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Criteria and Methodology

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Value chains also called marketing chains from the marketers perspective are the integrated chains in which products are transformed from being raw

    Working paper 9.03.03

    Criteria and Methodology to improve

    the Effects of International Trade on Food Security in

    Fish-Exporting and Fish-Importing Developing Countries

    By

    Torbjørn Trondsen *

    Norwegian College of Fishery Science

    University of Tromsø and Bodø College, Norway

    INFOSAMEK/FAO

    Expert Consultation on International Fish Trade and Food Security.

    Casablanca 27-30 January 2003

    *Address: Office: Breivika, 9037 Tromsø. Phone +4777645567, Fax +4777646020, email torbjorn@nfh.uit.no, Internett: http://www.fishmarketing.com/

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Abstract

    This paper shows how criteria and methodology to improve the effects of international trade on food security in fish-exporting and fish-importing developing countries can be generated from international fish marketing and strategic management theoretical frameworks. Business behaviour in value chains is the unit of analysis. Observed trade performance, driven by the traders‟ competitive strength is a

    function of trade structures and the value chain strategies. Trade structures rely on the related market power from (i) the political, economic, social and technological environment (PEST) and (ii) the competitive structure in the value chain; for example, the degree of competitive rivalry and historic traditions regarding preferences and supply. The competitive strength of the value chain can be measured by the products‟ and marketing services‟ transaction value to its customers, their rarity in the market

    place, their possibilities for imitation or their dependency on specific organizational structures and the difficulty of imitation (The VRIO concept). Competitive product and marketing services are combinations of many things, including delivery of products, services, prices and promotions at desired locations and times which satisfy customers better than competitors. The paper also illustrates the importance of transaction barriers for trade between regions of high and low-income levels. Competitive value chain strategies for improving food security in underdeveloped countries are oriented toward production and cost efficiency. Competitive value-adding export strategies from underdeveloped countries offer differentiation advantages for high-income groups and regions, which may gain higher revenues than are available through domestic trade.

    Improving food security from international trade may rely upon a broader governance of a range of policies including: fisheries management to secure sustainable

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    harvesting, economic policy to secure distribution of the economic gain from trade and a supply policy to secure products and marketing services preferred by the consumers.

    The paper proposes the concept of individual export quotas (IEQs) as a market solution for improving both food security and economic development. Countries with an insecure food supply situation in a WTO framework might be permitted to issue individual export quotas. Such IEQs might be issued to individuals on the condition that they are reciprocated by the import of at least the same quantity of food for human consumption. It is argued that IEQs will generate net surplus from the export of high value products but will also be accompanied by no lesser quantity of cheaper products into the food-deficient exporting country. The idea of an IEQ to protect food supply for low-income consumers has its parallel in individual fish quotas (ITQs) which are intended to protect fish stocks at the same time as generate economic gain.

    Concluding hypothesis: International trade of fish improves economic development, but not necessary for all. Trade might improve food security, but not necessarily for all and especially low-income groups. Food security measures should be integrated within international trade regulations to encourage both economic development and food security. Policy must rely on the analysis of behaviour, market power and interests for change in the PEST environment and in the value chains. Imposing of individual IEQs where export quantities in each trading company are balanced by similar import quantities, may improve both economic development and food security.

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Introduction

    This paper deals with the criteria and methodology to improve the effects of international seafood trade on food security in fish-exporting and fish-importing developing countries. The main question to be discussed is: what is the main international fish trade barriers for food security between regions with different regional economic development levels and how can government influence international fish traders that improves food security. Individual fish export quotas (IEQs) are discussed as a regulation strategy for improving food security in needed regions. The discussion will embrace theories on international marketing and strategic management and will be illustrated by a case of Norwegian-Russian fish trade.

Theoretical criteria for trade analysis

    From a marketing strategy perspective, international trade may be seen as value adding transactions conducted over national boarders between businesses in value chains where fish products and money are exchanged. Value chains (also called marketing chains from the marketers perspective) are the integrated chains in which products are transformed from being raw material through to manufacture products (and services); information about these products is communicated and ultimately they are delivered to targeted markets wherein consumers are willing and able to pay for them. This chain integrates physical or technological processing, logistics, economic and social transactions related to the product flows. Social transactions include a variety of sociological, cultural and political interactions.

    Figure 1 about here

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    Value adding is the profit seeking activities that fuel the transactions. Both total value adding and its distribution among the participants in the chain are of interest for the analysis.

    Performance, in terms of value adding as a margin between sales value and production costs‟ is dependent on the total market power of the value chain as a whole

    compared to competing value chains and its distribution among the participants in the chain (Porter 1980). The source of market power is the participants‟ control of the demanded and limited trade barriers, which form the industry‟s value chain structure

    (Barney 1996). Market power can be gained by business conduct based on competitive combinations of market preferences, product attributes, the marketing mix and organizational solutions (Figure 1).

    Figure 2 about here

    The value chains are embedded in a broader societal context, which is conceptualised as PEST, meaning the political, economic, social and technological environment, controlled by Government and the society which influences the international trading patterns of seafood as well as all other products (Figure 2). Transaction costs are related to developing and maintaining management of transactions and trade barriers over time. The transaction costs are higher in the early stages of the development of the value chain because of the need to establish routine in relationships and the associated learning curve (Baker & Hart 1999). Transaction costs are both barriers for

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    business and Government. Businesses manage the value chain transaction costs while Governments manage the PEST transaction costs.

    The relative market power in the chain e.g. between traders in developed and underdeveloped countries, is dependent on the participants‟ relative competitive strengths and weaknesses, related to the firms‟ control over heterogeneous and

    immobile resources (physical and human). Thus, the value chain and the individual company‟s long-term competitiveness can be analysed through the VRIO framework (Barney 1996), which characterizes four important competitive factors: (1) Product value for customers, (2) Product rareness for customers, (3) Imitable resources and (4)

    Unique organizational resources. The higher the VRIO value the stronger is the competitive strength and market power for value adding in the transactions process between the end customer and the raw material supplier.

    The question of value stands for the products‟ and services‟ customer value. For example the more the customers require specific technical supply specification such as freshness or customer relations in order to satisfy their customers or needs, the greater will be the value of these specific product attributes for the buyer. However, the value is dependent on the rarity of the supply specifications offered in the markets: the greater the supply, the lower value. And vice versa. The best supplier position is to be able to provide the rarest specifications possible. Control over advanced technology or limited quotas belong to this category and here the ideal supplier position is to have control over products that cannot be imitated or copied. All successful products and strategies are copied in the market place if they are not protected. For example China‟s expansion in the fish processing business is heavily based on copying western technology. Patents, branding, exclusive quotas rights or

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    control over limited fresh fish supply belong to this factor category. Control over a unique organization to manage the internal and external value chain is also a competitive strength. The best supplier position is to control rare demanded products, which are embedded in unique business organizations developed through a long history of being difficult to copy in the market place. Well-developed cost or market oriented organizations, marketing networks, unique and competent staff and efficient organizations all belong to this factor category.

Case: Norwegian-Russian Fish Trade

    The following describes the development of Norwegian- Russian seafood trade in the period 1996- 2001 in order to demonstrate the dynamics of international trade development.

    After the Soviet Union was dissolved, Russian vessels were attracted by higher prices and so started landing cod in Norwegian ports. Over this time Norwegian imports grew from almost nothing to 140.000 tons in 2000

    The trawlers switched from their earlier supply of fish to processing plants in North West Russia, mainly Murmansk, and began deliveries of fresh fish to Norwegian processing plants. There was however a price premium for frozen-at-sea round fish, which could be traded internationally via Norwegian cold storage capacity, and consequently during the 1990s the Russian vessels invested heavily in onboard freezing. This investment effectively reduced the impact of freezing equipment as a trade barrier. Those in control of the cold chain trade barriers were able to increase their value adding, while those fish processors who had earlier purchased fresh fish

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    from the Russian vessels lost out. The cold store businesses were thus in a position either to sell to Norwegian processing plants for a higher price, or to trade on the international markets in its unprocessed round form. More recently a significant and expanding component of this trade has been with China for further processing into fillets, which are then re-exported to Europe and the USA.

    In the same period, Russia started importing fish from Norway. The quantity developed from a very low level in the Soviet period to 240 million kg/yr in the end of the period. The average price of the Norwegian import from Russia was 12-14 NOK per kg in 1999/ 2000, while the similar figure for the fish exported to Russia was 4-5 NOK per kg.

    The fish species exported from Norway fell into two categories: cheap small pelagic species including herring, mackerel, capelin and blue whiting for low income Russian consumers and more expensive salmon and trout for high income consumer groups within Russia.

    The trade development started as a result of reduction of the governmental-managed trade barriers between Norway and Russia. This reduction in control coupled with the existing value chain structures fuelled realignment of trading partnerships. Initially the Norwegian fish processing industry demanded more raw material to boost their integrated export oriented value chains, while on the other hand the Russian value chains were solely oriented to the domestic markets, a reflection of their earlier planned Soviet economy. The change in the macro environment meant that the Russian vessels in control of cod quotas in the Barents Sea were able to get much higher prices in line with international market levels compared to the prices offered by the old-fashioned Russian fishing industry. In addition, the new Russian

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    Government demanded landings taxes in Murmansk, which further discouraged Russian vessels to land at home.

    However on the other side of the transaction, the reduced supply of domestic landings into Russia at the time of an increased the demand for cheaper seafood products created a new trade opportunity. During the 1980s and 90s Norway had developed very cost efficient pelagic trawlers able to keep very high quality fish in RSW tanks (keeping fish in ice tanks at zero degree Celsius) before freezing in onshore factories. Whereas earlier most of these pelagic species had gone into the production of fishmeal, the opening of the Russian market made it possible to satisfy the increasing demand of its consumers for cheap pelagic round frozen fish.

    In addition an emergent consumer group with increasing buying power grew in Russia, especially in Moscow and St. Petersburg. These consumers were able to pay premium prices for imported high quality products such as farmed salmon, which found a ready supply available from the well-stocked Norwegian salmon industry.

    In the period 1996-2000, Norway exported 953,000 tonnes and imported 580,000 tonnes of fish, a trade surplus in excess of 370,000 tonnes. However in terms of value these volumes equated to a trade deficit of 1,7 billion NOK (about 200 mill US$). Combining these balances shows that the Russians gained 1.7 million NOK and 370.000 tons of fish through the transactions with Norwegian traders over the 5 years period by importing fish for 5,2 NOK/kg and exporting for 11,5 NOK/kg. In other words for each kilo of Russian fish exported to Norway, Russia could import 2,2 kg fish.

    Leaving aside the, possibly important, issue of consumer preferences it would appear that the winners in this case are the Russian consumers who have improved their

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    seafood supply of about 75.000 tons seafood a year (NSEC annual reports) From a welfare perspective it is important to note that the winners include low-income consumers who have preferences for low priced pelagic fish; this is in some contrast to the more general impact of trade which tends to result in reduced supply for poorer groups. In this case other beneficiaries also include high-income consumers with preferences for more high quality salmon. In addition, the Russian and Norwegian quota owners also win. Russians quota owners gained through the increased rent from the cod stock by exporting directly to Norwegian processing plants, while the Norwegian pelagic quota owners gained by increasing the sales of round frozen fish for human consumption instead of low priced sales for reduction to fishmeal. However costs were incurred in the process and were borne by the processing industries in North West Russia mainly in Murmansk. Upon losing raw material supply for their traditional white fish processing plants, thousands of fish processing workers became unemployed with adverse consequences for income and socio-economic welfare in the region.

    Despite this pattern over the 5 years period, the trading pattern is not necessarily sustainable in the longer term viewed in a VRIO perspective, only the control of quotas of the strategic business resources cannot be imitated. The Russian players in this value chain are already investing in factory trawlers and in pelagic boats, further helped by a Norwegian ship building industry. This technology is all available on the market. The Russians have a short learning curve and are soon able to manage the catching and processing operations in the same efficient way as Norway but with lower labour costs.

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