December 10, 2012 8:01 am
Warning on resource nationalism
Resource nationalism is making commodity prices more volatile and threatens global security, warns Chatham House, the think tank, in a report.
Based on new data concerning commodity trade flows, the report highlights how international politics have come to dominate resource markets.
It says “every country for itself” resource grabs mean that markets do not respond properly to higher prices, threatening trade wars, environmental degradation and famine in poorer countries unless the world finds new ways to govern resources.
“When countries and governments think they may be running out of cheap resources, they try to keep more for themselves,” says Bernice Lee at Chatham House in London, pointing to export controls on food and state companies that buy up resources abroad.
For example, countries such as China, Ukraine and Argentina responded to the surge in food prices in 2008 with taxes or controls on the export of grain.
Export controls can trigger similar actions in other countries, driving up prices, and creating a crisis of confidence that spreads from one resource to the next.
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They also make price volatility worse and reduce investment in new production because exporters cannot access high international prices, governments often tax windfall profits from price rises, and fluctuating prices increase risk and raise the cost of capital.
“The market signals are not right for investment in these long-term projects,” says Ms Lee.
There has also been an increase in expropriations and investment disputes over resource assets in emerging economies. Chatham House warns that “escalating trade wars over resources could overwhelm the dispute settlement regime at the World Trade Organisation”.
The report highlights how the rise of emerging economies has reshaped resource trade and created new interdependencies, notably oil from the Middle East to China, but also wheat from Russia and Ukraine to the Middle East, and palm oil from Malaysia and Indonesia to China and India.
Soyabean exports from the US and Brazil to China are now the largest agricultural trade relationships in the world. Flows to China of iron ore from Australia and copper from Chile are the largest in metals.
Chatham House points to the concentration of some resources in a few countries.
“The question is not whether Opec will continue to exist, but whether it will be joined by new international cartels in other resource markets,” it says.
The report suggests new mechanisms to reduce the impact of commodity price shocks. For example, it suggests that grain and oilseed producers such as the US should buy options from their biofuel industries, letting them divert food back to human consumption when prices rise.
It calls for the integration of China and India into existing mechanisms to share oil in an emergency and for compulsory stockholding reports by metals traders to reduce speculative bubbles and panic buying.
But ultimately it says new institutions are needed to collaborate in managing resources. “The blindness of standard policy prescriptions to resource politics could worsen the future outlook and undermine sound economic choices,” it says.
A new “Resources 30” grouping of economies could work to set rules on export restrictions and the activities of state-owned resources companies, it says.
“The question is whether people with the capacity to influence the market can come together and try to reduce volatility,” says Ms Lee.
Copyright The Financial Times Limited 2012.
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