The saying “What is the price in of tea in China?” used to represent the theoretical number that was not relevant to your world. The other one was “Chinese money.” All I can say is, how times have changed.
Today the impact of a worm on the hillside farmer in the Philippines growing rice is worth a page of coverage in the Wall Street Journal. We might not yet care about the price of tea in China, but we do care about the price of rice and labor and why the Chinese currency is pegged to the dollar.
We care about a whole lot of things as the world has gotten a lot smaller, thanks in large part to the impact of the Internet. We now read news from India and learn how it will impact a mine in Canada, and the source is a news site, not the local paper.
Barack Obama is running for president of the United States, and I am not going to vote for the guy, as he is the most anti-free trade of anyone who is a product of free trade, having been born to a Kenyan father and American mother, raised in Indonesia, and gone to American schools. I do give him credit for one thing, though, and that is questioning if free trade is a good thing.
What is interesting is he has found free trade not to be a good thing on the micro level. In fact, change, including the change caused by free trade, is never a good thing on a micro level. Jobs will always leave high-cost shores and move to lower-cost shores, and when they do, someone in the high-cost area loses a job. The United States actually benefited from this when its shores were low-cost compared to Europe’s, and now it is experiencing the other side of the equation.
From my perspective, free trade and opening of world’s markets is a transfer from the rich counties to the poor countries, from the haves to the have-nots, and on the whole it is probably a good thing. The problem with it, of course, is the haves tend to not want to change, and the impact can vary greatly: When IBM shuts down a factory, 50 other factories sprout up because people have the training to do other things. But when you shut down a food processing plant, workers for the most part won’t have the skills or capital from the workers to build new plants.
The moral question is, is the person who has a job in the United States and loses it any more deserving than the person who gets the job in Mexico?
The fact is barriers to entry make some people and companies windfall profits at the expense of others. “Cartels,” “oligopolies,” and “marketing organizations” are all words that denote profit in business. If you want to make money, you want some centralized barriers to entry into investing in a business, and free trade removes those barriers.
Today the price of rice in China impacts the price of rice at Wal-Mart in the United States in 20 minutes. The question is, can the price of rice stay high? Agricultural foods have always been the absolutely most freely traded items. The price of grain has to be the same net of shipping +-20% around the world or else the price of grain will shift, assuming that you do not have an artificial barrier to entry.
The U.S. farm lobby is powerful and has created a number of structures that should now go into the sunset, like barriers to sugar from outside the United States and payments to farmers to not to farm land. We frankly should open our borders to free trade in food stuffs, or else we should not complain when Southeast Asia wants to form a rice cartel. We cannot have our corn-based Coca-Cola and high-priced beet sugar, and then get angry at a bunch of countries deciding to jointly market rice.
Now this rice cartel is not going to work, but I applaud the countries for trying to do it. They are trying to make more money and get it to stick in their pockets. The problem is that rice is traditionally a marginal business, and when you make a cartel the key is to remove the free rider problem. That’s going to be difficult in a cartel this size.
If you have a cartel made up of a few players, it is in all of their interests to jointly market the product and not to cheat. If you have a cartel made up of eight nations and 8 million farmers, there are many incentives to cheat. If one farmer can sell 10% more grain on the brown market, or get a slightly higher price by not marketing via the central agency, he or she will do it. If this happens on a large scale, the cartel has a problem, because for it to work it has to be able to restrict supply to get prices up. Unless the cartel has the money to buy all the grain at any price, farmers will sell individually, the market will set the price, and the attempt to keep prices up will not work. The cartel has to offer its farmers fairly close to international price, or else they will cheat, and if there is a bumper crop the cartel has to be able to buy it, stockpile it, and not sell it to keep supply in check.
If you have iron ore or even copper, enough of the market is held by the core players that a cartel will work, but I do not see it working with rice, as anyone with a flooded bit of dirt and a few kids to do the work can grow rice, and it is very hard to communicate to the small-scale farmer trying to send his kids to school that even though it is a good year, he can only sell 94% of his crop and the last 6% has to be fed to the pigs.
Having said that, bravo for trying. It is damn nice to see people taking the lessons from oil and ore and trying to apply them on other commodities, even if Uncle Sam is screaming.
Leave a Reply