CRITERIA AND METHODOLOGY TO IMPROVE THE EFFECTS OF INTERNATIONAL TRADE ON FOOD SECURITY IN FISH-EXPORTING AND FISH-IMPORTING DEVELOPING COUNTRIES

by Torbjrn Trondsen Professor, Norwegian College of Fishery Science University of Troms, Norway 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 and (ii) the competitive structure in the value chain. 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. 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 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. 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. 1. THEORETICAL CRITERIA FOR TRADE ANALYSIS 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 are the main international fish trade barriers for food security between regions with different regional economic development levels and how can governments influence international fish traders to improve 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. From a marketing strategy perspective, international trade may be seen as value adding transactions conducted over national borders between businesses in value chains where fish products and money are exchanged. Value chains (also called marketing chains from the market perspective) are the integrated chains in which products are transformed from being raw material through to manufactured 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. Value adding are 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 industrys 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 1: Value chain behavioral model

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). Figure 2: Criteria for trade analysis 1. Market Power: Controlling values of interest to others 2. PEST: Political, Economical, Social and Technological environment 3. Transaction costs: Developing and maintaining costs for international transactions 4. VRIO: Traders competitive capabilities; a. What is the supply value for customers? b. How rare is the supply compared to competitors? c. Can the supply be imitated? d. Is the supply covered by organizational uniqueness? 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 and Hart, 1999). Transaction costs are both barriers for 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 companys 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 transaction process between the end customer and the raw material supplier.

The question of value stands for the customer value of products and services. 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 the 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, Chinas expansion in the fish processing business is heavily based on copying western technology. Patents, branding, exclusive quota rights or 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 tonnes 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 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 materials 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 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 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 refrigerated seawater 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, a consumer group with higher purchasing power emerged 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 million US$). Combining these balances shows that the Russians gained 1.7 million NOK and 370 000 tonnes of fish through the transactions with Norwegian traders over the five 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 seafood supply of about 75 000 tonnes 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 five year 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. 2. TRADE BARRIERS IN VALUE CHAIN Coordination of transactions and behaviours in the value chains is an important trading barrier between different cultures. Products, as we observe them in markets, are normally the result of a social, economic and technical process developed over a long period of time. The NorwegianRussian trade reflects an evolutionary process of product development with both fresh cod and round frozen pelagic species being established, well-known products in the respective markets. Over time fish product forms observed in most market places have expanded from being fundamentally a function of locally available fish resources to incorporate many more different types that are demanded in that area. Provision of the wider product range has been enabled by available technologies for catching and processing specific species. The Norwegian pelagic fishery is a high-tech operation developed to a very high level compared to many other countries. However, the history of fish storage and preservation plots an intricate path of product innovation and diffusion, of which the Russian development of onboard freezing operations is yet another example where technology is adopted in response of favourable market conditions. Technology can be defined as a combination of hardware (the physical product) and software that is capable of generating knowledge, skill, financial returns and entrepreneurial drive to utilize the resources (Rogers, 1995). This means that economic development and welfare for the people in the value chain can be obtained by improving technologies and products which satisfy market needs better than alternative technologies. In order to develop international trade, value chains in one region or country have to be compatible, to some extent at least, with value chains in other regions or countries with different development patterns for products, social traditions and technology (Figure 3). Sustainability of the trade requires reciprocal VRIOs. Rather than taking over each others position in the chain,

each partner has to value the other partners contribution in the transactions. In the NorwegianRussian case, several problems had to be overcome in the early years of seafood trade, for example the business culture in Russia was significantly different after 80 years of communist rule. Figure 3: Trade barriers in food value chain

A lack of compatible business cultures between countries and partners may be an insurmountable barrier for trade development. Development of a mutual understanding of the nature of supply and demand and the act of establishing and developing trade relationships incurs high transaction costs. However, the net gain received by the end consumer should cover the set-up and ongoing transaction costs, including satisfactory profits to all the participants in the chain. Long-term sales credit for the middlemen until the products are sold to the end consumer is an often-used strategy to increase sales through the value chain, but such credit is risky. In the NorwegianRussian case, some companies incurred substantial financial losses because of deficiencies in the contractual arrangements between exporters and importers. 3. PEST TRADE BARRIERS The trade barriers related to the political, economic, social and technological environment (PEST) are most in focus in the general international trade debate (Porter, 1990). Trade barriers might be different in high and in low GNP countries as illustrated in Figure 4. Differences can be observed in key resources needed for cross-boarder trade. These resources are typically political systems such as Governments affording varying permissions etc., property rights for investments and taxation regimes for profits and allowances. Figure 4: PEST Trade Barriers - High versus Low GNP Countries High GNP Low GNP

Governmental service system? Property rights and legal system? Taxation? Capital system? Labour and raw material costs? Entrepreneurial traditions and culture? Research and educational system? Level of technology development? Logistical system?

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Trade barriers in Governmental systems and property rights might be higher in low GNP countries than in high GNP countries. For example, in the Norwegian-Russian case, unclear property rights and Governmental interventions were important barriers against Norwegian investment in the Russian part of the fish value chain. Under this competitive environment, Russian firms were able to retain the market power of their end of the value chain. Russian governmental policy of imposing high tax levels on fish landings simply encouraged supplies into the Norwegian market. More commonly less developed countries apply much lower taxes than developed countries and so-called low tax economic zones (e.g. China). Labour and raw material costs are also important trade barriers, which tend to be highest in developed countries. For example, high labour cost is a main trade barrier in the Norwegian fish processing Industry. Instead of processing and exporting cod directly to the main consumer markets, the Norwegian catching firms increasingly send frozen cod to China for fillet processing where low-wages provide a major comparative advantage. This is enhanced through the improved yields available from hand filleting, compared to the automated machine lines of Norwegian plants. The edible flesh recovery gain, in itself pays for the transportation costs of exporting the raw material from Norway and the subsequent re-export of consumer packs of cod fillets from China to Europe and USA. Similar patterns can be observed in Japan. Entrepreneurship culture is the driving part of economic development (Schumpeter, 1934). Development of entrepreneurship is highly dependent upon culture as observed already by Weber, who described the relationship between Protestantism culture, entrepreneurship and economic development (Weber, 1947). Some cultures are in greater need and have to trade in order to survive and prosper, whilst cultures developed from harvesting natural resources for their own consumption are more inward looking and so tend to develop cultural barriers against trade. In Norway we can observe these differences between the resource-rich coastal Northern regions and the scarcer resources of the Western region. The Northern regions rely on coastal small-scale fishing where the fish comes to their regions with regular seasonal migrations. In the Western coast, there is only very limited access to local fish and so an off shore fleet has been built to follow shoals into other regions. As some consequence of this pattern of fishing, the Western part of Norway is highly developed as an industrial fishing and export oriented region compared to the more production-orientation

found in Northern Norway. These differences in fishing structures have also resulted in different value chains into the international markets. In more advanced value chains, RandD activities and better-educated specialists are needed to handle all the operations. In Norway such specialist resources have developed in the West region as a side effect of the industrial fishing and export operations. It is this technology and industrial fish business, which has laid the ground for the Norwegian expansion into industrial fishing in the North Pacific, New Zealand, Australia and in West Africa. Lack of local resources may therefore be a barrier for economic development, but at the same time may also serve to stimulate trade entrepreneurship and spur economic development of the human resources. On the technological side, logistical systems are most important for the development of the value chain. For example the distribution of frozen fish is dependent upon a cold chain and its associated costs. The absence of an adequate cold chain in many developing countries can be viewed as a trade barrier, which favours alternative product forms such as dried fish. A technology, which frees the product of any such temperature constraints, may be an important advantage; and may be so significant that it is still employed to advantage even in countries where cold chains are adequate. Such is found in the case of Norwegian klipfish (dried salted cod), which can be transported at ambient temperature and so access a wider market area wherein temperature-controlled environments are absent. 4. TRADE DEVELOPMENT Entrepreneurs who identify and develop business opportunities drive development of trade. Standard theory states that at least five criteria must be satisfied, as illustrated in Figure 5 (Cateora, 1987). Figure 5: Trade Development 1. Are trade gains greater than the costs of development, trading, shipping and tariffs? 2. Are products equally acceptable in the mind of middlemen and consumers? 3. Market information network - are traders aware of cost differences and product attributes? 4. Does the differential provide a profit for trading entrepreneurs? 5. Are there other technical, financial, or legal restrictions, which inhibit the products and trading of these products? In the Norwegian-Russian case these conditions were gradually developed. The geographical proximity of the countries encouraged close contacts between entrepreneurs in both countries on several levels of the value chains and government, which together strengthened the underlying trading foundations. Based on the Norwegian-Russian case, it may be assumed that food security among low-income groups can be improved through the following steps illustrated in Figure 6.

The low-income groups or regions gain income by exporting high unit-value fish products such as salmon, cod, shrimp, and crab to high income consumer groups in both developed and less developed countries. High unit-value products trade can be developed by investment in production and marketing of products with a differential advantage for high income groups willing to pay premium prices. Low income groups have a cost advantage in supplying low value products to other lowincome groups in both poor and rich regions. The export income gained in low-income regions gives resources to purchase a higher quantity of low-value fish products. High-income groups can improve food security among the low- income group by investing in large-scale production of low value products such as small pelagic species thereby gaining a low price competitive advantage among the low-income consumers. In a VRIO analysis products will gain differential advantage with unique quality advantages perceived by consumers. This requires that the advantages match consumer preferences and be relatively unique with few other similar products. In this way, differentiated products create market barriers, which reduce entry from competitors with similar products and so alleviate price competition. Figure 6: Industrial trade strategies between income groups

Over time, the unit value of high value products tends to decrease as they progress through the product lifecycle in increasingly competitive markets. Norwegian salmon is an example as shown in Figure 7. Figure 7: High value becomes low value without catch/ production limitation Example: Norwegian salmon export 1993 2002 percent change

Export Quantity 167 421 (1000 MT) Export Unit Value 27,7 22,7 (NOK/KG)

162 percent -18 percent

This value chain developed from zero in the early 1980s to 421 000 metric tonnes export in 2002. While export prices for boxed salmon the first years were 50-60 NOK/kg, the prices in 2003 fell to about 22 NOK/kg in real prices. Since 1993, the export quantity increased 162 percent and the average prices decreased 18 percent. Over the growth period, the salmon was considered to be a high-class product for high-income people. Increasing economies of scale in production and related chain activities encouraged an expansion of output both in Norway and in several other countries that imitated this Norwegian success industry. Subsequently the original high unit value product transmogrified into a lower unit value product, which now also appeals to low income market segments. This has required that the value chains alter and diversify during the product lifecycle and that technology, management and marketing methods develop continuously according to the product position in lifecycle (Albaum et. al, 1996). 5. CHANGES IN TRADE BARRIERS OVER THE PRODUCT LIFECYCLE 5.1 Some Impacts of the Product Lifecycle As the competition changes over the product lifecycle, so do the interactions between developed and underdeveloped countries. Standard international marketing theory shows the dynamics between production and consumption, and between countries over the product lifecycle as illustrated in Figure 8. Figure 8: Trade barrier changes over the product life cycle

New production often has its origin in developed innovative countries, where the main consumption may take place also, at least in the initial period. Norwegian farmed salmon is one such example. Initially Norway developed this production mainly for home markets and

European targets. While the consumption of salmon successfully penetrated new markets in the US, Canada, Japan etc., countries in which salmon aquaculture was less developed such as the Faroe Islands, Canada, Scotland and Chile developed their own production, and was significantly driven by Norwegian entrepreneurs in the process. With this expansion of the production base, Norway lost its foothold in the US markets, however, it managed to expand into Asian markets. Within Norway, total salmon production is now levelling off whilst elsewhere, notably Chile, it is still expanding. Production of frozen whitefish blocks followed a similar trade pattern. The production started after the Second World War in Norway and moved to Iceland, Canada, US, Chile, Argentina and now, more recently, China. At this point of time, it is not profitable to process the frozen cod block in Norway. This pattern can be observed for most successful generic global products, where countries take advantage of their low production cost position and successfully copy the production. 5.2 Transaction Trade Barrier between Countries International trade takes place between consumers and producers where both perceive relative advantages to the transaction process. As shown in the Norwegian/ Russian case, both trading countries have low income and high-income groups and trade between countries may benefit both countries, but not necessarily both groups. Trade tends to take place between high-income groups in both countries. Trade is performed through communication networks, which consist of interconnected individuals who share some common values linked together by information flows and networks (Albaum et. al, 1996). Trading networks can reinforce linkages and ties especially where individuals belong to the same social groups, which communicate and interact with each other with common language and/or understanding of social values and practice (Grannovetter, 1973). In trade this promotes transactions between traders with common understanding, such as the high income groups in different countries as illustrated in Figure 9. Figure 9: Trade and transaction barriers between countries and groups

The trade between high income and low income groups tends to be carried out more between groups inside the countries. Typical fish trade networks between Norway and Russia are between Norwegian traders and Russian traders in Moscow and other big cities, and further between these Russian traders and local traders that are spread out over the Russian continent. These high income Russian traders control financial resources to be used for fish importation and the

distribution centres for frozen fish, which strengthens their VRIO in the market place. Economic development might also change the competitive rules. Trading networks might open up for new entrants and widen the scope for new links to become established. New traders soon penetrate the high income groups and the basic trade pattern between high income and low income groups tends to continue. The tendency for trade transactions to flow through value chains with common languages, understanding of social values and practice, means that the trade barriers often are lower between neighbours at the same socio-economic and technological level than more distant acquaintances, as illustrated in Figure 10. Figure 10. Transaction trade barriers between high vs. low income groups

Typically Norways most important trade partner is the neighbouring country Sweden. Denmark, Norways other neighbour, is the most important seafood trading partner in terms of quantity and second most important in term of value, even if most of the exported fish from Norway to Denmark are re-exported to other countries. These three countries understand each others language and are at the same technology and business levels, which makes communication easy. Danish traders competitive advantage is their international trade-orientation, while Norway traditionally has had its competitive advantages in catch and production orientation. 5.3 Market Orientation versus Cost Orientation The main management difference between trading of high unit value and low unit value products is the management orientation in the value chain. While management of low value products has a main focus on cost factors in production to be competitive, high value products require a much higher degree of market orientation (Trondsen, 2001). Market orientation means a management that identifies customer preferences in market segments, which are profitable and may be satisfied by offering the best differentiated supply attributes relative to costs. Marketing of value added surimi products and Norwegian fish cake products would serve as examples. The main

competition in these product-market segments has for years been focusing on the price at the expense of product quality. The outcome of this cost focus has been a decline in the consumption of processed fish products as consumer incomes have risen (Trondsen et al., in press). Price management is comparatively easy and prices are a quick and efficient market signal for consumers. Cost and price orientation focuses more on short-term market relations and operations and relies more on spot market conditions. High unit value quality on the other hand is much more difficult to communicate. Markets have to be segmented; suppliers must invest in collecting information and communicating with customers with informed preferences, for which they are able and willing to pay. This tends to demand long-term relations and trust must be built through branding and consistent market behaviour. In short the transactions costs are much higher in building-up a market-oriented trade of high value products (Grunert et al., 2002). However, the fish business environment varies. Market oriented strategies require some stability in the business environment which make market oriented planning possible. Continuous and assured access to raw fish of a homogeneous quality standard is one such requirement. The greater the variation in raw fish supplies, the higher the probability for a price oriented shortterm trading behaviour rather than any market orientation (Trondsen and Johnston, 1998). Somewhat unfortunately from a market-orientated perspective, this is very often the case in the fish trade because natural seasonal variations in the abundance of fish stocks, their migration patterns and subsequent catches tend to conspire to favour short-term expediency. 6. TRADE DEVELOPMENT International trade development might develop faster if the products and trading partners are well known to the partners of the transaction. However, if the purpose is to increase the market value of under-utilized fish resources, the case is very often to build new value chains between suppliers controlling raw material and customers who have unsatisfied needs and wishes for products to be made from these resources. Examples are the surimi products made from many under-utilised small pelagic whitefish species in the Asian region (notably breams, croakers etc.), which are turned into surimi and crab sticks then exported to European markets. Another example is the white fish fillet developed from Alaska Pollock. In the 1960s and 1970s all Alaska pollock were turned into surimi by Japanese processors. In the 1980s Norwegian entrepreneurs entered the pollock fishery in the US economic zone and brought in filleting technology and market access to the European and US fillet markets. Frozen fillets received higher prices in the market and the flesh yield recovery was better compared to utilizing pollock for surimi. When the product was developed in a form where it could be used as a substitute for cod in fillet blocks as raw material for fish sticks at a price half of the cod fillet price, its success was assured. Nowadays, 50 percent of the fish processed onboard factory trawlers in US North Pacific waters are fillets. However, such development of product and value chain takes time and is costly as illustrated in Figure 11. Figure 11: International trade development - investment to lower costs as trade barriers

Investment in physical product development is only one of many factors contributing to increasing market oriented value adding. The new product and process must be a competitive alternative both for the supplier and the buyer. The relations must be developed through intensive exchanges of information in order to mutually understand customer preferences for different product attributes. RandD strategies and investment must be carried out through studies, experimentation and trial and error in order to find the optimal business product-market concepts for the target markets. Development of the value chain for the product requires further investment in the trade structure and marketing network (Cateora, 1987). A sustainable trade of new products relies on trade, which is continuously changing and where all participants receive greater advantages compared to alternative strategies and value chain options. In summary, international trade developments require investment in lowering transaction costs between supplier and buyer, which combine market oriented product and value chain development, and which satisfy both supplier and customer preferences. 7. THE RELATIONSHIP BETWEEN INTERNATIONAL TRADE AND FOOD SECURITY How can the export of high value food products gain income which is turned into production and importation of low- unit value products capable of satisfying the needs of low-income consumers and promoting food security? Food security from international trade is dependant upon a broad range of synergetic factors. Many observers have noted that there is not a direct relationship between international trade, economic development and food security (Jansen, 1999; Kurien, 1999; Trondsen, 1999). It is therefore important to identify the factors, which contribute to economic development and food security. Figure 12 shows some of these relationships. Figure 12: Food Security Diamond

Firstly, in fisheries there are no direct long-term relationships between international trade and economic development. Increasing trade of fish might increase demand for scarce fish resources causing further over-exploration of fish stocks, which over time will tend to decrease catches and bring about a decline in economic gain from international trade (Hannesson, 1999). Gaining economic development from the international trade of fish products is therefore conditioned by a fisheries management system, which balances the total catch to a sustainable fish stock level. Gaining economic development from international fish trade is also dependent on the local fish resources having an economic value in the international fish market. The economic value is influenced by the products VRIO competitive value. This means that the local fish resources can be transformed into product and marketing services, which offer superior values satisfying marked preferences in the international market segments. Sustainable trade is also dependent upon the customers perceptions of the rarity of the product and marketing services compared to competing offers. Sustainable trade is also supported by product and marketing services, which are difficult to imitate. Controlling a scarce fish resource is one such example; controlling unique and patented technology is another. Sustainable trade can also be performed in industries with unique organisations, skills and working culture, which are difficult to copy. Even if international trade might generate economic development, the gain of such development might be restricted to those who are in control of the scarce resources. In fisheries there are many examples whereby economic gains primarily accrue to those in control of the fish quotas[8]. If economic development in a country is to have a positive impact on food security and especially for low-income groups, it is important that these needy people gain their part of the income generated to permit them to buy food in their local market place. However, the amount and type of food that low-income people can buy is also dependent upon the preferences of other consumers and available choices. Previous examples of food aid projects where fishmeal has been offered to hungry people only for them (understandably) to reject it, have highlighted the need for some consideration of consumers preferences. Food products offered must have attributes suited to the preferences and tastes of the target groups. Food and especially fresh fish has a limited shelf life and has to be preserved by drying,

smoking, freezing or other means. An associated implication for distribution and logistics has been discussed already. Prices may also be a major barrier for food security. Especially in times of shortage, food products usually find their way to the table supported by the fattest wallet. Yet, when lowincome people are most needy for food security, all factors that improve the supply of low cost food products, would subsequently contribute to food security. Notwithstanding earlier comments about the need for appropriate qualities of foods to be made available, clearly a price level, affordable by the poorest groups, is desirable. A supply policy is therefore an important part of a food security policy. This begs questions as to how food security might be improved through trade. Based of the analysis presented in this paper, the following section will present some ideas how governments can improve both economic development and food security by introducing export quotas. 8. IMPROVING FOOD SECURITY THROUGH INTERNATIONAL TRADE 8.1 Rationale for Government Action in a Market Economy Exporting high unit value food products and importing low unit value food products, can improve national food security. As has been shown in a liberalized market, the traders choose the particular food product sector, which will follow profit rather than need. Exporters of high value food products do not necessarily import food or fish products with the money gained through their fish exports. Profits are a function of both prices and costs. Transaction cost barriers drive traders focus in the short run towards value chains with lowest transaction costs, less investment and least risk relative to value added. Therefore, the requirement to keep both food security and a regional food balance amenable to all sections of the population, may force government to influence traders choices. 8.2 Food Security Strategies In the WTO discussions one option is to improve food security by protecting the domestic production. One consequence of such a strategy might be lower economic development. There are differences between countries, i.e. production of various products and their accessibility to the wide range of technology. Economic development is dependent on international division of work specialisation and exchange. All countries have to finance import by exports. Exports of some scarce food products needed would typically be at the expense of the poorest groups of consumers, as shown in the case of Lake Victoria (Jansen et al., 1999). Imports may, on the other hand, distort domestic production and lower incomes for the poor; increases in national income are an ideal long-term solution for countries being able to solve food security. However, they are also idealistic in the sense that the gain of any one group is most likely to be at the expense of some other. Of course another option is simply to ban exports of fish and food from food unsecured areas. Not only would such a strategy be difficult, if not impossible to implement, it would in addition reduce foreign currency for the exporting country and the income available for imports, lessen economic development in the long run and decrease the purchasing power, and ultimately lower

food security. This suggests that some alternative mechanism, operating within existing means of income distribution, needs to be considered. 8.3 The Case for an Individual Export Quota (IEQ) An alternative strategy which warrants further consideration is the introduction of Individual Export Quotas (IEQs), which might improve both trade for food security and development (FSD). Export quotas are a well-known regulatory tool allocating import quotas in other countries (for example Vietnamese export quotas for garments and textile), but it would appear that they have not been used as a food security tool. Figure 13: Individuel Export Quota (IEQ) - Licences issued where an improved food supply is required - Individual fish export quotas for traders paid by import food quantity without limitation as to total quantity - Country licences possibly issued by WTO/WHO, or regulated otherwise internationally An IEQ would constitute a license issued to individual companies for export of a specified quantity of food, which would require import of a similar quantity in return as an integral condition of the award of the license. Such licenses would make it possible for companies to export high value products and use these export values to import no lesser quantity of foodstuffs back into the country. Typically such imports would be of lower unit value product. There is no need to set a maximum quantity for these licenses; market forces would curb any tendency to excess. The single trading entrepreneur will look after the balance of trade, and this series of transactions should improve food supply by providing a channel for lower unit value product to become available to poorer consumer groups. The cost associated with such imports would be offset against the sale of the IEQs and the market value realised for the imported product. Governments might issue such IEQ licences when better food supply is needed in designated regions, and these instruments might be applicable for specified periods of time. For example, national permissions to issue such licenses might be given by WTO/WHO when population groups are in need of special measures for food security. The impact of such import quotas are threefold: Gain economic development in underdeveloped regions by exporting higher value products, gain food security by improving import of lower value food products and improve the balance of food exports and imports. 8.4 The Impact of IEQs The impact of IEQs might be that exporters will become trading firms. Exporters of high unit value products from food unsecured regions would get incentives for developing compensating food import. This would provide incentives for development of more trade of new and improved

products, species and technology and enlargement of trading networks, promote market orientation and relational marketing. Such a system might also open up for trading of IEQs in the same way as trading of individual transferable fish quotas (ITQs) has occurred internationally. Most important of all, such regulations should improve the composition and quantity of local food supply. An IEQ is similar to Voluntary export restrains (VERs) and orderly marketing agreements (OMAs), which is common in textiles, clothing, steel, agriculture, and automobiles, the VER is an agreement between importing country and exporting country for the restriction on the volume of exports. Japan has for example VER on automobiles exported to the United States; that is, Japan has agreed to export a fixed number of automobiles annually and Viet Nam has a VER on textile and garments exported to the EU. A VER is called voluntary because the exporting country sets the limits; however, it is generally imposed under the threat of stiffer quotas and tariffs being set by the importing country (Cateora and Graham, 2002). It may well be argued that export quotas are an old idea, abandoned in the movement to free trade development and because of its attendant implications for bureaucracy and difficulty of implementation and enforcement. Export regulation is a trade measure, which is traditional and related to the old-style thinking on market regulation. However, IEQs might be implemented as an efficient market oriented regulatory tool. Control systems can be run efficiently, as is found in the case of the auction of Viet Namese garment and textile quotas to regulated markets (http://Viet Namnews.vnagency.com/2002-10/29/stories/17.htm). Government might trade IEQs through an auction market without interference. 9. CONCLUSION This paper has shown that income levels between groups can be real barriers for trade and consequently for distribution of economic development and food security from trade. This can be summarized in the following hypotheses:

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 therefore be integrated in international trade to encourage international trade for both economic development and for food security. Policy must rely on analysis of behaviour, 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. Acknowledgement Thanks to Professor Jimmy Young for his comments on an earlier draft of this paper, who has been very helpful for the final English presentation.

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E.g. the Lake Victoria Nile perch conflict between the export industry and local peoples need for fish for their own consumption (Jansen et al., 1999) and the quota conflicts between factory trawler owners and coastal small boat fishermen (Trondsen, 2001).