RESEARCH AND ANALYSIS

Natural resources and export restrictions

Frank van Tongeren: Head of division, OECD Trade and Agriculture Directorate
Jane Korinek: Policy analyst, OECD Trade and Agriculture Directorate
Jeonghoi Kim: Policy analyst, OECD Trade and Agriculture Directorate

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There has been a sharp increase in prices for some natural resources as well as on the number of restrictions imposed on the export of these natural resources. This, in turn, has drawn the attention of policy makers and business people to the issue of free trade of natural resources and has raised a number of questions: What is the rationale behind these measures? Are price increases the outcome or the cause of export restrictions? How do these measures affect exporting and importing countries?

In October 2009, OECD organized a workshop on raw materials with the objective to improve understanding of the economic aspects and the policy objectives of export restrictions. The presentations and discussions amongst academics and representatives of the business community, OECD members and several non-OECD countries such as Argentina, Chile and the Russian Federation identified a number of issues outlined below.

Natural resources and undistorted trade

In view of the high level of interdependence between exporting and importing countries, the issue of export restrictions on natural resources is significant for the world economy. No individual economy is fully self-sufficient in every resource and the uneven distribution of natural resources across countries increases the importance of world markets and free trade. Recognizing the importance of undistorted trade, a discussion ensued in the Workshop on whether the current multilateral trade system provided enough disciplines.

Policy objectives of export restrictions

Governments apply export restrictions to achieve several policy objectives. These include fiscal revenue, development and social policies. Specifically, several governments have applied export restrictions on metals and minerals for objectives such as environmental protection and the conservation of natural resources. Policies can seek to reduce the negative externalities caused by pollution associated with mining or processing. Assuming there is a fixed supply of non-renewable resources, governments can also justify their interventions on the basis that they must guarantee resources for future generations.

Not all countries, however, rely on these measures to achieve these objectives and there are alternative policy options with different trade impacts. In addition, uncoordinated application of export restrictions, combined with additional policy responses from other countries, can lead to unexpected outcomes, and thus the original export restriction policy to fail in meeting its objective. This leads to two questions: (1) how do the effectiveness and the economic cost of export restrictions compare to the alternatives? and (2) how can coordinated responses that minimize economic distortions be encouraged?

Economic impacts of export restrictions

Export restrictions lead to a decrease in export volumes, which has economic impacts on the domestic and foreign markets. Such restrictions may divert supply to the domestic market, thus leading to a downward pressure on domestic prices but higher international prices due to reduced supplies on these markets. Through this supply-side effect, export restrictions can create a differential between the domestic price and the price charged to foreign customers.

The question was raised at the Workshop as to whether export restrictions affect domestic production as expected by policy makers. For example, a number of governments apply measures to reduce domestic production with a view to conserving natural resources under the assumption that limited exports will result in reduced exploitation of these natural resources. Such an outcome is not guaranteed since these measures affect only foreign demand. For this reason, many policies applied by several countries focus instead on regulation and taxation at the production level.

Behind the recent proliferation of export restrictions are policy concerns associated with the recent high prices of natural resources. Nevertheless, export restrictions can lead to even higher international prices, and they can increase price volatility. The lack of transparency regarding the application of export restrictions creates uncertainty for alternate suppliers of raw materials. This uncertainty, in turn, can delay long-term business decisions on investment, leading to lagged responses of the supply.

 

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Summary report of the raw materials workshop

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