Jan 15, 1988

SOUTH-SOUTH TRADE POTENTIAL IN OILSEEDS AND OILS

GENEVA JANUARY 13 (IFDA/CHAKRAVARTHI RAGHAVAN)— Third World countries have largest potential for increased demand, production and trade in vegetable oils and oilseeds, and there is wide scope for policy actions to expand this mutual trade, according to the UN Conference on Trade and Development.

In a report (TD/B/C.7/83) on "trends and potentials for trade among developing countries in vegetable oils", the UNCTAD Secretariat suggests that there are considerable obstacles hampering the inter-third world trade in vegetable oils and oil-bearing commodities - tariff and non-tariff barriers, and lack of marketing links, transportation facilities and weakness of information exchange.

Trade policy actions should be undertaken to negotiate reduction or elimination of tariff and non-tariff barriers, along with complementary actions in (...) of transition, marketing (...) financing facilities, UNCTAD advocates.

The bulk of the negotiation efforts in trade policy, UNCTAD suggests, should be undertaken in the Asian and Latin American regions along the lines of the GSTP.

While a number of third world countries produce oilseeds and other oil-bearing commodities, five countries account for more than 80 percent of exports of vegetable oils and oilseeds.

Of these five, Malaysia and Brazil is the most important. The other three are Argentina, Indonesia and Philippines.

Exports of these products are the prime source of foreign exchange earnings for a number of least developed countries (LDCS) such as Gambia (73.3 percent), Guinea-Bissau (43.5 percent) and Mali (19.2 percent).

The major importers of vegetable oils and oilseeds in the third world are India, Iran, Pakistan and Egypt. These together account for about one-third of third world imports.

The third world share in vegetable oil trade has been steadily increasing. On the import side it rose from 35 percent in 1975 to 50 percent in 1983, and on the export side from 47 percent to 57 percent.

Third world countries also show a persistent revealed comparative advantage in vegetable oil trade, UNCTAD adds.

Trade in vegetable oils and oilseeds among third world countries is gaining in importance and there is high potential for mutual trade, especially between main producing countries and the highly populated nations.

Intra third world trade in vegetable oils rose from 11 percent in 1975 to more than 21 percent in 1981.

Simultaneously the share of imports originating from industrial countries dropped from 68 to 51 percent, while share of exports to third world countries rose from 26 to 43 percent.

A similar trend is also seen in respect of vegetable oilseeds.

"A substitution of imports from developed countries for imports from developing countries is going on in the vegetable oilseeds and oil market", UNCTAD comments.

The intra-regional trade has expanded fastest in Asia with an average annual growth rate of 47 percent from 1975 to 1981 compared to 13 percent in Africa and ten percent in Latin America.

Inter-regional trade in 1981 was 30 percent of total intra-regional trade. Such trade is particularly important for Latin America and to a lesser extent for Africa.

The role of the private sector in processing, marketing and trading of vegetable oils and oilseeds varies from country to country and appears to be quite important.

But given the importance of vegetable oils supplies for basic consumption needs in many imparting countries, and its importance as a source of revenue for rural population in many exporting countries, governments of many third world countries consider this sector as a strategic sector of the economy needing direct government involvement.

As a result State Trading Organisations (STOS) channel vegetable oil imports and exports in many third world countries.

Some major exporters and importers use STOS - Brazil, Malaysia, Indonesia and Senegal among exporters, and India, Pakistan, Egypt, Iran and Venezuela among importers.

Most third world countries apply a substantial overall protection through tariffs and a variety of Quantitative Restrictions (QRS) in this sector.

Highest tariff rates prevail in India where oil-bearing commodities bear an average customs duty of 60 percent, but copra is charged at 100 percent. Vegetable oils bear an l25 percent duty, but Soyabean oil has a lower rate of 45 percent.

Pakistan and Bangladesh also have high nominal tariffs.

Algeria, Egypt, Mexico and Saudi Arabia at the other end have little or no customs duties on these products.

Overall there is substantial tariff escalation in oilseeds and vegetable oil sector. But the tariff escalation is limited to the processing step from the oil-bearing product to the respective vegetable oil, and not as between raw and refined oils.

Only Colombia, Kenya, Venezuela and Yugoslavia distinguish between processing stages for some specific vegetable oils by imposing higher rates on refined than on raw oil.

At the product level, the tariff level is higher if the specific oil or oilseed is produced domestically.

The impact of non-tariff measures is relatively high and more direct than that of tariffs. But the variety of measures applied is limited, and in most cases they take the form of import licenses and governmental import channels.

The countries frequently applying non-tariff (...) to imports of both vegetable oils and oil-seeds including Algeria, Bangladesh, Colombia, India, Kenya, South Korea and Thailand.

Colombia applies the strongest measures and has the highest non-tariff barriers: the imports of all vegetable oils and of Soyabears are prohibited.

Algeria, Bangladesh and Thailand use prohibitions for their main national products - alive oil, palm oil and coconut oil respectively.

Global quotas are used by Kenya for all oils and oil-bearing commodities, while Yugoslavia uses them on Soyabean, olive and sunflower seed oil.

All other countries apply restrictive import licensing and/or exchange control measures or imposes government import channels.

India exercises the strongest control through non-tariff measures, combining the imposition of governmental trading channel with licences for selected purchasers. But their effect on import level is difficult to estimate according to UNCTAD, since the government adjusts it according to domestic consumption needs.

Morocco uses similar measures for vegetable oils only, while Egypt controls imports through requirements about foreign currency deposit and special import authorisation for five vegetable oils.

Looking at future prospects, UNCTAD notes that the bulk of oil -bearing commodity production is unlikely to shift geographically in the third world.

Argentina, Brazil, India, Indonesia, Malaysia, Philippines, Nigeria, Senegal and Sudan will continue to supply most of the third world needs.

Nor is there any indication of diversification of output. There would be continued specialisation in production for export purposes - Soyabean by Argentina and Brazil, palm oil by Malaysia, coconuts by Philippines, and palm oil, palm kernels, groundnuts and cottonseed by the three African producers.

Only India and Indonesia are expected to grow a variety of oilseeds.

But not all main producers will supply international markets.

The major exporters would continue to be argentine, Brazil, Malaysia, Philippines and Indonesia.

In the medium term all African producers, and India, would be using their domestic production for consumption.

The most important potential importers in the medium term would be Bangladesh, India, Iran, Mexico and Pakistan. All of them show increased tendency towards higher dependency rates for consumption on imports.

The oils most likely to benefit from demand growth are those with particular nutritional qualities like Soyabean oil, and also lauric oils like coconut and palm kerner oil.

Since vegetable oils are increasingly substitutable, the determining factor of demand for specific oils will be their relative price and continuity of supply.

In this respect palm oil will play major role, since recent developments in cultivation enable significant reductions in production costs to permit much lower prices.

Given the developments in production and consumption, vegetable oil trade will grow in importance, particularly in third world countries.

The fast expansion (an annual five percent) in imports of third world countries compared to that of industrialised countries, and of exports of major third world exporters, if it persists, will result in a significant increase of south-south trade in vegetable oils, UNCTAD predicts.

The directions of trade flows among third world countries are unlikely to undergo major changes.

Trade within the Asian region is likely to expand most, with trade among Latin American countries also showing a strong potential for increase.

In contrast, intra-African trade has the lowest growth potential. Once climatic conditions improve, major consuming countries of Africa have high potential to expand their domestic production, and African consumers will rely less on imports to cover their needs.

There is high potential for trade between Latin America and Asia.

Overall, UNCTAD sees trade barriers in third world countries as constituting a serious obstacle to trade expansion.

In most of the third world countries intended tariff reductions would have only marginal trade creation effects.

Liberalisation of non-tariff measures offers greater potential for trade expansion, especially among Latin American economies and in imports of major Asian consumers.

Existing cooperation schemes to expand mutual trade in vegetable oils, and the proliferation of STOS dealing with these products or of counter-trade deals including some of these commodities show the concern of third world countries about this sector.

However, overall cooperation efforts remain too sporadic and limited in scope to ensure a significant strengthening of trade ties in the vegetable oils sector.

Given the patterns of production and consumption, the Asian region is most concerned by trade in vegetable oils, and thus should be first region in which efforts to facilitate this trade should be undertaken.

A sectoral approach could be pursued within existing regional and intra-regional negotiation frameworks.

Sectoral negotiations for inter-regional trade would open up perspectives for trade between Latin America and Asia.

Such negotiations could also investigate problems raised by inter-continental trade among third world countries, particularly in transportation and marketing.

If they do not involve whole sector of vegetable oils and oilseeds, the negotiations should concentrate on those with highest trade potential - palm oil and Soyabean oil.

This will allow significant amounts of trade to be covered, and the inclusion of these products in the GSTP negotiations would offer "interesting trading perspectives", UNCTAD adds.

A whole repertoire of policy measures could be applied. But these should act as directly as possible on present limitations, which are commercial and relate to transportation infrastructure, financing of transactions and the multitude and variety of institutional trade barriers.

A range of problems relating to competitiveness in marketing have to be tackled by improving information exchange on existing needs and opportunities, market studies and promotion campaigns.

In regard to transportation, shipping companies involving main producing and consigning third world countries and development of containers especially suited to transport of vegetable oils would be most natural steps to take. But these would need an adequate cost-benefit analysis.

The scarcity of financial resources standing in way of expansion of trade, UNCTAD suggests, could be tackled by use of long-term or counter-trade contracts permitting transactions involving lesser use of hard currencies.

The presence of STOS in many importing and exporting countries, and their involvement in counter-trade, provides favourable environment for implementation of such policies.

As regards institutional barriers, the GSTP negotiations could pay attention to several points.

Among these are: reduction and standardisation of tariff levels for all vegetable oils and oilseeds produced and exported by third world countries, reduction of tariff escalation, and preferential treatment for oil originating from LDCS.

The tariff negotiations should be simultaneous with efforts to reduce non-tariff barriers, including reduction of import licensing and prohibitions.

STOS and state trading monopolies handling such trade should be encouraged to look to supply and trade possibilities with other third world countries.

A principal objective should be to match regional export surpluses with import requirements and, wherever economically justifiable, substitute imports originating from industrialised countries for imports from third world regions on basis of mutual advantage.