INTRODUCTION
This
section provides a broad overview of the role that trade in natural resources
plays in the global economy. It begins with a discussion of definitions and
terminology, focusing on key features that distinguish natural resources from
other types of traded goods. These features include the exhaustibility of
natural resources, the uneven geographical distribution of resource endowments,
the presence of externalities in the spillover effects of extraction and use of
natural resources, the dominance of the natural resources sector in many
national economies, and the high degree of price volatility in this class of
goods. A variety of statistical data related to natural resources are presented
in order to illustrate the magnitude and direction of global trade flows.
Since
most natural resources trade is conducted through organized commodity
exchanges, we examine the role that financial markets play in determining
prices and quantities. This is followed by a historical account of trade in
natural resources since the industrial revolution, touching on the recurring
themes of technological change, trade liberalization and scarcity.
Since
most natural resources trade is conducted through organized commodity
exchanges, we examine the role that financial markets play in determining
prices and quantities. This is followed by a historical account of trade in
natural resources since the industrial revolution, touching on the recurring
themes of technological change, trade liberalization and scarcity. This account
also elaborates the evolution of thinking about how perceptions of natural
resources have evolved over time, including their role in determining economic
and political outcomes. Together, these analyses provide essential background
information for the theoretical and policy-related discussions in subsequent
chapters.
DEFINITIONS AND KEY FEATURES OF NATURAL RESOURCES
Natural
resources are difficult to define precisely, particularly in the context of
international trade. Most people have an intuitive idea of what natural
resources are, but “common sense” definitions cannot be relied upon since they
eventually run into problems when dealing with ambiguous cases. For example,
crude oil and wood are clearly natural resources, but it is less obvious how
intermediate and final goods made from these products should be classified.
Air
would not be considered a natural resource under this definition because people
can obtain it freely simply by breathing. This is not to suggest that air
(especially clean air) or for that matter sea water (e.g. as a carbon sink) are
without value, but it does mean that they are not commodities that can be
traded in markets. In this report, the term “resources” is used interchangeably
with “natural resources”. A useful definition should not only identify the
nature of natural resources but also distinguish what is and what is not a
natural resource. Under the above criteria, it is clear that manufactured goods
such as automobiles and computers would not be considered resources, since both
are subject to more than a minimal amount of processing.
All goods either embody natural resources (e.g. automobiles
contain iron ore) or require resources for their production (e.g. food crops
require land and water to grow), so all goods could conceivably be classified
as natural resources. Such an approach would be logically consistent but
otherwise unenlightening. At another extreme, one could choose to focus
strictly on resources in their natural state. However, even clear-cut examples
of natural resources would be difficult to classify as such under this
approach, since most resources require at least some processing before they can
be traded or consumed. Regardless of the choice of definition, the line of
demarcation between natural resources and other goods will always be somewhat
arbitrary. For the purposes of this report we define natural resources as
“stocks of materials that exist in the natural environment that are both scarce
and economically useful in production or consumption, either in their raw state
or after a minimal amount of processing”.1 Note the qualifier
“economically useful” in this definition. For example, sea water is a natural
substance that covers much of the earth’s surface, but it is of limited
intrinsic or direct value for consumption or production. Goods must also be
scarce in the economic sense to qualify as natural resources; otherwise people
could consume as much as they wanted at no cost to themselves or to others.
Two
important exceptions in this report relate to fish and forestry products, which
are normally classified under agriculture in WTO trade statistics, but which
are treated here as natural resources. Both fish and forestry products can be
cultivated, for example in aquaculture for fish or through forest management
for wood. Natural resources can be
thought of as natural capital assets, distinct from physical and human capital
in that they are not created by human activity. Natural capital may be a
potentially important input in a country’s
TRADE IN NATURAL RESOURCES
As
noted earlier, natural resources falling under our definition typically share a
number of key features, including exhaustibility, uneven distribution across countries,
negative externalities consequences in other areas, dominance within national
economies and price volatility. We now examine each of these features and illustrate
them with some concrete examples.
(a) Exhaustibility
In resource economics, a
distinction is usually made between renewable and non-renewable resources. A renewable
resource is a resource that either increases in quantity or otherwise renews
itself over a short.
(b) Uneven distribution across countries
Many natural resources are
concentrated in a small number of countries, while others have limited domestic
supplies.
(c) Externalities
An externality occurs when the
actions of one economic agent affect other agents indirectly, in either a
positive or negative way (Nicholson, 2001). Another way of expressing this is
that the outcomes of certain activities may impose external costs on, or
provide external benefits to, consumers or firms not involved in the relevant
production or consumption decision price movements.
(d) Dominance of natural resources
Another important feature of
natural resources is the dominant position of this sector in many national economies.
Many of these countries tend to rely on a narrow range of export products.
Table 2 shows export concentration indices from the 2008 UNCTAD Statistical
Handbook, along with shares of natural resources in total merchandise exports
for selected economies.
(e) Volatility
The final characteristic of
natural resources examined here is their occasional extreme price volatility.
This is especially true for fuels, which have experienced sharp price rises
from time to time since the 1970s, only to collapse at a later date. Prices for
minerals and metals have also fluctuated dramatically in recent years, although
their importance for the world economy is perhaps lessened by their smaller
share in world trade.
Natural Resources Trade By Region
Due
to the uneven distribution of natural resource deposits across countries, the
pattern of exports is quite different from one region to another. For some
regions (e.g. the Middle East, Africa, the Commonwealth of Independent States),
resources represent a significant proportion of merchandise exports, while
others (Asia, Europe and North America) have more diverse export profiles (see
Table 5). South and Central America is an intermediate case, with resources
making up a significant, but not dominant share of merchandise exports. In
2008, the Middle East had the largest share of resources in merchandise
exports, at 74 per cent, with total shipments of resources valued at US$ 759
billion.
MODES OF NATURAL RESOURCES TRADE
Many natural resources are fairly homogeneous and may be
classified as “commodities”. Unlike the many varieties of manufactured products
– automobiles, for example – they are suited to centralized trading and the
formation of a unified price. In addition, characteristics, such as the uneven
geographical distribution of natural resources around the world, and the
consequent accumulation of market power, has triggered the evolution of
alternative modes of trade that reduce market risks, such as disruptions in the
supply of critical natural resource inputs. It is important to keep in mind
these particular modes of natural resources trade when considering the
consequences that some of the key features of natural resources, such as
volatility, may have for trade and trade policy.
This sub-section first describes the role of centralized spot and futures markets in
commodities trade, notably in the context of organized exchanges. It also
provides an account of the evolution of these exchanges, describes their
geographical distribution, and highlights their principal functions. These
include price discovery, liquidity, and management of risk, financial
intermediation and clearing house guarantees. Second, we analyze alternative
arrangements for trade in commodities that may be important for strategic
reasons or quality control. These include bilateral long-term contracts, which
are relevant for certain energy and metal commodities. We also explore the
prevalence of vertical integration in some natural resource sectors.
A
commodity is typically defined as a homogeneous product which can be exchanged
among consumers and producers. The term “commodities” is often used in the
relevant literature to refer to agricultural goods, but it also includes a
number of other products that are classified as natural resources in this
report. Examples are fuels, forestry products, minerals and metals. Given their
mostly homogeneous nature and the fact that their quality can usually be easily
verified, trade in commodities is facilitated by organized market places where
trade is centralized (UNCTAD, 2006). A concentration of buyers and sellers in
one place reduces the transactions costs that would be incurred in the search
for a suitable counterparty (Thompson and Kunda, 2000).
NATURAL
RESOURCES: GLOBALIZATION AND THE INTELLECTUAL DEBATE
(a) Globalization of natural resources
Over the past two centuries – and especially over recent decades –
there has been a dramatic expansion of the volume and range of natural
resources traded internationally. At one time only the most valuable resources
were shipped to distant markets. Today vast quantities of almost every raw
material imaginable are traded around the planet – fuelling the rapid spread of
industrialization and development that is defining the modern economic era.
Although a number of factors have contributed to the “globalization” of natural
resources – including population growth, colonization, industrialization, and
the rise of developing countries the following section looks at two key
developments that have underpinned this process: first, the farreaching
improvements in transport technology since the mid-19th century which have
dramatically reduced the costs of commodities trade; and second, the trend
towards more liberal natural resource markets, especially since the 1980s,
which have opened up an increasingly global marketplace for natural resources.
(i) Shrinking distances
The rise of a world market for natural resources is a relatively
recent phenomenon. For most of human history, bulk raw materials were too
costly to transport over great distances, which effectively tied economic
production to the location of key natural resources, such as wood, coal or iron
ore.
(ii) More
open markets
A second major factor influencing
global trade in natural resources has been the ebb and flow of government
intervention in national and international commodity markets. While it is
difficult to generalize, the extent and type of government intervention in
resource markets has appeared to depend not simply on ideological views and
trends, but on the relative abundance or scarcity of natural resources on world
markets.
THE INTELLECTUAL DEBATE:
For
over two centuries, a wide-ranging intellectual debate has taken place about
the impact of economic growth on the earth’s limited natural resources. Some have
argued that unrestrained economic growth will lead inevitably to resource
depletion and environmental degradation. Others have contended that economic
growth and technological progress
can help to manage scarce resources and develop alternatives
(i) Free-market optimism
Adam Smith was the
first economist to systematize the argument for the central role of free
markets in allocating resources, including natural resources, efficiently and
productively. In his Wealth of Nations, he famously argued
that the pursuit of self interest within a free marketplace was the key to
economic growth and social improvement.
(ii) Malthusian pessimism
The ideas of Thomas
Malthus ran directly contrary to Smith’s belief in the market’s ability to help
resolve the tension between growing human consumption and the earth’s finite
resources – and indeed against the broader Enlightenment faith in an improving
and perfectable society. Malthus saw the idea of endless progress as not
only naïve, but
dangerous because of the inexorable pressures of population growth and the
planet’s limited capacity to support it. In his Essay on the
Principle of Population, he argued that the impact of growing population
on a fixed supply of land and other resources would result in starvation.
Conclusions
In conclusion Natural resources are indispensable for the
functioning of modern economies, and for achieving and maintaining high
standards of living in all countries. They are primary inputs in the production
of all manufactured goods (e.g. ores and other minerals). They provide the
energy needed to transport people and goods from place to place, to light our
cities, and to heat our homes and places of work (fuels). They are also a
potentially unending source of valuable materials and a habitat for wildlife
and plant species (forests, oceans). Finally, in the case of water, they are
necessary for sustaining all life on the planet. It is no exaggeration to say that
the way the world manages its natural resources will go a long way towards
determining the sustainability of the global economy. In this section we have
examined some of the factors that make natural resources trade different from
trade in other types of products, surveyed data on global trade flows, taken a
closer look at some of the mechanisms through which resources are actually traded
in commodity exchanges, and sketched the history of this trade since the
industrial revolution. Taken together, these analyses provide some insight into
why trade in natural resources is sometimes controversial.
On the positive side,
trade in resources allows countries with limited domestic supplies to benefit
from the use of these materials. Trade also contributes to efficiency in production,
provides exporting countries with earnings that can be re-invested in future
production, and enables them to diversify their economies. On the negative
side, by contributing to production, trade may exacerbate a number of adverse consequences
associated with resource use, such as air pollution caused by the burning of
fossil fuels, or a reduction in biodiversity brought about by the destruction
of natural habitats.
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