The Hindu Business Line : Politics, the catalyst of economics

That international politics plays a key role in deciding the ‘power centres’ is well-known but few realise the relationship between international politics and commodity markets, though this has been the case from time immemorial.

The range of traded goods since the voyages of Magellan has risen steadily especially with the development of technology that has led to a substantial integration of markets by making the flow of information fast, easy and efficient.

This market integration, however, has not been monotonic; it has been interrupted by shocks such as political wars and economic depression in some part of the world, or by endogenous political responses to the distributional effects of globalisation itself. Often, political shocks have had long-run effects on the international integration of commodity markets as a result of several politically-induced hysterics.

Some recent major global issues that have impacted the commodity markets are Iran’s nuclear progress and Iraq’s military ambitions, European Union’s subsidies on sugar, the Nigerian oil crisis, Japan dumping automobiles into the US, and the World Trade Organisation issues over the Chinese textile sector.

Iran — the N-conundrum

Iran has the world’s second largest proven oil reserves after Saudi Arabia and the second biggest natural gas reserves after Russia. Iran’s geo-strategic position and its already developed network of pipelines make it a key factor in the energy markets.

However, both international and domestic factors have hampered their optimal exploitation since the 1979 revolution that toppled the Shah.

Revenues from crude oil exports — projected to reach at least $45 billion (5 per cent of global supplies) in the year to March 2007, according to Iranian press reports — fund about 50 per cent of its annual budget.

Yet, its nuclear energy programme has been controversial and attracted sanctions. This has unsettled crude oil prices and had a cascading effect on all commodities. The US continues to dissuade India to from entering into the proposed gas pipeline project that would transport gas to India from Iran via Pakistan. Further, the Iranian oil and gas sector suffers from under-investment.

Nigeria — the oil tangle

The largest crude oil producer in Africa witnessed countrywide protests and labour strikes in oilfields after the Government increased fuel prices and privatised two state-owned refineries.

As it coincided with the summer driving season of the US, crude oil prices rose after the general strike. Crude oil prices retracted with the strike was called off.

Persistent militant attacks on oil refineries and pipelines in Nigeria, apart from kidnappings of oil workers and officials of companies operating in the oil rich Niger Delta also affected the global crude prices.

EU’s sugar subsidy

On the farm front, the WTO ruled that the European Union subsidies to sugar producers violated global trade rules and harmed the producers of the developing countries.

According to the Brazilian Agriculture Minister, the decision meant that the opportunities for EU to export two million tonnes of sugar from next year would cease and Brazil would be allowed to export additional 10 per cent.

This caused a slump in global sugar prices as EU producers were in a hurry to offload excess sugar into world markets (which were already reeling under a glut), before the ban/deadline came into effect.

China’s cotton stand

The US Government filed a complaint with the WTO in early February 2005 that China was using export subsidies to help its companies, especially textiles, that were dumping manufactured goods in the US. It led to the imposition of quotas on Chinese textile products. Piqued China, a leading consumer of US cotton, gradually reduced its imports and turned to India.

This dampened US cotton prices but raised that of the Indian commodity’s; India’s cotton exports to China increased 20 folds in 2005-06.

The change agent

The powerful force of globalisation has accelerated changes in the world economy over the past half-a-century. It has affected the fate of companies as much as that of countries. And perhaps, nowhere has the change been more dramatic than in the US car industry.

The Big Three American auto-makers, facing fierce foreign competition, have been losing out in the US market leading to a shut down of many of their plants. They do have plan to build more plants but all in emerging markets such as China and India.

On the contrary, Toyota has emerged as the fastest growing car company in the US, building factory a year to meet its demand for its fuel-efficient and hybrid cars.

It was the oil crises of the 1970s that first brought to the fore the problems of US automakers that made large, fuel-guzzling cars.

Imports of Japanese cars soared in the 1980s, much to the annoyance of US companies and unions alike; these cars quickly captured a significant share of the US automobile market. When pressure mounted on the US government to limit imports, the Japanese car-makers started building plants in the US. These units, located in low-wage, non-union areas, ushered in flexible production methods, and reaped large profits.

The American companies tried but failed to design a competitive small car. Nor did their experiments with the Japanese production methods work.

In 2006, both Ford and GM finally accepted that they would never be able to dominate the US car market as like the past.

Global impact

As much as the international commodity markets, political and trade conflicts affect producers, manufacturers, and economies. Any adverse/unfair move by a country affects not only bilateral but also multilateral trade relations. Even changes in interest rates by major economies, often politically motivated, can cause a slowdown in the world economy.

While globalisation may have integrated world markets, it has also raised the vulnerabilities of some. Does this then seek a new global trade order that vouchsafes minimal impact of politics on economics.

(The authors are Chief Economist and Senior Analyst with Multi Commodity Exchange of India Limited. The views are personal. They can be contacted at v.shunmugam@mcxindia.com and ritambhara.singh@mcxindia.com)

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