Thai Economy: Trading Rice for Oil with Iran

Bangkok, 31 Oct. In an effort to address credit, food, and oil woes, Thailand and Iran are planning to barter rice and oil.

Bangkok, 31 Oct. In an effort to address credit, food, and oil woes, Thailand and Iran are planning to barter rice and oil.

The last nations we might expect to prove trade theories and capitalism might be those most opposed to them, like the former-Soviet Union and Iran. But it is remarkable that both have done so, both under adverse economic conditions.

In 1972, a fear of the Soviet ruble, or the ability to spend it outside the USSR, led Pepsi to accept Stolichnaya vodka in a barter trade to introduce its soda into the huge Soviet market. The USSR had Pepsi and the US had Stoli. Both had to be happy.

The barter system may well be one of the oldest methods of trade, but it has all but disappeared. One of its major drawbacks is the double coincidence of wants, which means both parties must want each other’s product. Money has eliminated this barrier. Furthermore, each party had to have the need to consume the other party’s goods, or sell it.

But what if the money is no good? What if one country does not want the other country’s currency? Or what if one nation has ideological or political objections to a currency? On 13 October, EconomyWatch’s Ron Portobello wrote about Iran’s overt reticence to using the greenback, or even outright hatred of the dollar.

This may help explain the deal Iran and Thailand are planning to exchange oil for rice. Not all of the blame can be placed on Iran’s dislike of the US dollar. Even if they wanted to use it, it would be difficult considering the US has placed sanctions on its banks, meaning Iran has had trouble financing agriculture trade all along. Add the current financial crisis into the complex equation, and the barter proposal actually makes sense, as long as there is the double coincidence of wants.

Given the fact that the world is facing oil and food price pressures, and that Thailand is the world’s largest rice produce and Iran is the world’s second or third largest oil producer – depending on how it is measured – that double coincidence of wants is present.

And assuming each can produce its own product cheaper than the other – Ricardo’s comparative advantage – both willing trade parties will be able to receive and consume more. Keep in mind that Thailand produces oil and Iran produces rice.

Credit and liquidity are nowhere to be found anyway, so a simplification in trade such as this is logical. Concepción Calpe, a senior economist from the UN Food and Agriculture Orginisation (FAO) in Rome, said, “Government-to-government deals will increase in number. The lack of credit for trade could lead also to a resurgence of barter deals between countries.”

The managing director of London rice brokers Jackson Son & Co,?Ben Savage, said the credit crunch has not entirely impacted food trade yet because the majority of agricultural trade contracts had been signed prior to the financial meltdown.

“Trade finance has tightened sharply and, in many cases, letter of credit confirmation fees have doubled or tripled. Exporters are reviewing the terms of payment they are ready to accept and credit they are prepared to give,” he said.

Letter of credit confirmation costs have now risen to 3-4% of the contract value. Before the financial crisis these fees were only 1-1.25%.

The FAO director-general, Jacques Diouf, showed his fear that the credit crisis could exacerbate an already-complicated and unstable food situation worldwide, “Borrowing, bank lending?.?.?.?all may be compromised by a deepening financial crisis.”

Where conventional trade tools may fail, necessity and comparative advantage will prevail. Even the anti-capitalist Soviets proved this Ricardian theory, and the anti-American Iranians are doing the same.

Bjorn Supaporn, EconomyWatch.com