In the discussion of Vernon's Product Life Cycle Theory, it was noted that new products tend to be developed, produced, and consumed in the developed countries first; then exported to the rest of the world; and finally produced in the developing countries. As the cost of production of these goods declines, countries with less sophisticated production processes begin to produce them for local consumption first and subsequently for exportation to the developed countries.
The raw materials development and consumption process follows the same pattern in reverse fashion. Raw materials are extracted and sold by developing countries first. When the use of the materials reaches a level sufficient to offset the higher labor cost of local production, developed countries begin to produce the materials synthetically, eventually reaching the point where they cease to import the materials altogether. Thus, the high price of the raw materials, a result of extensive demand for them, triggers a substitution process aimed at replacing natural raw materials with synthetic ones.
A perfect example of this process is the life cycle of rubber. The tremendous increase in demand for rubber that followed the invention of the automobile gave rise to the development of synthetic rubber. Today, over two-thirds of the rubber produced worldwide is synthetic, and many rubber plants are located in the industrialized countries, primarily the United States, Western European countries, and Japan. The same process of developing synthetic substitutes was followed in the areas of nylon yarns, industrial diamonds, paper, and other once indispensable natural raw materials.
In sum, the international trade in raw materials is not as stable as is the trade in consumer goods. Even though raw materials are much more indispensable to human survival than are goods (because without them there can be no production of consumer and capital goods), trade of raw materials is much more volatile than that of goods. The reason is that most of the raw materials are found in the developing world, and most of the users are in the developed countries. This situation has stimulated a number of attempts to stabilize both the production and the prices of raw materials via either bilateral or multilateral agreements or the development of cartels, which restrict the production and supply as well as determine the price of the materials. Examples of efforts of the first type are agreements concerning the exportation of coffee, sugar, rubber, and other primary products. The best-known example of the second type of effort was the 1973 oil embargo and price hike of the Organization of Petroleum Exporting Countries (OPEC).
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