TERM PAPER on

Bangladesh Edible Oil Limited & Impact of Tariff on Oil Price

Term paper on: Bangladesh Edible Oil Limited & Impact of Tariff on Oil Price

Course Name: International Economics Course Code: IB 301

Submitted to: Shobod Deba Nath Lecturer Department of International Business Faculty of Business Studies University of Dhaka

Submissive: Sujon Saha (17) Borhan Uddin (21) Nepal Chandra Dhar (30) S.M. Khairul Islam (42) Arijit Kumar Saha (57)

Date of Submission: August 21,2011

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Letter of Transmittal
The Honorable Course Instructor, Shobod Deba Nath Lecturer Department of International Business University of Dhaka

Subject: Submitting Term Paper on Bangladesh Edible Oil Limited & Impact of Tariff on Oil Price

Sir, At the threshold I am glad to submit the term paper to you which is a partial course requirement of the respective course of BBA Program. For understanding the International Economics broadly, you have given us to prepare and present a term paper on Impact of Tariff on Oil Price. While preparing this term paper, we have learned so many things. So we thank you for giving us this opportunity to prepare this term paper.

Hereby, we hope you would be kind and generous to accept the term paper and oblige thereby.

Thanking you, S.M. Khairul Islam (on behalf of our group members)

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Acknowledgement

At the beginning, we would like to express our gratefulness to God for his kindness and helping us in preparing the term paper.

We are also grateful to the people who have helped us in every situation and to make this term paper a successful one. We must explicitly acknowledge to our course teacher Mr. Shobod Deba Nath, Lecturer, Dept. of International Business, University of Dhaka, for her all out support and unstated cooperation.

We are also grateful to Mr. Fazlur Rahman, co-chairman of Bangladesh Edible Oil Refiners Association, who has greatly helped us in preparing the term paper.

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Table of Contents

Content About BEOL BEOL Brands Our Concern: Rupchanda About Edible Oil Market of Bangladesh Tariff: Definition & reasons Costs and Benefits of Tariff Effect of Tariff on Consumers Effect of Tariff on Producers Net National Loss From Tariff Welfare Effects of a Tariff Could a Nation Ever Gain by a Tariff? Probable Threats!!! Conclusion Reference

Page No 07 09 10 12 13 14 15 17 18 20 20 21 21 22

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List of Illustrations

Illustrations

Page No.

Effect of Tariff on Consumers Effect of Tariff on Producers Net National Loss From Tariff

15 17 18

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About BEOLBangladesh Edible Oil Limited

Establishment Bangladesh Edible Oil Limited (BEOL) was established in 1993 and has since been aggressive in the marketing of consumer pack edible oil under the well known household brands like Rupchanda, Meizan, King's, etc in Bangladesh.

BEOL is a 100% foreign owned joint venture between Wilmar International Limited of Singapore and Adani Group of India. Wilmar, Asia's leading agribusiness group, is the largest processor and merchandiser of palm oil and lauric oil globally, as well as the largest palm biodiesel manufacturer in the world. Wilmar is today amongst the largest listed companies by market capitalization on the Singapore Exchange. Adani Group of India has grown from being a trading house to a diversified and dynamic business group with interests from infrastructural development to FMCGs. A leader in international trading and infrastructure development, the Adani Group is engaged in a continuous Endeavour to maximize potentialities by synergizing the multiple businesses of the Group creating optimum business model.

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From established till now, BEOL has continuously improved quality and introduced new products and packaging to bring in value added elements to the consumers of Bangladesh to consolidate our leading position in the market. BEOL is the first company to introduce packing of edible oil in PET bottles, pouch and bag in box and also the first to launch a sachet pack in mustard oil in Bangladesh.

Quality policy: We are committed to providing the highest quality products and customer services to ensure customer satisfaction in order to achieve our business growthMission We aim to improve the quality of people's lives by providing constantly improved quality products with full customer satisfaction

Vision To be the most distinct market leader in edible oil and food stuff business in Bangladesh

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BEOL Brands
BEOl is passionate to understand consumers want and need. BEOL brands aim to improve the quality of people's lives through continuous innovation and uncompromising quality control.

Rupchanda: Ensuring happy moments for you and your family through uncompromosing quality.

Meizan; A healthier product with added benefits for the mass people of Bangladesh.

KINGS: Derived from the finest quality sunflower seeds.

Olivoil: First Cold Pressed Extra Virgin Oilve Oil.

5 Star: Industrial Margarine for wonderful baking.

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Lucky: Super Refined Palmolien, excellent for deep frying.

Vikings: Excellent shortening for baking purpose.

Our Concern Rupchanda soyabean Oil:

Rupchanda, the "numero-uno" in the branded edible oil category, was lanched in 1996. In just over a decade, Rupchanda has almost single-handedly transformed the soyabean oil category and taken steps to sensitize the nation about the vitality of staying fit and healthy. readily packaged format was an unknown concept. Branded cooking oils were perceived as imported oils items of middle class and elite consumption. When Rupchanda made a foray, the edible oil market was commodity-driven and the consumer awareness was extremely low. The market was dominated by 'loose selling'- oil in readily packaged format was an unknown concept. Branded cooking oils were perceived as imported oils items of middle class and elite consumption. But over the years with innovation and determination has genuinely connected
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with the and equiped them with information about staying healthy and fit. In the last couple of years, the brand has resorted to deeper consumer engagement activities and the number of health awareness workshops, cooking competitions as well as cooking shows and Family carnivals have risen at a fast clip.

From entering a category at a time when it was completely commodity driven to building a brand that today resonates with 'happy family moments' - a consumer need-state, transcending category level associations is phenomenal. Every marketing activity in all spheres of Rupchanda is crafted and executed with the focused intent of improving the quality of life of its consumers.

Key Facts: Rupchanda Soyabean Oil was the first brand in edible oil category:

To launch consumer pack in 1996. To claim to be "Cholesterol Free" To launch transparent PET and Pouch modes of packaging

Rupchanda Soyabean Oil is rich in Omega 3 & 6 which

Help lower blood pressure. Provide more nutrition to the unborn child. Suport healthy skin and hair. Helo eye to respnd faster and also prevent glaucoma.

1 out of 5 households use Rupchanda Soyabean Oil every year.

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Edible Oil Market of Bangladesh

Background Information:
The annual consumption of edible oil is 1.4 million tones, which is dependent on import. Bangladesh imports about 97 per cent of its total demand for edible oil. The price of crude soya bean oil rose to US$ 1320 per ton "Import cost of per liter edible oil is Tk 104 A liter of bottled soya bean oil is now being sold at Tk 120 at the retail level. Mill gate price for per liter soya bean oil is Tk 114-118

Edible oil trade is subject to payment of

5.0 per cent Advance Income Tax (AIT), 15 per cent VAT at import stage, while tariff value has been fixed at the local stage at Tk 0.44 per kilogram

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Tariff and its effects

Tariff:
The economic analysis of what is lost or gained by putting up barriers to international trade starts with a close look at the effects of the classic kind of trade barrier, a tariff on import goods. A tariff on imports clearly lowers national well being. It costs consumers more than it benefits producers and the government, which collects the tariff revenue. The tariff thus redistributes income from consumers of the imported product toward others in the society.

Reasons behind Imposing a Tariff

Protecting Domestic Employment The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries that may fire employments Protecting Consumers A government may levy a tariff on products that it feels could endanger its population. Infant Industries The use of tariffs to protect infant industries can be seen by the Import

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Substitution Industrialization (ISI) strategy employed by many developing nations National Security

Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Retaliation Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. But this practice is a total loss for the world.

Costs & Benefits of A tariff

A tariff raises the price of a good in the importing country and lowers it in the exporting country. As a result of these price changes: Consumers lose in the importing country and gain in the exporting country Producers gain in the importing country and lose in the exporting country Government imposing the tariff gains revenue

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Effect on Consumers:

If there were no tariff, Soyabean oil would be imported at the world price of 100 tk. At this price consumers would buy S0 oil per year from domestic suppliers and world import M0 oil a year, buying D0 = S0 + M0 oil in all. Here, the demand shows that at free trade price of tk. 100, somebody in our country is just willing to pay that 100 for the last litter of oil bought at point A. From another perspective at point B, somebody was willing to pay tk. 120 for a litter of oil that makes total purchases come to D1 a year.

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 Similarly if no oil was bought for some reason, there is approximately somebody willing to pay a high price, such as tk. 500 to get the first litter of oil, up at point C. This view of the demand curve for the oil dictates us to add up tk. Measures of how much consumers are gaining form being able to buy oil at all. Triangle ACE is the Consumer Surplus area which is an approximation to what being able to buy oil is worth to consumers. An import tariff of 15% and Advance Income Tax of 5% on oil per litter raise the retail price to 120 122 tk. where the consumers must now pay for either imported or domestic oil and cuts the gains that are represented by the consumer surplus. By raising the price to tk. 120, the tariff forces some consumers to give up an extra 20 tk. per liter of oil to get the same D1 oil they would rather have bought at 100. While it makes other consumers decide that a litter of oil is not worth 120 tk. to them. So the total demand drops back from D0 to D1. The net loss to consumers from the tariff is the total shaded area or areas, a+b+c+d. This is the amount that consumers lose by having their consumer surplus from bicycle purchases cut from triangle ACE to triangle BCD

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Effect on Producers;

The tariff raises the price of domestic oil from 100 to 120 tk. Domestic firms respond by raising their output and sales as long as that is profitable. They will expand from S0 to S1. It is at output S1 that their costs of producing each extra litter of soyabean oil, shown by the supply curve, rise as high as the tariff ridden market price of 120 tk. It is not profitable for them to raise their output any higher because doing so would raise the marginal costs above 120 tk. The profits that producers make are the differences between their total revenues and their costs. Total revenues equal price times quantity sold, here tk. 100 times S 0 without the tariff and tk.120 times S1 with it.

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 The tariff has clearly raised the total sales revenues of the domestic producers. Below the supply curve, there is the variable costs of producing soyabean oil and above the marginal cost curve and within the total revenue area represents profits above costs. Thereafter, the tariff raises profits for the domestic producers of soyabean oil only for the amount of area a, from area e to areas a+e.

Net National Loss:

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Consumer loss Producers gain Government collects Net national loss From the tariff

Area a+b+c+d Area a Area c in tariff revenue

Area

b + d

A tariff brings a net national loss. What is costs to consumers of the home country to buy the soyabean oil is greater than what it brings producers of domestic market plus the governments tariff revenue. Here, in figure B we see that because of raising the soyabean price from tk. 100 to tk. 120 for increasing tariff of 15% and advance income tax of 5% reduces the imports from M0 to M1. This national loss has occurred due to two main reasons which can be seen in Figure A in the areas b and d. Area b, the production effect, dictates the loss from making a higher marginal cost of 120 tk what could have been bought for less abroad at only 100 tk. Area d, the consumption effect, shows the less from discouraging import consumption that was worth more what it costs the domestic country for soyabean oil market. Area b and area d is both deadweight loss which is an overall inefficiency caused by the tariff.

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Welfare Effects of A Tariff:

Importing Country Consumer Surplus (a + b + c + d) Producer Surplus + (a +e) Govt. Revenue + c National Welfare (b +d) If trade gain area a is greater than the deadweight loss b + d, the tariff increases welfare for the importing country.

Could a Nation Ever Gain by a Tariff?

Importing nation needs to be a large country: a price maker A large buyer may have monopsony power A large country tariff reduces demand In order to offset tariff impact, exporter may lower price Importer has buying power When national producer gain > consumer loss, =Net national gain from tariff

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Probable Threats!!!

Redistribution effect - from consumers & toward producers World loss - deadweight production loss Retaliation by exporting countries: Foreign countries may respond to import tariffs with import barriers of their own. It may escalate into an all-out trade war; both sides may suffer serious loss.

Conclusions:

Now we can conclude that, tariff to some extent is beneficial for the importing country government but it is a total loss for the consumers and the country. When national producer gain is greater than the consumer loss, it is a net national gain from tariff. And when trade gain area is greater than

deadweight loss, the tariff increases welfare for the importing country.

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Reference:

International Economics Peter H Lindert 8th Edition

International Economics: Theory and Policy Paul R. Krugman and Maurice Obstfeld Sixth Edition http://www.thefinancialexpressbd.com/more.php?page=detail_news&news_id=126573&date=2011-02-19 http://www.thefinancialexpressbd.com/more.php?page=detail_news&news_id=27707&date=2008-03-11

http://www.beol-bd.com

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