“The Man-Made Causes of Price Volatility”
Global Commodities Forum, United Nations Conference on Trade and Development, 31 January — 1 February 2011

> Pascal Lamy’s speeches


Ladies and gentlemen,

Over the past 50 years, commodity prices have followed a cyclical pattern of rising and falling prices of varying amplitudes and durations.  After a period of steady decline from 1995 to 2002, international commodity prices reversed course.

2011 will see the price of most commodities rise, as the rise in global GDP bolsters demand, led by the emerging economies.  Global GDP is set to grow by 4% this year.  Over 70% of the growth will come from commodity-intensive emerging markets. China, India and Latin America, in particular, will be acting as a “pull” for global commodities.

In general, the ascent in prices is likely to be most pronounced for crude oil, due to contracting global inventories, copper, gold, corn, and soybeans.   Droughts and biofuels in several parts of the world have tightened the supply of corn and soy, together with much higher Asian demand for the latter. 

The ascent in prices is likely to be least pronounced for natural gas, zinc and cattle. Higher grain prices have themselves slowed the demand for live cattle.  In so far as there will be an ascent in prices, that ascent is likely to be volatile.  Lingering sovereign risks, fears of policy mis-steps in high growth economies, and bouts of a strong US dollar, may be part of the challenge that markets have to contend with.

While rising prices may give commodity-dependent economies a certain reprieve, the rise in food prices has been of tremendous concern across the globe.  Barely out of the 2008 food price crisis, the world appears to have entered yet another phase of higher prices.  Rising food prices are now stoking global inflation, not to mention political unrest of proportions that we could have seldom imagined.  

The G20 has placed agricultural price volatility at the top of its agenda this year, and intends to tackle it through innovative mechanisms for greater agricultural investment and productivity, food availability, and smallholder agriculture.  Mitigating price volatility, without distorting markets, is the G20 goal.

Volatility, clearly, is a central theme to the Global Commodities Forum.  As I am in the long-term business of rule-making, allow me, ladies and gentlemen, to point out the benefits of the world trade rules in smoothing at least a certain portion of that volatility.  The portion that is man-made, through artificially constructed barriers to trade, such as tariff walls, price suppressing subsidies, and restrictions on export.  Volatility is at its worst in tight and closed markets. It eases in open and, hence, deeper markets.

Since the creation of the Multilateral Trading System, some 60 years ago, the world's average industrial and agricultural goods tariffs have declined significantly.   Rules for subsidies and fair competition were created.  Rules for the sanitary and phyto-sanitary regulations, that affect trade in commodities such as wheat, rice, and corn, were established.  And the WTO rule-book continues.

But through the Doha Round of trade negotiations, WTO members have an opportunity to dismantle even more of the artificially-created barriers that hinder commodity trade. They have an opportunity to reduce the developed world's remaining tariff peaks, such as extremely high tariffs on rice in parts of the Northern hemisphere.  An opportunity to reduce the tariffs of emerging economies; as well as the agricultural subsidies of developed countries that distort international trade. Cotton — a commodity that is of interest to many of you in this Forum — is a prime example of the receipt of trade-distorting subsidies.  These subsidies crowd out the developing world from international markets, and prevent it from fairly competing. 

For some of the world's poorest countries, that are dependent on only one or two commodities in their international trade, the Round also offers an opportunity to deal with tariff escalation.  The phenomenon of tariffs that rise with processing, and that discourage the developing world from industrializing.  It hurts commodities that range from cocoa all the way to metals.  A legacy of colonial patterns of trade.  In fact, were this Round to be completed, least-developed countries would get almost entirely duty-free, quota-free, access to developed world markets. 

There is also a window in the Doha Round for tackling export taxes and export restrictions in agriculture.  It is certainly true that there is an imbalance in the WTO rule-book between the stringency of the rules for imports and their laxity for exports. For example, certain export prohibitions and restrictions that are designed to alleviate critical food shortages are allowed in the WTO.  But export restrictions can hurt net-food-importing countries; and could actually starve them.  Not to mention that they can prevent the World Food Programme from fulfilling its role, depriving it of the food with which it can help others.

They were the single most important reason for the 2007-08 price explosion on the rice market; there was no fundamental market imbalance at the time. Equally, the 2010-11 price rise for cereals has much to do with the export restrictions of Russia and Ukraine; imposed after both countries were hit by severe drought. It is my hope that the necessary political will will be generated to tackle  them.

The Doha Round — when completed — will oil the wheels of international trade in commodities, giving the developing world its fair share of the market.  It will improve the workings of what is no more, in the end, than a transmission belt, between countries where there is demand and countries where there is supply.  For food trade, the climate crisis makes a properly functioning transmission belt even more imperative.  Droughts, and other natural catastrophes, should not deprive parts of the globe from food.   

Ladies and gentlemen, trade in natural resources was, in fact, the topic of last year's World Trade Report.  I urge you to read that report.  I urge you in particular to support the world trade rule-book that can help bring greater law and order to commodity markets, and to strengthen it through the Doha Round.

I thank you for your attention.

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