Commodity

-basic good used in commerce that is interchangeable with other commodities of the
same type
-a raw material or primary agricultural product that can be bought and sold

Commodity chains
 The network of economic links, which integrate transnational labour
processes and corporations involved in global sourcing and global marketing
of products.

 a network of labour and production processes whose end result is a finished

commodity’ (Hopkins and Wallerstein, 1986)

 The full range of activities that firms and workers do to bring a product from
its conception to its end use and beyond

 challenges the assumption that capitalism is an incremental process

contained within nation-states by tracking the organizational, geographical,
and cultural dimensions of world-wide chains for the manufacture and
distribution of goods such as clothing, automobiles, food, and drugs.
Ways to Analyse Commodity Chains

- Institutional analysis: Identification of the flows and of the agents at work

in the existing productive system, analysis of the locations for decisions and
collaboration amongst agents;
- Comparative analysis: Research in to the relative competitiveness of chains
(a comparison of margins at different points in the chain) and of the
strategies of actors;
- Functional analysis: Identification of bottlenecks (upstream: inputs, supply
logistics; downstream: output delivery, packaging, collection, standardization
and introduction of quality norms);
- Economic analysis: In the form of modelling, most importantly simulation.

Commodity Chain Analysis

-French Research Institutions as a neutral, value-free technique applied to analyzing
existing marketing chains for commodities assessing how public policies,
investments and institutions affect local production systems.
-used to analyze policies in two important ways:
 it is a tool for setting out the complete financial accounts6 of the various
agents along the length of the chain,
 it is an accounting framework allowing for the systematic recording of a large
part of the information necessary for a proper economic analysis thus extending
financial accounting analysis.
Value Chain Analysis
-analyses the competitive strength of the business
-finds out what part of production is best done by the business itself and what
should outsourced instead
-involves all processes beyond the vertical commodity chain

Global Commodity Chain

-introduced by Gereffi in 1990s
-analyses the way international trade affects commodity chains and the economic
integration of international production
-analyses the impact of globalisation on commodity chains
-highlights power relations found in value chain analysis (governance)

Producer-driven commodity chains

-controlled by those who produce the commodity
-is coordinated not only by producers but also by distributors who provide
materials from subcontractors, suppliers, etc.
-examples include automobile and aeronautical industries
-because they require intensive labor and a large-scale economy, these commodity
chains have high barriers of entry

Buyer-driven commodity chains

-controlled by those who buy the commodity
-the demand and value for commodities can easily change how the commodities are
sourced or produced
-production is carried out in Third World countries
-include goods such as clothes, toys, electronics, etc.

Constructing a Commodity Chain

- Commodity chains follow specific commodities as they are moved over space
from points of production to points of consumption. Commodities are seen as
originating in regions of production and moving through networks of
economic agents, as with producers, distributors and transporters, to regions
of consumption, where they are advertised, retailed and consumed. The
commodity chain concept has potential for demonstrating the effects of
consumption on labor and the environment. Armed with greater
geographical knowledge, organized around the commodity chain concept,
consumers can make choices that more fully consider the effects of their
consumption on workers and the natural environment.
Agent
-used to describe an economic actor, i.e. a basic unit in the economy, who
undertakes an activity and makes decisions autonomously. This could consist of a
physical person (farmer, trader, consumer) or a legal entity (a business, an
authority, a development organisation)

There are many ways to classify agents:

 Firms, (including traders),which produce goods and services intended for sale;
 Financial institutions, which make their income through financial operations
such as loans, borrowing, insurance;
 Households, which is the population considered solely in terms of those
economic activities linked to domestic life;
 Government, which provides services for the community without any direct
corresponding financial flow;
 The rest of the world, which comprises all economic agents located outside of
the national territory.

Inputs and outputs

 used in place of ‘factors of production and product’
Input
  the supplies used to make product
Output
 The product; will be created into a commodity and in the final stage, the
commodity itself

Example of commodity chain

Why it Is Important To Analyze Commodity Chains

 Economic analysis
-Analyses whether the pricing and production of goods were done in the
most efficient way possible
 Institution and Policy Analysis
-Commodity chains help us see whether the institution is undergoing the
proper processes in making or using commodities. It can review whether
current business policies are upheld and followed, especially in the earliest
stages of production
 Globalization Analysis
-Helps us realize how most products sold today are created, letting us see the
integration of multiple nations in the production of goods today
-Lets us appreciate the effort put into making each and every item we use
today

What is World Trade?

 World trade is the exchange of goods and services between countries. This
type of trade gives rise to a world economy, in which prices, or supply and
demand, affect and are affected by global events.
 gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries.
 Services are also traded
  A product that is sold to the global market is an export, and a product that is
bought from the global market is an import.
 -Entrepot Trade is a combination of export and import trading and is also
known as Re-export. It means importing goods from one country and
exporting it to another country after adding some value to it.

Types of World Trade

Based on those Involved

 Bilateral trade: This is a trade agreement in which two countries exchange
goods and services.
 Multilateral trade: This is the type of international trade where a country
trade with two or more countries.

World Trade Organization

-only global international organization dealing with the rules of trade between
nations
-Their goal is to help producers of goods and services, exporters, and importers
conduct their business
-an organization for trade opening
-a forum for governments to negotiate trade agreements
-a place for them to settle trade disputes
-operates a system of trade rules

Advantages
1. It provides a foundation for international growth.
- This allows brands and businesses an opportunity to achieve sustained
revenues from a diversified portfolio of customers in several markets
instead of a limited customer base in a single home market.
2. International trade improves financial performance.
- Brands and businesses which assert themselves in foreign trade work can
increase their financial performance. This allows them to augment the
returns they achieve on their investments into research and
development. By rotating the products or services through the global
market, the commercial lifespan of each opportunity can be amplified,
expanding what existing products and services can provide.
3. It spreads out the risk a brand and business must assume.
- Organizations can better protect themselves from risk thanks to
international trade because of the amount of diversification that can be
achieved.
- A home market may be unstable, but international trade can still let the
brand and business be stable.
4. International trade encourages market competitiveness.
- By observing a larger range of trends because of their greater level of
global market access, brands and businesses can focus on quality, design,
 and product development improvements so that they can continuously
improve and diversify.
5. International exchange rates can be beneficial to a business.
- Brands and businesses involved with international trade can further
reduce their risk by taking advantage of monetary exchange rates.
6. Revenue streams have some protection.
- all risk cannot be eliminated from international trade, a series of
contracts, insurance, and financial instrument trading can help to protect
the revenue streams a brand and business is able to develop.
7. It can be used as a way to get around high levels of domestic
competition.
- A domestic market can have several products or services that are like
what a new brand and business is trying to offer. Instead of competing for
a small sliver of that domestic market, going through international trade
can help an organization target similar foreign markets where
competition may be much lower
-
DISADVANTAGE
1. There is always a political risk involved with international trade.
- Different countries provide their own political risks at varying levels,
while domestic politics changes over time and presents an ongoing
challenge. A government can change laws in a discriminatory fashion or
create regulations that directly impact a specific organization.
2. There can be severe exchange rate risks.
- means the exchange rates in those emerging markets may fluctuate
wildly, making it difficult to forecast finances for budgeting purposes. The
value of assets and liabilities that are in foreign currencies creates the
potential of a brand and business becoming immediately less competitive
overnight, resulting in steep revenue losses.
3. International trade also presents cultural complications.
- Failing to consider the expectation a different culture may have can lead
to mistakes that damage the reputation of the brand and can be very
costly to the bottom line.
- Something as simple as inappropriate packaging can be enough to
permanently damage a brand’s reputation.
4. It has a credit risk that must be specifically managed.
- Credit risks can be managed by obtaining insurance or a letter of credit,
but customer finances and credit can still impact the number of potential
sales that can be received within a market.
5. International trade increases the risk of proprietary information theft.
- Going into an international market with a product or service increases
the risk of another brand or business stealing proprietary information,
marketing concepts, or even a personal identity.

Why is World Trade Important

1. Make use of abundant raw materials
Some countries that are naturally abundant in raw materials can trade to other
countries for materials they don’t have in their countries for mutual benefit
2. Comparative advantage
A country has a comparative advantage if it can produce a good at a lower
opportunity cost than another country.
Trade allows countries to specialise.
3. Greater choice for consumers
-a driving factor behind the trade is giving consumers greater choice of
differentiated products.
-trade enables the widest choices to appeal to different tastes
4. Specialisation and economies of scale – greater efficiency
-When a country specialises in certain productions, it allows them to pursue further
development of their goods
-Businesses may trickle out to neighboring countries and multinational production
allows for greater efficiency
5. Global growth and economic development
-International trade has been an important factor in promoting economic growth
-This growth has led to a reduction in absolute poverty levels

How Are Commodity Chains and World Trade Connected

 Commodity chains let us see that most products today are not just made in
one place.
 Products sold by one country could actually be made in a different country
(ex. Made in China products sold from US)
 World Trade allows commodity chains to exist because it allows nations to
outsource their labor and allows others to bring their products into
international commerce
 Without analyzing commodity chains, world trade would also be harder to
conduct as it is imperative the multiple countries be involved in the
production and consumption.