Agriculture Trade and Policy - Class Notes

Agriculture Trade and Policy
(Class Notes)
M.Sc.Ag. (Agribusiness Management)
Course Instructor
Nanu Jha
Adjunct Professor
H I C A S T , K a t h m a n d u

Agricultural Trade and Policy (MTP-533) M.Sc.Ag. (ABM), 3rd
Semester
1
Class Notes by Nanu Jha Adjunct Professor, HICAST
World Economic Integration (WTO)
World economic integration has been done through World Trade Organization
(WTO). It was established on 1 January 1995. It is successor to the GATT
(General Agreement on Tariffs and Trade). It is the legal and institutional
foundation of the multilateral trading system. WTO is an international
organization to promote multilateral trading system. It is the platform on
which trade relations among countries evolve through collective debate,
negotiation and adjudication. It covers trade in goods, services and intellectual
property. It is based on rules of trade need to be followed by all members.
They cover 98% of global trade. Trade liberalization is its main focus.
By April 2009, WTO had 153 members. Only three members were least
developed-Nepal, Cambodia and the newest member Cape Verde. At present,
it has 164 member countries, including Nepal. 23 countries are still as observer
under this WTO. It is leading the way for world economic integration.
Provisions under WTO:
1. Ministerial Conference: It is the highest body governing WTO. It consists
of ministerial representatives of all WTO members. It meets every two
years. It is empowered to take decisions on matters related to
multinational trade agreements.
2. General council: It is compared of all WTO members. It reports to
Ministerial Conference
3. Dispute Settlement Body (DSB): It looks after dispute settlement
procedures.
4. Council for Trade in Goods: Oversees the functioning and
implementation of all agreements covering trade in goods.
5. Council for Trade in Services: oversees the functioning and
implementation of all agreements covering trade in services.

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6. Council for Intellectual Property Rights: Oversees the functioning and
implementation of all agreements covering intellectual property rights.
7. Trade Policy Review Body (TPRB): Conducts regular reviews of trade
policies of individual WTO members.
8. Committee on Trade and Development: Concerned with trade and
development issues relating to developing countries and especially least
developed countries.
9. Committee on Budget, Finance, Administration: Concerned with issues
related to WTO financing, budget and administration.
The principles of WTO are:
1. Free trade: Trade should be without discrimination.
2. Predictability: There should be predictable and growing access to
markets.
3. Promotion of Fair Competition: There should be transparency and fairy
competition in trade. (Transparency)
4. Encouragement to Development and Economic Reform: Industrial
countries should assist developing country members in their trading
conditions.
Functions of WTO
The functions of WTO are:
a) Administer and implement the multilateral and plurilateral trade
agreements which together make up WTO.
b) Act as a form multilateral trade negotiations.
c) Seek to resolve trade disputes.
d) Oversee national trade policies.
e) Cooperate with other international institution involved in global
economic policy-making, such as IMF and World Bank
f) Maintain trade-related data base.
g) Act as a watchdog of international trade.
h) Provide technical assistance and training for developing countries.

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Provisions of WTO
The major provisions of WTO are related to:
a) Agriculture: Trade reform and market-oriented policies in agriculture.
b) Health and Safety Measures: Food safety and animal and plant health
regulations.
c) Helping least developed and food importing countries: Assistance to
them to remove negative effects with regard to food supplies.
d) Textile and clothing: Integrate their trade in mainstream of WTO.
e) TRIPS: Trade related aspects of intellectual property rights copyright,
trademark, patents, designs.
f) GATS: The general Agreement on Trade in Services.
g) Anti-dumping measures: Promote fair competition.
76 countries became founding members of WTO. At present, WTO members
number 153. Nepal is 147th
member and got WTO membership in 2004.
Vietnam got membership in 2006. WTO has 32 least-developed countries as
members.
Benefits of WTO
1. Trade Expansion: WTO membership allows trade in a more predictable
and stable trading environment. It offers duty free market access and
trading opportunities. Members become a part of multilateral trading
system with harmonized set of rules. Fair trade opportunities increase
through elimination of quotas and subsidies.
2. Trade Diversification:WTO opens possibility for trade diversification in
terms of markets and products. Foreign direct investment will increase.
3. Freedom of Transit: WTO rules provide freedom of transit to member
countries without unnecessary delays or restrictions. WTO membership
provides legal and secure transit rights.

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4. Industrial Development:Foreign investment increases. National
treatment and low risks attract foreign investors to set up industries.
Exposure to new technologies increases.
5. Dispute Settlement: The WTO regime provides common system of rules
and procedures for settling disputes related to trade. WTO membership
ensures access to a stronger, faster, impartial and binding mechanism
for settlement of disputes related to trade.
6. End of Bilateralism:WTO does away with the need for bilateral trade
agreements. It provides the automatic advantage of trade links with all
the member countries of WTO.
7. Image and Power:WTO membership enhances image. Almost three-
quarters of WTO members are developing countries. Decisions of WTO
are based generally on unanimity of member’s views.
8. Special Benefits:WTO has special provisions to help least developed
countries. It also has provisions to provide technical assistance to food
importing countries.
Problems of WTO
1. Erosion of preferences:WTO rules impose obligation for concession of
tariff rates, removal of subsidies in agriculture, and opening-up of trades
in services. Quota restrictions are totally prohibited. WTO membership
may adversely affect the domestic industries. It does not guarantee
long-term economic and human development.
2. Price hike and competition:WTO membership may result in steep price
hikes of food, drugs, agricultural inputs and other items of imports.
Subsidies will be reduced or eliminated. Foreign exchange outflows will
increase. Competition will increase in terms of price and quality.
Domestic industries will be threatened by free imports. Export prices for
commodities may decrease.

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3. Accession commitments: WTO requires stringent commitments by
members. They have far reaching impacts on trade and economic
development. Cost of compliance will be high. WTO membership
reduces flexibility in policy and strategy formulation relating to trade.
Revenue loss may increase.
4. Institutional requirements: WTO requires infrastructure, efficient
institutions and competent human resources to reap benefits of
membership. This increases dependence on foreign firms for technology
and resources.
5. Gaps in theory and practice: WTO largely represents the interests of
developed nations. The theoretical provisions of open trade for goods
produced by developing countries may not be true in practice. WTO is
neither pro-poor nor growth friendly. There is no level playing field for
the WTO regime.(See box 6-6 for evolution of GATT and WTO)
GATT (General Agreement on Tariffs and Trade):
It was established in 1947 under the auspices of United Nations to abolish
quotas and reduce tariffs. It had 125 members.
GATT was guided by the fundamental principle of trade without discrimination
embodied in its most favored nation clause. It held several rounds of sessions
from 1947 to 1993 to address trade issues. They led to multilateral reductions
in tariffs and non-tariff barriers.
The scope of GATT was limited to trade in goods. GATT was reduced by WTO in
1995. The principles and trade agreements of GATT were adopted by WTO.
Evolution of WTO is indicated by the decisions of its Ministerial meetings.
They have been as follows:
1. First meeting: December 9-13, 1996 at Singapore
 Focused on maintaining a conducive global trading environment
which is free, transparent, inclusive and stable.
 Adopted comprehensive and integrated WTO plan of action for least

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2. Second meeting: May 18-20, 1998 at Geneva, Switzerland.
 Focused on promoting global electronic commerce and creating new
opportunities for trade.
3. Third meeting: November 30-december 3, 1999 at Seattle, USA
 Focused on promoting globalization process.
 Nepal advocated a fast track accession process of least developed
countries and extension of transition periods for accession to WTO.
4. Fourth meeting: November 9-12, 2001 at Doha, Qatar
 Focused on problems of developing countries.
 Gave priority to least developed countries for membership.
 Freed pharmaceuticals from TRIPS to make life saving drugs cheaper
for developing countries.
 Admitted China and Taiwan to WTO membership.
 Set 1 January, 2005 as deadline for completing all negotiations
relating to membership to WTO.
 Agreed to undertake a broad and balanced work programmed relate
to various issues.
 Nepal pointed out the marginalization problem of LDCs in world trade
and advocated accession facilitation of LDCs to WTO.
5. Fifth meeting: September 10-14, 2003 at Cancun, Mexico.
 Granted membership to Nepal.
 Nepal became WTO member in 2004.
6. Sixth meeting: December 13-18, 2005 at Hong Kong, China.
 Failed to reach agreement.

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Important Regional Economic Cooperation Groups
1. EU (European Cooperation) Groups
EU was formed in 1991. It has 27 members. It is a powerful economic
and political union. It is leading the way in regional cooperation. It has
created a single European market by reducing barriers among member
nations to free flow of products, services, finances and labour. It
develops trade policies with non-member nations. It has a common
currency called Euro. It is one of the world’s largest single markets.
2. SAFTA (South Asian Free Trade Area)
SAFTA is an agreement of SAARC (South Asian Association for Regional
Cooperation). It was signed in 2004 to promote and enhance mutual
trade and economic cooperation. It came into effect in 2006. Its ultimate
objective is to create a south Asian economic union with common
currency. SAFTA classifies contracting nations in two categories:
Least developed Countries (LDC): They are Afghanistan, Bhutan,
Maldives, and Nepal. They are given special treatment.
Non-Least Developed Countries (NLDCA): They are India, Pakistan, and
Sri Lanka. SAFTA entails a reduction of 20% tariff rates for NLDC and 30%
for LDC from the existing rates.
The objectives of SAFTA are to:
 Eliminate barriers to trade.
 Promote conditions of fair competition.
 Create effective mechanism for the implementation and application
of this agreement.
 Establish a framework for further regional cooperation.

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Principles of SAFTA are:
 Rule-based functions.
 Reciprocally and mutuality of advantage.
 Emphasis on trade facilitation.
 Special preference to least developed countries.
 Free movement of products.
 Trade without discrimination.
3. BIMSTEC:
Bay of Bengal Initiative for Multi-sectoral Technical and Economic
Cooperation (BIMSTEC) is an Asian region cooperation grouping. It was
created in 1997 at Bangkok. It consists of seven members. They are
Bangladesh, India, Sri Lanka, Thailand, Myanmar, Nepal and Bhutan.
The objectives of BIMSTEC are:
1. Create favorable environment for economic development through
identification and implementation of special assistance projects. The
areas are trade, investment, industry, technology, manpower
development, tourism, agriculture, energy, infrastructure and transport.
2. Promote social and economic progress.
3. Promote active collaboration and mutual assistance in economic, social,
technical and scientific fields.
4. Provide cooperation for the provision of training and research facilities.
5. Provide assistance in the national development of member countries.
6. Establish close and advantageous cooperation with international and
regional organizations.
4. ASEAN (Association of South East Asian Nations)
It was formed in 1967. It is the third largest free trade agreement in the
world. It has ten members as follows: Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam

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Objectives of ASEAN
1. To expand economic, social, cultural administrative and technical
cooperation.
2. To accelerate economic progress and stability of the region.
3. To strengthen regional peace and security.
ASEAN has a preferential trading arrangement system. But the system
covers only about 5% of ASEAN trade. In 1993 “ASEAN free Trade Area”
(AFTA) was established. A common effective preferential tariff has come
in force. Intra-ASEAN trade and investment has increased.
 The Asian financial crisis of 1997 hit several ASEAN countries hard. The
progress has been slow.
Concept of Globalization (Internationalization Process)
Globalization has accelerated internationalization process. It is an important
force in modern business environment. Business enterprises need either to
manage globalization or let the globalization manage them. Globalize or perish
is the new business slogan. The global business environment is changing
rapidly. Global integration is increasing.
There are several views about globalization.
a. Economic View:
Globalization means integration with the world economy. It is through
liberalization and removal of trade barriers. It is the process of the
integration of the world into one huge market. Global interdependence
increases. Global linkages among nations increase.
b. Company View:
For a company, globalization means multi-plant operations. The
company establishes manufacturing plants around the world. It offers
diversified products. They think globally but act locally.

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c. Competition View:
Globalization means ability to compete in free markets. It is domestic
companies competing with global companies on the home ground.
Globalization is global competition.
d. Structural View:
Globalization is regarded as synonymous to multinational enterprises.
They operate in many countries.
Characteristics of Globalization
1. Integration through interdependence
Globalization implies integration of national economies through
economic interdependence. It is borderless. Business is viewed in a
global perspective with a global outlook. World is viewed as a single
market. Business philosophy takes a global vision.
2. Free Market Economies
Globalization is based on free market mechanism. It is not possible in
state-controlled economies. Liberalization, privatization and open
market economies are essential for globalization. The role of the private
sector is paramount.
3. Free Movement of Products
There is free movement of goods and services across borders. There are
no trade barriers and control regime. Trade, tariff and non-tariff
restrictions are absent. World trade increases.
4. Free flow of factors of production
Globalization requires free flow of capital, labor, technology, and
management across borders. Liberalized flow of foreign direct
investment is allowed. Necessary legal, economic and environmental
conditions are provided for this purpose. A global investment climate is
created free from fear of nationalization. Portfolio investment increases
through indirect foreign investment in shares and bonds.

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5. Standardized technology
Globally acceptable technology is adopted. Product quality standards are
maintained in all countries. The technology transferred is friendly to the
local environment.
6. Information and communication
Globalization requires extensive use of information technology and
communication networks. Transportation and communication facilities
are needed for globalization to succeed.
7. Global corporations carry a global image.
Global corporations carry a global image. Promotion strategies focus on
promotion of image. Examples are SONY, PHILIPS, TOYOTA, HONDA,
Coco-Cola, PEPSI. Global corporations have worldwide manufacturing
units linked by common ownership. They draw on a common pool of
resources consisting of technology, information, finance, patents,
trademarks, management, and control systems. All the units respond to
a common strategy. They think globally but act locally.
Types of Globalization
Globalization can be of following types:
1. Economic Globalization
It is global inter-linkages of markets in goods, services and finance. It is
integration with the world economy through liberalization, privatization
and deregulation. Trade barriers are removed. Currency is fully
convertible.
2. Political Globalization
It is many nations joining hands through union or regional groupings. It
aims at a macro-political framework for development. It involves
exchange of ideas, views and experiences on governance, legal system,
women’s rights, human rights and sustainable development.

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3. Cultural Globalization
It is assimilation of cultural values worldwide. It involves exchange of
ideas for mutual understanding peaceful co-existence and learning from
each other. It can be through media, tourism, communication
technologies and consumption patterns. However, there are counter
movements to such globalization to preserve individual cultural
identities.
4. Environmental Globalization
It aims at protection of global ecology. It aims at addressing the
problems of global warming, ozone layer depletion, loss of bio-diversity
and growing pollution. It aims at conservation of environment,
forestation and rational use of resources. It also deals with international
laws to protect world environment.
The globalization has been driven by a number of factors. The important
factors are:
1) Rapid technological change
Rapid advancements are taking place in product, process and
information technology. Many firms have moved towards globalization
to reap advantages of economies of scale.
Telecommunications, computers and internet have greatly facilitated the
growth of globalization. They have broken the barriers of time and
space. E-commerce and E-banking are serving as the engine of
globalization.
2) Liberalization
The trade and investment barriers are declining. Openness in economic
policies of a large number of countries is increasing. This has facilitated
the cross borders flow of trade and investment. The volume of

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international business is growing. This, together with the privatization of
public enterprises in developing countries has boosted globalization.
3) Decreasing costs
Globalization has been driven by decreasing costs. Major advances have
occurred in transportation technology. The most important are jet
aircraft, containerization and high speed trains. They have lowered costs
of transportation goods over long distances.
The costs of distribution have been lowered by computerized and
automation. E-commerce is replacing traditional channels of
distribution. The costs of information processing and communication
have fallen sharply. Cheap labour and nearness to sources of raw
materials have also reduced costs.
4) Supportive institutions
The emergence of supportive international institutions has facilitated
the growth of globalization. They are:
I. World Bank and IMF (International Monetary Fund): they are the
modern agents of globalization. They generally prescribe uniform
economic, fiscal and monetary policies through structural
programmes in developing countries. They are advocate:
 Free market economies and private sector development.
 Privatization of public enterprises.
 Removal of subsidies.
 Liberalization through delicencing, deregulation and decontrol.
 Devaluation of currencies; floating currency rates.
 Greater incentives for foreign direct investment by global
corporations.

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II. World Trade Organization (WTO): established in 1995, it is the
champion of globalization. It is the legal and institutional foundation
of multilateral trading system. It serves as a platform for collective
debate, negotiation and adjudication for trade relations among
countries. Its scope is trade in goods, services and intellectual
property rights. It encourages open trade and prescribes uniform
trade policies and rules.
The principles of WTO trading system are:
 Trade without discrimination
 Predictable and growing access to markets
 Promotion of hair completion
 Encouragement to development and economic reform
III. UNCTAD: United Nations Committee on Trade and Development has
also facilitated the growth of globalization.
5. Regional Economic Groupings
Regional economic groupings are also helping the growth of
globalization through economic integration. They harmonize trade
policies, laws and regulations of all member states. Examples are EU
(European Union), ASEAN (Association of South East Asian Nations).
SAARC (South Asian Association for Regional Cooperation).
Liberalization, Globalization, Privatization
Liberalization
Liberalization implies absence of tariff and non-tariff trade barriers and
exchange controls. It involves delicencing, deregulation and decontrol.
The trend towards liberalization is increasing Reliance on market
mechanism is increasing liberalization are:

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a) Multinational Companies: They are giant enterprises. They operate in
many countries of the world. They use standardized technology to
offer standardized products. They command huge resources.
Increasing operations of multinational companies have led to
increased liberalization. They are the children of globalization.
b) Information Technology: It has facilitated flow of information. It fuels
liberalization by breaking natural barriers of time and space. E-
commerce, E-banking and E-governance have served as the engine of
liberalization. Increasing use of information technology has led to
increased liberalization.
c) International and Regional Institutions: World Trade Organization
(WTO) is the champion of liberalization. It has facilitated multilateral
trading system. It promotes trade without discrimination and with
fair competition. The World Bank and IMF also advocate liberalization
through economic reforms. The regional economic cooperation
groups have also led to increased liberalization through the creation
of free trade areas, common markets and economic unions.
d) Consumerism: it is an organized movement of consumers to
strengthen their rights and powers. It informs and protects
consumers from malpractices. It lobbies for free trade. This
movement has boosted the demand side of the market. This has
facilitated liberalization.
Globalization
Globalization means integration of national economies with world economy.
The world is becoming a borderless one huge market. The factors of
production move freely across borders. Increasing globalization has led to
increased liberalization.

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Privatization
It is the process of selling government assets to private sector. There has been
a wave of privatization in developed and developing countries.
Telecommunications, energy, industries and banks are being privatized.
The Government may privatize a public enterprise by the following processes
a) By sale of shares of the enterprise to the general public, employees,
workers, and any person or company interested in the management of
such enterprise.
b) By formation of cooperative.
c) By selling assets of the enterprise.
d) By leasing out the assets of the enterprise.
e) By involving private sector in the management of the enterprise.
Privatization is an important agenda for economic for economic reforms in
Nepal. But its speed is slow.
Barriers to Trade
Many countries use restrictive measures in trade. They prevent foreign
competition. They serve as barriers to international trade.They can be:
 Tariff Barriers
 Para-tariff Barriers
 Non-Tariff Barriers
Instruments for Trade Control
1. Tariff Barriers
Tariff is a tax on goods that are traded internationally. It is added to the price
of goods. It directly provides price protection. Tariff barriers can be:
a) Export Tariff: It is a tax on goods sent out of country. It is generally ad
valorem imposed as a percentage of value of goods exported.

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b) Import Tariff: It is a tax on goods brought into the country. It is known
as customs duty. It is generally ad valorem imposed as a percentage of
the value of goods imported.
 Countervailing duty may be imposed on imports to offset export
subsidy provided to exporters.
c) Specific Duty: It is a tax based on number of items exported or
imported. The value of the goods is disregarded.
d) Compound Duty: It is a tax consisting of both ad valorem and specific
duty. It is based on both the value and number of items imported or
exported.
e) Transit Tariff: It is a tax levied on goods passing through a country.
 Tariff barriers raise revenue, discourage imports and make local
products more attractive.
2. Para Tariff Barriers
They consist of border charges, fees, and local taxes other than tariffs on
imports and exports. They can be:
 Custom valuation systems
 Tariff classifications systems
 Fees, special charges, local taxes
3. Non Tariff Barriers
They are rules, regulations and bureaucratic red tapes. They delay or
prevent purchase of foreign goods. They restrict imports. They indirectly
provide non-price protection.Non-tariff barriers can be:
a) Quotas: It is quantity limit on the volume of imports or exports. They
restrict the number of units or share of market. Licensing can be used. A
quota set at zero is called Embargo. It prevents imports from particular
countries.

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 Some countries resort to voluntary trade restraint for exports.
Other tie-up imports with exports.
b) Subsidies: They involve use of public funds by the government to lower
costs. They can be direct or indirect. They help domestic companies to
compete with imported products.
c) Local Content Requirement: It specifies that a specified percent of value
added must be sourced locally to avoid import duties. Exports are
subjected to this restriction.
d) Technical and bureaucratic Barriers: They are restrictive specifications
of technical standards. They are procedural barriers. They can be:
 Quality standards for products; laboratory testing
 Consumer safety, health and sanitary regulations; bio-security
 Packaging and labeling
 Quarantine requirements for imported goods
 Documentary requirements and Bureaucratic delays in processing
documentation.
 Antidumping measures: under pricing of exports below cost or
home country price is not allowed.
e) Procurement Policies: They favour domestic producers. A “buy local”
policy is an example.
f) Exchange Controls: They restrict the availability of foreign currencies to
pay for imports. Foreign exchange licencing and variable exchange rates
can be used. Foreign exchange earnings may need to be deposited in
central bank for export earnings.
Problems of International Trade
The problems of international trade are:
1. Protection
Countries resort to protection through tariff and non-tariff barriers.

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2. Laws and Institutions
Every country has its laws, regulations and institutions. They regulate the
conduct of international trade. They impact trade as follows:
a) Bilateral: They regulate trade two countries on a bilateral basis. For
example, the Treaty of Trade regulates trade between Nepal and India.
Such agreements are enforced by individual countries. They constrain
flexibility and freedom of international trade.
b) Regional: They regulate trade at regional level. They are enforced by a
group of countries by establishing preferential trading arrangements,
free trade areas or customs union. SAARC, ASEAN, NAFTA and EU are
examples.
c) Multilateral: They regulate international trade worldwide. They are
enforced by international institutions, such as WTO.
 Laws and institutions provide both constraints and opportunities to
international trade.
3. Foreign Exchange Problems
Every country has its own currency and financial system. International trade
involves use of different currencies. Not all currencies are freely
convertible. Currency values keep on changing, especially for countries
subject to floating exchange rates. The risks of changes in currency value
need hedging. This adds to costs of international trade.
 Many developing countries have foreign exchange control regulations.
They adversely affect international trade.
 Countries also face balance of payment problems which constrain
international trade. Countries with trade deficits resort to import
restrictions or import substitution practices.

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4. Transit Problems
Land locked countries face transit problems. They restrict accessibility to
markets for international trade. Such problems also add to the cost of
products. Export documentation, customs clearance, demurrage charges,
damages and pilferages related to transit adversely affect the competitive
position of land locked countries in international trade. Transit delays
constrain meeting of deadlines for exports. The use of many intermediaries
also adds to costs of exports.
5. Unfair Competition
International trade is subject to intense competition. However, unfair
competition is one of its major problems. In order to capture markets, some
countries resort to dumping. They sell their products at less than fair value.
China provides example of dumping practices.
 Corrupt and unethical practices have also appeared as serious problems
for international trade. Under-the-table deals are increasing.
 Domestic industries in developing countries suffer adversely from unfair
competition.
6. Government policies
Government policies relating to foreign trade differ from country to
country. They change with the changes in the political and economic
environments. Changing government policies create problems for
international trade. Bureaucratic hurdles constrain implementation of
foreign policies.
7. Information Gap
Many developing countries lack up-to-date information for international
trade. They lack institutional mechanism to monitor movements and

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changes in international markets. Market development is constrained by
lack of market research. The information gap has led to overdependence on
few countries for international trade.
8. Poor Quality Control
Developing countries have not been able to control the quality of
exportable products. Unscrupulous exporters tarnish the image of their
products by exporting low quality products. An interesting example is hand-
knotted woolen carpets and Pashmina shawls of Nepal. The high image of
these products in the European market has been adversely affected by the
export of products made from waste wool.
 The system of labeling and quality certification are also lacking in many
developing countries. ISO certification is lacking.
 Poor quality control of exportable products is a big problem of
Regional Economic Integration Stages (levels)
Regional economic integration can take place in the following stages.
 Free Trade Area
 Customs Union
 Common Market
 Economic Union
 Political Union
a) Free Trade Area: Member countries abolish tariff and non-tariff barriers
for trade within the region. Members are free to levy tariffs on imports
from non-member countries. This modality involves least integration.
South Asian Free Trade Area (SAFTA) is an example.

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Preferential trading agreement allows trading of products among
member countries on preferential terms. It can be through quotas or
reduced tariffs.
b) Customs Union: Member countries abolish barriers to intra-region trade
and maintain a common tariff wall for imports from non-member
countries. There is common external tariff. The degree of integration is
higher than free trade area.
c) Common Market: Member countries have common external tariff and
free movement of factors of production. They can be labour, capital,
technology and management. Business methods, rules and procedures
are made common. Resources are optimally allocated and utilized. The
degree of integration is higher than customs union.
d) Economic Union: Members of economic union have harmonized
monetary, fiscal and other economic policies. A single currency is used.
The degree of economic integration is the highest in this modality. It is
full economic integration. EU (European Union) is an example of
economic union.
e) Political Union: The member countries lose their national identities and
form a single state. It is the highest form of overall integration. There is
no national sovereignty. East Germany joining West Germany is an
example of political union.
The Triad
Most international business involves the Trial. It comprises of:
 EU (The European Union)
 NAFTA (North American Free Trade Agreement Countries consisting of
USA, Canada, Mexico)
 Pacific Rim (especially Japan)

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Meaning of International Marketing:
Marketing encompasses all activities aimed at satisfying customer needs
through exchange relationships to achieve the objectives of profit, market
share or quality leadership.
International marketing consists of marketing activities conducted across
borders. It operates in a dynamic international environment composed of
political, economical, socio-cultural, financial and technical forces. Global
markets and customers differ from country to country. It is also as global
marketing.
Definitions
According to Philip Cateora, "International marketing is the performance of
business activities that direct the flow of a company’s goods and services to
consumers or users in more than one nation."
According to Warren Keegan, "Global marketing is the process of focusing the
resources and objectives of a company on global marketing opportunities and
threats."
The nature of international marketing consists of:
a) Creation of Value:Value is created for international customers. Value is
the ratio of benefits to costs. Value can be created by increasing benefits
and reducing costs. Rice advantage is important in international
marketing. Economics of scale provide price advantage.
b) Gaining competitive advantage: It is gained by making marketing offers
that are more attractive than competitors in foreign markets. Marketing
mix, consisting of a combination of product, price, place and promotion
represents marketing offer. Competition is tough.
c) Maintaining focus: It is concentration of attention on customer needs in
a foreign target market. Successful international marketers think globally
and act locally.

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d) Risk: International marketing involves greater risks compared to
domestic marketing. They can be political, commercial and foreign
exchange risks.
e) International environment: International marketing focuses on
customers in the broader context of external environment. It pursues
long term marketing opportunities outside the home country. Marketing
practices vary country to country.
Product Policy Issues in International Marketing
Product is anything that satisfies the needs of customers. It can be goods,
services, ideas, experiences, events, persons, places, properties, organization
and information. Policy is guideline for international marketing decision
making.The scope of international marketing can be:
a) Consumer products: They can be convenience, shopping, specialty and
unsought products.
b) Industrial products: They can be raw materials, capital goods, supplies
and services.
Products policy issues in international marketing are related to:
1. Type of products: It can be adoption of home product or offer of a
modified product to suit the needs of international market. New product
can also be developed. Quality certification is done.
2. Product mix: Product mix is set of product lines and items that are
offered in the international market. Single or multiple product lines can
be offered.
3. Branding: Brands identify products. A global brand is generally offered in
the international market. A new brand can also be offered, if needed.
Brands are registered in host countries.

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4. Product differentiation: Products offered in international market can be
differentiated from competitor’s products. The basis can be features,
quality, design, service.
5. Packaging: Packaging is wrapper or container of the product. It can be
primary, secondary and shipping package. The packaging policy for
international marketing can be unit packaging, family packaging, and
multiple packaging.
6. Labeling: Product labeling is done to meet the legal requirements of
international markets.
WTO rules are followed for marketing with WTO members. Regulatory
requirements are met. Standardized warranty is provided.
Introduction to CoDEX, IPPC and OIE:
Three sisters organizations of W T O :
International food trade has excited for thousands of years but until not too
long ago food was mainly produced, sold and consumed locally over the last
century the amount of food traded internationally has grown exponentially.
The codex alimentarius international food standards, guidelines and codes of
practices contribute safety, quality and fairness of this international food
trade. Consumers can trust the safety and quality of the food product they buy
and importers can trust that the food they ordered will be in accordance with
their specifications.
Codex standards serve in many cases as a basis for national legislation. The
reference made to codex food safety standards in WTO agreement on sanitary
and phytosanitary measures means that codex has far reaching implications for
resolving trade disputes. WTO member that wish to apply stricter food safety
measures than those set by codex may be required to justify these measures
scientifically.

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Codex members to covers 99% of the world population. More and more
developing countries are taking an active part in the codex process in many
cases by codex trust fund, which strive to finance and train participants from
such countries to enable efficient participation. Being an active member of
codex helps countries to compete in sophisticated, world marketers and
improve food safety for their own population. At the same time exporters
know what importers demand and importers are protected from the
substantial shipments.
International government and non-government organizations can become
accredited codex observation to provide expert information and advice and
assistance to the commission. International food trade is 200 billion dollar a
year industry with billion of tones of food produced marketed and transported.
There is a lot of stake for protecting consumers’ health and ensuring fair
practices in the food trade. All information is on codex in public and free.
The codex alimentarius commission, established by FAO and WHO in 1963,
develops harmonized international food standards, guidelines and codes of
practices to protect the consumers and ensured fair practices in the food
trade. The commission also promotes coordination of all food standards work
under taken by international governmental and non-governmental
organizations.
In 1945, foundation of food and agricultural organization of the United Nations
and in 1948, foundation of the World Health Organization. In 1950, first
session of the joint FAO/WHO expert committee on Nutrition stated.
Food regulations in different countries an often conflicting and contradictory,
legislation governing preservation, nomenclature and acceptable food
standards often varies widely from country to country. New legislation not
based on scientific knowledge is often introduced and little account may be
taken of nutritional principles in formulating regulations.

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In 1950, an international convention on the naming and composition
requirement of particular varieties of cheese was signed in the Italian city of
Stresa.
In 1955, the fourth session of joint FAO/WHO expert committee on nutrition
stated that “the increasing and the sometimes insufficient controlled, use of
food additives has become a matter of public and administrative concern.”
In 1961 November, the 11th
session of the conference of FAO passed the
resolution by which codex alimentarius commission was established and
responsible for the implementing the joint FAO/WHO food standards
programme.
In 1995, codex standards, guidelines and codex of practice become a reference
for food safety in the WTO agreement on sanitary and phytosanitary measures
(SPS agreement). The only other organizations mentioned are the world trade
organization for animal health (OIE) for animal health issues and the
international plant protection convention (IPPC) for plant health.
Codex Food Safety Standards in due to its scientific bases that codex tests are
considered by WTO as the international reference for food safety.
Codex-Alimentarius commission
Maximum residues limit for veterinary drugs in food updated as at the 35th
session of the codex alimentarius commission (July 2012)
JECFA Evaluation (1-40 pages)
The joint FAO/WHO expert committee on food additives (JECFA)
JMPR - Joint FAO/WHO Meetings on Pesticides Residues.FAO/WHO maintains
separately the work of the JMPR.
JMPR at FAO
JMPR at WHO

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Theory of Comparative Advantage (David Ricardo) Economic Growth and
Trade, Gains from Trade, Barriers for trade, Basis for International Trade
Let us briefly review the historical background of the theory of international
trade propounded mainly by Adam Smith and Ricardo, the principal exponents
of the classical school of economics.
The economic philosophy that prevailed during the 17th
and 18th
centuries was
that of Mercantilism. The main feature of the mercantilist doctrine was that a
country could grow rich and prosperous by acquiring more and still more
precious metals especially gold, and, therefore, all the efforts of the State
should be directed to such economic activities as help a country to acquire
more and more precious metals. According to the mercantilist school of
economists, if international trade is not properly regulated then people might
exchange gold for commodities of daily use or required for a luxurious living to
the depletion of the stock of precious metals with the nation. Thus, exports
were viewed favorably so long as they brought in gold but imports were looked
at with apprehension as depriving the country of its true source of riches, i.e.,
precious metals.
Adam Smith and Ricardo strongly repudiated the mercantile notions of
THE BASIS OF INTERNATIONAL TRADE
The fundamental basis of international trade lies in the fact that countries are
endowed by nature with different elements of productive power. In other
words, factor endowments are unevenly distributed among the countries of
the world. This is due to geographic facts, physical features and climatic
differences. Some countries have the monopoly of certain minerals, e.g., Africa
in gold and diamonds and oil resources in Arab countries; other countries are

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climatically best suited for the production of certain crops, e.g., Bengal and
Bangladesh for jute.
Thus, international trade is inevitable when there are marked differences in
the countries regarding materials, natural vegetation, climate, soils and other
physical and geographical conditions.
International trade is also affected by several other factors besides the natural
or geographical factors, e.g., stage of economic development, accumulation of
capital by a nation and its foreign investments, technological progress, trade
and financial regulations, political affiliations, and so on.
THE THEORY OF ABSOLUTE ADVANTAGE
Adam Smith argued that a country could certainly gain by trading with other
nations. Just as a tailor does not make his own shoes but exchanges a suit for
shoes, and hence both the tailor and shoe-maker gain by trading in the same
manner. Smith argued that a country as a whole would gain by having trade
relations with other countries. According to Smith, if one country has absolute
advantage over another in one line of production, and the other country has
an absolute advantage over the first country in another line of production,
then both countries would gain by trading.
For example, if it takes 10 units of labour to produce one unit of good X in
country A, but 20 units of labour to produce the same good in country B, and if
it takes 20 units of labour to produce one unit of good Y in country B and 10
units of labour to produce the same good in country A, then both the countries
will gain by trading. After the opening of trade, country A will specialize in the
production of good X, while country B will specialize in the production of Y.

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THE THEORY OF COMPARATIVE COST
Ricardo agreed with the analysis of Smith that international trade would be of
mutual advantage if one country has absolute advantage over another in one
line of production and the other country has an absolute advantage over the
first country in another line of production. But Ricardo went further and
argued that any two countries can very well gain by trading even if one of the
countries is having an absolute advantage in both the goods over another,
provided the extent of absolute advantage is different in the two
commodities in question, i.e., comparative advantage is greater in respect of
one good than in that of the other. In other words, when there are
comparative differences in costs.
Comparative Differences in Costs. When the comparative advantage is
different, trade will arise and it will continue. Suppose that
In Country A {Marginal cost of producing wheat is Rs. 70 a qtl.
Marginal cost of producing cotton is Rs. 140 a qtl.
In Country B {Marginal cost of production cotton is Rs. 70 a qtl.
Marginal cost of producing wheat is Rs. 50 a qtl.
In this case, country B can produce both wheat and cotton cheaper than
country A. but the comparative advantage is higher in the production of cotton
than in that of wheat. On the other hand, A has a comparative disadvantage in
the production of both the commodities but the disadvantage is lower for
wheat that for cotton.

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Thus: Cost Ratio
Country A:
1 qtl.of wheat = ½ qtl. of cotton 1:2
Country B:
1 qtl.of wheat = 5/7 or .71 qtl.. of cotton 1:1-/5
It will, therefore, pay country B to specialize in the production of cotton and A
in wheat.
Gain with Comparative Differences in Costs. In this case, a surplus arises with
specialization.
Without specialization:
A= 1 quintal of wheat + 50 quintal of cotton.
B= 1 quintal of wheat + .71 quintal of cotton.
A+B= 2 quintals of wheat + 1.21 quintals of cotton.
With specialization, A producing wheat and B producing cotton only:
A=2 quintals of wheat.
B=1.42 quintals of cotton.
A+B=2 quintals of wheat + 1.42 quintals of cotton.
Surplus = .21 quintal of cotton.
This is the gain from trade.
Size of the Gain. The total gain from international trade depends upon the
differences in the cost ratios in the two countries,. The larger the range
between the comparative costs the greater the total gain. In the words of
Harrod:
“A country gains by foreign trade if and when the traders find that there exists
abroad a ratio of prices very different from that to which they are accustomed
at home. They buy what to them seems cheap and sell what to them seems
dear. The bigger the gap between what to them seems low points and high

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points, and the more important the articles affected, the greater will the gain
from trade be.”?
Sharing the Gain. As regards the share of this gain accruing to the parties, this
will depend also upon the terms of trade, i.e., the ratio in which wheat changes
for cotton in our example for instance. This ratio, as we have explained,
depends upon the elasticities of the demand of one country for the goods of
the other or the intensity of reciprocal demands. Whoever is more keen to
purchase or sell will be the loser in the bargain.
What will be the terms of trade? B will gain as long as she can get a quintal of
wheat by parting with less than .71 quintals of cotton. A will gain as long as she
can get more than 50 quintal of cotton by parting with a quintal of wheat. The
rate of exchange will lie between
1 quintal of wheat= .05 quintal of cotton.
1 quintal of wheat = .71 quintal of cotton.
The actual rate will depend upon the relative4 elasticities of demand of each
party for the goods of the other.
If the demand of A for cotton is more elastic than the demand of B for wheat,
the rate of exchange will be more favorable to A. this is so because A will be
less anxious for cotton that B is for wheat. In the opposite case, the rate of
exchange will be more favorable to B.
When the rate of exchange is favorable to A, it is nearer the 1 quintal of wheat
= .71 quintal of cotton limit. When the rate is favorable to B, it is nearer the 1
quintal of wheat = .50 quintal of cotton limit.
The margin of gain in this example is quite narrow. In actual practice, trade will
arise, if the margin is fairly wide to counter balance any inconvenience
involved in such a trade.

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The argument here relates to two countries and two commodities but it can be
extended to cover more than two commodities and to more than two
countries without invalidating the essential principle.
We may sum up the theory of comparative cost in general terms. An individual
is able to perform them all. He selects that work which pays him the most. A
doctor can also do the dispensing but he does not do it; a professor can teach
his son reading in a school but advantage he does not do it. All these people
find it to their advantage, and it is also to the advantage of the community,
that the inferior work is left to inferior persons. In that case, time and energy
are more profitably employed.
The same principle works in international trade. Considering climatic
conditions, distribution of mineral and other natural resources, geographical
position and physical configuration, every country seems to be better suited
for the others. It will be to the advantage of each country, as well as to the
advantage of the world as a whole , that each country specializes in the
production of those commodities for which it has greater relative advantage.
In that case, the productive resources of the countries concerned will be more
remuneratively employed.
Among the factors that determine the commodities in which a country should
specialize, we may mention the rate of exchange, that monopoly element,
transfer costs, prices of the factors and their relative efficiency. A country
would tend to specialize in the production of those commodities in which
transfer costs and factor prices are low but productive efficiency is high.
A Paradox. The application of the theory of comparative cost may give rise to a
paradoxical situation. A country may specialize in the production of certain
commodities and import certain other articles, even though it can produce
them at a lower cost than the country from which it imports them. For

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instance, England imports dairy products from Denmark although their cost of
production in England is less. The reason is that England is able to get much
better return from labour and capital employed in other directions, say,
machinery, and the loss from the purchase of cheese and better is more than
made up.
“The theory of comparative costs as applied to international trade is,
therefore, that each country tends to produce not necessarily what it can
produce more cheaply than another country, but those articles which it can
produce at the greatest relative advantage, i.e., at the lowest comparative
costs.”
Limitations
Like other economic laws the principle of comparative cost is also a statement
of a tendency. In actual practice, the operation of the theory is hindered by
frictional influences such as differences in language, custom, religion and
above all the unwillingness of labour and capital to be guided by purely
economic considerations. They are also influenced by political motives,
commercial practices and general security. The cost of transport and the
behavior of the cost of production are the other limiting factors. Specialization
tends to increase the scale of production, but if the industry is subject to the
law of increasing cost, the principle of comparative cost will cease to function.
Trade Concept and Neo classical Trade Theory
Three Main concepts
There are several measures of terms of trade, each representing a different
concept. The important measures among them are:
i. Net barter terms of trade;
ii. Gross barter terms of trade; and

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iii. Income terms of trade.
There are other measures too like single factorial and double factorial terms of
trade, which, however, are not used frequently. The most widely used measure
is the net barter or the commodity terns of trade. Now a word about these
three important measures.
Net Barter Terms of Trade
It is obtained by dividing the index of export prices by the index of import
prices both indices expressed in percentages and the quotient thus obtained
also expressed in percentage. In symbols it is Px/pm X 100; where Px stands for
the index number of export prices and Pm stands for the index number of
import prices.
Let us take an example. If the index number of export prices of country A is 200
and index number of import prices of country is 100, then the net barter terms
of trade will be equal to 200/100 X 100 = 200. This means that the Net barter
terms of trade of a country A have shown an increase of 100 percent over the
base period. If the value of the Net barter terms of trade comes to lower than
100, that means that the terms of trade have fallen to that extent. From the
point of view of a country, a rise in the net barter terms of trade is favorable
because as a result of the rise, the country has now to pay a smaller quantam
of exports in return for the same volume of imports or alternatively the same
volume of exports for a larger quantam of imports.
Gross Barter Terms of Trade
It is obtained by dividing the index of the physical quantity of exports by the
index of the physical quantity of imports, all expressed in terms of
percentages. In symbols, Qx/Qm X 100 where Qx stands for the index number
of quantity of exports, and Qm stands for the index number of quantity of
imports. If Qx = 100 and Qm = 80 then the gross barter terms of trade will be
equal to 100/80 X 100 = 125 which means that the gross barter terns of trade
have shown an improvement of 25 percent.

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Income Terms of Trade
This is obtained by dividing the value of exports (Value index= Quantity index X
Price index), divided by the index of import prices. In symbols, Qx X Px X 100
Pm
A rise in this index means that a country can obtain a larger volume of imports
from its sale of exports in a given year relative to the base year.
Factors on which Terms of Trade Depend
The following are the main factors on which the terms of trade of a country
may depend:
i. Elasticity of demand and supply;
ii. Availability of substitutes;
iii. Size of demand;
iv. Rate of exchange;
v. Production pattern of a country.
Elasticity of Demand. If the demand of a country for her exports is relatively
less elastic as compared with her demand for imports, then the prices of her
exports may be higher as compared with the prices of her imports. This will
make the terms of trade favorable to that country. On the other hand, if the
demand of a country for her exports is relatively more elastic as compared
with her demand for imports, then the prices of her exports may be lower as
compared to the prices of her imports. This would make terms of trade
unfavourable to the country concerned.
Elasticity of Supply.If the supply of exports from a country is relatively elastic
as compared with the elasticity of supply of its imports, then it is possible that
she may be able to enjoy favorable terms of trade. This is so because of the
fact that she will be able to adjust her supply according to demand. She will
not then allow the prices of her products falls in the foreign markets.
Availability of substitutes. A country may be able to enjoy favorable terms of
trade, given the demand conditions, if the products exported by her do not

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have close substitutes. This is so because in case of the non-availability of the
substitutes, the country may be able to sell her products at a higher price.
Size of Demand. The terms of trade of a country are also considerably by the
size of the effective demand. A highly populated country like India may be
relatively in a stronger position to bargain over price for her imports. However,
this factor is such as can cut both ways.
Rate of exchange. A country may be able to have favorable terms of trade by
appreciating the exchange value of her currency. This is because of the fact
that the prices of her exports will become relatively higher as compared with
the prices of her imports by currency appreciation. However, if the other
country also appreciates her currency, then there would be no impact on the
terms of trade of either country.
Production Structure. Production structure of a country also influences its
terms of trade. If the country produces primary goods (e.g., food and raw
materials), there is every possibility that the country may experience
unfavorable terms of trade, for the reason that the demand for these products
is normally declining with economic development. It is partly because of the
operation of the Engel’s Law, which states that as the income of a country
rises, less is spent on food products, etc., and partly because of technological
advances which usually are of the raw materials displacing or economizing
nature. In other words, the primary producing countries have usually to sell
their products at falling prices. On the other hand, their main demand consists
of industrial goods the demand for which is of a rising rather than falling
nature and they have no option but to accept the prices dictated by their more
advanced industrialized suppliers.
Raul Prebisch has shown that prices of primary products (of under-developed
countries) deteriorated in relative terms (i.e., relatively to manufactured
products) which means a reduction in the export earnings of the countries

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producing such goods. That is, the under-developed countries have not
benefited from international trade relatively to the exports of industrial goods
(i.e., the developed countries). In other words, the gains from international
trade have not been equitably distributed between the developed and under-
Economic Growth
Terms of trade play an important role in the economy of a country. Improved
terms of trade enable a country to import a larger quantity of goods from her
trading partners in return for the same quantity of her exports or the same
quantity of imports in exchange for a smaller quantity of exports. This greatly
influences the income of the countries engaged in trade. Secondly, the terms
of trade play a significant role in explaining changes in income differentials
among countries. Changes in terms of trade may affect the international
distribution of income and unfavourable terms of trade of income in
developing countries.
The analysis of terms of trade is very important in the case of developing
countries for a number of reasons: Firstly, the volume of international trade is
generally very large in relation to their national income. Secondly, international
trade is vital for them because it provides them with technical skills, plant,
machinery, etc.., which are so essential for their economic development. These
countries then will naturally be very much concerned with all aspects of their
trading relationships, including their term of trade. Any worsening of their
terms of trade (particularly any change in export volume or productivity) other
thing being equal will reduce their capacity to import and shift income away
from them, thus retarding their efforts to promote economic growth.
There are two views. The classical economists believed that the terms of trade
would shift in the long run in favor of countries producing primary goods and
against those producing manufactured goods. This is so because of the fact

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that primary products are subject to diminishing returns whereas
manufactured goods obey the law of increasing returns. The net effect of this
tendency would be an increase in the prices of primary products and a
reduction in the prices of manufactured goods. This would in turn make the
terms of trade of developing countries favorable.
Recently, however, a group of economists viz., Raul Prebisch, Singer and
Myrdal are of the view that the terms of trade of developing countries tend to
move against them. Their view, termed secular deterioration hypothesis, was
based on the trend in the terms of trade of the U.K. from the latter part of the
19th
century to the late 1930’s. At the end of this period, a given quantity of
primary products exported to the U.K., purchased 40 per cent less of
manufactured goods than at the beginning. The main reasons for it given by
them are as follows:
i. The developed countries keep most of the gains of the increased
productivity in manufactures by increasing wages and profits and not
reducing prices. Strong trade union organizations make sure that the
gains in productivity are followed by wage- increases. On the other
hand, growth in the productivity in primary products results in lower
product prices. The result of this is unfavourable terms for the primary
product producing countries, where is practically perfect competition in
the factor markets.
ii. There has been a relative increase in the demand for manufactured
goods produced by developed economics and decrease in their demand
for primary products. This is partly explained by Engel’s Law, which
states that as income increases a small proportion is spent on food
items. Their income elasticity of demand of thus lower for such items
which are mainly produced and exported by developing countries, than
that of the demand of developing countries for manufactured goods.

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Secondly, technological progress in manufactures has greatly reduced
the demand for raw material used in manufactures. Therefore, Engel’s
Law coupled with technical progress in manufactured goods have
worked together in causing a reduction in the total demand for the
primary products, which in turn have shifted the terms of trade to the
detriment of the developing countries.
iii. It is argued that the prices of primary products rise and fall sharply in
periods of both boom and depression thus losing all the gains of the
boom periods. But the prices of manufactured goods do not fall in
depression as much as they rise in boom periods, because of the
presence of strong trade unions. As a result, there arises a wide gap
between the prices of primary products and manufactured goods over
successive cycles which in turn make the terms of trade of developing
countries unfavourable in the long run.
Raul Prebisch has shown, as pointed out above, that the developing
countries are handicapped in their attempts at economic development,
since terms of trade are unfavourable to them relative to the developed
countries. That is why they have to seek loans and griants from the
developed countries. The terms of trade are unfavourable to the developing
countries since their export earnings are derived from a few commodities
only known as the traditional exports, e.g., jute, tea and oilseeds in the case
of India. The prices of such commodities do not rise as much as the prices of
capital goods and other manufactured goods that they have to purchase.
Prices of imported manufactures being relatively high and prices of primary
goods exported being relatively low, the terms of trade are unfavourable to
the developing countries. There is a secular decline in their terms of trade.
Prof. Haberler has questioned this thesis of a secular decline. But Prof.
Kindlebeger supports Raul Prebsich and asserts that the terms of trade have

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41
been generally favourable to well-developed countries and unfavourable to
developing countries.
For economic development, the developing countries have to purchase
from abroad machinery and capital equipment, essential industrial raw
materials and technical know- how. But owing to the terms of trade being
unfavorable to them they do not have adequate export earnings to be able
to purchase their requirements of economic development. This is a great
handicap.
In the view of the above, we might say that economic development has not
benefited the developing countries as much as the well-developed
countries.
Thus, fair terms of trade are very important for the economic development
of the under-developed countries. Favorable terms of trade enable a
country to import a larger quantity of goods for the same quantity of
exports or the same quantity of imports for a smaller quantity of exports.
This is a potential source of capital formation. In Nurkse’s words, “The great
advantage of this potential source of capital formation is that it gives rise
neither to foreign debt burden nor to the various frictions that may arise
from inter-governmental loans and grants.” Unfavorable terms of trade
accentuate balance of payments and budgetary difficulties. It may,
however, be emphasized that unless the additional resources made
available by the favourable terms are turned into savings and investment,
economic development will not be promoted. Favorable terms by
themselves do not accelerate development automatically.

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Agri-business promotion policy 2006
(Approved by government of Nepal on dated 11-08-2063)
Agricultural production and productivity are not being achieved as they are
targeted, due to uncertainty of produces to sell in the market. It is a need of
transforming the scattered and subsistence agriculture to modern, integrated,
competitive and commercialized agriculture. Agricultural business promotion
became troublesome in the present context, and it is, therefore, to utilize the
opportunities' effectiveness of world marketing management system to
support national economy. As per the objective of national agricultural policy
2004, agribusiness promotion policy 2006 is implemented to speed up the
activities of agri-business promotion by developing commercial and
competitive agriculture bases to compete with regional and world market.
Objectives:
I. To achieve market oriented and competitive agricultural production.
II. Contribute to promote domestic market and export by developing
agricultural industries.
III. Commercialize the agriculture for poverty alleviation.
Policy Highlights:
Agri-business promotion policy focuses on the establishment of larger
production pockets, based on geographical, economical and technical viability.
It also gave emphasis on industrial policy establishment and special economic
zones formation as a commercial crop/ commodity production area, organic
and pesticide free production area, and agricultural export oriented production
area. It also facilitates grazing facility on contract basis to private sector for
animal husbandry in the mountain region. It provides exemption of tenancy
right and land sealing to those who are involved in exportable commodity

Semester
43
promotion, and also have their agriculture on contract farming land. The policy
encourages to herbal production on public land through leasing out and also in
another areas of land.
In additions, policy suggests about creation of pricing based on the settlement
of market forces and would also introduce auction sale of agricultural produces
in bulk as per the feasibility report. It promotes the establishment of market
related business infrastructure, research and development, agricultural road,
collection centres, cold storage facilities, purchase vehicles for transportation
of agricultural commodities, in partnership approaches with farmers groups,
co-operatives and non-governmental organization. This policy encourages the
promotion of contract services facilitation and supervision, and also proposes
the establishment of accredited analytical laboratory, market facilities, rural
electrification, conducting training, slaughtering houses etc. in Public Private
Participation (PPP) approaches for quality services. The policy also facilitates
insurancescheme for crop production, livestock, marketing management and
also in agro-industry development. Further,It also suggests to exploreand
disseminate market of agricultural commodities in world market and for them
the Nepalese Diplomatic mission would use.
This policy supports tax exemption up to 10 years for 75% custom rebate in
machineries and tools such as thresher, processing machines, sprayer,
harvester and equipments import, and up to 10 years for 25% rebate on
electricity surcharge, electricity based cold and frozen storage, cold chain, cold
chamber and chilling vat. It also supports in the promotion of local raw
materials use in agricultural industries. The policy has provision to pay interest
of loan by keeping farmers' group collateral to finance credit. It also supports
to provide subsidy on agricultural inputs. The promotion policy supports to
launch special programme for the establishment of agricultural enterprises for

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44
minority community, ethnicity group, gender, educated unemployed, ladies
and ex-service holders. In addition, it supports in the establishment of capacity
and quality improvement of training centres for human resources
development in coordination with private sector. This policy supports in E-
commerce provision of marketing information system. It would also provide
technical and financial support in rural areas by creating rural agricultural
business promotion fund. It also provides facility for the maintenance,
promotion and construction of market centre, and for them 20% net income
shall be allocated to each market committee.
Agri-business promotion fund would create in coordination with them for
infrastructural development and management. Every market would deposit 2
percent of their net income in the fund and the fund can be managed by the
Board of marketing directors. This policy encourages to make quality
certification update and efficient, for the import and export of plants, seeds,
livestock, food, feed and agricultural commodities.
In the process to implement this policy, a standard for organic agriculture was
formulated in 2007. Special regions for commercial commodity production and
organic production are gradually developed in districts. For example, Sindhuli
and Ramechhap districts are emerging as special production regions of junar
(citrus sinesis). Jumla district has been declared as a special production region
for organic farming.
Government has been providing subsidies of 50% reduction in the electricity
bills for cold storage facilities, encouraging the production of perishable
agricultural products. However, budget is not sufficiently for other incentives.
Other incentives envisaged in the policy have not been provided to those who
really need. Subsidies for market infrastructure development through PPP for

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45
example, have not been included in the budget because regulations on market
yards have not been formulated.
High level Agri-business promotion committee consists
I. Honorable minister, ministry of agricultural and development, chairman
II. Honorable state minister, MOAC member
III. Secretary, MOAD, member
IV. Secretary, MOF, member
V. Secretary, ministry of industry, commerce and supplies, member
VI. Secretary, ministry of local development, member
VII. Joint-chairman, National cooperative Development Board, member
VIII. President, federation of Nepalese chamber of commerce, member
IX. Two nominated by MOAD, member
X. Joint secretary, Agri-business promotion and statistics division ministry
of Agricultural Development, member secretary
Note: four years duration of nominated persons.

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46
CAUSES FOR RISE IN PRICES
Inflationary rise in prices can be the result of rise in demand for goods and
services.
A. Demand Pull Factors
The demand for goods and services depends upon the size and the rate
of growth of population, the increase in national and per capita incomes,
the expenditure of the people and of the Government, the saving of the
community and the investment outlay and the way the latter is financed
Undoubtedly the rising pressure of demand resulting from the growth of
population and of money incomescannot be solved satisfactorily unless
the growth of population is checked.
I. High rate of investment. In a predominantly country likeNepal
launching of big programmes of economic development involving
huge investment creates an excess demand in the intermediate
and capital goods sector. Such large investments the prices of
capital goods and of other factors of production naturally rise
resulting in rise of all other goods as well.
II. Mounting Government Expenditure. Government expenditure has
been steadily increasing over the last 30 years. Increasing
government expenditure represents a large demand for goods and
services and thus, it is an important factor for recent rise in prices.
Besides, continuous increase in Government expenditure-specially
when it is not financed through taxation has the effect of putting
large money income in the hands of the general public.

Semester
47
III. Deficit Financing and increase in money supply. The method of
financing economic development by the government has an
important bearing on the money supply and level of prices.
IV. Role of black money. A large accumulation of unaccounted money
in the hands of income-tax evaders and black marketers. It is
difficult to estimate the amount of black money or the precise
influence of this money in pushing up prices in recent years but
there is no denying the fact that one of the factors responsible for
inflationary pressures is the existence of unaccounted money.
B. Cost push factors
If supply of goods and services can be increased to correspond with every
increased in demand, then there is no possible reason for prices to rise.
Fluctuation in output. Fluctuations in the output of food-grains were a
major in rise in prices. Likewise we may also refer to the fact that the supply
of manufactured goods did not increase adequately in certain periods.
Shortage of transport facilities are major factors for lower rate of
production of manufactured goods. With heavy demand for manufactured
products, the producers are in a position to push up the prices to any
extent.
Decline in Market arrival. Apart from fluctuations in production, market
arrivals have also tended to be erractic. In fact, the upward pressure in
agricultural prices is also due to large hoarding by and hoarding and
speculation in foodgrains by traders and blackmarketeers.
Taxation, public sector product etc as a factor in rising costs.
Hike in oil prices and international inflation.

Semester
48
Other factors
The failure of the Government policy on the price front was a serious factor
in the inflationary rise in prices. Finally the government has generally
followed a highly vacillating and anti-peasant policy in fixing procurement
prices. This is equally true in fixing and controlling prices of such essential
goods. Nor are the controls properly enforced thus giving great scope for
rampant black-marketing to exist, for the benefit of the traders.
There was not such urgency in price policy, as the rise in prices was gradual
and as there was no public agitation against rise in prices.
On fiscal and monetary measures with a view to restrict demand of the
general public.
Considerations for a proper price policy
I. Limit to deficit financing.
II. Role of food supplies.
III. Role of agricultural prices.
IV. Role of industrial prices.
V. Role of fiscal and monetary policies.
VI. Infrastructure bottlenecks.
VII. Vulnerable sections. Afford to pay high prices for essential items
VIII. Control of free market forces
Price policies should be such as to establish some consistent relationships
between agricultural prices of manufactures and the prices of various services.
Agricultural prices should be fixed and maintained at that level at which they
ensure adequate incentives of increasing agricultural production and
therefore, cover the full costs of production including a reasonable
remuneration for farm management. Once reasonable stability is established,

Semester
49
the interest of the consumers should be safeguarded. If agricultural prices
could be kept within very narrow limits, more than half the battle o inflation
would have been won. In controlling food grains prices, three aspects may be
kept in mind.
a. The government should fix and guarantee such procurement prices for
various food grains as will provide suitable incentives to the producers.
This is particularly important as the volume of production is expected to
increase considerably under the influence of the “green revolution”.
b. The retail prices should be fixed in such a way that the interests of the
consumers are safe-guarded and at the same time there is no scope for
hoarding and speculation.
c. Holding the price line should apply not only to cereals, but to all basic
consumption goods.
Price policy designed to promote economic growth should include measures
for regulating the general volume of private expenditure. The aim is that there
may not be any undue pressure on the limited supply of consumption goods
particularly food. In the first instance, the volume of investment should be
limited to be matched by equivalent value of basic consumption goods. Besides
these goods should be available at prices regarded reasonable from the point
of view of the low income groups. Secondly, non-essential and non productive
expenditure in both the public and private sectors must be reduced and, if
possible, eliminated. Thirdly, black money should be identified and brought
under control so that its influence on the upward pressure of prices may be
limited subsidies of all types and loses of government enterprises.
Export policy for price stability. The vast foreign exchange reserves have been
used to prevent internal shortages of essential goods and to check inflationary
pressures.

Semester
50
Accordingly, the prices of food grains and agricultural raw materials hold a key
position in the price structure of the country. A rise or fall in agricultural prices
will immediately generate a similar rise or fall in the general price level.
Agriculture is seasonal and supply of agricultural goods is subject to serious
fluctuations. Naturally agriculturally prices may rise faster at times and full
rapidly at some other times due to a temporary imbalance of supply and
demand.
Rise in agricultural prices
The income elasticity of demand for food grains of the bulk of the population
in a developing economy is high. Therefore, steeping up and rate of investment
and increasing money income with the people without adequate measures to
increase food supply leads to a distortion of the price structure. Further,
increasing population and urbanization are also responsible for increased
demand for food grains, and rise in food grains prices. Accordingly, fluctuations
in the prices of food grains and agricultural goods have serious consequences
for the producers and consumers and could be exploited easily by the
middlemen. It is in this context that the problem of stabilization of prices of
agricultural goods especially food grains becomes significant.
Moreover, a steep rise in the prices of cereals, pulses, oil and other essential
food articles increases the cost of living of the people. Consumers belonging to
the lower income groups of the population are hit hard, as their incomes do
not increase so easily to offset the increase.
As mentioned earlier, the rise in the prices of agricultural products is generally
behind inflationary spiral in the economy. When cost of living rises, trade
unions press for and secure higher wages. When wage increases are conceded,
the cost of production of manufactured articles will rise and this in turn would
increase their prices, and on. In the case of agricultural raw materials, a rise in
price will directly increase the cost of production of industrial goods.

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It may be thought that the rise in the prices of agricultural goods is in the
interest of the farmers. This may not always be so. Only the rich farmers are
able to take advantage of rise in prices. But the majority of the farmers who
cultivate small holdings are forced to sell their little surplus immediately after
the harvest, when prices are relatively low. They have to pay higher prices for
manufactured goods and even for agricultural products which they need such
as seed, fertilizers, diesel oil, pesticides, etc. The benefits of higher prices of
agricultural goods are appropriated by large landowners and middlemen.
Hence rising prices are not likely to be favorable for capital formation and
economic development.
If rise in agricultural prices is positively bad from the point of view of
consumers an excessive fall in agricultural prices is equally bad from the point
of view of millions of farmers majority. A fall in the agricultural prices means
distress for a majority of the farmers and a large decline in Government’s
revenue too. The farmers have many fixed commitments such as land revenue,
rent, interest, etc. and hence their net incomes will be considerably reduced
when the prices of agricultural products fall and agricultural products fall and
agricultural income will adversely affect the capacity of small farmers to meet
their fixed charges. In many cases they will be forced to sell off their small
holdings to meet their commitments. Besides, the farmers lose the incentive to
increase production and thus there may be a fall in the supply of agricultural
products.
Past experience shows clearly that a recession in agri-culture automatically
leads to a general recession in the country.
Measures for stabilization
Stabilization policies for agricultural goods will have three elements:
appropriate support prices, buffer stock operations and imports when
necessary.

Agriculture Trade and Policy - Class Notes

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