Quality And Export Products Of Ethiopian Trade Point - Case Study Example

April 26th, 2009 TABLE OF CONTENTS Page Background 2 2. Introduction and Overview 2 3. International Trade Regulations /Definitions 3 4. Economic and Social Impact of Trade Regulations on the Ethiopian Economy and Coffee Farmers 4 5. Alternative Strategies 8 6. Conclusion 10 Bibliography 1. Background: "Ethiopia is a country in East Africa bordered by Eritrea, Somalia, Djibouti, Kenya, and Sudan, and was one of the world's earliest centers of agricultural innovation. It was never a European colony, unlike other African nations. The capital, Addis Ababa, is central to the Organization of African Unity (OAU) and the United Nations." (Internet. Buzzle.com). It's major export products are coffee , leather and leather products oil seeds and pulses, fruits, vegetables and flowers, textiles, natural gum, spices and mineral products.(Internet-Ethiopian Trade Point)) It qualifies as a least Developed country (LDC). Ethiopia is one of the Worlds poorest, with Gross National Income per Capita of US $220.00 (World Bank 2008). Ethiopia home to ancient civilizations (Internet. Houston Museum of Natural Science) produces only 2.6 % of the world's coffee (Internet. FAO). Ethiopia's distinct and mild Arabica coffee however is some of the most aromatic and sought after coffee beans worldwide. "The Horn of Africa country prides itself as the origin of coffee. Its beans are grown in the misty forested highlands of southwestern Ethiopia in a region known as Kaffa which legend says gave its name to the plant. Ethiopia earned $525 million from exporting 170,888 tonnes in the 2007/08 season, and hopes to earn $800 million from 224,831 of exports this year, according to the Trade Ministry". (Internet. Reuters) Coffee exports and the impact of world trade regulations on its coffee exports are important to Ethiopia and its farmers; as coffee comprises between 35-40% percent of Ethiopia's export earnings of 1. 2 billion USD. However Ethiopia earned a mere $ 525 million in 2008, or 1.05% of a trading market recently valued in 2006 at $50 billion. (Internet. Source: Retail World 2003 and BIS Shrapnel, Coffee in Australia 2006-2008). Any improvements to word trade regulations or trading arrangements with regard to coffee will be important to Ethiopia and its coffee farmers. 2. Introduction and Overview: This piece of work examines the impact of international trading regulations as they now exist, on the activities of Ethiopian coffee farmers. It addresses and analyzes the impact, both direct and indirect, of international trade regulations on the activities of Ethiopian coffee farmers. It shows the socio-economic adversities which can impact farmers who produce coffee in a developing country, when international trade regulations outside of the farmers' control, impact world coffee prices and therefore the earnings of Ethiopian coffee farmers. The plight these farmers is further exacerbated when the farmers as a group have relatively little bargaining power over the processors and distributors of coffee in its final consumed state in global markets. These issues affect farmers notwithstanding the existence and impact of international trade regulations, purportedly intended to benefit developing countries through the expansion of world trade; but which have the opposite effect when the agreements do not truly take into account the interests of developing countries. A number of credible sources with relevant data will be cited to support our arguments. The question is important insofar as it analyzes the effects of international trade regulations and agreements on the economy of a poor developing country. In the alternative, we seek to set out some alternative legal strategies which countries like Ethiopia can adopt in order that its farmers may gain a greater proportion of the value derived from the unique Arabica coffee product, which fetches substantial prices at the retail end of the world market. 3. International Trade Regulations/Definitions: The Trade regulations and organizations which will be discussed in this paper are the General Agreement on Tariffs and Trade (GATT); World Trade Organization, (WTO) International Coffee Agreement and Fair Trade protocol. General Agreement on Tariffs and Trade (GATT) is a UN agency for promotion of free trade between signatory countries (called contracting parties). Formed in 1947 in Geneva, its objective was to counter the devastating effect of protectionist measures (such as the US Smoot-Hawley tariff that raised import duties from 39 percent to 53 percent) supposedly intended to mitigate impact of the great depression. GATT instituted a rule-based multilateral trading system for trade in both goods and services through a series of negotiations (called 'rounds'). It succeeded in achieving reduction in the average tariff on manufactured goods from 40 percent to about 5 percent in the industrialized nations, and in obtaining varying degrees of promised reductions from less developed nations. Its approach was based on two non-discriminatory principles, the (1) Most favored nation and national treatment, and (2) Reciprocity. It worked to eliminate all non-tariff barriers and import quotas, and advocated use of countervailing duties to fight dumping and to negate the effects of subsidies. (Internet. Business Dictionary) GATT was supposed to have become the international Trade organization, a full international organization like the IMF or World Bank. But the Agreement was not ratified. On January 1, 1995, after the culmination of the Uruguay Round, GATT was replaced by World Trade Organization (WTO) which administers the GATT Treaties. " the detailed commitments by each country to limit tariffs on particular items by the amount negotiated and specified in the tariff schedule is the central core of the GATT system of international obligation:" (Bagwell. 2002). "On January 1, 1948 the agreement was signed by 23 countries: Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, the Czechoslovak Republic, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, the United Kingdom, and the United States. According to GATT's own estimates, the negotiations created 123 agreements that covered 45,000 tariff items that related to approximately one-half of world trade or $10 billion in trade." (Internet. GATT Disambiguation). Note Ethiopia was not a signatory to the GATT Treaty. World Trade Organization (WTO): "UN multilateral trade organization formed on January 1, 1995 (after culmination of the Uruguay Round) as the successor to GATT and the court of final settlement in trade disputes. Its objectives included (1) removal of all barriers to international trade in goods, services, and intellectual property, (2) equitable and speedy resolution of disputes between trading partners, and (3) identification of non-compliance with trade agreements." (Internet. Business Dictionary) International Coffee Agreement: A United Nations pact, establishing the International Coffee Organization initially ratified in 1963 and extended by Agreements 1968, 1976, 2001, 2007,. The primary v purpose of these agreements were to stabilize prices, by establishing production quotas among members (Internet. International Coffee Organization) Developing Country: Is generally taken to mean a country whose economy is based on primary production e.g. agriculture and mining and which does not possess the same level of physical and, social infrastructure, e.g. transportation grids, medical care, educational institutions, to the level existing in the industrialized nations. (Girvan. 1970) Least Developed Country (LDC): The Least Developed Countries are countries which according to the United Nations exhibit the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteria, based on: low-income (three-year average Gross National Income per capita of less than US $750, which must exceed $900 to leave the list) human resource weakness (based on indicators of nutrition, health, education and adult literacy) and economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, and handicap of economic smallness, and the percentage of population displaced by natural disasters. (Internet. Source watch) Fair Trade: Is a trans national Social Movement and organized approach to alleviating poverty by seeking improved working conditions and fair market prices for goods and raw materials produced in developing countries. Fair trade is supported by a variety of groups and NGOs e.g. Oxfam. 4. Economic and Social Impact of Trade Regulations on the Ethiopian Economy and Coffee Farmers: International trade regulations have impacted or potentially impact the activities of Ethiopian coffee farmers in the following ways: a. The impact of tariff reductions on the world coffee market price b. The impact of world coffee market prices on the export earnings of Ethiopia and its coffee farmers c. The impact of the GATT Uruguay round Agreement, which has caused a loss in trade and export earnings among Least Developed countries, including Ethiopia and an increase in the cost of food imports (Internet. UNCTAD) "The secretariat report shows that as a result of the Uruguay Round, the LDCs could suffer a combined deterioration in their trade balances of as much as $300 to $600 million a year or a 2.6 to 5% of their export earnings - with the cumulative loss over the five years to the end of this century as much as three billion dollars." (Ibid) d. The impact on world prices when the International Coffee Agreement, Collapsed in 1989 e. The impact and potential impact of TRIPS- Trade Related Aspects of Intellectual Property Rights. The Impact of Tariff Reductions on World Coffee Market Prices "Nearly all coffee sold in North America is imported from developing country producers and exporters . The North American coffee market accounts for over one quarter of global coffee imports in value (27% in 2005) and the United States are the world's largest single buyer of coffee." (Internet.FAO) North America Europe and Japan account for 90% of coffee imports worldwide. (Internet. FAO). Low duties on coffee have led to pervasively low prices for unprocessed coffee in general on the international market and in particular Ethiopian Arabica coffee " North America Europe and Japan account for nearly 90 percent of world trade in coffee, imports of coffee into North America are to remain duty free In the EC the 5% duty on green coffee will b phased out by 2000" (Internet FAO). The impact on coffee farmers worldwide and in Ethiopia no exception, have been devastating. The overall effect of tariff reductions has been to reduce coffee prices including Ethiopian coffee world wide, with consequent devastating effects on farmers' income and standards of living. Many families who make their living from coffee are impoverished and desperate," says Harriet Lamb, Executive Director of the Fairtrade Foundation which awards the Fairtrade Mark to coffees where the retailer has paid the Fairtrade price. "Evidence of low and declining living standards is clear. Many farmers have been struggling for years as they have failed to recover their production costs for several harvests running. The collapse in this year's coffee prices has had a devastating impact on their already precarious existence. Some have abandoned their land and gone in search of work in cities. Others have neglected or uprooted their coffee bushes."( Internet. Coffee- The Human Crisis-Report Launch.) " as a result of this massive slump in coffee price, the Sidama and other coffee farmers in Ethiopia faced a sharp increase in poverty and hunger" (Goodoo. Internet) The Impact of the Collapse of the International Coffee Agreement 1989: The International Coffee Association is a UN based effort at stabilizing world coffee prices, introducing improved methods of husbandry and collecting and circulating industry data to coffee farmers who were members and others worldwide. "Effective international attempts to stabilise coffee prices began in 1954, when a number of producing countries made a short-term agreement to fix export quotas. After three such agreements, a five-year International Coffee Agreement (ICA), covering both producers and consumers, and introducing a quota system, was signed in 1962. This led to the establishment in 1963 of the International Coffee Organization (ICO), with its headquarters in London." Internet. OTAL Coffee) Disagreements within the membership and the withdrawal of the USA from the ICA led to the first major fall in world prices which spanned the periods 1989-1993 and 1999-2002. The International Coffee Agreement was initially signed by 44 countries accounting for 90% of world production and 18 countries accounting for 81 %ports. Disagreements during the periods covering further agreements signed during the period 1962-1983 were fraught with contention over i) allocation of members' export quotas, ii) the operations of price support mechanisms iii and illicit sales by some members to non members. " With the abandonment of the ICA quotas, coffee prices fell sharply in world markets, and were further depressed by a substantial accumulation of coffee stocks held by consumers" TRIPS Trade Related Aspects of Intellectual Property Rights: "The TRIPS Agreement., establishes new global protection for the trademarks copy rights and patents of multinational corporations" (Wallach, Lori and Sforza. Michelle. Public Citizen) Intellectual property rights bestows ownership rights and legal protections on ideas, artistic creations technological innovations. (Ibid). It is the intent of the TRIP[S agreement by 2005 to impose global standards directed by developing countries ion intellectual property rights. The danger to a country like Ethiopia is bio-piracy, whereby multinational corporations could pirate indigenous coffee plants alter them genetically and claim them as their own under the WTO TRIPS Agreement. " Already biotechnology corporations send out "prospectors" to collect medicinal plants and indigenous knowledge about their uses. The TRIPS Agreement gives these corporations the ability to obtain world wide patents on these resources and thus exclusive ownership and marketing rights." (Ibid page 104 Chapter 4) The WTO's main achievement from the six sets or rounds of negotiations from 1950 to the 1986 Uruguay Round, were to achieve reductions in duties. The WTO decisions have not necessarily been favourable to developing countries. In the Chiquita Banana Case, the most powerful nation on earth the USA initiated proceedings on behalf of Chiquita Brands, a US based corporation which produces bananas in Latin America and exports them to Europe and the rest of the world, to deny special preferences low tariffs and import quotas to the primarily Caribbean former European colonies. For example, the small farmers who produce bananas in the Caribbean depend on banana income for their livelihood and cannot compete with large Latin American farmers. Nevertheless despite the fact that Chiquita Brands already controlled 50 % of the EU market and Caribbean farmers only 8 % The WTO by a series of rulings 1998-1999, upheld the ruling to that the European Union should dismantle the tariff barriers and quotas which protected Caribbean bananas in the EU market.( Internet. World Trade Organization) WTO regulations are therefore of no benefit to Ethiopian coffee farmers. The country is not a member of the WTO. The laws regulating international coffee trade, the GATT Treaty, resulted in the World Trade Organization Agreements. The International Coffee Agreements, have not benefitted Ethiopian coffee farmers and have not resulted in an improvement in the income or welfare of Ethiopian coffee farmers. Could the laws be improved Yes but the organizations making the laws are controlled by the developed countries and the history has shown tat there is no effective will to change the laws to the befit of developing countries in general and Ethiopian coffee farmers in particular. The International Coffee Agreements which have been in place since 1963, have not benefitted Ethiopia or its coffee farmers either. The USA left the International Coffee Organization (ICO) in 1989, the International Coffee Agreement floundered and prices collapsed. Prices are now determined on two big futures markets in London and New York (Internet. Tran), to the detriment of powerless Ethiopian coffee farmers. Ethiopia has continued to be one of the poorest countries in Sub-Saharan Africa. Despite the stated goals of the ICO to implement export quotas, stabilize prices, promote training, technology and financing; prices at the production source have remained depressed. Ethiopia and Ethiopian Coffee farmers have remained poor and deprived. The film "Black Gold" (2003-2005) dramatized the plight of these farmers, as it follows Tedese Meskela the General Manager of the Oromia Coffee Farmers' Cooperative Union, as he visits coffee farming regions in Sidamo and Oromia. One coffee farmer plans to cut down his coffee plants and grow "chat ' instead, an amphetamine containing plant used to male illegal drugs. This because of depressed coffee prices, which in 2006 reached an al time low. 5. Alternative Strategies: The question is how does Ethiopia and its poor coffee farmers benefit from international trade and how does Ethiopia and its poor coffee farmers circumvent non beneficial international trade regulations and develop strategies to benefit themselves from its unique and highly desired Arabica coffee The answer is i) set clear business objectives to receive a larger "piece of the pie" internationally ii) change the power relationship between the farmer and final retailer e.g. Starbucks , - Ethiopian farmers receive between 6-10 % of the retail value of their coffee -Jamaican farmers in contrast, receive 45% of the retail price for Blue Mountain coffee iii) (Internet. Goodoo) iii) organize at the level of farmer organizations, iv) obtain government support and v) harness international law to achieve these targets. Ethiopia is now on its way to achieving these objectives: a. Ethiopia supported by Oxfam. has branded its prime luxury coffee after protracted protests by Starbucks' one of the largest US retailers with income of 7.8 billion US dollars "after more than four years of effort to brand its own coffee crops Ethiopia has become the first African country to pursue marketing of its products through brand management. The key to this is its new 'e' logos for the three Ethiopian coffee varieties . Sidama, Harar and Yirgacheffee "With the power of a branded logo in support it , the Ethiopian government has signed international licensing agreements with 70 global companies in nine countries to promote its Coffee." "(Internet. Lempert)" Ethiopia has successfully registered trademarks for its coffee in Canada, the European Union, the United States and Japan". (Ibid). b. Ethiopia has successfully harnessed international legal arrangements to the benefit of its country and farmers The Oromia Farmers Cooperative established in June 1999 represents 102,000 coffee growers , processors and exporters in the Oromia region of southern and western Ethiopia. It grows coffee of the milder and now more in demand, Arabica species exclusively and in both conventional and organically grown form The union's members are organized into approximately 115-129 Cooperatives. It attempts to bypass many of the middlemen who characterize the international coffee trade, sorting roasting and exporting its own, rather than simply growing and picking. It's General Manager Tadese Meskela says it's goal is to return 70% of its gross profits to Cooperatives. ( Internet. Oromia Cooperative) and (ILO. 2008) This is a very good example of use of a legally incorporated organization and mechanism to empower Ethiopian coffee farmers, leading to a change in the power and value relationship and value share between the producers and buyers (Cox. Andrew. 2002). Indirectly through these strategies the Ethiopian coffee framers, supported by movements like Fair Trade, which stamp its Fair Trade label on coffee it authenticates, are beginning to create their own international trade arrangements to their benefit. c. "From June 01, 208 the Fair Trade price for all Arabica coffee increased to ensure that famers continue to receive a price which covers the cost of sustainable production. Producers receive a guaranteed minimum price of $1.25 per pound of Fair Trade certified Arabica coffee". ( Internet. All Fair Trade Coffees). Producer organizational also receive a minimum of 10 c per pound for investment in community and business improvements. (Ibid) Arrangements with Fair Trade mitigate loss of income to a plethora of middlemen along a lengthy coffee value chain, which spans Smallholders-Farmers - Cooperative-Curing Plant -Trader- Exporter-Roaster-Retail Market. The final value of coffee has been computed at 36 times the price paid to farmers worldwide (Internet Kufuor and Tropical Commodity Coalition). "A pound of Shirkina Sun dried Sidamo Ethiopian coffee which netted farmers less than US1.00 is sold by Starbucks for US 26.00 per pound" (Faris. 2007) 6. Conclusion: International trade regulations, GATT and the WTO Agreements have been developed to free trade and to open markets to developed countries for their goods. Ethiopia as a producer of primary products and a non signatory to GATT and WTO, is impacted indirectly by GATT and WTO, as the price of imported oil and cereals, fuel and fertilizers, have contributed significantly to an increased the cost of living in Ethiopia. (Internet. IMF). The reduction in tariffs on coffee resulting from the Uruguay round of the GATTT Treaty and the collapse of the International Coffee Agreement have contributed to a depression in world prices of coffee including Arabica coffee produced by Ethiopian farmers. To benefit from world trade in coffee Ethiopia needs to adopt alternative trade marking, cooperative organizational, and branding strategies which will enable it and its farmers to benefit from a higher proportion of the coffee value chain. Attempting to change the present WTO and GATT trading regulations would neither be pragmatic nor a good use of its Ethiopian resources. Its farmers with the support of their government must organize - e.g. the Oromia Cooperative- and take control of the value chain in coffee. Utilizing international laws of licensing and trade marking as tools, with support from social action groups like Fair Trade and NGO' s like Oxfam, Ethiopian coffee farmers make their own international trading arrangements and obtain greater benefits from the distinctive coffee they produce. Bibliography: 1. Houston Museum of Natural Science. 2008-2009. Lucy's Legacy, The Hidden Treasure of Ethiopia. http://www.lucyexhibition.com/about-the-exhibit.aspx 2. Ethiopian Trade Point-Quality Export Products Information. http://www.telecom.net.et/etp/qexport.htm 3. World Bank Group. September 2008. Ethiopia at a Glance. 4. Australian Coffee Stats. Retail World 2003 and BIS Shrapnel, Coffee in Australia 2006-2008. http://www.acta.org.au/article.phpa=3 5. Byers, Alice and Pascal, Lui. 2008. Value-Adding Standards in the North American Food Market, Chapter 3. Rome. FAO. http://www.fao.org/docrep/010/a1585e/a1585e00.htm 6. Sourcewatch. 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