This paper provides a review of current thinking
on the economics of international trade in mineral resources. I first
define what is meant by trade in mineral resources. I then discuss
patterns of trade in mineral resources. The paper then moves on to the
five topics requested by the World Trade Organization: theoretical and
empirical literature on international trade in minerals; trade impacts of
mineral abundance and the resource curse; the political economy of mineral
trade in resource-abundant states; non-economic considerations associated
with strategic mineral resources; and the impact of domestic market
structure and regulation on production and trade in minerals.
Worldwide mineral export volume grew by 4.1% annually from 1950 to 2003.
Production grew at only 2.7%, indicating an increasing degree of
specialization across countries during this period. In 1965 minerals and
metals accounted for 12.4% of the value of global exports. By 2005 this had
shrunk to 6.6%, though the value of annual mineral and metal exports rose
from $23 billion to $671 billion over the period, mainly due to increases in
tonnages shipped. This increase in tonnage reflects both the impacts of
reductions in trade barriers and the reduction in bulk transportation costs.
The top mineral and metal commodities traded over the 2003-2005 period were
iron and steel ($249 billion/yr.), precious stones ($74 billion/yr.), copper
concentrates and metals ($35 billion/yr.), coal ($33 billion/yr.) and
aluminum concentrates and metals ($30 billion/yr.). To put this in
perspective, average annual exports of aircraft were $116 billion over this
The Heckscher-Ohlin model of comparative advantage is the favored model for
explaining trade in minerals. In this model comparative advantage in mineral
products depends mainly on regional availability of mineral resources.
Empirical testing shows that exports of mineral and metal products do tend
to depend on endowments of minerals. They also depend on a scarcity of
capital and a lack of professional and technical workers. As such,
resource-rich developing countries tend to be mineral exporters, and
resource-poor developed countries tend to be mineral importers.
For the past 20 years it has been widely held that economies specializing in
natural resource extraction have suffered from a “resource curse,” whereby
their incomes per capita are higher than normal but their economic growth is
slower than normal. One explanation for this is Dutch disease effects,
whereby an important stimulus to growth, such as a domestic manufacturing
sector, shrinks during a mineral boom. This leads to pressures to protect
the manufacturing sector, perhaps via trade policy. Another explanation for
the slow growth in mineral economies is resource depletion. If depletion is
the problem, distortionary trade policies implemented under the assumption
of a Dutch disease will be inefficient and will further slow the rate of
economic growth in the mineral economy.
Mineral export booms may generate not only the direct boom and bust growth
effects associated with the resource curse or depletion phenomena, but also
indirect growth effects via the quality of institutions, the rate of human
capital formation, increases in poverty, and civil wars. The indirect
effects have been the subject of intense scrutiny by political scientists.
These political economy worries about mineral booms have translated into
policy actions, though the evidence shows that these trade policies probably
have a minor influence on mineral trade patterns.
Over time, and in part due to increasingly freer trade, the advanced nations
have increased their dependence on imported minerals. Concerns about this
dependence have intensified. At the same time, rapidly growing developing
countries that export minerals have increasingly adopted policies to ensure
sufficient domestic supply of such minerals. In 2006, China increased to 15%
export taxes on aluminum, copper, and nickel. In 2007, India created a 7%
export tax on iron ore exports.
While there are many responses and strategies to alleviate the risks
associated with import dependence, a main policy response is to attempt to
increase domestic production. It is not clear, however, that domestic supply
is any more secure than diversified international supply. An artificially
induced domestic supply is likely to be concentrated geographically and
commercially, leaving open the risk of supply disruptions and market
maneuvering by the supplier. There must also be prohibitions against export
in times of shortages, which reduce incentives for private investment in
domestic production activities.
The last three decades have witnessed the introduction of a new framework to
understand international trade. This new approach breaks with classical
trade theory by stressing the relevance of increasing returns to scale as an
important, independent source of trade. This new way of understanding
international trade emerged in response to observations that there is far to
much trade between similarly endowed nations, and that in some cases there
appears to be intra-industry trade. For example, Chile exported to Peru
copper concentrates worth US$ 31.8 million in 2008, while Peru exported to
Chile copper concentrates worth US$ 94.6 million. This cannot be explained
by the Heckscher-Ohlin theory of comparative advantage.
One explanation of intra-industry mineral trade is the possibility of having
an oligopoly in a domestic mining industry that faces a competitive
international market. A dominant cartel will export mineral ores and final
products facing international prices, and it will sell the ores domestically
at a markup over the marginal cost of production. If the dominant cartel
controls the majority of mines in the country, the international competitive
fringe will need to import some ore concentrates to produce final products
to be sold domestically or internationally.
Another possibility is that different mineral ore concentrates at different
stages of processing may be simultaneously exported and imported between two
countries in order to be processed at specialized smelting facilities
located in both countries. Firms tend not to smelt other firms’
concentrates. Each firm may then export all of its worldwide concentrates to
its own smelter locations. With smelters scattered across the world and
located in regions where there are mines, there will appear to be
intra-industry movement of concentrates.
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