Dec '09/Jan '10

MAC Economic Commentary

Raw materials protectionism: An interesting and growing trade policy issue

By P. Stothart

There are a number of interesting public policy issues surrounding Canada’s mining industry relating to areas such as social license, tax competitiveness, tailings management, air pollutants, land access and Aboriginal relations. One emerging policy issue that has not attracted much attention in the industry or media relates to a growing movement towards raw materials protectionism by a number of developing countries, most significantly China.

At the root of the raw materials protectionism issue is the fact that many countries are engaged in a battle to secure a steady, or better yet, growing supply of raw materials. Towards this end, any key raw materials that these countries can get their hands on, in the form of concentrate, scrap or recycled material, are jealously guarded.

In the case of China, a broad array of export taxes, quotas and licensing requirements are used to obstruct raw materials exports so as to ensure the maximum supply for domestic usage. According to a study by ITS Global consultants, in recent years these measures have been used to maximize domestic supply of aluminum, antimony, bauxite, nickel, scrap, iron ore, coal, coke, platinum, copper, tungsten, zinc, manganese, molybdenum and rare earth elements.

These border measures are a critical component of China’s industrial strategy, where raw materials are used to build the country’s infrastructure and to underpin the value-added and job-intensive manufacturing sector. A second major component of this industrial strategy involves foreign investment — China has embarked upon a far-reaching and active outward investment campaign aimed primarily at securing a supply of raw materials. Tens of billions of dollars worth of direct investments are being made to secure supplies of petroleum, minerals and metals from Angola, Sudan, Nigeria, Zambia, Zimbabwe, Democratic Republic of Congo, Sierra Leone, South Africa, Australia, Canada and many other countries. China possesses large reserves of U.S. dollars and financial instruments, and a significant portion of these will be used to acquire hard assets.

Western governments are becoming increasingly concerned with this protectionism, primarily because of the direct impacts on western manufacturing competitiveness. By diminishing the availability of raw materials in the free market, the Chinese government causes western manufacturers to pay higher prices than they would otherwise. Conversely, by enhancing the supply within their own country, Chinese manufacturers pay lower prices for raw materials than they would otherwise.

In the aim of reducing or ending these trade policies and distortions, the U.S. and EU governments launched a World Trade Organization (WTO) challenge in June 2009 regarding “China’s restraints on the export from China of various forms of bauxite, coke, fluorspar, magnesium, silicon carbide, silicon metal, yellow phosphorus and zinc.” These raw materials are important ingredients for the production of chemicals, aluminum and steel. For the United States, this is President Obama’s first WTO challenge. Mexico has recently joined this challenge as a co-complainant, while Canada has joined the dispute with third-party status and not as a co-complainant.

It remains unclear whether the WTO path will lead to satisfaction on this issue. WTO processes are long, complex, expensive and subject to equally lengthy appeal processes. When found in violation of rules, countries can implement relatively minor policy adjustments that, if felt inadequate, can lead to subsequent disputes. Canada’s experience with WTO disputes, for example, regarding regional aircraft financing or softwood lumber, can be measured in terms of decades and half-decades. Lawyers and officials within the government’s trade law division have virtually devoted entire careers to these issues.

A further complication flows from the fact that not all countries (or even all affected sectors) speak with a common voice on this issue. Within the mining and metals sphere, for example, many companies have important supply, investment and market arrangements with Chinese entities and do not want these to be affected by bilateral trade disputes or frictions. Many see the Chinese market as a growth centre of the future. Given this reality, it is unclear whether national governments can muster the sustained support necessary to ride WTO disputes to a useful conclusion.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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