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The international natural rubber agreement 1979
The International Natural Rubber Agreement 1979
Kabir-Ur-Rahman Khan
The
International
Agreement and
so
far
the
agreement
to
negotiations
of
the
for
of joint
been
first
time
of reducing
regulatory
the
single-instrument suitable
has
accepted
in
at the of the
and that the
pattern
has adopted or
the for
stock
scope
mechanism,
agreement
an
responsibility
IN RA, this has been achieved cost
to
as
that while
international
for the
in the
relating
development.
concludes
financing
((PC).
and
future
the
Integrated
issues stock
The author principle
from
the
is examined
international indicator
commodity
for Commodities
agreement
context
only,
Rubber is the first,
emerge
under
Programme The
Natural
(IN RA) 1979
that
the
may not be
acceptable
in
other
commodities.
K.R.
Khan
Department Law,
is
a
of
Public
University
College,
of
lecturer
in
the
International
Edinburgh,
Old
South Bridge, Edinburgh
EH8
9YL. UK. The author acknowledges with appreciation the help given by Dr Leslie Bateman, Secretary General, international Rubber Regulation Committee, and Syed Abdul Jabbar Shahabuddin of the Association of Natural Rubber Producing Countries in providing the requested documents and answering his queries.
’ Foreign Office File, U/372/21/53. See also Cabinet Paper L.P.(44) September 1944.
0301-4207/80/030253-13
1944. 148, 11
$02.00
In the pre- 1945 phase, rubber was first regulated in 1922 by the UK under the so-called Stevenson Scheme which lasted until 1928. An International Rubber Agreement was reached in 1934 and renewed in 1938. Although accepted at first, the regulation invoked critical and later hostile response in the USA. This was largely because of the stringent application of the first scheme and later the linking of rubber and tin. In 1944, when the renewal of the rubber agreement was considered, a representative of the Department of State informed the British Mission in Washington, ‘the USA do not wish to join a new agreement which directly or indirectly reminds of the previous one’. The UK delegation concluded that, ‘no good purpose would be served by continuing negotiations on the new agreement in its present form which would most probably create stronger opposition’.’ Instead, an International Rubber Study Committee was agreed.* Natural rubber is among the eighteen commodities which are recognized as suitable for international measures under the Integrated Programme for Commodities (IPC). The International Natural Rubber Agreement (INRA) 1979 is the first international commodity agreement (ICA) that has emerged from the negotiations held since 1976 under the IPC. For this reason alone the INRA is of historic importance. But substantively, the agreement merits a consideration for two interrelated purposes. First, to see how natural rubber, an agricultural raw material of considerable commercial and strategic importance, is regulated; and second, to examine the regulatory machinery in the context of the IPC. Is the agreement a pattern for the future or simply an exceptional case? The agreement is examined in the context of the following questions: why an agreement on natural rubber has succeeded whereas agreements on other commodities have failed or there are still struggles for such agreements; how the principle of joint responsibility for financing international stock accepted by the exporting and importing countries is put into practice; what relationship there will be between the INRA and the Common Fund whose fundamental elements have been agreed. The provisions of the agreement are examined under the headings of organization, that is how the instruments and measures are instituted, and under regulation, that is how the given instruments and measures are
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The Irllerrlational Natural Rubber Agreement 1979
operated. This discussion is preceded, with a view to eliciting the relevant issues, with a brief account of the negotiations.
Natural rubber commodity profile
2 For the working of the agreement see Sir Andrew McFadyean, ed, The History of Rubber Regulation 1934-1943, published for the International Rubber Regulation Committee, George Allen and Unwin, London, 1944, passim; K.E. Knorr, World Rubber and its Regulations, Stanford University Press, Stanford, CA, chapter 6. For the issues relating to the governments’ participation, see Kabir-ur-Rahman Khan, The Law and Organisation of International Commodity Agreements, Sijthoff and Noordhoff, Alphen-aan-den Rijn. chapter 2. section 2, forthcoming; and Joseph Brandes, Herbert Hoover and Economic Policy, University of Pittsburgh Press, Pittsburgh, 1962, chapter 6. 3 Proposal for International Arrangements for Natural Rubber Price Stabilisatian, A Working Paper submitted by the producing countries members of the Association of Natural Rubber Producing Countries,TD/B/IPC/RUBBER/L.4. 4 Ibid. ’ Khan, op cit. Ref 2. 6 Proposed International Arrangement for Natural Rubber, A Working Paper for UNCTAD Preparatory Meeting, TD/B/IPC/RUBBER/L.B, para 9, citing the World Bank Report, Price Prospect for Major Commodities. See also Report of the Intergovernmental Working Group on Rubber, TD/B/IPC/RUBBER/3, 9 June 1977, paras 1 fcj and 6. 7The large volume of synthetic rubbers represented by styrene-butadiene rubber (SBR) is complementary to natural rubber. cis-polyisoprene Synthetic presents some direct competition but not to a serious extent. TD/B/IPC/RUBBER/L.B, Ref 2. Fig 1. 8Ibid. 9 The Association of Natural Rubber Producing Countries Constitution and Procedures and Financial Rules. I0 International Natural Rubber Price Stabilisation. Agreement on Djakarta, 30 November 1976. ” Established on 3 1 July 1961. For a brief account of its functions and structure, see Economic Co-operation and lntegration among Developing Countries, TD/B/609. Vol2, pp 136-l 40. I2 SEATO came into being on 19 February 1955. United Nations Treaty Series fUNT.S).Vol209.23. I3 Financial Times, 7 March 1980.
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Certain economic and political factors have proved conducive to the development of the agreement. Natural rubber is produced mainly in the Far East. Indonesia, Malaysia, Sri Lanka and Thailand themselves account for 85% of total world production.3 In its cultivation smallholders have a significant role. Of total production in Thailand their share is 95%, in Indonesia 85% and in Malaysia 65%.4 This constitutes a recognized reason for international regulation. Its justification goes back to the League of Nations World Monetary and Economic Conference 1933.5 The problem of natural rubber is seen in the context of expanding production. Between 1960 and 1974, its production has grown from 1.9 million tonnes to 3.13 million tonnes, and demand for natural rubber is expected to grow at 5.9% per annum between 1980 and 1995. Natural rubber occupies 34% of total rubber demand, and it is expected to rise to 45%.6 The market for natural rubber is separable from that for synthetics. Natural rubber faces competition from synthetics but not to a damaging level. The synthetics are either complementary to or a poor substitute for natural rubber.’ The producing countries did not see any need, as the producers of jute did, to combine the regulation of the natural product and synthetics in an international regulation scheme. Price fluctuations in the commodity have been severe.’ This affects adversely the supply position of the commodity. Faced with this uncertainty the producing countries find it difficult to make rational and long-term plans for production and marketing. There is sufficient homogeneity of interest among producing countries. They have cooperated, though intermittently, on rubber since 192 1. This cooperation was given an organized form in 1970 by the establishment of the Association of Natural Rubber Producing Countries (ANRPC).9 Since 1976 the producing countries have operated a price stabilization scheme under the auspices of their Association.” A convergence of interests among the producing countries and consuming countries also exists. Rubber is needed in consuming countries for vital transport industries. Political factors are also propitious. The producing countries belong to a region which is of ‘vital interest’ to the Western powers. A regional organization, the Association of South East Asia Nations (ASEAN),” a metamorphosis of the South East Asia Collective Defence Treaty,‘* exists, to which the major importing countries are favourably disposed. ASEAN has important trading links with the EEC.i3 Thus, homogeneity of interests among producing countries, a recognized need for helping smallholders, an established case of price an expanding rubber economy, the feasibility of fluctuation, separation of natural rubber from synthetics, the economic importance of rubber to consuming countries, the favourable disposition of the consuming countries towards the producing countries, and the convergence of interests between the two sides - all these factors have facilitated positive development.
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UN Preparatory Meetings Negotiations The IPC prescribes possible measures and provides a framework for negotiation on the UN Conference on Trade and Development (UNCTAD) commodities. The measures are threefold: supply management, such as international quota or international stock; measures relating to access to and security of market that are taken within the framework of multilateral trade negotiations of the General Agreement on Tariffs and Trade (GATT); and R&D measures. The process of negotiation has been given a quasi-legislative framework. Initial negotiations held under the Preparatory Meetings are designed to identify the problems, determine the agreed course of action to deal with those problems and prepare proposals for international action. The formal discussion of the proposals and adoption of a treaty take place at the UN Conference. The First Preparatory Meeting recognized the excessive price volatility in the natural rubber market and accepted the need to achieve stable conditions. The stabilization measures already taken by the producing countries were viewed with approbation and were referred to as ‘a significant and constructive contribution to an understanding of a basic problem of the international market’. The work already done by the producers’ association was appreciated and the documents submitted by that association, it was recognized by the Preparatory Meeting, ‘have provided an adequate basis for the analysis of the problem and the development of effective international measures for their solution’.14 With the recognition of the basic problem needing international measures, the long and acrimonious discussions which have taken place in other commodities, for example, in relation to copper,i5 were thus averted. And the discussions swiftly moved towards the substantive issues of regulation, in particular to the questions of size, location of international stock, its price mechanism and operation, and whether the agreement should be based on the sole instrument or whether it should have supplementary instruments as well.
Size of stock
” Report on the First Preparatory Meeting Rubber (Rubber PM I), $B/IPC/RUBBER/l, 1 February 1977. l5 See TD/B/IPC/RUBBER/1,4,8,1 1.14 and 16. See Kabir-Ur-Rahman Khan, ‘The Integrated Programme for Commodities: an assessment of negotiationson minerals and metals’, Resources Policy, Vol 5, No 3, pp 170-l 84. para 10: ‘6TD/B/IPC/RUBBER/3. TD/B/IPC/RUBBER/7. para 2. One consuming country argued that in the light of comparative stability in the rubber market during the past two years, a stock of 150 000 tonnes would suffice. TD/B/IPC/RUBBER/5, para 4. l7 TD/B/IPC/RUBBER/5, para 9; TD/B/IPC/RUBBER/B,p 10.
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The producing countries suggested that a stock of 400 000 tonnes would suffice. Their estimate was based on the size of the fluctuations in the past of -3% to +5%. This could be supplemented by another 300 000 tonnes secured through borrowing by the International Natural Rubber Council. Some importing countries advocated a much larger stock of up to 794 000 tonnes, if the functions of stabilizing prices were to be achieved at both ends of the price range.16
Location The producing countries favoured the idea of locating the international stock in their own territories on the ground that the cost of warehousing in the producing region was considerably less than in the consuming countries. The question, they argued, should be decided by the application of the criteria -of effectiveness and economy of cost. Consuming countries on the other hand preferred the stock to be located both in their territories as well as in producing countries.”
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The International Natural Rubber Agreement 1979
Price Some criteria were suggested for determining the minimum and maximum prices. Minimum price, it was maintained, could be determined by making it remunerative to smallholders. Similarly in determining the ceiling price, the need for keeping the competitiveness of rubber against synthetics should be kept in mind. The minimum price was suggested as 150 Malaysian ringgits and this would enable the smallholders to continue with the production of rubber, and the maximum of 210 was suggested as suitable in June 1977 because it would discourage the proliferation of synthetic cis-polysorprene, the nearest competitor to natural rubber. One representative of consuming countries thought that the comparison of the natural rubber price should be made with that of SBR with which natural rubber competed in certain areas. In reply it was pointed out that natural rubber had certain unique properties which merited a premium over SBR.‘* Reference grades The question was raised whether the price should be related to one particular grade or whether it should be based on various grades. The suggestion that the reference price should be based on one grade RSS. 1 only was unacceptable to producing countries on the grounds that the quantities traded in this grade were too small and the grade was exposed to speculative transactions, hence to ensuing artificial fluctuations in price. A composite price based on various grades was considered to be more conducive for the stabilization of prices.” Adjustment of price The feasibility of adopting an automatic adjustment mechanism for adjusting price was rejected on the grounds that the factors affecting the costs of production of natural rubber and the price of competing synthetic rubber were too complex to be incorporated into an automatic adjustment mechanism. The review procedure already adopted in other ICAs was considered more suitable.” Operation For the purpose of the operation of the international stock, two concepts were considered. The agreement should provide a gauge, that is minimum and maximum price, and second - this was an innovation - that the agreement should have two stabilization zones, inner and outer, within that range. Consuming countries did not raise any serious objection against this, but they thought that the band of 20 Malaysian ringgits would unduly restrict the operation of the free market, and suggested instead that both the outer and inner stabilization bands should be wider. 21 The controversy was in fact on the degree of intervention which the agreement should allow. The latter countries preferred a machinery with the least intervention.
‘“TD/B/IPC/RUBBER/5,pp6-7. 19The suggested grades were RSS.1 RSS.2 and RSS.3: Ibid, paras 10 and 24. 2oTD/B/IPC/RUBBER/9,para9. 21TDIBIIPC/RUBBER/5,para 14. 22 Ibid. para 28.
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Financing The producing countries suggested that contributions should be made directly by governments on the basis of the balanced rights and obligations, and expressed the view that the trade levies system, as used in the International Cocoa Agreement, invariably resulted in the burden being placed on the producing countries.**
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The international
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Complementary supply management measures The International Stock, the producing countries suggested, should be supplemented with regulation of exports and production control. The additional measures would, however, be contingent and could be used to meet extraordinary market situations. This was unacceptable to consuming countries. One of their representatives referred to the International Tin Agreement (ITA) in which the operation of export control, he maintained, had led to the ‘ratcheting up’ of the price scale, the freezing of existing production patterns, the forcing-out of marginal producers and shortage of supply. At the current United Nations Tin Conference, in a keynote speech the special trade representative of the USA has expressed a similar view and suggested its deletion from a future ITA. The producing countries found the consumption of natural rubber with tin inapt. Tin was a non-renewable resource; tin deposits could be retained whereas untapped rubber could not be regained; and the tin industry was much organized in production, whereas rubber production was overwhelmingly a smallholders’ effort.23 The Third Preparatory Meeting reiterated the case for international action, and, endorsing the recommendation of the Task Force, recommended that the negotiations for an international agreement with an international stock as the central element, be convened. Accordingly, the UN Natural Rubber Conference was convened and from this agreement on natural rubber has emerged.24
Provisions of the Rubber Agreement International stock
23TD/B/IPC/RUBBER/3, para 4, 24 and 27. For the keynote speech, see The Financial Times, 18 April 1980. 24TD/B/lPC/RUBBER/9,para 10. 25 international Natural Rubber Agreement 1979, TD/RUBBER/15, 17 October 1979, Article 27. x See International Tin Agreement 1975, International Cocoa Agreement 1975, and International Sugar Agreement 1977. For a discussion of the machinery of these agreements, see Khan, op cif, Ref 5 27 Article 27. “Article 28. 29 Ibid, para 7. So ITA 1975, Article 24(a). ” Article 29. 32 Article 30. paras 2 and 6.
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International stock, the agreement declares, ‘shall be the sole instrument of market intervention for price stabilization’.25 This is a departure from other ICAs with international stock or quasiinternational stocks. In those agreements the international stock or quasi-international stocks are complemented with regular or contingent regulation of exports. 26 Here the USA and other states which advocated the least interventionary mechanism have prevailed. The international stock consists of 550 000 tonnes. This is divided into a normal stock of 400 000 tonnes and a contingent stock of 150 000 tonnes.27 Contributions for the normal stock are made by the participating governments in cash. Contingent stocks may be subscribed either by borrowing from commercial sources by the Council on the security of rubber and on the governments’ undertakings, or in cash by the governments.28 The Council shall borrow, it is relevant to note, on behalf of the members concerned ‘who shall be responsible for all their respective liabilities arising from such borrowing’.29 This reduces the role of the Council to that of an agent of individual members. In the ITA, the Council borrows in its own name, as a principal. 3o The principle of governmental contributions is accepted. The normal stock is subscribed in stages and is subject to certain conditions. The first contribution equivalent to 70 million Malaysian ringgits is called within eighteen months of the entry into force of the agreement, as soon as the members have declared their preparedness to meet the financial requirements.31 There appears to be a minor discrepancy in the agreement. Whereas the reference currency is jointly composed of Malaysian ringgits and Singapore cents,32 the
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Natural
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Agreement
33 Article 29, para 3. 34 INRA, Annex B. The contributions are assessed at 168 MS cents flower trigger action price). For price range and sectors see below. ” Article 29(5). 36 Article 38. 37The financing of both normal and contingent stock ‘shall be shared equally between the exporting and importing categories of members’. Article 28(2). 38 UNCTAD. Report of the United Nations Nen0tiatin.q Conference on a Common Fund under the Integrated Programme for Commodities on its Third Session, 12- 19 TD/lPCECF/CONF/19, March 1979. Annex 1, Fundamental Elements of the Common Fund, para 15. See Kabir-UrRahman Khan, 'Thefundamental elements of the Common Fund’, Food Policy, Vol 5, No 1,1980, pp 38-48. 39 Khan, op cit. Ref 2. chapter 2.
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contributions to the international stock are called for by reference to the Malaysian currency only. The rest of the normal stock may be called by the Executive Director at any time provided the Buffer Stock Manager has certified the need for the resources in the next four months. The timing of the contributions is thus determined by the anticipated and certified need of the international stock. This reduces the maintenance costs of the international stock. The decision of the Executive Director to call the funds may be challenged by any member or members holding 200 votes in the Council.33 The USA which has 24.756% of total imports can, for example, alone call the Council’s meeting challenging the decision of the Executive Director. 34 If the Council fails to reach a decision, the original decision of the Executive Director stands. The instituting of the contingent stock is subject to even more stringent conditions. The timing of the call-up of this stock depends on the extent of the net transactions, buying or selling, by the Buffer Stock Manager. The stage of preparedness begins when the Manager has purchased or sold a total amounting to 300 000 tonnes. The Council makes, at this stage, all financial and other arrangements that are necessary for the prompt implementation of the stock. When the transactions have reached the limit of the normal stock, the Council ensures that the members have contributed their due shares in their chosen manner.35 Penalty for non-payment of the contribution results not only in the deprivation of voting and other institutional rights but includes a corrective obligation to pay interest on unpaid amounts until the obligation is discharged.36 A notable development in the agreement is that the contributions are made by exporting and importing countries, equally as a group. The principle of joint responsibility which had been adumbrated by the producing countries for sometime and recognized by some consuming countries has been implemented. Within a group, each member’s share of the contribution is determined by reference to its votes in the Council, which in turn is assessed in relation to the share of the export or import of the countries concerned in the reference years.37 The members with small imports, less than O.l%, are given differential treatment. They contribute according to their net imports. The principle of joint responsibility has taken several years to be recognized and implemented. During the negotiations of the International Tin Agreement 1970, this principle was advocated by producing countries and received recognition by some consuming countries. The recognition by the latter was given tangible form by voluntary contributions, for example from the Netherlands, France, Denmark and the UK. This is taken a step further in the present ITA a framework for receiving equal amount of which provides contributions from the importing countries on a voluntary basis. The fundamental elements of the Common Fund include a provision that the future ICAS associated with the Common Fund will be negotiated or renegotiated ‘on the principle of joint buffer stock financing by all producers and consumers participating in the agreements’.38 The INRA gives substance to this principle. These developments illustrate the process of the organization of contemporary ICAs and show a link between the recognized international commodity policy and the agreements.3g On the location of the international stock, a compromise has been reached. The stocks will be held in the territories of both exporting
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The lrzternational Natural Rubber Agreement
1979
and importing countries. The placing of the stock, however, does not affect the international nature of the stock. The guiding principle is that the location of stocks ‘shall ensure economic and efficient commercial operation’. The stocks will be held in the warehouses approved by the Council and the distribution of stocks among the exporting and importing countries shall be effected in such a way as to attain the stabilization on the one hand and the maintenance of the stocks at the minimum cost on the other.40 Recognizing the diversity of grades of natural rubber, the agreement: (a) authorizes the Council to name the internationally recognized standard grades and types for the inclusion in the international stock; (b) specifies a minimum standard limit by requiring that the lowest grade and types of natural rubber authorized for such inclusion will be RSS.3 TSR.20; and (c) requires that the designated grades and types shall include all grades and types which account for at least 3% of the previous calendar year’s international trade. The Manager is to ensure that the composition of the international stock reflects export/import pattern of natural rubber, while maintaining the effectiveness of the stock for achieving the stabilization objectives of the agreement.41 Price A price range is an essential element of the commodity regulation. The INRA studiously avoids the use of the term minimum and maximum price (or floor and ceiling price) - although the concept itself is present. The price range extends from 150 Malaysian/Singapore (MS) cents/kg to 270 MS cents/kg. The two ends of the range are termed as the ‘lower indicative price’ (LIP) and the ‘upper indicative price’ (UIP). The range is wide and extends to 120 MS cents.42 It is similar to that in the ITA (1 200 M$).43 By contrast, in the International Sugar Agreement (ISA) the range is of 9 US cents only. 44 INRA gives a reference price of 210 MS cents on which the price structure is based.45 Unlike the ITA under which the price range is divided into three almost equal sectors, the INRA makes the middle range inordinately wide. It comprises MS 63 cents, or 52.5% of the entire range and 75% of the inner range. The boundaries of the middle sector are designated as the ‘lower intervention price’ (LITP) and the ‘upper intervention price’ (UITP). Adjacent to the middle sector there is a narrow sector at each end. These comprise 5% of the reference price. The boundaries of these sectors are designated as the ‘lower trigger action price’ (LTAP) and the ‘upper trigger action price’ (UTAP). These are at 168 cents and 252 cents respectively.46 The prices are indicated in the combination of Malaysian ringgit and Singapore cent at the prevailing rates of exchange.47 The use of two currencies as a reference currency is unusual. In the event of a divergence between the two currencies to the extent that the buffer stock operation is ‘significantly’ affected, the Council has the power to review it with a view to adopting a single currency. The concept of market indicator has been refined. The international stock is operated not on the basis of the daily market prices as such but on the basis of the market indicator price (MIP). Instead of relying on the situation in one market and prices of one particular grade, the MIP takes into account the prices in Kuala Lumpur, London, New York and Singapore, and on various specified grades,
“Article 35. 4’ Article 34. ‘* Article 30. ” Khan, op cit. chapter 4. 44 ISA, 1977, Article 44. ” INRA, Article 30. Q /bid, and see Figure 1. ” Ibid. paras 2 and 6.
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The International
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Table 1. International
Rubber Agreement
management
measures.
Band
Sector
B’ -C’
Inner Lower Sector 178.5-168
The Manager may sell or buy
C’
Inner Lower Minimum (Lower Trigger Action
The Manager shall purchase
Minimum
a
Natural
Action
Lower
168 Point)
Indicative
Price 150
The Manager shall buy and all resources shall be used for the defence of the minimum price
8*-C*
Inner Upper Sector 241.5-252
The Manager may buy or sell
C*
Inner Upper Maximum 252 (Upper Trigger Action Point)
The Manager
Maximum (Upper Trigger Action Point) 270
The Manager shall sell and use entire resources for the defence of the maximuma
I NRA, Article 3 1.
shalt
sell
with equal weighting. The market indicator price is deemed above or below the specified points if the daily market indicator prices for the last given market days is above or below such a price leve1.48 The MIP so constituted recognizes the diversity of grades and markets and avoids the possibility of a precipitous action.
48/bid, Article 3 1 49Article 31, para 50Article 31, para
260
1 cc), and Article 36. 4.
Operation For the purpose of its operation, as with its organization, the international stock is divided into two components, normal and contingent. The normal stock is intended to be used for the defence of the inner stabilization band. The normal stock and the contingent stocks are utilized for the defence of the outer stabilization band. In the B’ - C’ band, Middle Sector (178.5-245.1 cents), the Manager is prohibited from operation except for rotation of stocks.4g Further management measures in different bands and sectors are shown in Table 1. The sector within which the anticipatory action may be taken is narrow, although within these sectors the entire resources of the international stock are available for corrective active. The agreement thus envisages and provides for short and swift measures. When the defensive action has resulted in the maximum limit of the international stock, ie 400 000 tonnes, the Council decides by special vote whether to bring the contingent stock into operation. It also determines the point at which to start its operation. Unless the Council decides otherwise, the Manager is obliged to commence operation at the mid-point between the trigger point and the lower or upper indicator point (D’ and D2). This leaves a sector to the freemarket operation. The total resources of the international stock are committed to the defence of the two extremities of the price range.‘O The agreement makes a distinction between three price objectives: stabilization of prices, stabilization of export earnings, and the achievement of increased export earnings. The international stock is used for achieving the first; the adjustment of the price mechanism for the second. The increased export earnings objective is largely left to the ‘best endeavour’ formula. The price mechanism in an international commodity agreement serves the purpose of a gauge on which the regulatory instrument operates and when adjustable it is a regulatory instrument by itself. The INRA, the reference price and the price range are adjustable. In the INRA the adjustment mechanism is elaborate.
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The International Natural Rubber Agreement 1979
The reference price may be revised for market or monetary reasons. The price will be reviewed every 18 months. The market trends and net changes in the international stock are, inter alia, determining factors. No revision of the reference price can however be made if the market price (MIP) over the six months prior to review has been outside the middle sector.51 The reference price on the other hand will automatically be revised downwards by 5%, if the MIP during the similar period has been below the lower intervention price (the inner minimum). The Council has the discretion to alter that percentage, but not the nature of the decision.52 Similarly, an automatic change in the reference price amounting to 3% is made, if net international stock purchases or sales amount to 300 000 tonnes have taken place since the entry into force of the agreement or the last change in the reference price.53 Reference price cannot be changed in such a way as to push the operative sectors beyond the present range (150-270 cents).54 The revision of the indicative prices, ie the minimum and maximum prices, is not simple. No circumstances for automatic changes are given. The range is to be reviewed every 30 months, not every 18 months as in the case of the reference price. In exceptional circumstances the review may take place earlier, when requested by members having over 200 votes, or when the automatic changes in the reference price have been made and the market indicator price for the past 60 days has been lower or higher than the trigger price, and is outside the scope of the normal stock. In the review, the Council shall take into account the trend of natural rubber prices, consumption, supply, production, costs and stocks, as well as the quantity of natural rubber held in the international stock and the financial position of the stock. Revision can only be made by special vote.55 No revision can be made if the prices on average for the past six months have been below the reference price (210 cents). Similarly, no downward adjustment can be made if for the same period prices have been above the reference price. The adjustment can be made in either direction - the Council is authorized to revise ‘the lower and upper indicative prices’.56 In the ITA, the Council may revise either or both.57 Presumably, this is not allowed in the INRA. One-sided adjustment will upset the symmetry constructed around the reference price (see Figure 1). In the adjustment of the reference price for monetary reasons, the INRA goes a step further than the other contemporary ICAs. The circumstances in which such a revision is allowed are clearly defined. The review is warranted when the exchange rates of the reference currencies and that of the major natural rubber exporter and importer members change to the extent that the operation of the international stock, not the objectives, of the agreement in general ‘are significantly affected’. The Council establishes the procedure to determine the given contingency justifying the adjustment.58 There is no machinery for securing increased export earnings. The agreement leaves this objective to be achieved through increased productivity. The Council is given the function of identifying and proposing appropriate measures for promoting the development of the natural rubber economy by producing members and ‘thereby increasing the export earnings’ of producing members, providing at the same time the reliability of ~upply.~~
5’ Article 32, para 1 (a). 5z /bid, para 1 (c). 53 Article 32, para 3. ‘a Article 32, para 4. 55 Article 32, para 5. 56 Ibid, para 8. 57 ITA 1975, Article 27, para (d). 58 INRA, Article 40. 59 Article 44.
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The Itlrerrmtiorral Natural Rubber Agreement
1979 Upper indicative pnce (UIP)
Max
270 I
( UTAP)
C2
252
Upper trigger action price
B2
241.5
Upper intervention price (UITP)
I Gl
E
I
I G *0 :: I
I g s q I
s 8 : + I I A
210
Reference price
! / I i I
Figure Rubber
International Natural 1. Agreement 1979 price range
and sectors. Source:
INRA
1979,
Articles
30 and 31.
8’
178.5
Lower intervention price (LITPI
C’
168
Lower trigger action price (LTAP)
0’
,59_
Min
150
____------___--_-------~ ln
I
Lower indicative price (LIP) CS: Contingent stock II lndicotes the limits of the Normal Stock
Supply measures The producing countries do not undertake any specific supply commitments, but they are obliged to pursue policies and programmes which ensure continuous availability to consumers of natural rubber supplies. In the event of potential shortage of natural rubber the Council may make recommendations relating to appropriate steps to ensure rapid increase in the supplies.60 Obstacles to trade In this field, the agreement has made some, but not significant, advances. The Council shall identify obstacles to the expansion of trade in natural rubber in its raw, semi-processed and modified form, and may make recommendations to the members to seek mutually acceptable measures designed to remove progressively, and where possible, eliminate such obstacles. 61 Within what forum this is to be done is left for the members themselves. Theoretically, it is possible for the members to use the Council as a forum for this purpose, but it will be an innovation. Such measures are negotiated within GATT, within the framework of regional cooperation, such as the Lomt Convention between the EEC and the African, Caribbean and Pacific countries (ACP) and bilateral agreements, and certain concessions are granted unilaterally within the General Scheme for Preferences (GSP). Perhaps the time has come to establish some form of coordination among these diverse and at present truncated fora. The examine periodically Council shall the results of its recommendations.62 6o Article 6’ Article ‘* Ibid.
262
43. 50.
Transportation and market structure The agreement goes some way towards recognizing
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The Internatiorlal
Natural Rubber Agreement
1979
the producing countries that the transportation charges at present applied to natural rubber are an obstacle to the expansion of trade, but as to the remedial measures it does not go beyond a recommendatory device. The Council should, not shall, encourage and facilitate the promotion of reasonable and equitable freight rates and improvements in the transport system, so as to provide regular supplies to markets and to effect savings in the cost of the products marketed. How it is to be done is not specified. Thus the argument that these matters are appropriately dealt with within the Committee of Shipping of UNCTAD has, on the whole, prevailed.
Research and development (other measures) The importance of R&D is recognized and the areas which are relevant to the achieving of the objectives of the agreement are specified. They relate to the promotion of the development of the natural rubber economy by producing members through expanded and improved production, productivity and marketing, and improvement of reliability of supply. In these areas, the Council shall identify and propose appropriate measures and techniques. The proposals will be made after appropriate studies by a Committee on ‘other measures’ which will comprise consuming and producing members. The Council is authorized to make appropriate arrangements for financing of these projects. These arrangements include the Second Account, the so-called ‘second window’ of the Common Fund.63 The apprehension expressed during the negotiation of the Common Fund that the Second Account operation would be just another way of providing aid or grants is not substantiated. The area of R&D is well defined. The projects will be examined by a bipartite committee and finally they are approved by the bipartite Council.
Relationship with the Common Fund
63 Article 44. 64 TD/IPC/CF/CONF/19, Ref 38, paras 10, 1 1 and 13. See also Khan, op cit. Ref 38. 65 TD/IPC/CF/CONF/19, para 2. 66 Ibid. paras 3-9. 67 See Ref 64. “UNCTAD Report, op tit, Ref 38, para 1 O(a). “Ibid. para 14.
RESOURCES
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A formal treaty establishing the Common Fund is being negotiated, but the fundamental elements of the Common Fund have been agreed. The relevant points are as follows. The Fund will comprise two accounts,64 the first devoted to the international stocks and quasiinternational stocks;65 and the second to R&D measures, described somewhat dismissively as ‘other measures’.66 The members will make mandatory contributions of US%400 million for the purpose of the first account, from which at least $70 million will be allocated to the second account. The second account will comprise $350 million and will be financed largely from voluntary contributions through a pledging system. 67 The role of the governmental contribution is to ‘enhance the creditworthiness?* of the Fund and not to be the mainstay of its operation. The role of the Fund is to facilitate borrowing to the international commodity organizations which associate with the Fund. The international commodity organizations (ICOs) will deposit one-third of the borrowing requirement to the Fund, and the ICOs and their respective members will guarantee the amount to be borrowed.69 The details for the operation of the R&D account are still to be agreed. The Natural Rubber Council is authorized to negotiate with the Common Fund an association agreement with a view to utilize the facilities of the Fund. As noted above, the borrowing requirements of
1980
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The International Natural Rubber Agreement 1979
the Natural Rubber Council are limited. At the most these can be equivalent to the value of the contingent stock. The expectation that the Common Fund will be the sole sources of the financing of international stock has not only been abandoned, but this agreement seems to indicate that the requirements for those borrowing will be minimal. The utilization of the second account of the Fund will also be limited and subject to the decision of the Council on which the producing and consuming countries have equal voice.
Domestic policies of producing countries On this matter, the producing countries have conceded ground to consuming countries. Domestic policies of producing countries are now a matter of international concern and subject to consultation within the Council. Formally at least the concession is not unilateral, as the Council is empowered to consult at the request of any member on natural rubber policy ‘directly affecting supply and demand’, and may submit its recommendation to members for their consideration.70
Conclusion
” ”
Ibid, Article 45. UNCTAD Resolution refers to ‘rubber’.
93(V),
1976,
The homogeneity of interests among the producing countries, the narrowing of the scope of the agreement to natural rubber,” the certain innate advantages of natural rubber over synthetics with which it competes, the well prepared case by the producing countries, and above all the favourable disposition of the consuming countries, have helped in bringing about the agreement on natural rubber. The principle of joint responsibility in financing the international stock has been implemented. But this has only been brought about with major changes and diminution of the scope and operation of the regulatory machinery: the agreement has no supplementary regulatory mechanism; its sole instrument is the international stock; the band within which the stock operates is very much curtailed; the competence of the Manager to take anticipatory defensive action is reduced; and the agreement now relies on short and swift action for the defence of the inner and outer stabilization range. Further, the concept of the contingent stock is an innovation, and its operation is not automatic - it requires, inter alia, special approval of the consuming countries. The price range is wide - it is expected to be maintained by a combination of the international stock and the operation of the free market. An elaborate machinery for the adjustment of the prices is given. Objective factors are specified and the machinery by which these factors are to be established is stipulated. In the decisions on this matter there is a combination of certainty of automatic adjustment in given situations and the reliance on a consensus to be evolved in the Council. Outside the supply measures, the agreement, constrained by the framework of international commodity negotiations, has not made much advance. It recognizes the problems of freights and marketing, and empowers the Council to make appropriate recommendations and a periodic review of the progress on the implementation of those recommendations. The members, however, are left to deal with these the problems in appropriate fora. As with other commodities, agreement demonstrates the need for some coordination between the
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1980
The International Natural Rubber Agreement 1979
ICAs and the agencies within which the measures pertaining to primary commodities are taken. The Natural Rubber Council is authorized to establish the association arrangement with the Common Fund, but its borrowing requirements are likely to be small. The area of R&D has been well defined and the projects are to be determined by well defined criteria and scrutiny. The agreement demonstrates that R&D is an essential part of ICAS. The International Natural Rubber Agreement is a mosaic of checks and balances with some characteristics of its own. It is attractive, but it is unlikely to be a pattern for other commodities under the IPC. The price mechanism, not the actual figures, and the distinction between normal and contingent stock (not necessarily the manner of its operation), merit serious consideration. Its reliance on a single regulatory instrument of the international stock cannot be taken as a precedent for other commodities.
Bibliography Preparatory
Meetings
on
Rubber:
relevant documents 1
2
3
4
RESOURCES
POLICY
September
Report of the First Preparatory Meeting on Rubber: 17-2 1 January 1977 TD/B/IPC/RUBBER/l, 1 February 1977 Report of the Second P.M. on Rubber: 6-lOJune 1977 TD/B/IPC/RUBBER/4. 17 June 1977 Report of the Third P.M. on Rubber: 27 Feb.1 March 1978: TD/B/IPC/RUBBER/9.2 March 1978 Report of the Intergovernmental Task Force on Rubber on its First Session: 1 O-20 October 1977 TD/B/IPC/RUBBER/5, 9 November 1977
1980
5
6
7
Ditto, Second Session: 1977 TD/B/IPC/RUBBER/7,
6-9
December
20
December 1977 Intergovernmental Report of the Working Grouo on Rubber: 2-9 June 1977 TD/B/IPC/RUBBER/3 (ACi2) 9 June 1977 Report of the Preparatory Group for the Nations Conference on United Natural Rubber 1978: 20 August-7 September 1978 TD/RUBBER/2 (PG/2) 2 October 1978.
265
Kabir-Ur-Rahman Khan
The
International
Agreement and
so
far
the
agreement
to
negotiations
of
the
for
of joint
been
first
time
of reducing
regulatory
the
single-instrument suitable
has
accepted
in
at the of the
and that the
pattern
has adopted or
the for
stock
scope
mechanism,
agreement
an
responsibility
IN RA, this has been achieved cost
to
as
that while
international
for the
in the
relating
development.
concludes
financing
((PC).
and
future
the
Integrated
issues stock
The author principle
from
the
is examined
international indicator
commodity
for Commodities
agreement
context
only,
Rubber is the first,
emerge
under
Programme The
Natural
(IN RA) 1979
that
the
may not be
acceptable
in
other
commodities.
K.R.
Khan
Department Law,
is
a
of
Public
University
College,
of
lecturer
in
the
International
Edinburgh,
Old
South Bridge, Edinburgh
EH8
9YL. UK. The author acknowledges with appreciation the help given by Dr Leslie Bateman, Secretary General, international Rubber Regulation Committee, and Syed Abdul Jabbar Shahabuddin of the Association of Natural Rubber Producing Countries in providing the requested documents and answering his queries.
’ Foreign Office File, U/372/21/53. See also Cabinet Paper L.P.(44) September 1944.
0301-4207/80/030253-13
1944. 148, 11
$02.00
In the pre- 1945 phase, rubber was first regulated in 1922 by the UK under the so-called Stevenson Scheme which lasted until 1928. An International Rubber Agreement was reached in 1934 and renewed in 1938. Although accepted at first, the regulation invoked critical and later hostile response in the USA. This was largely because of the stringent application of the first scheme and later the linking of rubber and tin. In 1944, when the renewal of the rubber agreement was considered, a representative of the Department of State informed the British Mission in Washington, ‘the USA do not wish to join a new agreement which directly or indirectly reminds of the previous one’. The UK delegation concluded that, ‘no good purpose would be served by continuing negotiations on the new agreement in its present form which would most probably create stronger opposition’.’ Instead, an International Rubber Study Committee was agreed.* Natural rubber is among the eighteen commodities which are recognized as suitable for international measures under the Integrated Programme for Commodities (IPC). The International Natural Rubber Agreement (INRA) 1979 is the first international commodity agreement (ICA) that has emerged from the negotiations held since 1976 under the IPC. For this reason alone the INRA is of historic importance. But substantively, the agreement merits a consideration for two interrelated purposes. First, to see how natural rubber, an agricultural raw material of considerable commercial and strategic importance, is regulated; and second, to examine the regulatory machinery in the context of the IPC. Is the agreement a pattern for the future or simply an exceptional case? The agreement is examined in the context of the following questions: why an agreement on natural rubber has succeeded whereas agreements on other commodities have failed or there are still struggles for such agreements; how the principle of joint responsibility for financing international stock accepted by the exporting and importing countries is put into practice; what relationship there will be between the INRA and the Common Fund whose fundamental elements have been agreed. The provisions of the agreement are examined under the headings of organization, that is how the instruments and measures are instituted, and under regulation, that is how the given instruments and measures are
0 1980
IPC Business
Press
253
The Irllerrlational Natural Rubber Agreement 1979
operated. This discussion is preceded, with a view to eliciting the relevant issues, with a brief account of the negotiations.
Natural rubber commodity profile
2 For the working of the agreement see Sir Andrew McFadyean, ed, The History of Rubber Regulation 1934-1943, published for the International Rubber Regulation Committee, George Allen and Unwin, London, 1944, passim; K.E. Knorr, World Rubber and its Regulations, Stanford University Press, Stanford, CA, chapter 6. For the issues relating to the governments’ participation, see Kabir-ur-Rahman Khan, The Law and Organisation of International Commodity Agreements, Sijthoff and Noordhoff, Alphen-aan-den Rijn. chapter 2. section 2, forthcoming; and Joseph Brandes, Herbert Hoover and Economic Policy, University of Pittsburgh Press, Pittsburgh, 1962, chapter 6. 3 Proposal for International Arrangements for Natural Rubber Price Stabilisatian, A Working Paper submitted by the producing countries members of the Association of Natural Rubber Producing Countries,TD/B/IPC/RUBBER/L.4. 4 Ibid. ’ Khan, op cit. Ref 2. 6 Proposed International Arrangement for Natural Rubber, A Working Paper for UNCTAD Preparatory Meeting, TD/B/IPC/RUBBER/L.B, para 9, citing the World Bank Report, Price Prospect for Major Commodities. See also Report of the Intergovernmental Working Group on Rubber, TD/B/IPC/RUBBER/3, 9 June 1977, paras 1 fcj and 6. 7The large volume of synthetic rubbers represented by styrene-butadiene rubber (SBR) is complementary to natural rubber. cis-polyisoprene Synthetic presents some direct competition but not to a serious extent. TD/B/IPC/RUBBER/L.B, Ref 2. Fig 1. 8Ibid. 9 The Association of Natural Rubber Producing Countries Constitution and Procedures and Financial Rules. I0 International Natural Rubber Price Stabilisation. Agreement on Djakarta, 30 November 1976. ” Established on 3 1 July 1961. For a brief account of its functions and structure, see Economic Co-operation and lntegration among Developing Countries, TD/B/609. Vol2, pp 136-l 40. I2 SEATO came into being on 19 February 1955. United Nations Treaty Series fUNT.S).Vol209.23. I3 Financial Times, 7 March 1980.
254
Certain economic and political factors have proved conducive to the development of the agreement. Natural rubber is produced mainly in the Far East. Indonesia, Malaysia, Sri Lanka and Thailand themselves account for 85% of total world production.3 In its cultivation smallholders have a significant role. Of total production in Thailand their share is 95%, in Indonesia 85% and in Malaysia 65%.4 This constitutes a recognized reason for international regulation. Its justification goes back to the League of Nations World Monetary and Economic Conference 1933.5 The problem of natural rubber is seen in the context of expanding production. Between 1960 and 1974, its production has grown from 1.9 million tonnes to 3.13 million tonnes, and demand for natural rubber is expected to grow at 5.9% per annum between 1980 and 1995. Natural rubber occupies 34% of total rubber demand, and it is expected to rise to 45%.6 The market for natural rubber is separable from that for synthetics. Natural rubber faces competition from synthetics but not to a damaging level. The synthetics are either complementary to or a poor substitute for natural rubber.’ The producing countries did not see any need, as the producers of jute did, to combine the regulation of the natural product and synthetics in an international regulation scheme. Price fluctuations in the commodity have been severe.’ This affects adversely the supply position of the commodity. Faced with this uncertainty the producing countries find it difficult to make rational and long-term plans for production and marketing. There is sufficient homogeneity of interest among producing countries. They have cooperated, though intermittently, on rubber since 192 1. This cooperation was given an organized form in 1970 by the establishment of the Association of Natural Rubber Producing Countries (ANRPC).9 Since 1976 the producing countries have operated a price stabilization scheme under the auspices of their Association.” A convergence of interests among the producing countries and consuming countries also exists. Rubber is needed in consuming countries for vital transport industries. Political factors are also propitious. The producing countries belong to a region which is of ‘vital interest’ to the Western powers. A regional organization, the Association of South East Asia Nations (ASEAN),” a metamorphosis of the South East Asia Collective Defence Treaty,‘* exists, to which the major importing countries are favourably disposed. ASEAN has important trading links with the EEC.i3 Thus, homogeneity of interests among producing countries, a recognized need for helping smallholders, an established case of price an expanding rubber economy, the feasibility of fluctuation, separation of natural rubber from synthetics, the economic importance of rubber to consuming countries, the favourable disposition of the consuming countries towards the producing countries, and the convergence of interests between the two sides - all these factors have facilitated positive development.
RESOURCES
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1980
The International
Natural Rubber Agreement
1979
UN Preparatory Meetings Negotiations The IPC prescribes possible measures and provides a framework for negotiation on the UN Conference on Trade and Development (UNCTAD) commodities. The measures are threefold: supply management, such as international quota or international stock; measures relating to access to and security of market that are taken within the framework of multilateral trade negotiations of the General Agreement on Tariffs and Trade (GATT); and R&D measures. The process of negotiation has been given a quasi-legislative framework. Initial negotiations held under the Preparatory Meetings are designed to identify the problems, determine the agreed course of action to deal with those problems and prepare proposals for international action. The formal discussion of the proposals and adoption of a treaty take place at the UN Conference. The First Preparatory Meeting recognized the excessive price volatility in the natural rubber market and accepted the need to achieve stable conditions. The stabilization measures already taken by the producing countries were viewed with approbation and were referred to as ‘a significant and constructive contribution to an understanding of a basic problem of the international market’. The work already done by the producers’ association was appreciated and the documents submitted by that association, it was recognized by the Preparatory Meeting, ‘have provided an adequate basis for the analysis of the problem and the development of effective international measures for their solution’.14 With the recognition of the basic problem needing international measures, the long and acrimonious discussions which have taken place in other commodities, for example, in relation to copper,i5 were thus averted. And the discussions swiftly moved towards the substantive issues of regulation, in particular to the questions of size, location of international stock, its price mechanism and operation, and whether the agreement should be based on the sole instrument or whether it should have supplementary instruments as well.
Size of stock
” Report on the First Preparatory Meeting Rubber (Rubber PM I), $B/IPC/RUBBER/l, 1 February 1977. l5 See TD/B/IPC/RUBBER/1,4,8,1 1.14 and 16. See Kabir-Ur-Rahman Khan, ‘The Integrated Programme for Commodities: an assessment of negotiationson minerals and metals’, Resources Policy, Vol 5, No 3, pp 170-l 84. para 10: ‘6TD/B/IPC/RUBBER/3. TD/B/IPC/RUBBER/7. para 2. One consuming country argued that in the light of comparative stability in the rubber market during the past two years, a stock of 150 000 tonnes would suffice. TD/B/IPC/RUBBER/5, para 4. l7 TD/B/IPC/RUBBER/5, para 9; TD/B/IPC/RUBBER/B,p 10.
RESOURCES
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September
The producing countries suggested that a stock of 400 000 tonnes would suffice. Their estimate was based on the size of the fluctuations in the past of -3% to +5%. This could be supplemented by another 300 000 tonnes secured through borrowing by the International Natural Rubber Council. Some importing countries advocated a much larger stock of up to 794 000 tonnes, if the functions of stabilizing prices were to be achieved at both ends of the price range.16
Location The producing countries favoured the idea of locating the international stock in their own territories on the ground that the cost of warehousing in the producing region was considerably less than in the consuming countries. The question, they argued, should be decided by the application of the criteria -of effectiveness and economy of cost. Consuming countries on the other hand preferred the stock to be located both in their territories as well as in producing countries.”
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The International Natural Rubber Agreement 1979
Price Some criteria were suggested for determining the minimum and maximum prices. Minimum price, it was maintained, could be determined by making it remunerative to smallholders. Similarly in determining the ceiling price, the need for keeping the competitiveness of rubber against synthetics should be kept in mind. The minimum price was suggested as 150 Malaysian ringgits and this would enable the smallholders to continue with the production of rubber, and the maximum of 210 was suggested as suitable in June 1977 because it would discourage the proliferation of synthetic cis-polysorprene, the nearest competitor to natural rubber. One representative of consuming countries thought that the comparison of the natural rubber price should be made with that of SBR with which natural rubber competed in certain areas. In reply it was pointed out that natural rubber had certain unique properties which merited a premium over SBR.‘* Reference grades The question was raised whether the price should be related to one particular grade or whether it should be based on various grades. The suggestion that the reference price should be based on one grade RSS. 1 only was unacceptable to producing countries on the grounds that the quantities traded in this grade were too small and the grade was exposed to speculative transactions, hence to ensuing artificial fluctuations in price. A composite price based on various grades was considered to be more conducive for the stabilization of prices.” Adjustment of price The feasibility of adopting an automatic adjustment mechanism for adjusting price was rejected on the grounds that the factors affecting the costs of production of natural rubber and the price of competing synthetic rubber were too complex to be incorporated into an automatic adjustment mechanism. The review procedure already adopted in other ICAs was considered more suitable.” Operation For the purpose of the operation of the international stock, two concepts were considered. The agreement should provide a gauge, that is minimum and maximum price, and second - this was an innovation - that the agreement should have two stabilization zones, inner and outer, within that range. Consuming countries did not raise any serious objection against this, but they thought that the band of 20 Malaysian ringgits would unduly restrict the operation of the free market, and suggested instead that both the outer and inner stabilization bands should be wider. 21 The controversy was in fact on the degree of intervention which the agreement should allow. The latter countries preferred a machinery with the least intervention.
‘“TD/B/IPC/RUBBER/5,pp6-7. 19The suggested grades were RSS.1 RSS.2 and RSS.3: Ibid, paras 10 and 24. 2oTD/B/IPC/RUBBER/9,para9. 21TDIBIIPC/RUBBER/5,para 14. 22 Ibid. para 28.
256
Financing The producing countries suggested that contributions should be made directly by governments on the basis of the balanced rights and obligations, and expressed the view that the trade levies system, as used in the International Cocoa Agreement, invariably resulted in the burden being placed on the producing countries.**
RESOURCES
POLICY
September
1980
The international
Natural Rubber Agreement
1979
Complementary supply management measures The International Stock, the producing countries suggested, should be supplemented with regulation of exports and production control. The additional measures would, however, be contingent and could be used to meet extraordinary market situations. This was unacceptable to consuming countries. One of their representatives referred to the International Tin Agreement (ITA) in which the operation of export control, he maintained, had led to the ‘ratcheting up’ of the price scale, the freezing of existing production patterns, the forcing-out of marginal producers and shortage of supply. At the current United Nations Tin Conference, in a keynote speech the special trade representative of the USA has expressed a similar view and suggested its deletion from a future ITA. The producing countries found the consumption of natural rubber with tin inapt. Tin was a non-renewable resource; tin deposits could be retained whereas untapped rubber could not be regained; and the tin industry was much organized in production, whereas rubber production was overwhelmingly a smallholders’ effort.23 The Third Preparatory Meeting reiterated the case for international action, and, endorsing the recommendation of the Task Force, recommended that the negotiations for an international agreement with an international stock as the central element, be convened. Accordingly, the UN Natural Rubber Conference was convened and from this agreement on natural rubber has emerged.24
Provisions of the Rubber Agreement International stock
23TD/B/IPC/RUBBER/3, para 4, 24 and 27. For the keynote speech, see The Financial Times, 18 April 1980. 24TD/B/lPC/RUBBER/9,para 10. 25 international Natural Rubber Agreement 1979, TD/RUBBER/15, 17 October 1979, Article 27. x See International Tin Agreement 1975, International Cocoa Agreement 1975, and International Sugar Agreement 1977. For a discussion of the machinery of these agreements, see Khan, op cif, Ref 5 27 Article 27. “Article 28. 29 Ibid, para 7. So ITA 1975, Article 24(a). ” Article 29. 32 Article 30. paras 2 and 6.
RESOURCES
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September
International stock, the agreement declares, ‘shall be the sole instrument of market intervention for price stabilization’.25 This is a departure from other ICAs with international stock or quasiinternational stocks. In those agreements the international stock or quasi-international stocks are complemented with regular or contingent regulation of exports. 26 Here the USA and other states which advocated the least interventionary mechanism have prevailed. The international stock consists of 550 000 tonnes. This is divided into a normal stock of 400 000 tonnes and a contingent stock of 150 000 tonnes.27 Contributions for the normal stock are made by the participating governments in cash. Contingent stocks may be subscribed either by borrowing from commercial sources by the Council on the security of rubber and on the governments’ undertakings, or in cash by the governments.28 The Council shall borrow, it is relevant to note, on behalf of the members concerned ‘who shall be responsible for all their respective liabilities arising from such borrowing’.29 This reduces the role of the Council to that of an agent of individual members. In the ITA, the Council borrows in its own name, as a principal. 3o The principle of governmental contributions is accepted. The normal stock is subscribed in stages and is subject to certain conditions. The first contribution equivalent to 70 million Malaysian ringgits is called within eighteen months of the entry into force of the agreement, as soon as the members have declared their preparedness to meet the financial requirements.31 There appears to be a minor discrepancy in the agreement. Whereas the reference currency is jointly composed of Malaysian ringgits and Singapore cents,32 the
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Natural
Rubber
Agreement
33 Article 29, para 3. 34 INRA, Annex B. The contributions are assessed at 168 MS cents flower trigger action price). For price range and sectors see below. ” Article 29(5). 36 Article 38. 37The financing of both normal and contingent stock ‘shall be shared equally between the exporting and importing categories of members’. Article 28(2). 38 UNCTAD. Report of the United Nations Nen0tiatin.q Conference on a Common Fund under the Integrated Programme for Commodities on its Third Session, 12- 19 TD/lPCECF/CONF/19, March 1979. Annex 1, Fundamental Elements of the Common Fund, para 15. See Kabir-UrRahman Khan, 'Thefundamental elements of the Common Fund’, Food Policy, Vol 5, No 1,1980, pp 38-48. 39 Khan, op cit. Ref 2. chapter 2.
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1979
contributions to the international stock are called for by reference to the Malaysian currency only. The rest of the normal stock may be called by the Executive Director at any time provided the Buffer Stock Manager has certified the need for the resources in the next four months. The timing of the contributions is thus determined by the anticipated and certified need of the international stock. This reduces the maintenance costs of the international stock. The decision of the Executive Director to call the funds may be challenged by any member or members holding 200 votes in the Council.33 The USA which has 24.756% of total imports can, for example, alone call the Council’s meeting challenging the decision of the Executive Director. 34 If the Council fails to reach a decision, the original decision of the Executive Director stands. The instituting of the contingent stock is subject to even more stringent conditions. The timing of the call-up of this stock depends on the extent of the net transactions, buying or selling, by the Buffer Stock Manager. The stage of preparedness begins when the Manager has purchased or sold a total amounting to 300 000 tonnes. The Council makes, at this stage, all financial and other arrangements that are necessary for the prompt implementation of the stock. When the transactions have reached the limit of the normal stock, the Council ensures that the members have contributed their due shares in their chosen manner.35 Penalty for non-payment of the contribution results not only in the deprivation of voting and other institutional rights but includes a corrective obligation to pay interest on unpaid amounts until the obligation is discharged.36 A notable development in the agreement is that the contributions are made by exporting and importing countries, equally as a group. The principle of joint responsibility which had been adumbrated by the producing countries for sometime and recognized by some consuming countries has been implemented. Within a group, each member’s share of the contribution is determined by reference to its votes in the Council, which in turn is assessed in relation to the share of the export or import of the countries concerned in the reference years.37 The members with small imports, less than O.l%, are given differential treatment. They contribute according to their net imports. The principle of joint responsibility has taken several years to be recognized and implemented. During the negotiations of the International Tin Agreement 1970, this principle was advocated by producing countries and received recognition by some consuming countries. The recognition by the latter was given tangible form by voluntary contributions, for example from the Netherlands, France, Denmark and the UK. This is taken a step further in the present ITA a framework for receiving equal amount of which provides contributions from the importing countries on a voluntary basis. The fundamental elements of the Common Fund include a provision that the future ICAS associated with the Common Fund will be negotiated or renegotiated ‘on the principle of joint buffer stock financing by all producers and consumers participating in the agreements’.38 The INRA gives substance to this principle. These developments illustrate the process of the organization of contemporary ICAs and show a link between the recognized international commodity policy and the agreements.3g On the location of the international stock, a compromise has been reached. The stocks will be held in the territories of both exporting
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1980
The lrzternational Natural Rubber Agreement
1979
and importing countries. The placing of the stock, however, does not affect the international nature of the stock. The guiding principle is that the location of stocks ‘shall ensure economic and efficient commercial operation’. The stocks will be held in the warehouses approved by the Council and the distribution of stocks among the exporting and importing countries shall be effected in such a way as to attain the stabilization on the one hand and the maintenance of the stocks at the minimum cost on the other.40 Recognizing the diversity of grades of natural rubber, the agreement: (a) authorizes the Council to name the internationally recognized standard grades and types for the inclusion in the international stock; (b) specifies a minimum standard limit by requiring that the lowest grade and types of natural rubber authorized for such inclusion will be RSS.3 TSR.20; and (c) requires that the designated grades and types shall include all grades and types which account for at least 3% of the previous calendar year’s international trade. The Manager is to ensure that the composition of the international stock reflects export/import pattern of natural rubber, while maintaining the effectiveness of the stock for achieving the stabilization objectives of the agreement.41 Price A price range is an essential element of the commodity regulation. The INRA studiously avoids the use of the term minimum and maximum price (or floor and ceiling price) - although the concept itself is present. The price range extends from 150 Malaysian/Singapore (MS) cents/kg to 270 MS cents/kg. The two ends of the range are termed as the ‘lower indicative price’ (LIP) and the ‘upper indicative price’ (UIP). The range is wide and extends to 120 MS cents.42 It is similar to that in the ITA (1 200 M$).43 By contrast, in the International Sugar Agreement (ISA) the range is of 9 US cents only. 44 INRA gives a reference price of 210 MS cents on which the price structure is based.45 Unlike the ITA under which the price range is divided into three almost equal sectors, the INRA makes the middle range inordinately wide. It comprises MS 63 cents, or 52.5% of the entire range and 75% of the inner range. The boundaries of the middle sector are designated as the ‘lower intervention price’ (LITP) and the ‘upper intervention price’ (UITP). Adjacent to the middle sector there is a narrow sector at each end. These comprise 5% of the reference price. The boundaries of these sectors are designated as the ‘lower trigger action price’ (LTAP) and the ‘upper trigger action price’ (UTAP). These are at 168 cents and 252 cents respectively.46 The prices are indicated in the combination of Malaysian ringgit and Singapore cent at the prevailing rates of exchange.47 The use of two currencies as a reference currency is unusual. In the event of a divergence between the two currencies to the extent that the buffer stock operation is ‘significantly’ affected, the Council has the power to review it with a view to adopting a single currency. The concept of market indicator has been refined. The international stock is operated not on the basis of the daily market prices as such but on the basis of the market indicator price (MIP). Instead of relying on the situation in one market and prices of one particular grade, the MIP takes into account the prices in Kuala Lumpur, London, New York and Singapore, and on various specified grades,
“Article 35. 4’ Article 34. ‘* Article 30. ” Khan, op cit. chapter 4. 44 ISA, 1977, Article 44. ” INRA, Article 30. Q /bid, and see Figure 1. ” Ibid. paras 2 and 6.
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The International
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Table 1. International
Rubber Agreement
management
measures.
Band
Sector
B’ -C’
Inner Lower Sector 178.5-168
The Manager may sell or buy
C’
Inner Lower Minimum (Lower Trigger Action
The Manager shall purchase
Minimum
a
Natural
Action
Lower
168 Point)
Indicative
Price 150
The Manager shall buy and all resources shall be used for the defence of the minimum price
8*-C*
Inner Upper Sector 241.5-252
The Manager may buy or sell
C*
Inner Upper Maximum 252 (Upper Trigger Action Point)
The Manager
Maximum (Upper Trigger Action Point) 270
The Manager shall sell and use entire resources for the defence of the maximuma
I NRA, Article 3 1.
shalt
sell
with equal weighting. The market indicator price is deemed above or below the specified points if the daily market indicator prices for the last given market days is above or below such a price leve1.48 The MIP so constituted recognizes the diversity of grades and markets and avoids the possibility of a precipitous action.
48/bid, Article 3 1 49Article 31, para 50Article 31, para
260
1 cc), and Article 36. 4.
Operation For the purpose of its operation, as with its organization, the international stock is divided into two components, normal and contingent. The normal stock is intended to be used for the defence of the inner stabilization band. The normal stock and the contingent stocks are utilized for the defence of the outer stabilization band. In the B’ - C’ band, Middle Sector (178.5-245.1 cents), the Manager is prohibited from operation except for rotation of stocks.4g Further management measures in different bands and sectors are shown in Table 1. The sector within which the anticipatory action may be taken is narrow, although within these sectors the entire resources of the international stock are available for corrective active. The agreement thus envisages and provides for short and swift measures. When the defensive action has resulted in the maximum limit of the international stock, ie 400 000 tonnes, the Council decides by special vote whether to bring the contingent stock into operation. It also determines the point at which to start its operation. Unless the Council decides otherwise, the Manager is obliged to commence operation at the mid-point between the trigger point and the lower or upper indicator point (D’ and D2). This leaves a sector to the freemarket operation. The total resources of the international stock are committed to the defence of the two extremities of the price range.‘O The agreement makes a distinction between three price objectives: stabilization of prices, stabilization of export earnings, and the achievement of increased export earnings. The international stock is used for achieving the first; the adjustment of the price mechanism for the second. The increased export earnings objective is largely left to the ‘best endeavour’ formula. The price mechanism in an international commodity agreement serves the purpose of a gauge on which the regulatory instrument operates and when adjustable it is a regulatory instrument by itself. The INRA, the reference price and the price range are adjustable. In the INRA the adjustment mechanism is elaborate.
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The International Natural Rubber Agreement 1979
The reference price may be revised for market or monetary reasons. The price will be reviewed every 18 months. The market trends and net changes in the international stock are, inter alia, determining factors. No revision of the reference price can however be made if the market price (MIP) over the six months prior to review has been outside the middle sector.51 The reference price on the other hand will automatically be revised downwards by 5%, if the MIP during the similar period has been below the lower intervention price (the inner minimum). The Council has the discretion to alter that percentage, but not the nature of the decision.52 Similarly, an automatic change in the reference price amounting to 3% is made, if net international stock purchases or sales amount to 300 000 tonnes have taken place since the entry into force of the agreement or the last change in the reference price.53 Reference price cannot be changed in such a way as to push the operative sectors beyond the present range (150-270 cents).54 The revision of the indicative prices, ie the minimum and maximum prices, is not simple. No circumstances for automatic changes are given. The range is to be reviewed every 30 months, not every 18 months as in the case of the reference price. In exceptional circumstances the review may take place earlier, when requested by members having over 200 votes, or when the automatic changes in the reference price have been made and the market indicator price for the past 60 days has been lower or higher than the trigger price, and is outside the scope of the normal stock. In the review, the Council shall take into account the trend of natural rubber prices, consumption, supply, production, costs and stocks, as well as the quantity of natural rubber held in the international stock and the financial position of the stock. Revision can only be made by special vote.55 No revision can be made if the prices on average for the past six months have been below the reference price (210 cents). Similarly, no downward adjustment can be made if for the same period prices have been above the reference price. The adjustment can be made in either direction - the Council is authorized to revise ‘the lower and upper indicative prices’.56 In the ITA, the Council may revise either or both.57 Presumably, this is not allowed in the INRA. One-sided adjustment will upset the symmetry constructed around the reference price (see Figure 1). In the adjustment of the reference price for monetary reasons, the INRA goes a step further than the other contemporary ICAs. The circumstances in which such a revision is allowed are clearly defined. The review is warranted when the exchange rates of the reference currencies and that of the major natural rubber exporter and importer members change to the extent that the operation of the international stock, not the objectives, of the agreement in general ‘are significantly affected’. The Council establishes the procedure to determine the given contingency justifying the adjustment.58 There is no machinery for securing increased export earnings. The agreement leaves this objective to be achieved through increased productivity. The Council is given the function of identifying and proposing appropriate measures for promoting the development of the natural rubber economy by producing members and ‘thereby increasing the export earnings’ of producing members, providing at the same time the reliability of ~upply.~~
5’ Article 32, para 1 (a). 5z /bid, para 1 (c). 53 Article 32, para 3. ‘a Article 32, para 4. 55 Article 32, para 5. 56 Ibid, para 8. 57 ITA 1975, Article 27, para (d). 58 INRA, Article 40. 59 Article 44.
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The Itlrerrmtiorral Natural Rubber Agreement
1979 Upper indicative pnce (UIP)
Max
270 I
( UTAP)
C2
252
Upper trigger action price
B2
241.5
Upper intervention price (UITP)
I Gl
E
I
I G *0 :: I
I g s q I
s 8 : + I I A
210
Reference price
! / I i I
Figure Rubber
International Natural 1. Agreement 1979 price range
and sectors. Source:
INRA
1979,
Articles
30 and 31.
8’
178.5
Lower intervention price (LITPI
C’
168
Lower trigger action price (LTAP)
0’
,59_
Min
150
____------___--_-------~ ln
I
Lower indicative price (LIP) CS: Contingent stock II lndicotes the limits of the Normal Stock
Supply measures The producing countries do not undertake any specific supply commitments, but they are obliged to pursue policies and programmes which ensure continuous availability to consumers of natural rubber supplies. In the event of potential shortage of natural rubber the Council may make recommendations relating to appropriate steps to ensure rapid increase in the supplies.60 Obstacles to trade In this field, the agreement has made some, but not significant, advances. The Council shall identify obstacles to the expansion of trade in natural rubber in its raw, semi-processed and modified form, and may make recommendations to the members to seek mutually acceptable measures designed to remove progressively, and where possible, eliminate such obstacles. 61 Within what forum this is to be done is left for the members themselves. Theoretically, it is possible for the members to use the Council as a forum for this purpose, but it will be an innovation. Such measures are negotiated within GATT, within the framework of regional cooperation, such as the Lomt Convention between the EEC and the African, Caribbean and Pacific countries (ACP) and bilateral agreements, and certain concessions are granted unilaterally within the General Scheme for Preferences (GSP). Perhaps the time has come to establish some form of coordination among these diverse and at present truncated fora. The examine periodically Council shall the results of its recommendations.62 6o Article 6’ Article ‘* Ibid.
262
43. 50.
Transportation and market structure The agreement goes some way towards recognizing
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the grievance of
September
1980
The Internatiorlal
Natural Rubber Agreement
1979
the producing countries that the transportation charges at present applied to natural rubber are an obstacle to the expansion of trade, but as to the remedial measures it does not go beyond a recommendatory device. The Council should, not shall, encourage and facilitate the promotion of reasonable and equitable freight rates and improvements in the transport system, so as to provide regular supplies to markets and to effect savings in the cost of the products marketed. How it is to be done is not specified. Thus the argument that these matters are appropriately dealt with within the Committee of Shipping of UNCTAD has, on the whole, prevailed.
Research and development (other measures) The importance of R&D is recognized and the areas which are relevant to the achieving of the objectives of the agreement are specified. They relate to the promotion of the development of the natural rubber economy by producing members through expanded and improved production, productivity and marketing, and improvement of reliability of supply. In these areas, the Council shall identify and propose appropriate measures and techniques. The proposals will be made after appropriate studies by a Committee on ‘other measures’ which will comprise consuming and producing members. The Council is authorized to make appropriate arrangements for financing of these projects. These arrangements include the Second Account, the so-called ‘second window’ of the Common Fund.63 The apprehension expressed during the negotiation of the Common Fund that the Second Account operation would be just another way of providing aid or grants is not substantiated. The area of R&D is well defined. The projects will be examined by a bipartite committee and finally they are approved by the bipartite Council.
Relationship with the Common Fund
63 Article 44. 64 TD/IPC/CF/CONF/19, Ref 38, paras 10, 1 1 and 13. See also Khan, op cit. Ref 38. 65 TD/IPC/CF/CONF/19, para 2. 66 Ibid. paras 3-9. 67 See Ref 64. “UNCTAD Report, op tit, Ref 38, para 1 O(a). “Ibid. para 14.
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A formal treaty establishing the Common Fund is being negotiated, but the fundamental elements of the Common Fund have been agreed. The relevant points are as follows. The Fund will comprise two accounts,64 the first devoted to the international stocks and quasiinternational stocks;65 and the second to R&D measures, described somewhat dismissively as ‘other measures’.66 The members will make mandatory contributions of US%400 million for the purpose of the first account, from which at least $70 million will be allocated to the second account. The second account will comprise $350 million and will be financed largely from voluntary contributions through a pledging system. 67 The role of the governmental contribution is to ‘enhance the creditworthiness?* of the Fund and not to be the mainstay of its operation. The role of the Fund is to facilitate borrowing to the international commodity organizations which associate with the Fund. The international commodity organizations (ICOs) will deposit one-third of the borrowing requirement to the Fund, and the ICOs and their respective members will guarantee the amount to be borrowed.69 The details for the operation of the R&D account are still to be agreed. The Natural Rubber Council is authorized to negotiate with the Common Fund an association agreement with a view to utilize the facilities of the Fund. As noted above, the borrowing requirements of
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The International Natural Rubber Agreement 1979
the Natural Rubber Council are limited. At the most these can be equivalent to the value of the contingent stock. The expectation that the Common Fund will be the sole sources of the financing of international stock has not only been abandoned, but this agreement seems to indicate that the requirements for those borrowing will be minimal. The utilization of the second account of the Fund will also be limited and subject to the decision of the Council on which the producing and consuming countries have equal voice.
Domestic policies of producing countries On this matter, the producing countries have conceded ground to consuming countries. Domestic policies of producing countries are now a matter of international concern and subject to consultation within the Council. Formally at least the concession is not unilateral, as the Council is empowered to consult at the request of any member on natural rubber policy ‘directly affecting supply and demand’, and may submit its recommendation to members for their consideration.70
Conclusion
” ”
Ibid, Article 45. UNCTAD Resolution refers to ‘rubber’.
93(V),
1976,
The homogeneity of interests among the producing countries, the narrowing of the scope of the agreement to natural rubber,” the certain innate advantages of natural rubber over synthetics with which it competes, the well prepared case by the producing countries, and above all the favourable disposition of the consuming countries, have helped in bringing about the agreement on natural rubber. The principle of joint responsibility in financing the international stock has been implemented. But this has only been brought about with major changes and diminution of the scope and operation of the regulatory machinery: the agreement has no supplementary regulatory mechanism; its sole instrument is the international stock; the band within which the stock operates is very much curtailed; the competence of the Manager to take anticipatory defensive action is reduced; and the agreement now relies on short and swift action for the defence of the inner and outer stabilization range. Further, the concept of the contingent stock is an innovation, and its operation is not automatic - it requires, inter alia, special approval of the consuming countries. The price range is wide - it is expected to be maintained by a combination of the international stock and the operation of the free market. An elaborate machinery for the adjustment of the prices is given. Objective factors are specified and the machinery by which these factors are to be established is stipulated. In the decisions on this matter there is a combination of certainty of automatic adjustment in given situations and the reliance on a consensus to be evolved in the Council. Outside the supply measures, the agreement, constrained by the framework of international commodity negotiations, has not made much advance. It recognizes the problems of freights and marketing, and empowers the Council to make appropriate recommendations and a periodic review of the progress on the implementation of those recommendations. The members, however, are left to deal with these the problems in appropriate fora. As with other commodities, agreement demonstrates the need for some coordination between the
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The International Natural Rubber Agreement 1979
ICAs and the agencies within which the measures pertaining to primary commodities are taken. The Natural Rubber Council is authorized to establish the association arrangement with the Common Fund, but its borrowing requirements are likely to be small. The area of R&D has been well defined and the projects are to be determined by well defined criteria and scrutiny. The agreement demonstrates that R&D is an essential part of ICAS. The International Natural Rubber Agreement is a mosaic of checks and balances with some characteristics of its own. It is attractive, but it is unlikely to be a pattern for other commodities under the IPC. The price mechanism, not the actual figures, and the distinction between normal and contingent stock (not necessarily the manner of its operation), merit serious consideration. Its reliance on a single regulatory instrument of the international stock cannot be taken as a precedent for other commodities.
Bibliography Preparatory
Meetings
on
Rubber:
relevant documents 1
2
3
4
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POLICY
September
Report of the First Preparatory Meeting on Rubber: 17-2 1 January 1977 TD/B/IPC/RUBBER/l, 1 February 1977 Report of the Second P.M. on Rubber: 6-lOJune 1977 TD/B/IPC/RUBBER/4. 17 June 1977 Report of the Third P.M. on Rubber: 27 Feb.1 March 1978: TD/B/IPC/RUBBER/9.2 March 1978 Report of the Intergovernmental Task Force on Rubber on its First Session: 1 O-20 October 1977 TD/B/IPC/RUBBER/5, 9 November 1977
1980
5
6
7
Ditto, Second Session: 1977 TD/B/IPC/RUBBER/7,
6-9
December
20
December 1977 Intergovernmental Report of the Working Grouo on Rubber: 2-9 June 1977 TD/B/IPC/RUBBER/3 (ACi2) 9 June 1977 Report of the Preparatory Group for the Nations Conference on United Natural Rubber 1978: 20 August-7 September 1978 TD/RUBBER/2 (PG/2) 2 October 1978.
265