NATURALRESOURCES: EXPORTING AND IMPORTING

Pre-text assignment Special Terms

A. Match these terms with their definitions

Capital, quota, exporting, theory of comparative advantage, minerals, cartel, importing, tariff, colonialism, exploration, commodities

a) In international trade, the world's natural resources.

b) Sending goods to another country for sale or trade.

c) Bringing in goods from another country for sale or trade.

d) Commodities obtained through mining.

e) The search for mineral deposits.

f) Money to invest in a project for profit.

2) An economic theory stating that if one country can produce a product rela­tively more efficiently than another country, it is beneficial to both countries for the first country to export that product to the other. It is also called the comparative cost theory.

h) A tax on certain imported items. It places a limit on the goods that may be imported into a country.

i) The maximum quantity of a certain product that is allowed into a country during a given period of time. A quota is used to limit imports.

j) The domination of foreign lands by an imperial power.

k) An association of commodity producers designed to limit competition among its members with the objective of increasing profits.

1) The buying and selling of commodities by producers and consumers at to­day's prices for delivery at a future date when prices will probably have changed.

B. Vocabulary Practice

1. What are commodities?

2. Define exporting and importing.

3. What is the process of searching for mineral deposits called?

4. What is capital used for?

5. Explain the theory of comparative advantage. What is another name for it?

6. Define tariff and quota. What do they have in common?

7. What is colonialism?

8. What is a cartel? What is a cartel's objective?

9. What is commodity futures trading?

Natural Resources: Exporting and Importing

The location of the world's natural resources, also called commodities, deter­mines the patterns of world trade. Some regions are abundant in resources; elsewhere, reserves are scarce or nonexistent. As far as the industrialized nations are concerned, the United States and Canada enjoy the most favorable position. They are the domi­nant exporters of grains. The United States and Canada also have vast coal and oil reserves, as well as nonferrous metal deposits.

such as copper, zinc, and lead, which these countries export. The United States is also a heavy consumer of natural resources, and it is increasingly reliant on certain imports, especially on oil. Japan, a highly industrialized nation, is very dependent and has to import 99 percent of its primary commodities. Western Europe produces nearly all of the grain it needs but lacks other commodities to a great extent. The United States, Canada, Japan, and Western Europe all have to import tropical agri­cultural products from the developing nations.

There are basically three commodity groups: minerals, such as coal, oil, cop­per, zinc, and bauxite; tropical agricultural products, such as cocoa, coffee, sugar, tea, and tobacco, which grow in tropical climates; and cereals, such as wheat, maize, and other grains, which grow in colder climates. While world consumption of re­sources is increasing at a fast pace, world reserves of many commodities are increas­ing equally fast. The Brookings Institution in Washington, D.C., estimates that iron ore and bauxite reserves have recently doubled. The amount of world reserves has been determined by exploration. Although the earth contains extremely large mineral deposits, some of these are not easily accessible. Also, in some cases, the quality of a mineral varies from one place to another. For example, in the nineteenth century half of the world's copper ore came from Cornwall, England, and had a 13 percent metal content. Today copper ore mined in the United States has less than a 1 percent metal content. But over the last seventy years, improved technology in exploration, produc­tion, and transportation now makes mining of such ores with low-metal content a worthwhile venture.

A great part of the world's reserves may still be unknown because they are in­accessible. However, new ways to discover and exploit these reserves may yet be found.

Increased technology sometimes decreases the demand for natural resources. The need for metals has been relieved by the development of plastics and synthetic fibers. Solar energy may eventually lessen our dependence on oil. Increased recycling of paper, metals, and other reusable materials will further reduce our demands for primary commodities. However, an offsetting factor to these new developments is the growth of the world's population, which puts an even greater demand on natural re­sources.

Tropical agricultural products differ from minerals in the sense that they are renewable, that is, new crops can be harvested on the same land. Technology is not very advanced in many developing nations where tropical crops are grown, so pro­duction is very dependent on manual labor. This is not a constraint, since these coun­tries are densely populated. However, the lack of capital (money to invest) may be a

problem. It takes five years for coffee trees to reach their peak of production and seven years for rubber trees. Sugar processing facilities are expensive to build. Also, many developing nations resist foreign investment in their industries,thereby re­stricting the growth of production.

The availability of grain supplies depends on two factors: population growth and increased production. For the past twenty years world grain production has grown 3 percent annually. In the same period world population has grown by 2 percent. The in­dustrialized countries achieved their production growth without expansion of agricul­tural acreage; in developing countries acreage increased 30 percent. Improved technol­ogy and increased cultivation should help alleviate some of the food problems now lying ahead of us. In Latin America, according to a United Nations study, the crop acreage could be quadrupled, and in North America it could be doubled.

International trade, where goods and services move across borders, is often ex­plained by the theory of comparative advantage, also called the comparative cost theory. This theory was developed by David Ricardo, John Stuart Mill, and other economists in the nineteenth century. The theory emphasizes that different countries or regions have different production possibilities. A tropical climate is better suited for growing bananas than a cold one. A country like Norway could produce bananas in hothouses, but it is cheaper for Norway to import the bananas than to produce them. Thus, climate establishes a trade pattern between a northern and a southern country. In other cases the availability of natural resources may be the trade factor.

The theory of comparative cost points out that trade between countries can be profitable for all, even if one of the countries can produce every commodity more cheaply. As long as there are minor, relative differences in the efficiency of produc­ing a commodity, even the poor country can have a comparative advantage in pro­ducing it. The paradox is best illustrated by this traditional example: the best lawyer in town is also the best typist in town. Since this lawyer cannot afford to give up pre­cious time from legal affairs, a typist is hired who may be less efficient than the law­yer in both legal and typing matters. But the typist's comparative disadvantage is least in typing. Therefore, the typist has a relative comparative advantage in typing.

The same holds true for countries. Paul Samuelson, a well-known United States economist, gives this example: the United States is relatively more efficient than Europe in producing food (using only one-third of the labor that Europe does) and in producing clothing (using only one-half the labor). Thus, while the United States has an absolute advantage in both forms of production, its efficiency in food production is greater. It has a comparative disadvantage in clothing. Consequently, a great deal of clothing is exported from Europe to the United States. To conclude, the theory of comparative advantage states that if each country specializes in products in which it has a comparative advantage (greatest relative efficiency), trade between these countries will be mutually profitable.

Comparative advantage has led countries to specialize in particular products and to mass-produce. Sometimes this goes one step further. Italy gained a compara­tive advantage over many countries in mass-producing wine. France, self-supporting

in wine, presently imports large quantities of Italian wine, which is cheaper. In turn, a large portion of the French wine production is exported.

It is generally assumed, as the famous economist David Ricardo stated in the last century, that international trade is beneficial for all participants. However, gov­ernments can often lake protectionist measures. For example, they can impose tariffs and quotas on imported items. A faii/fls a tax on imported items, computed as a per­centage of the import value. An import quota is the maximum quantity of a product allowed into a country during a given period of time. These measures are meant to protect domestic industry so that imported goods will not be sold cheaper than home-produced ones. At the same time, countries attempt to achieve equilibrium in the bal­ance of payments, which will be discussed in Unit Two.

international trade can also be limited due to the high cost of transporting bulky or perishable goods. Even if the United States had a comparative advantage over Jordan in producing lampposts, transportation expenses would prevent exporting them to that country. Similarly, if Holland had a comparative advantage over Brazil in producing tomatoes, transportation costs would make these perishable goods too expensive to sell.

World trade patterns can change and have changed dramatically in some cases. Japan, a closed society for many centuries, was opened up to trade at the end of the nineteenth century. Gradually. Japan gained a comparative advantage in many indus­tries because its labor costs were lower than in the West. Although Japan has to im­port raw materials, it exports the finished products.

Colonialism has been a great stimulus to world trade. Centuries ago merchants sailed the oceans searching for sources of spices and silk. At first they had no inten­tion of becoming rulers of foreign lands. However, the merchants, gradually grew more powerful and their governments became involved in faraway lands.

During colonial periods some industrialization was introduced: railroads, ports, and roads were built. Some natives were educated under a system which stressed European values and life-styles, and together with their colonial masters, they be­came an elite group of merchants and entrepreneurs. But the large rural areas of the colonies never took part in the economic change. Now that many former colonies are independent, the new politicians, who were part of the former elite, face a dilemma. On one hand, they see the need for the technology and capital funds of the former colonial powers; on the other hand, they are reluctant to assume the financial or po­litical obligations that this collaboration may bring.

Many developing nations, rich in minerals and tropical agricultural products, now try to increase their earnings from these commodities by forming cartels, which are producers' associations. They attempt to increase prices by controlling supply. This is achieved by limiting production or by imposing an embargo, which is a sus­pension of exports. The best-known and most successful cartel is the Organization of Petroleum Exporting Countries (OPEC), a group of leading oil exporters from the Middle East, Nigeria, Venezuela, and Indonesia.

Other commodity cartels have followed OPEC's example. The seven leading bauxite expoiters formed the International Bauxite Association (ІВА). Bauxite is the major raw material in aluminum production. Therefore, Jamaica, one of the cartel members, imposed a sixfold price increase on bauxite, forcing the other members to follow.

In spite of OPEC's success, cartels are not easy to organize. When they sub­stantially increase prices, cartels force consuming countries to speed up technological research. As substitutes such as plastics and synthetics are found, the demand for primary commodities decreases. Obviously, then, there is a growing need for consul­tation between producing and consuming nations. This is what is meant by interde­pendence among nations.

Commodity futures trading is an important part of the buying and selling proc­ess. A farmer, knowing that he will harvest a crop in October, may want to sell his wheat in March. He thus protects his production against a possible price drop. The farmer would sell his wheat to a commodity dealer, who in turn would sell it to a third party. The dealer is then said to have hedged his position. (He has bought and sold in the future.)

Many commodity futures are bought and sold on commodity markets, which means that future deliveries are organized. In other words, commodities are bought and sold at today's prices for delivery at a future date. The London Metal Exchange (LME) is a commodity market that deals in nonferrous metals, such as copper, zinc, lead, tin, and silver. In the United States these metals are traded at the Commodity Exchange Inc. in New York. The oldest and largest commodity exchange in the world is the Chicago Board of Trade, which trades in wheat, soybeans, and soybean meal, all commodities in which the United States is the world's number one producer. Today's international trade could not exist without these and other small commodity exchanges.

Expanding vocabulary

A. Say it in English

Розташування природних ресурсів, надлишок ресурсів, найбільш сприят­ливе положення, експортери, що домінують, поклади кольорових металів, сві­тові запаси, якість мінералу змінюється, сонячна енергія, зменшити залежність від нафти, сучасна технологія, протистояти іноземним інвестиціям, обмежувати зростання виробництва, кількість населення зросла на 2%, модель торгівлі, тор­гівля між країнами буде взаємовигідною, міжнародна торгівля вигідна всім учасникам, ці заходи покликані захистити власну промисловість, країни нама­гаються досягти рівноваги, призупинення експорту, країна-виробник і країна-споживач.

B. Find in the text and give the translation

A heavy consumer of mineral resources, to be increasingly reliant on certain imports, it lacks commodities to a great extent, they are not easily accessible, it

makes milling of ores with low-metal content a worthwhile venture, plastics and synthetic fibers, an offsetting factor, improved technology, the same holds true for countries..., theory of comparative advantage, France, self-supporting in wine..., to impose tariffs and quotas, as substitute for oil.

Discussion

A. Are the following statements true or false? Explain your answers.

1. Assuming that the United States has a comparative advantage in the produc­
tion of food and clothes, it will under no circumstances import these items from
countries which are at a comparative disadvantage.

2. OPEC is the most successful cartel to date; other cartels may never achieve
the same success, even though they are trying hard.

C. Review the factors that contribute to the shaping of world trade patterns.

B. Give your point of view

1. What are the three main commodity groups? Mention at least two commodi­
ties in each group.

2. Even though countries become increasingly industrialized, why does the
demand for certain primary commodities sometimes decrease?

3. If the United States has an absolute comparative advantage over Europe in
food and clothing, why is it still beneficial to import clothing from Europe?

4. What are protectionist measures supposed to achieve? Give two examples
and explain how they work.

5. If a country has a relative comparative advantage in producing bulky or per­
ishable goods, is it then always beneficial to export? Explain your answer.

6. What is a cartel? How does it attempt to achieve its goal of increasing earnings?

7. What is the most successful cartel? Why are all cartels not successful?

8. Name at least two other commodities where there is a potential for cartelization.

9. Give an example of commodity futures trading. What does hedging achieve?

 

10. Where are nonferrous metals traded in London? Where in the United
States?

11. What is the oldest and largest commodity exchange in the world? Name a
few of the commodities traded there.

Language Practice Translate into English

УКРАИНА-МОЛДАВИЯ

В. ЭКСПОРТ МЕТАЛЛОЛОМА

На прошлой неделе стало известно, что Минпромполитики не будет возражать против беспошлинных поставок украинского металлолома в Молдавию, если последняя выполнит ряд условий. Во-первых, добровольно установит квоту на импорт лома из Украины (на уровне 500-700 тыс. т в год).

Во-вторых, гарантирует, что лом не будет реэкспортироваться в третьи страны. В-третьих, обеспечит поставку на украинские предприятия катанки на условиях производственной кооперации. Такое мнение озвучил на последнем заседании балансовой комиссии по распределению сырьевых и энергетических ресурсов предприятий ГМК Украины зам. госсекретаря Минпромполнтики Украины. Вывозная пошлина на лом в размере EUR30 за 1 т не взималась при его экспорте в Молдавию, поскольку Украина и Молдавия подписали два договора о свободной и беспошлинной торговле. Минэкономики Украины готовило проект изменений к упомянутым договорам, чтобы вывести из-под их действия металлолом. Молдавия в лице Премьер-министра страны обратилась к правительству Украины с предложением не взимать пошлину при экспорте металлолома и впредь. На взаимовыгодных условиях. По материалам еженедельника "Бизнес";