Trade and Commerce in the World
Senior 6 · Geography
Trade and Commerce in the World
Lesson 2 of 4
40 min
In July 2025 UN Trade and Development (UNCTAD) published The State of Commodity Dependence 2025. It calls a country commodity-dependent when commodities (crops, minerals and fuels) make up more than 60% of its merchandise exports. Study Figure 1 before you read on.
Figure 1. Commodity dependence by group of countries, 2021–2023. Drawn by Ganzaa from UNCTAD data. Africa is shown separately but its countries are also counted among the developing countries.
The pattern is stark: dependence on raw materials is the normal condition of developing economies and the exception in developed ones. UNCTAD adds that more than 80% of least developed countries and of landlocked developing countries are commodity-dependent. Rwanda, both least developed and landlocked, still earns most of its domestic export income from minerals, coffee and tea. Why is that a problem?
Definition
Commodity: a raw or lightly processed product traded in bulk, such as coffee, tea, copper, crude oil or gold.
Commodity dependence: a situation in which commodities make up more than 60% of a country's merchandise exports (UNCTAD's threshold).
Value addition: processing a raw product into one worth more, such as roasting and packing coffee instead of exporting green beans.
Tariff escalation: charging higher import duties on processed goods than on the raw materials they are made from, which discourages processing in exporting countries.
Non-tariff barrier: any obstacle to trade other than a tax, such as quotas, strict health and quality standards, complex paperwork or slow border checks.
| Problem | Explanation |
|---|---|
| Narrow export base | A few primary products earn most export income, so one bad harvest or one price fall hits the whole economy |
| Unstable prices and worsening terms of trade | Prices of crops and minerals swing with weather, world demand and speculation; over the long run they have often risen more slowly than the prices of manufactured imports |
| Low value of exports | Raw goods earn little; most of the value of a cup of coffee or a phone is added where processing, branding and selling take place |
| Barriers in rich markets | Tariff escalation, quotas, subsidies to farmers in developed countries and strict sanitary standards limit access |
| High transport costs | Poor roads and railways, port delays and, for landlocked countries, long transit routes through neighbours raise the cost of every container |
| Competition and substitutes | Many countries export the same crops; synthetic substitutes replace natural products, as synthetic rubber and fibres did |
| Shortage of capital, skills and technology | Limits processing, quality control and marketing, so goods may fail to meet buyers' standards |
| Trade deficits and debt | Imports of fuel, machinery and food exceed exports; borrowing to cover the gap builds up debt |
| Weak bargaining power | Small economies have little influence over world prices or over trade negotiations, and large foreign firms often control buying and shipping |
| Political instability and informal trade | Conflict closes borders; smuggling and unrecorded trade reduce government revenue |
Worked example 1: what a price fall does to export earnings
Problem. In an illustrative year, a country exports 20,000 tonnes of coffee at US$ 4.00 per kg. The next year the world price falls to US$ 2.80 per kg. Calculate (a) the earnings in each year, (b) the percentage fall in price and (c) the tonnage needed in the second year to earn the same as the first.
Solution. 20,000 tonnes = 20,000,000 kg.
Interpretation. The country loses US$ 24 million although its farmers worked just as hard, and it would need about 43% more coffee to stand still. If every exporter responds by growing more, the extra supply can push the price down further. This is why diversification matters more than simply producing more.
Worked example 2: judging a solution
Problem. A government proposes to answer falling coffee prices by (A) planting more coffee, or (B) building roasting and packaging plants and selling branded coffee in the region. Evaluate the two options.
Solution. Option A raises output but leaves the country selling the same raw product into a market where it has no control over price; if other producers do the same, prices fall again. Option B adds value, creates factory and marketing jobs, and sells to a regional market such as the EAC, where tariffs are low. Its limits are cost (machinery, electricity, packaging), the need to meet food-safety standards, and tariff escalation if it tries to sell roasted coffee into some distant markets. Judgement: B tackles the cause (low value and price dependence) rather than the symptom, but it needs investment, skills and market access to succeed, so it works best combined with diversification into other exports.
Despite its problems, trade brings large benefits, which is why no country tries to do without it.
| Benefit | How it helps development |
|---|---|
| Access to goods a country cannot produce | Fuel, machinery, medicines and vehicles for a country without oil fields or heavy industry |
| Foreign exchange | Export earnings pay for imports and for debt service |
| Specialisation and larger markets | Firms produce more at lower cost; economies of scale |
| Employment and income | Jobs in farming, mining, processing, transport, warehousing and banking |
| Government revenue | Customs duties and taxes on trading firms |
| Technology and skills | Imported machinery and foreign investors bring new methods |
| Cooperation and peace | Countries that trade heavily with each other have strong reasons to cooperate |
Definition
Financial centre: a city where banks, stock exchanges, insurers, investment firms and other financial services are concentrated and serve customers far beyond the city, often worldwide.
Stock exchange: a market where shares in companies and government bonds are bought and sold, such as the New York Stock Exchange or the Rwanda Stock Exchange.
Trade cannot happen without money moving: payments, loans, insurance for cargoes and exchange of currencies. These services gather in a few cities. The Global Financial Centres Index (GFCI), published every March and September by the Z/Yen group with the China Development Institute, ranks them. In GFCI 39 (March 2026), which rated 120 centres, the top four were only one point apart:
| Rank (GFCI 39) | Centre | Main strengths |
|---|---|---|
| 1 | New York | Largest stock exchanges by value (New York Stock Exchange and Nasdaq), headquarters of global banks, the US dollar as the world's main trading currency |
| 2 | London | Centuries of banking, insurance (Lloyd's of London) and foreign-exchange trading; a time zone that overlaps both Asia and America; English law and language |
| 3 | Hong Kong | Gateway for investment into and out of China; a free port with low taxes |
| 4 | Singapore | Hub for South-East Asia; stable government, strict regulation and a major port |
Shanghai, Dubai, Tokyo, Zurich, Frankfurt and Paris are also leading centres. In Africa, GFCI 39 placed Casablanca (49th) and Mauritius (50th) first and second, and Kigali third (72nd in the world), followed by Johannesburg (80th). The Kigali International Financial Centre is being developed by Rwanda Finance Limited, a government company, to attract investment funds, banks and fintech firms; in the same GFCI survey Kigali was among the centres that respondents most often expected to become more significant.
Functions: financial centres provide credit for traders and governments, insure ships and cargoes, exchange currencies, raise capital through shares and bonds, and provide letters of credit that guarantee payment between buyers and sellers who have never met.
Warning
Common mistakes
UN Trade and Development: "Commodity dependence runs deep. Developing countries must add value to turn the tide", a one-minute summary of the 2025 report behind Figure 1. As you watch, note which groups of countries it names as the most dependent and what it says they must do.
Practice
Summary
Sources and credits
Photos: Sorwathe Tea Plantation, Rwanda (Jeremy Weate, CC BY 2.0) and City of London skyline (Dimitri Hon, CC BY-SA 3.0), via Wikimedia Commons.
Video: "Commodity dependence runs deep. Developing countries must add value to turn the tide", UN Trade and Development, embedded from YouTube.
Figure 1, the worked examples and the exercises were drawn and written by Ganzaa.
This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
