Why are global commodities so much cheaper in poorer countries?
October 28, 2022 6:59 AM Subscribe
For example: In San Francisco, USA, a gallon of gas is $5.50 and a seared tuna entree at an upscale restaurant is $35. In Medellin, Colombia, the respective prices are $2.00 and $7. Gas and tuna not local goods, there's a global market for them. Why are they cheaper in poorer countries?
What's more, these costs are roughly proportional to the buying power of a citizen in each country.
I can understand why coffee might be cheaper in Colombia because it's what they make — or steak in Argentina because there's so much ranch land ... but local production can't explain all of it, can it? I see so many products that don't seem to be locally produced ... and could probably be sold for more money abroad.
Colombia is a major oil producer, sure, but still, why would it sell internally and price so low when it could sell abroad?
And then tuna definitely has to be shipped inland and into high mountain valleys to reach Medellin. Why not take as much trouble to put it on a boat to San Francisco, since the fisherman is already on the water, and transport costs by sea are a fraction of those by air or ground?
Are there subsidies at play in poorer countries?
Is, say, Colombia conducting a trade for items that are locally cheaper and can command higher prices abroad, like coffee, for that tuna steak?
Or is the basic commodity price the same... say the tuna steak is $2, and the price differences between places are all in local cost of living? The dinner in SF is $35 minus $2 = $33 in rents, transport and local wages, while the dinner in Colombia is $6 minus $2 = $4 in rents, transport and local wages?
What's more, these costs are roughly proportional to the buying power of a citizen in each country.
I can understand why coffee might be cheaper in Colombia because it's what they make — or steak in Argentina because there's so much ranch land ... but local production can't explain all of it, can it? I see so many products that don't seem to be locally produced ... and could probably be sold for more money abroad.
Colombia is a major oil producer, sure, but still, why would it sell internally and price so low when it could sell abroad?
And then tuna definitely has to be shipped inland and into high mountain valleys to reach Medellin. Why not take as much trouble to put it on a boat to San Francisco, since the fisherman is already on the water, and transport costs by sea are a fraction of those by air or ground?
Are there subsidies at play in poorer countries?
Is, say, Colombia conducting a trade for items that are locally cheaper and can command higher prices abroad, like coffee, for that tuna steak?
Or is the basic commodity price the same... say the tuna steak is $2, and the price differences between places are all in local cost of living? The dinner in SF is $35 minus $2 = $33 in rents, transport and local wages, while the dinner in Colombia is $6 minus $2 = $4 in rents, transport and local wages?
Colombia has a big subsidy for internal gas/oil sales. A lot of developing countries subsidize goods like oil.
In terms of the tuna, yes, I would think labor, rent, and transport (which is a lot of labor) makes up much of the difference.
posted by Mid at 7:11 AM on October 28, 2022 [3 favorites]
In terms of the tuna, yes, I would think labor, rent, and transport (which is a lot of labor) makes up much of the difference.
posted by Mid at 7:11 AM on October 28, 2022 [3 favorites]
If you buy an identical tin of sardines,
but in Rich Country, you buy it from a large air conditioned supermarket with electronic/computerised cash registers; EFTPOS[1] (which banks charge for); and 15 cashiers plus shelf stocking staff;
whereas in Poor Country you buy it from a single person operating in an outdoor market, only accepting cash, and doing the maths in their head
there's a big difference in the overhead costs.
[1] Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at payment terminals located at points of sale
posted by chariot pulled by cassowaries at 7:13 AM on October 28, 2022 [2 favorites]
but in Rich Country, you buy it from a large air conditioned supermarket with electronic/computerised cash registers; EFTPOS[1] (which banks charge for); and 15 cashiers plus shelf stocking staff;
whereas in Poor Country you buy it from a single person operating in an outdoor market, only accepting cash, and doing the maths in their head
there's a big difference in the overhead costs.
[1] Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at payment terminals located at points of sale
posted by chariot pulled by cassowaries at 7:13 AM on October 28, 2022 [2 favorites]
By the way, you may be interested in the Big Mac index, which is published by The Economist to analyze these types of purchasing power differences. I have never really understood everything that goes into purchasing power calculations, but I think this may be a good place to start.
posted by Mid at 7:13 AM on October 28, 2022 [2 favorites]
posted by Mid at 7:13 AM on October 28, 2022 [2 favorites]
Why do some people pay $600 for jeans when there are other jeans for sale for $40? The simple answer is that people selling jeans for $600, or tuna for $35, find people willing to pay the price they're asking. If SF tuna restaurants could find people willing to pay $38 for tuna, that's what they'd charge.
posted by kevinbelt at 7:21 AM on October 28, 2022 [1 favorite]
posted by kevinbelt at 7:21 AM on October 28, 2022 [1 favorite]
Particularly in the case of the tuna, I'd agree with what everyone else is saying, most of the difference is going to be about the costs associated with turning the tuna into the tuna steak entrée - so wages, rental, and what the clients are willing to pay.
However, you can also have various trade barriers, either monetary or non-monetary that make it more difficult and expensive to export goods than sell them domestically.
Tariffs/duty are more obvious and are generally used to protect a domestic industry from cheaper imports. (I don't think that this applies for tuna from Colombia to the US, but I could be wrong.) If the US were to have a tariff of 10% on Columbian tuna, then taking your $2 example, the fisherman would get $2, but the buyer would need to pay $2.20, with the additional $0.20 going to the US government. (This is also why duty-free products are cheaper.)
Non-tariff barriers are a little less obvious, but it includes a lot of paperwork and requirements to be licensed, or additional agencies/middlemen, all of which adds to the cost of the commodity to the buyer, but without the seller seeing any of the increase. This tends to be more about proving that the goods are meeting the standards of the importing country, rather than simply blocking trade (but can be used that way too!)
There may also be differences in taxes (sales taxes, VAT, etc.) that affect the end price.
posted by scorbet at 7:42 AM on October 28, 2022
However, you can also have various trade barriers, either monetary or non-monetary that make it more difficult and expensive to export goods than sell them domestically.
Tariffs/duty are more obvious and are generally used to protect a domestic industry from cheaper imports. (I don't think that this applies for tuna from Colombia to the US, but I could be wrong.) If the US were to have a tariff of 10% on Columbian tuna, then taking your $2 example, the fisherman would get $2, but the buyer would need to pay $2.20, with the additional $0.20 going to the US government. (This is also why duty-free products are cheaper.)
Non-tariff barriers are a little less obvious, but it includes a lot of paperwork and requirements to be licensed, or additional agencies/middlemen, all of which adds to the cost of the commodity to the buyer, but without the seller seeing any of the increase. This tends to be more about proving that the goods are meeting the standards of the importing country, rather than simply blocking trade (but can be used that way too!)
There may also be differences in taxes (sales taxes, VAT, etc.) that affect the end price.
posted by scorbet at 7:42 AM on October 28, 2022
Agreed on the consensus so far - i.e. whenever you buy something, you aren't just buying the thing, but the labor, rent, infrastructure, etc. that surrounds it. Presumably you can find this at play in Medellin - the same food item is likely cheaper when bought in an outdoor market vs. in a climate controlled store.
Colombia is a major oil producer, sure, but still, why would it sell internally and price so low when it could sell abroad?
Because the political capital it wins the government is not insignificant. I am less familiar with Colombia than I am with another oil state which does the same thing, where when they once tried to raise oil prices slightly, it resulted in large-scale protests that were extremely disruptive.
But also, your premise isn't 100% true all of the time. In many so-called "developing countries" certain global products are much more expensive - whenever I have lived in such a country my diet always changes pretty radically as a result, because if I was to eat similar foods as I do in the US, it would be easily six times the cost (like, I'm talking a head of lettuce for $20).
posted by coffeecat at 8:06 AM on October 28, 2022 [2 favorites]
Colombia is a major oil producer, sure, but still, why would it sell internally and price so low when it could sell abroad?
Because the political capital it wins the government is not insignificant. I am less familiar with Colombia than I am with another oil state which does the same thing, where when they once tried to raise oil prices slightly, it resulted in large-scale protests that were extremely disruptive.
But also, your premise isn't 100% true all of the time. In many so-called "developing countries" certain global products are much more expensive - whenever I have lived in such a country my diet always changes pretty radically as a result, because if I was to eat similar foods as I do in the US, it would be easily six times the cost (like, I'm talking a head of lettuce for $20).
posted by coffeecat at 8:06 AM on October 28, 2022 [2 favorites]
I used to work in sustainable seafood advocacy. The tuna thing is complicated to say the least. Let's look at seafood supply chains!
It's important to remember, any truly global commodity is essentially a vehicle for investor speculation first and a physical item second. The cost of production and the cost to the consumer become completely detached from one another via the magic of commoditization. And this is not even counting the markup from the restaurant! Rent in SF is insane.
Here's a close-to-home, simple example of a non-global-commodity supply chain with wildly differing prices: I buy Clover Leaf brand canned wild pink salmon instead of tuna. There is another brand called Raincoast* which leans heavily on the sustainability angle, which also sells canned wild pink salmon. But at twice the price.
From my work I know that both of those cans come from the exact same fishery. Literally, at the dock, they are buying from the same ships, because of how the pink salmon fishery is managed. They're probably even canned in the same facilities and just have a different label put on. There is no import/export, they're caught in Canada and sold in Canada, and they're both MSC certified because MSC looks at the fishery not the end product. The supply chain is short and easily traceable with few middlemen. The 2x price difference between the brands is just that, purely branding.
Colombia catches a lot of tuna, but the type of fishing boats in Colombia that catch tuna literally cannot go to San Francisco. I looked it up and the only way Colombia exports tuna is canned, or a bit to Ecuador for immediate canning there. So this tells us that unprocessed tuna from Colombia is not a truly global commodity.
The Medellin tuna you had is very very likely caught in-country by a small-time fisher with low overhead who likely gets a better price selling to the fresh market than to the canning factories. The Colombian tuna fishery is considered "underdeveloped," i.e. small boats not optimized for mass production / maximum exploitation of the fishery. These small boats, with variable catch based on weather, season, and labour costs, means the input is not regular and predictable and optimized. Lots of logistical difficulties to send these fish, as high-quality tuna steaks, into a global supply chain. But the cheap input, cheap output, simple supply chain, no investor speculation means costs are kept down. If they do go to canning that process transforms them into a global commodity because it regularizes them into a shelf-stable, predictable, identical unit available in mass quantities, ready for speculation.
In SF, the tuna you're eating may or may not be a "global commodity." But let's assume it is! If it is, that tuna is likely caught by a huge factory ship the size of a city block which is fishing in international waters under some random country flag. The tuna is flash-frozen on the ship immediately after catching (may or may not be cut into steaks at this point). This mass production process turns it into a global commodity in the frozen food supply chain.
Steaks from one tuna could be bought, sold, processed, and shipped back and forth around the world by different distribution companies. Because as you noted, shipping is cheap. Shipping in the frozen food supply chain is marginally more expensive but still not that bad compared to possible profit. The distribution corporations make various levels of profit along the way, with lots of speculation. Then the actual tuna steak is sold at various prices to the end consumer. At that point, the cost of catching it would be almost completely detached from the price that the restaurant pays.
If you want a truly insane and mind-boggling supply chain you should look up how grocery store fish fingers are made. Some of them travel back and forth across the globe multiple times (entirely within the frozen food supply chain) and still end up being super-cheap to the end consumer. In Canada the same species of fish that the fish fingers are made from, if it was caught fresh and bought at the local dock, would be vastly more expensive. It makes zero sense, intuitively, but that's global commodities for you!
posted by 100kb at 8:45 AM on October 28, 2022 [47 favorites]
It's important to remember, any truly global commodity is essentially a vehicle for investor speculation first and a physical item second. The cost of production and the cost to the consumer become completely detached from one another via the magic of commoditization. And this is not even counting the markup from the restaurant! Rent in SF is insane.
Here's a close-to-home, simple example of a non-global-commodity supply chain with wildly differing prices: I buy Clover Leaf brand canned wild pink salmon instead of tuna. There is another brand called Raincoast* which leans heavily on the sustainability angle, which also sells canned wild pink salmon. But at twice the price.
From my work I know that both of those cans come from the exact same fishery. Literally, at the dock, they are buying from the same ships, because of how the pink salmon fishery is managed. They're probably even canned in the same facilities and just have a different label put on. There is no import/export, they're caught in Canada and sold in Canada, and they're both MSC certified because MSC looks at the fishery not the end product. The supply chain is short and easily traceable with few middlemen. The 2x price difference between the brands is just that, purely branding.
Colombia catches a lot of tuna, but the type of fishing boats in Colombia that catch tuna literally cannot go to San Francisco. I looked it up and the only way Colombia exports tuna is canned, or a bit to Ecuador for immediate canning there. So this tells us that unprocessed tuna from Colombia is not a truly global commodity.
The Medellin tuna you had is very very likely caught in-country by a small-time fisher with low overhead who likely gets a better price selling to the fresh market than to the canning factories. The Colombian tuna fishery is considered "underdeveloped," i.e. small boats not optimized for mass production / maximum exploitation of the fishery. These small boats, with variable catch based on weather, season, and labour costs, means the input is not regular and predictable and optimized. Lots of logistical difficulties to send these fish, as high-quality tuna steaks, into a global supply chain. But the cheap input, cheap output, simple supply chain, no investor speculation means costs are kept down. If they do go to canning that process transforms them into a global commodity because it regularizes them into a shelf-stable, predictable, identical unit available in mass quantities, ready for speculation.
In SF, the tuna you're eating may or may not be a "global commodity." But let's assume it is! If it is, that tuna is likely caught by a huge factory ship the size of a city block which is fishing in international waters under some random country flag. The tuna is flash-frozen on the ship immediately after catching (may or may not be cut into steaks at this point). This mass production process turns it into a global commodity in the frozen food supply chain.
Steaks from one tuna could be bought, sold, processed, and shipped back and forth around the world by different distribution companies. Because as you noted, shipping is cheap. Shipping in the frozen food supply chain is marginally more expensive but still not that bad compared to possible profit. The distribution corporations make various levels of profit along the way, with lots of speculation. Then the actual tuna steak is sold at various prices to the end consumer. At that point, the cost of catching it would be almost completely detached from the price that the restaurant pays.
If you want a truly insane and mind-boggling supply chain you should look up how grocery store fish fingers are made. Some of them travel back and forth across the globe multiple times (entirely within the frozen food supply chain) and still end up being super-cheap to the end consumer. In Canada the same species of fish that the fish fingers are made from, if it was caught fresh and bought at the local dock, would be vastly more expensive. It makes zero sense, intuitively, but that's global commodities for you!
posted by 100kb at 8:45 AM on October 28, 2022 [47 favorites]
There are different grades of tuna as well - I see in my area, prices for go from $9.99 a lb for wild caught tuna loin at a regular grocery store to $27.99 fresh yellowfin tuna steak per lb at the upscale grocery store. If I had to guess they send the higher quality stuff to the people who can pay more in general, though there may be some privisions for locally caught stuff.
posted by The_Vegetables at 8:54 AM on October 28, 2022
posted by The_Vegetables at 8:54 AM on October 28, 2022
If SF tuna restaurants could find people willing to pay $38 for tuna, that's what they'd charge.
And in some cases, it's not just a matter of willingness but able to. As long as you're still reasonably profitable, it's better to make a little money off of a poorer country than nothing at all.
posted by Candleman at 9:36 AM on October 28, 2022
And in some cases, it's not just a matter of willingness but able to. As long as you're still reasonably profitable, it's better to make a little money off of a poorer country than nothing at all.
posted by Candleman at 9:36 AM on October 28, 2022
Thing is that a lot of things are more expensive in these countries, too. Steak may be cheaper in Argentina and rent may be comparatively less but only for people being paid in foreign currencies; there's also an inflation rate of 73.5% expected by the end of the year and its daily and monthly effects are excruciating. Also, products like chapstick or hand cream can be even more expensive than in the US, just like the store price.
posted by smorgasbord at 10:29 AM on October 28, 2022
posted by smorgasbord at 10:29 AM on October 28, 2022
Ignoring the actual supply-chain, retail amenities, and government subsidy issues mentioned above (which is a lot of ignoring), there also seems to be a supply and demand issue. The tuna fishers of the world fish enough to satisfy global demand for tuna (presumably), but you can only sell so much of that tuna to people in San Francisco at San Francisco prices. They certainly want to sell it to them at those high prices, because that's a higher profit margin. But there's still lots of tuna left over after San Francisco has gorged itself on seafood, which Big Tuna (imagining for the moment a monolithic tuna-selling conglomerate) needs to sell elsewhere. Say, in Medellín. Your average Medellinense can't afford to pay San Francisco prices for tuna; price it the same and it will sit around until you have to throw it away. You're better taking a smaller profit — or even a loss, if you've badly misjudged demand — than getting zero value whatever for the product. The idea of a "true value" is illusory; value is dictated by supply and demand, and even if the supply is completely moblie, demand is geographically price-dependent.
(Disclaimer: I am not an economist. Or a Californian, Colombian, or tuna fisherman. All the above is a probably pretty naïve take.)
posted by jackbishop at 10:52 AM on October 28, 2022
(Disclaimer: I am not an economist. Or a Californian, Colombian, or tuna fisherman. All the above is a probably pretty naïve take.)
posted by jackbishop at 10:52 AM on October 28, 2022
You are comparing apples and oranges as far as the tuna though. A seared tuna dish in SF is probably made with yellowfin or bigeye tuna, which is more expensive. The dish in Columbia is probably made with albacore tuna, which is cheaper. The raw ingredient cost is going to be significantly different.
A lot of food is just not traded internationally as easily as you are imagining. Transport (especially cold chain), customs and tariffs, certifications and import rules, packaging, etc. — there are a lot of factors that make fresh or frozen foods significantly cheaper where they are produced compared to where they are imported.
Why not take as much trouble to put it on a boat to San Francisco, since the fisherman is already on the water, and transport costs by sea are a fraction of those by air or ground?
It is not cheap to package, freeze, transport frozen and import tuna to the US from Colombia. Shipping fresh fish inland is much cheaper.
posted by ssg at 10:54 AM on October 28, 2022
A lot of food is just not traded internationally as easily as you are imagining. Transport (especially cold chain), customs and tariffs, certifications and import rules, packaging, etc. — there are a lot of factors that make fresh or frozen foods significantly cheaper where they are produced compared to where they are imported.
Why not take as much trouble to put it on a boat to San Francisco, since the fisherman is already on the water, and transport costs by sea are a fraction of those by air or ground?
It is not cheap to package, freeze, transport frozen and import tuna to the US from Colombia. Shipping fresh fish inland is much cheaper.
posted by ssg at 10:54 AM on October 28, 2022
There's also the impact of goods and services tax.
I was shocked to find the same brand of Jarlsberg cheese was significantly more expensive in Norway (where it is made)
than the exact same brand in Australia - even tho it has to be shipped in refrigerated containers from Norway to Australia!
It's because Norway has high tax levels on many consumables.
posted by chariot pulled by cassowaries at 12:21 PM on October 28, 2022
I was shocked to find the same brand of Jarlsberg cheese was significantly more expensive in Norway (where it is made)
than the exact same brand in Australia - even tho it has to be shipped in refrigerated containers from Norway to Australia!
It's because Norway has high tax levels on many consumables.
posted by chariot pulled by cassowaries at 12:21 PM on October 28, 2022
Colombia has a state-owned company Ecopetrol and use subsidy to keep fuel prices low inrrespective of crude prices, but it's not a sustainable strategy. It also extracts its own crude oil and is an energy exporter.
US has a use tax / excise tax on gasoline to fund highway construction and safety programs instead.
posted by kschang at 1:49 PM on October 28, 2022
US has a use tax / excise tax on gasoline to fund highway construction and safety programs instead.
posted by kschang at 1:49 PM on October 28, 2022
Just to follow up with one more little tidbit of chaos from the seafood supply chain: I didn't even mention that your tuna steak in SF is likely a fraud! Here's a comprehensive overview from the Guardian on fish fraud. Any fish moving through the global seafood supply chain, especially when it's sourced from an IUU fleet, especially tuna, is very suspicious. Here's a 2016 report from Oceana which mentions that "Ninety-eight percent of the 69 bluefin tuna dishes tested in Brussels restaurants were another species." Brussels is a very wealthy place, and I'm sure those dishes were expensive. But I'd put real money on the Medellin fish being actually what it says it is.
posted by 100kb at 9:00 AM on October 29, 2022 [2 favorites]
posted by 100kb at 9:00 AM on October 29, 2022 [2 favorites]
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2. Rents for shops and restaurants are different;
3. Sometimes the country with the lower prices has MUCH laxer safety standards, so the goods are not equivalent. eg, Does the fish contain more mercury than would be permitted in a richer country?
posted by chariot pulled by cassowaries at 7:02 AM on October 28, 2022 [6 favorites]