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Graeme Whyte 299667 Assignment 1 Module 4078 International Business Luis Kluwe Aguiar Word Count 1272 Is specialisation

ion beneficial for less developed countries? Uruguay beef industry.

Table of Contents 1) Introduction.3 2) Trade Theories and specialisation....3 3) Problems of over specialisation...6 4) Conclusion...6 5) References....7

1) Introduction Since 1995, Uruguay has become a competitor in the world beef industry, putting pressure on its more established beef producing neighbours such as Argentina and Brazil. Its leap into the industry has begun to cause concern for US beef producers. This has come about due to an excellent beef traceability system and Uruguay being declared free of aftosa, or foot-and-mouth disease (FMD), by the World Organization for Animal Health (OIE). This opened access to several international beef markets including North America (Peck 2006). The Uruguayan beef export market has expanded and benefitted this less developed countys (LDC) capital wealth considerably since the opening of these markets. However this is not the only contribution that has made the industry successful. In this assignment, I will examine what the contributing factors are that have given their beef industry an advantage over its competitors by refection on theories of trade. I will also determine whether Uruguay should further specialise in beef and whether this will be beneficial for the countrys future? 2) Trade Theories and Specialisation Currently Uruguay has cattle herds estimated to be over 12 million head (INAC 2010), and it is my opinion that Uruguay should expand and specialise in beef. This can be explained by Adam Smiths theory of absolute advantage, which states that a country that has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources (Rulemic 2010). Uruguay has this advantage over many of it competitors in beef production as it is more competent, this can be explained for a number of reasons. Firstly, Uruguay is efficient at producing beef as the land and climate is perfect for its production. Most of their cattle are grass fed, and the natural grass of Uruguay is highly nutritional and weather conditions are conducive for good grass growth. Several countries, such as Australia, New Zealand, and more recently Uruguay, have been able to use their comparative advantages in grass-fed beef production to become important suppliers of 90s into the U.S. beef market (Peck 2006). 3

Some of their competitors such as the US, feed by grain feedlots which are less efficient, labour intensive and consume more recourses, hence this gives Uruguay an advantage over rivals. It is in my opinion that Uruguay should grow its beef market, whilst importing commodities that are les abundant to them. The principle of comparative advantage states that a country should specialise in exporting those products in which it has a comparative or relative cost advantage (Rulemic 2010). Through the adaption of this principle, specialisation can be achieved and will be beneficial. Specialisation is creating efficiency by concentrating on particular products or tasks (Tutor2u 2010). It creates skilled labourers and supply chains, which in turn produces professional production and distribution. The further one specialises, without overspecialising, the more efficient those that work in the industry become, thus more competitive. Also, Uruguayan labour costs are comparatively low compared to rivals min wage is $250 per month (INAC 2010), and their labour is less intensive on average to produce a kg of beef; hence this again gives Uruguay an advantage. According to Heckscher-Ohlin theory, countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply (Rulemic 2010). Uruguay is an ideal beef producing country with the precise resources needed to produce beef, this makes it competitively priced world wide. From this evidence, we can conclude that Uruguay should apply theories of trade and further specialise in beef exports, but should import products that it has minimal resources of. The protectionism of the Uruguayan government of their beef industry has lead to reduced taxes on exports; this is the concept of The New trade Theory. The Uruguayan Government currently intervenes minimally in the countrys beef market (McConnell and Mathews 2008). This is in contrast to many rivals, and gives Uruguay a competitive advantage. Uruguay does face tariffs from beef importer countries, Uruguay faces tariff-rate quotas in several of those importing countries, including a 20,000-metric-ton (MT) quota in the United States; 11,000 MT in Canada; and 6,300 MT under the Hilton 4

beef quota (McConnell and Mathews 2008). But many of its rivals are also faced with these tariffs, and due to Uruguays efficiency of production and low costs, it is still highly competitive and able to penetrate these markets. Another beneficial factor is that Uruguay exports a large majority of its beef. Beef exports are very important to our nation's economy; nearly 80% of Uruguay's beef production is exported, representing 6% of the nation's gross national product (Peck 2006). Because Uruguays exchange rate is weak compared to beef importing countries, prices received from exports a far more attractive than those paid for beef locally (For example $1 equals 20 Uruguayan Pesos). Thus exporting to American, Canadian and Russian consumers will pay Uruguayan beef farmers healthily and they can afford to under cut competitors. In 2010, Russia and Canada became the largest importers or Uruguayan beef, Canada took over the role from the US as a large buyer of beef from Uruguay. Exports to that country increased by 34%, while to the United States declined by 44% less than a year ago (Meat Trade News Daily 2010). This shows the need to export to new markets, as without these markets, the decline in US consumption, would have been a disaster to their beef industry.

Uruguay has also sought to create a competitive advantage, which is any activity that creates superior value above its rivals (Waggoner 2010). It has done this by excellent traceability systems, a national identification program aimed at disease control and the banning of hormones, which allows it to export to most markets worldwide. In response to consumer demands, Uruguay is developing product labels for Certified Natural Beef, Certified Organic Beef, Certified Hereford Beef, and Certified Uruguayan Angus Beef (Peck 2006). This will give producers an advantage in exporting to more exclusive markets.

3) The problem of over specialisation Although in my opinion specialisation will be beneficial to Uruguay in the future, there are dangers which need to be considered as well. If Uruguay over-specialised in beef and didnt develop other industries, this could be a fatal mistake. Take for instance, there was an outbreak of foot and mouth disease, and beef imports from Uruguay were band worldwide, this would have a catastrophic impact on its economy. Specialisation in one industry, may give you the momentum to drive ones economy, but seek to use this capital to propel other sectors of the economy, for example, the wool and rice industry where Uruguay is already competitive. Uruguay could also take its livestock exports a step further by diversifying and becoming more prominent in the hide and leather industry. This is adding value and will create further jobs and bring additional capital. By expanding other markets, if one market collapses due to unforeseen circumstances, other industries within the country, can support the economy and prevent a recession. 4) Conclusion It is my belief that the specialisation in the Uruguayan beef industry will benefited the country immensely. This can be seen by the manner in which beef production pulled Uruguay out of recession in 1999 when the devaluation of the Brazilian currency spilled over the borders to Uruguay and made their goods less competitive world wide. Since then, Uruguayan agricultural exports, especially beef have played a large role in the countrys economic recovery (McConnell and Mathews 2008). Specialisation is beneficial for a LDC such as Uruguay, but I also believe; that this success can be the driving force to kick start other industries where Uruguay has an advantage over competitors. Hence, to conclude specialisation should be an instrument to grow the beef industry in the future, but beef should be the platform to boost other targeted sectors, and through this a balanced economy can be achieved.

5) References Peck, C. (2006). Looming Large. Beef magazine. [Online] Available from: http://beefmagazine.com/mag/beef_looming_large/ [Date accessed 15.11.10] Munro, M. (1997). Threats and opportunities for the British producers. The South American beef industry 1996. 8-21 INAC (2010). Beef consumption rises. [Online] INAC. Available from: http://www.inac.gub.uy/innovaportal/v/4207/1/innova.net/beef_consumption_rises McConnell, M. and Mathews, K. (2008). Global Market Opportunities Drive Beef Production Decisions in Argentina and Uruguay. [Online] Amber Waves. Available from: http://www.ers.usda.gov/AmberWaves/April08/Features/GlobalMarket.htm [Date accessed 17.11.10] Fairbanks, M. (2000). Blame the cow for no prosperity. In, Culture Matters: How values shape human progression. ED. By Lawrence E. Harrison and Samuel P. Huntington: 268-281 Meat Trade News Daily (2010). Uruguay - Rise in beef exports. [Online] Meat Trade News Daily. Available from: http://www.meattradenewsdaily.co.uk/news/031010/uruguay___rise_in_beef_exports _.aspx [Date accessed 21.11.10] Meat Trade News Daily (2010). Uruguay - The cattle trade. [Online] Meat Trade News Daily. Available from: http://www.meattradenewsdaily.co.uk/news/251110/uruguay___the_cattle_trade.aspx Meat Trade News Daily (2010). Uruguay Meat Exports. [Online] Meat Trade News Daily. Available from: http://www.meattradenewsdaily.co.uk/news/181010/uruguay___meat_exports_.aspx Rulemic. (2010). Theories of International Trade. [Online] Rulmic. Available from: http://www.rulemic.com/absol.html [Date accessed 21.11.10] CIA. (2010). The World Factbook: Uruguay. [Online] CIA. Available from: https://www.cia.gov/library/publications/the-world-factbook/geos/uy.html [Date accessed 15.11.10]

Waggoner, D. (2010). Competitive advantage. Reference for business. 2nd Edition. [Online] Available from: http://www.referenceforbusiness.com/management/BunComp/Competitive-Advantage.html [Date accessed 21.11.10] USDA (2010). Uruguay: Livestock and products annual 2010. [Online] USDA. Available from: http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Livestock %20and%20Products%20Annual_Buenos%20Aires_Uruguay_9-10-2010.pdf [Date accessed 15.11.10] World Bank (2010). Country assistance strategy the oriental Republic of Uruguay 2005-2010. [Online] World Bank. Available from: http://siteresources.worldbank.org/INTURUGUAY/Resources/CASFinalIngles.pdf [Date accessed 15.11.10] Tutor2u (2010). Specialisation and Trade. [Online] Tutor2u. Available from: http://tutor2u.net/economics/revision-notes/as-markets-specialisation-trade.html