Export restrictions: facts, fallacies and shovels

export restrictionsFollowing the twin discovery that governments were composed of politicians and that politicians mostly don’t look much beyond the next election, the OECD created the International Futures Programme (IFP) to encourage long-term thinking. A few years later, the UK government decided to set up a foresight unit, and in 2004 I went as IFP representative to a meeting in London where holders of stakes in different industries discussed what strategic thinking meant to them. It was much as you’d expect, with the oil industry explaining that they worked on a 50-year horizon, the pensions industry even longer, the finance industry losing interest after two seconds and going to look for something more exciting… The one surprise was the chief economist of a big mining company. “We don’t bother with strategic planning” he explained. “We get all we need from geological surveys and the market. So if the price of copper, say, is going up, we dig till there’s none left then move elsewhere. If it’s going down, we lean on our shovels until it goes back up again”.

I’d like to say they went bankrupt shortly after, but looking at the company’s performance, this charmingly down to earth approach seems to work well. At least if you already own a big enough share of the things your business depends on and everybody else needs them. That is practically never the case though for any firm, or even for a country. So as a new OECD report on export restrictions points out, since “no country is self-sufficient in every raw material, it follows that virtually all countries are vulnerable to any attempt to restrict the export of at least some commodities.”

And yet, the use of export restrictions seems to have increased over the past decade. The OECD Inventory of Restrictions on Trade in Raw Materials lists over a dozen ways this can be done, but the three most common are making exporters apply for a permit, putting a tax on exports, and restricting the quantity of a product that can be exported. All raw materials sectors are affected, from minerals and metals to forestry and agriculture products.

Emerging and developing countries use export restrictions most, although they’re not the only ones. But their citizens can suffer the most. Oxfam puts it like this: “you might think that governments would take urgent action to address fragility in the food system. But […] Governments often exacerbate volatility through their responses to higher food prices. In 2008 the global food system teetered on the edge of the abyss as, one after the other, more than 30 countries slapped export restrictions on their agricultural sectors in a giddying downward spiral of collapsing confidence”.

So why do they do it? The idea is that by restricting exports, more of the product is available on the home market, making it cheaper than it would be otherwise for local firms, thereby helping them to grow and compete on world markets. (Except for the producer of the restricted commodity). This probably works wonderfully well in countries with large reserves of iron ore whose principal activity is manufacturing lumps of iron in home-made forges for the weightlifting trade. And on the assumption that all its trading partners let it do this and don’t put up the price of anything in retaliation.

Because once you start getting into more sophisticated products, the advantages of export restrictions disappear. These days, final products rely heavily on the so-called “intermediate products” used to make them, sourced from the world’s global value chains. They can be high-tech items such as computer chips or very low tech, like wood planks, but more often than not they’re imported. The new OECD report describes an analysis of the impact in a number of sectors of what would happen if export taxes were simultaneously removed on steel and steelmaking raw materials. It finds that “When regions that apply export taxes remove these in coordination with similar action by trading partners, their downstream industries actually benefit.”

In their report mentioned above, among the solutions Oxfam proposes in relation to food, are “increasing transparency in commodities markets, setting rules on export restrictions” (they also call for “an end to trade-distorting agricultural subsidies”). This sounds very similar to the OECD report’s call for “better control, and more transparent use, of export restrictions”. The OECD report goes further though and looks at what alternatives are available to countries thinking of applying (or lifting) export restrictions. Chile for example, rather than concentrating on downstream processing, promotes a range of less capital-intensive and less energy-intensive intermediate goods and services industries linked to mining operations, as do a number of other successful minerals-rich countries.

Finally, this just in. Since I started writing today’s post, I’ve learned that my intro about the different sectors is sooo 2004 and the miner and the trader can be friends. A bipartisan report is to be presented to the US Senate today and tomorrow on Wall Street bank involvement with physical commodities. I feel like quoting whole pages of it in full, but in essence: “Since 2008, Goldman Sachs, JPMorgan Chase, and Morgan Stanley have engaged in many billions of dollars of risky physical commodity activities, owning or controlling, not only vast inventories of physical commodities … but also related businesses, including power plants, coal mines, natural gas facilities, and oil and gas pipelines.”.

I used the copper example, and so do Senators Levin and McCain and their colleagues: “JPMorgan built a copper inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of copper, comprising nearly 60% of the available physical copper on the world’s premier copper trading exchange, the London Metal Exchange (LME).” I quoted the homely image of a man and his shovel, and the Senators quote how even these days, market making isn’t all laser beams to transfer data and fancy algorithms to do high frequency trades: “Goldman approved “merry-go-round” transactions in which warehouse clients were paid cash incentives to load aluminum from one Metro warehouse into another, essentially blocking the warehouse exits”. But where we talk abstractly about risk, our men on the Hill cite “injuries, an international incident, or worse”.

That’s the world some policy makers think they can manipulate with export restrictions.

Useful links

OECD work on international trade

International trade: free, fair and open? (OECD Insights)

Patrick Love

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