RESEARCH AND ANALYSIS
Trade in Mineral Resources
Graham A. Davis, Professor of Mineral Economics at the Division of Economics and Business, Colorado School of Mines
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 same period.
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.