential that suitable transport and shipping facilities are available. Bulk carriers for grains and cereals, and tankers carrying vegetable oils should be available for quick transport. Countries with smaller quantities for export have occasionally found that shipping lines are sometimes reluctant to enter their ports. It is also said that freight rates increase with the degree of processing of commodity exports by a developing country. Years ( 1977) states that freight rates appear to be higher for exports of certain developing countries than smaller exports from other developing countries in the same geographical area. 5° These are some aspects in shipping which primary commodity exporting countries should examine. Such discrimination may be avoided to a considerable extent by the deployment of vessels of the national shipping lines for carrying this type of cargo.

Economic Integration One last question , namely the question of economic integration. What one has to consider is whether economic integration of ASEAN countries with South Asia will help to improve primary commodity trade among them. Economic integration in its very basic form means the granting offavours to trade within the region as against the outside world. Traditionally, four types of integration systems exist, namely free trade area, customs union , common market and economic union. These types are accepted by GATT under provisions in Section XXIV of the regulations as exceptions to the general rule of Most Favoured Nation (MFN) treatment. 51 They have been effective as seen in the EC. However, for economic integration to be a success, certain prerequisites should exist. Uniformity in political, economic and cultural standing among countries is greatly important. This is lacking in the South Asia-ASEAN group. In addition, existing tariff regimes in these countries differ from one another with high tariff regimes practised by India, Bangladesh, and Pakistan, while low tariff regimes exist in Singapore, Malaysia, and Sri Lanka. Any endeavour to create a uniform tariff regime would be disadvantageous both to high tariff levying and to low tariff countries. Such a regime, if implemented, will also be a blow to countries with high cost, less efficient production. We saw in the analysis on individual primary commodities that intra-regional trade among ASEAN members was insignificant, and scope for future trade expansion is limited. SAARC, the existing regional organization

32

ASEAN-South Asia Trade

for South Asian countries, does not give priority to trade expansion as we saw in the analysis, and the future potential is limited. What ASEAN and SAARC separately were unable to achieve, may not be jointly. Instead of integration, the most than can be expected from this regional group is a selective reduction of tariff and non-tariff barriers within the framework of a regional tariff liberalization scheme.

V

CONCLUSION

This article has examined the scope of ASEAN-South Asia regional co-operation in the development of trade in primary commodities as a component in South-South cooperation . The first section of the analysis examined what countries in the region could attempt to achieve within the global institutional framework . The active support of the North is mandatory ; otherwise the attempt would be mere rhetoric. The second section focused on the improvement of the production-marketing process of the commodities. It's success would depend on the willingness to help a competitor or ability to compete. The third section was on the intra-regional trade within the group , which is limited mostly because of the complementary nature of the commodities. In addition to these factors, low productivity and regular production shortfalls in certain primary commodities could impede co-operation among countries in the region. Although promising on the surface, as a component in the South-South co-operation, this has its own drawbacks.

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ASEAN-South Asia Trade

NOTES AND REFERENCES I . Sanjaya Lal, "Trade Betwee n Deve loping Countries". In Challenges of South-South Cooperation , Volume II, edited by B. Pav lic (New Delhi : Institute of Development Studies , University of Sussex , Ashish Publishing House , 1988), p. 390. 2. Banglades h 's meat and fish expo rts for 1987 was US$343 million which was 28.73 per cent of tot al export ea rnings. See International Trade Statistics Year Book 1987 (New York: United Nations , 1989). 3. International Monetary Fund , Primary Commodities: Market Developments and Outlook (Was hin gton : IMF, Jul y 1989), p. 3. 4. Food and Agricultural Organization, FAO Commodity Review and Outlook 1988--89 (Rome: FAO), p. 3. 5. Ibid . 6. Inform ation on these NTBs were obtained from Foreign Trade Barriers and Export Growth (Manila: Asian Deve lopment Bank , 1988). 7. lnge borg Menzler-Hokkanen , "EC Trade Poli cies in Tropical Agri cultural Products". In A SEAN and the EEC-Trade in Tropical Agricultural Produ cts, edited by Rolf J. Langhammer and Hans Christoph Rie ge r (S ingapore: Institute of Southeast Asian Studies, 1988), p. 107. 8. Kam al Salih , Mohd. Haflah Pi ei and M. Sahathavan, "Trade Policy Options for Malaysia". In The Uruguay Round: ASEAN Trade Policy Options , edited by Mohamed Ariff and Tan Loong- Hoe (Singapore: Institute of Southeast Asian Studies, 1988). 9. Foreign Trade Barriers and Export Growth , op. cit. , p. 326. 10. Straits Times (Singapore), 3 1 Jul y 1990. Under the heading "APEC concerned over GATT talks", were the following quote, "The Singapo re Declaration issued at the end of th e day said that th e 12 member countries had expressed grave concern th at greater progress had not bee n made at the preliminary trade negotiation s held in Geneva recently. The six A SEAN countries also iss ued a strongly worded six paged joint statement on the Uruguay Round yesterday reiterat ing in tough language their disappointme nt at the slow prog ress of the Negoti ations." II . Inform ation on IPC of UNCTAD were attained from : South , Decembe r 1989; FAO Com modity Review and Outlook 1988!89, op. cit. ; Organization for Economic Cooperation and Development, National Policies and Agricultural Trade (Pari s: OECD, 1987). 12. South, Decem ber 1989 . 13. FAO Commodity Review and Outlook 1988- 89 , op. cit. Of the world 's production of 2,959,000 tonnes of jute in 1987/88, 2,200,000 tonnes were from these three co untri es. 14. Ibid. , p . 21. 15 . Ibid ., p. 22. 16. Ibid ., p. 23. 17 . Ibid ., p. 2 1. 18 . Ibid ., p. 14. 19. The Challenges of South-South Cooperation , edi ted by Breda Pavlic , et al. Volume (Boulde r, Colorado: We stview Press, l983 ), pp. 71. 20. S. Metka, " Global Sys tem of Trade Preferences (GSTP) - New Hope and Challenges for Developing Countries". Development and South South Cooperation V, no. 8 (June 1989). 2 1. The meetin g of the Group of 7, compri sing the bi gges t industriali zed economies of the world, was he ld in July 1990 at Houston . They were supportive of the recommend ations made on farm liberalization by the Cairns Group.

Notes and References

35

22. lnte rnational Trade Centre, Vegetable Oils and Oilseeds : A Trader 's Guide , Volume H, (Geneva: lnternationa l Trade Centre, 1990), pp . 16. 23. Primary Commodities: Mark et Development and Outlook, op. cit., pp . 26. 24. Alasdair I. Macbean and D.T. Nguyan , Commodity Policies , Problems and Prospects (London : Croom Helm , 1987), pp. 304-08. 25. lbid. 26. Kamal Salih , Mohd. Haflah Piei and M. Sahathavan , op. cit. , p. 74. 27. Mohamed Ariff, " Multilateral Trade Negotiations : ASEAN Perspectives" . In The Urugu ay Round: ASEAN Trade Policy Options , op. cit. , p. 3. 28. Alasdair I. Macbean and T.D . Nguyan , op. cit. , p. 326. Joint ventures with MNCs have a lso been beneficial to the region , and scope for further co-operation exists. However, the scope of thi s article is restricted to joint co-operation among ASEAN-South Asian countries. 29. UNCTAD, Document TD/22 9/Supp 3 ( 1979), Table I, pp. II. 30. B. Pavlic , et al. , Challenges of Soulh-South Cooperation, Volum e I, op. cit. , pp . 171-72. 31. Ibid. , for more information on the formation of such co mpanies. 32. Fiona Gordon Ashworth , lnternaliona/ Commodity Con trol: A Contemporary History and Appraisal (Ne w York : St. Martin 's Press , 1984.) 33. South, July 1989 . 34. R. Maligaspe , " Some Reflection s on Export Floor Pricing in Coconut Products of Sri Lanka" . CORD-Asian and Pacific Coconut Community, Jakarta, December 1985. 35. Information on futures trading wa s obtained from Vegetable Oils and Oilseeds: A Trader's Guide, Volum e I, op. cit. 36. CTC refers to cut, tear and curled tea, a recent method of process ing tea . 37 . World Bank , World Developmen l Report 1989 (New York : O xford University Press, 1989). 38 . The exports and imports of India, Myanmar and Maldives were not av ailabl e with the re leva nt sources . Thi s mea ns their figures are not included in the regional totals . However, fi g ures for Nepal , Bhutan and Brune i are inclus ive in th e region al total s. The yea rs exa mined , namely 1984 and 1986, were mode rate years without wide flu ctu ation s in price or exported quantities. 39. The exports and imports of Indi a, Myanmar and Maldives were not available with the re levant so urces. Thi s means their figures are not included in the regional total s. Howeve r, fi g ures for Nepal , Bhutan and Brune i are inclu sive in th e reg ion al total s. 40. Department of St ati stics, Malaysian Exlernal Statislics (Kuala Lumpur: 1986) . 41. Economic and Social Commission for Asia and the Pac ific , " Prom o /i on of IntraRegional Trade in Vegetable Oils". Document prepared for the Expe rt Group Meetin g on Trade in Vegetable Oil s, April 1990, p. 82. 42. Ibid. , p. 94. 43. Ibid ., p. 99. 44. Inform ation based on Challenges of Soulh-South Cooperation, Volume II , op . cit. ; a nd Committee on Studies of Cooperation in dev e lopment of South Asia , "Trad e Expans ion in South Asia Liberalization and Mechani sm: A Synthes is Study " , December 1986. 45. S. Mey nthan and I. Haron, "A SEAN Trade Cooperation: A Survey of th e Iss ues" . In A SEAN at the Crossroads: Obstacles , Options and Opportunities in Economic Cooperation , edited by Noordin Sopiee, Chew Lay See and Lim Siang Jin (Kuala Lumpur: Institute of Strategic and International Studies, 1987), pp . 17-18 . 46. Foreign Trade Barriers and Exporr Growth , op . cit. , pp . 249-346.

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ASEAN-South Asia Trade

47. Under Public Law No. 480, the United States Government allows the export of wheat, vegetable oils , etc . to third countries at concessionary rates. 48. Inform ation on the Asian Clearing Union was based on T.A. Medina, "Monetary and Payments Agreements among Developing Countries". In The Challenges of South-South Cooperation , Volume I, op. cit. 49. Commodity Review and Outlook 1986-87, op. ci t. 50. A.!. Macbean and D.T. Nguyen , op . cit. , pp. 326-27. 51. Mohamed Ariff, "M ultilateral Trade Negotiations: ASEAN Prospectives". In Uruguay Round: ASEAN Trade Policy Options, op. cit., p. 4.

THE AUTHOR Ranjit Maligaspe is Senior Ass istant Secretary, Mini stry of Trade and Shipping, Sri Lanka.