Economic levers shifting in favor of resource producers
By Scott Seaman, Shaun Levine, and Divya Reddy Major resource-producing countries are shifting economic levers in their favor, taking advantage of consumer countries’ thirst for commodities. Producer countries are increasingly restricting exports of raw commodities so they can be processed at home, creating jobs and moving domestic industry up the value chain. For countries that ...
By Scott Seaman, Shaun Levine, and Divya Reddy
By Scott Seaman, Shaun Levine, and Divya Reddy
Major resource-producing countries are shifting economic levers in their favor, taking advantage of consumer countries’ thirst for commodities. Producer countries are increasingly restricting exports of raw commodities so they can be processed at home, creating jobs and moving domestic industry up the value chain. For countries that import natural resources, export restrictions can translate into higher costs that industries, labor forces, and consumers find difficult to swallow.
Moreover, when facing off against developing countries whose economies are growing quickly and becoming more sophisticated, developed countries may find that threats or offers of traditional development aid and tit-for-tat trade actions are less effective tools to apply pressure. This will be especially true as the gains from implementing new export restrictions expand, adjusting the cost-benefit calculation in favor of new restrictions even in the face of potential trade conflicts.
A case in point is the row between Indonesia and Japan over Indonesia’s imposition in May of a 20 percent export duty on unprocessed mineral ores, as well as Indonesia’s plans to implement a total ban on such exports in 2014. Unsurprisingly, these restrictions have made post-Fukushima Japan even more skittish about the security of its commodity supplies, and are fueling a lively exchange: Japan has made references to potential WTO action and allegedly threatened to ban Indonesian imports of photocopy paper, while Indonesia has indicated it could retaliate by restricting LNG exports to Japan.
While a trade war is not likely, these tensions highlight a growing trend that countries like Japan will inevitably face. Recent efforts by countries such as Brazil and India to limit iron ore exports to promote domestic steel production, and by a local government in the Democratic Republic of the Congo to force domestic copper processing, pose worrisome precedents from Japan’s perspective.
Not only is there a risk that Japanese smelters will be squeezed out of the market by these changes, but associated job and revenue losses will pose challenges for the government. For example, Japanese firms and the government will face domestic backlash if they invest in smelting facilities abroad while cutting jobs at home, especially at a time when the economy is fragile and the "hollowing out" of industry there has become such a hot-button issue.
At the end of the day, Japan and other countries dependent on raw materials imports will have little recourse to counteract producer countries looking to take a greater share of the value-added processing market. That said, many of these producer countries (including Indonesia) will take time to build up their domestic smelting capacity and may not prove to be cost-competitive in areas such as labor and electricity supply.
So Japan may be able to buy some time and avoid the immediate economic and political consequences of a shifting resource landscape. But the overall trajectory probably won’t reverse course. At some point down the road, Japan and other countries accustomed to having more leverage will have to make painful adjustments.
Scott Seaman and Shaun Levine are analysts in Eurasia Group’s Asia practice. Divya Reddy is an analyst in the firm’s Global Energy & Natural Resources practice.
Ian Bremmer is the president of Eurasia Group and GZERO Media. He is also the host of the television show GZERO World with Ian Bremmer. Bremmer is the author of eleven books, including New York Times bestseller Us vs. Them: The Failure of Globalism, which examines the rise of populism across the world. His latest book is The Power of Crisis: How Three Threats—and Our Response—Will Change the World. Twitter: @ianbremmer
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