International Raw Materials Market

by A.E  Epechourin, group 1078/2

St-Petersburg State Technical University

The Department of Economic & Management

The Chair of World Economics 

St-Petersburg

1997

Introduction

Raw Materials - A natural of semifinished god that is used in manufacturing or processing to make some other good. Bauxite is the raw materials (ore) from which aluminum is made; aluminum is turn can be the raw material from which household utensils are manufactured.[1]

There is another definitions from the subject area of raw materials  distinct from the above mentioned:   

 Raw materials are products immediately extracted from nature which have undergone a first processing through which they have become marketable and, consequently, a tradable commodity. Raw materials include all energy raw materials (crude oil, natural gas, coal, uranium), metals, semi-metals and industrial minerals (kaolin, graphite, sulfur, salts, phosphates), rocks, water as well as all plant and animal products, whether they come from tropical regions (coffee, jute, tropical timber) or from temperate latitudes (wheat, meat, wool, etc.).[2]

 Raw material economy: It comprises all activities which are part of the planned handling of raw materials, i.e. explanation, evaluation, extraction, conversion into a tradable product, trade and forecasting. "Planned" here means economically useful, ecologically and socially responsible activities.[2]

 Resources are all natural material systems which as such are no commodities, but the intactness of which is a basic prerequisite for the continued existence of the earth's chemical and physical equilibrium and, consequently, for the survival of mankind. Resources include: the ozone balance, the CO2 balance, the equilibrium of sea water, the tropical forest, the krill and fish population, etc.[2]

 World resource balances are the planned (i.e. ecologically useful and socially responsible) handling of resources. This comprises: the explanation, evaluation, risk assessment and forecasting regarding world resources.[2]

Current research emphasis [2]  international raw material balances

 supply problems of the industrial countries

 location disadvantages of the developing countries

 dumping problems in international raw material trade

 recycling as a source for raw materials

 raw material deposits and connected environmental problems in east Siberia (addendum 1)

 structural questions and environmental problems of the Polish energy and metal economy[2]

I. Trade intermediates and natural resources

Once international trade in more than final consumer goods is allowed, basic notions of comparative advantage need to be re-examined. We have already discussed the limitations in a multi-commodity word of comparing autarky prices in two countries to predict item-by-item the pattern of trade; generally only correlations can be made except under additional assumptions. With trade in intermediates allowed, the problems in predicting trade in final goods became even greater. As MakKenzie (1945) remarked in one of his classic problem on the Ricardian model, the familiar nineteenth century trade pattern in which Lancashire produced and  exported cotton textiles would most probably not have been observed if England  had had to grow its own cotton [1] . We shall have occasion both in this section and to revert to this theme: the pattern of trade in final goods may not be readily deducible from the comparison of pre-trade relative prices in these markets.[3]    

I.I Middle products (intermediates)

The phrase «middle-products» was used by Sanyal and Jones (1982) to encompass what traditionally are referred to as intermediate goods, goods-in-process, and natural resources which have been extracted and prepared for trade on world markets. The core concept in their model is that of a productive spectrum whereby, at initial stages, natural resources and raw materials are processed and, in the final stages, goods-in-process and intermediate products are locally assembled for national consumption. International trade, according to this view, takes place in commodities, somewhere in the «middle» of this productive spectrum, freeing up a nation’s input requirements in the final stages of production from its output tradeable middle products at earlier stages.[3]

Such a view of the role of international trade suggests a natural division between that part of the economy which produces commodities (middle products) for the world market (including the local economy), called the Input Tier, and that section of the economy which makes use of internationally traded middle products as input along with local resources to produce none-trade goods for final consumption (the Output Tier). Ruled out by assumption in the simple version on this model is the notion that the «middle» stages of the productive spectrum might be «thick» in the sense that tradeable middle products might use other tradeable middle products as inputs. In addition, in production structure in each tier of the economy as assumed to resemble that of the specific-factors model. Labor is mobile both among sectors in each tier and between tiers. The balance of payments provides an additional link between the two tiers; if the trade account is balanced, the value of total output from the Input Tier of the economy is matched by the value of middle products used as inputs (along with labour) in the Output Tier.[3]

Several types of questions have been raised in the context on this model, and of central concern in each case is the allocation of labour between tiers and the real wage. Fore example, a transfer payment which gives rise to a trade surplus requires labour to be reallocated to the Input Tier  as consumption falls, and this serves unambiguously to reduce the real wage.[3]

  If domestic (and world) prices of trade middle products remain constant to the small country, all non-labour inputs in the Output Tier can be aggregated, a la Hicks, into a composite middle product input, which serves to convert the production structure in the Output Tier from an (n+1)-factor, n-commodity specific-factors model into a two-factors, many-commodity Heckscher-Ohlin model.[3]

In the middle-products model Input Tier is the existence of a world market in which middle products can be exchanged for each other that permits such a conversion.[3]

The middle-products model allows countries and sectors to differ in the extent to which local value must be added to transform middle products into final commodities,  and  much  depends  upon  this  comparison.  It  does   not,  however, focus upon another question: in а  vertical production  structure with  many stages, which goods-in-process  or middle  products does  а country  import and  which does it  export?  Two  recent  papers  have  tackled  this  issue independently  and with different  models. Sanyal  (1980) assumes  that in  each of  two countries  а commodity is produced in а continuum of stages, with  different Ricardian  labor-only input structures. Depending upon technological differences and  relative country  size, а cut-off point  will be  determined, with  one country  producing the  commodity from raw material stage to some intermediate  point, and  then exporting  this good-in-process  to  the  other  country  where labor  is applied  to finish  the production process.  By  contrast,  Dixit and  Grossman (1982)  use а  specific-factors model, with  one  of  the  commodities (manufacturing)  produced in  а continuum  of stages using capital and labor (the other sector using land and  labor) [2] . These  stages are arranged  such  that,  as  goods-in-process  develop towards  the final  stage, more labor-intensive techniques are required.  Thus with  two countries,  the labor-abundant country will tend to specialize in later stages of the productive spectrum[3] .[3]

They analyze how  endowment changes  alter the  cut-off point,  as well  as investigating issues related to content protection.[3]

I.II Natural resources

As Chapter 8 in this volume discusses,  the normative  question of  pricing natural resources (exhaustible or renewable) has received much attention in  the literature of the past  decade. The  middle-products approach  stresses that  some activities, the extraction of natural resources, must take place locally although international trade then allows other countries  access to  these resources.  Obviously, comparative advantage changes  over time  for countries  engaged in  exporting exhaustible resource. In  early work  Vanek (1963)  traced through  the changing  pattern of United States trade in natural resources, and suggested that asymmetries in resource use and availability could account for the Leontief paradox. In а context of multi-level trade, the costs of recourse extraction  in one  country often depend on the availability of foreign capital. Kemp and Ohyama (1978) have  presented  а  simple  model  of  North  -  South  trade in  which South  makes use of  Northern  capital  to  develop  its  resources  and  exports  these resources  to the North  where  they  are  used  to  produce  final  commodities[4] . They put  their model to use in  exploring the  normative issue  of different  degrees of  bargaining strength and ability to exploit via export taxes and tariffs in  the two  regions. But  the model also  stresses  the involvement  of capital  flows in  resource extraction.  Schmitz and Helmberger  (1979)  argue  strongly  for  complementarity  between  trade  in  resources and trade in capital, а point also stressed  by Williams  in his  1929 article.  We turn to  consider  more  generally, now,  the interaction  between trade  in goods  and trade in factors.[3]

Addendum 1

Siberia is Among Leaders in Raw Materials Markets[5]

Siberia's rating looks more impressive in some groups of goods than its 7-th general placing. Split the whole flow of commercial projects into 9 groups of goods, and for 6 of them Siberia joins the leading three:

Timber and Paper

I       Siberia         32.6

II      Moscow          19.1

III     St.-Petersburg  14.2

Fuel

I       Siberia         20.3

II      Urals           13.2

III     Moscow          12.3

Chemical Products

I       Moscow          17.2

II      Siberia         15.7

III     St.-Petersburg  11.9

Construction Materials

I       Moscow          22.0

II      Siberia         14.1

III     Urals           5.6

Transportation

I       Moscow          23.6

II      Siberia         12.4

III     Volga           12.1

Metals

I       St.-Petersburg  20.9

II      Urals           19.6

III     Siberia         11.7

Список литературы

«The New Polgrave a dictionary of economic» Editor: J.Eatwell, M.Mmilgate P.Newman

Chair of Raw Material Economy and World Resource Balances Prof. Dr.rer.nat. E. Machens (temporary appointment)

«Positive Theory of International Trade» Editor: R.W. Jones, J.P. Neary (pages 31-37)

«The World Economy  History & Prospect» Editor: W.W Rostow (part 52 «The Future of the World Economy» , pages 610-618)

«Siberia is Among Leaders in Raw Materials Markets»Editors: Alexei Alexeev, Andrey Kiselev

[1] In Jones (1980) a two-country Recardian model is illustrated in which one commodity requires an intermediate input and technologies differ between countries The pattern of trade can be reversed as a result of variations in the price of the traded intermediate.    

[2] Both papers cite the use of the continuum concept  in Dornbusch,  Fischer, and  Samuelson (1977).

[3] А limitation of both papers is the assumption that costs (or  factor proportions)  move monotonically from lower to higher stages of production. If not, trade may take place а1 many points  in the productive spectrum in the absence of inhibiting transport costs.

[4] This model is described in simplified terms by Findlay (1979).