China and the US: The World's Largest Economies

China is expected to surpass the US as the world's largest economy by 2025. This is unsurprising given China has maintained about four times the US growth rate and population, which currently consists of approximately six times the US labour force. Additionally, China's exports to the US already quadruple US exports to China.  China surpassed Japan this year to take its place as the world's second largest economy. 

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 Source: Reuters

Nationalisation of SA's Mining Sector Ruled out

All Africa 24th September 2010

South Africa is among the world's largest producers of gold, platinum and chromium, having reaped thirty-two billion euros in 2008 alone from its mining industry.

South African president Jacob Zuma ruled out the nationalisation of the country's mining sector as he closed a tense congress of the ruling party in Durban.

The week-long ANC National General Council was marked by fiery speeches and calls by the the party's left for the state take-over of the the economy's largest export sector.

Nevertheless, Zuma assured the 3,000 delegates that the ANC regards South Africa's minerals and petroleum as strategic national assets over which the state would retain custodianship.

China Embargoes Natural Resources but Not Semi Processed Alloys

Interesting piece along the lines of a previous post on proposed export ban on natural resources.

China has overtaken Japan and is now the world's second largest economy and Japan’s number-one trading partner. China also mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths. 

In a recent spat however, the Chinese government reportedly blocked exports and shipments to Japan, of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles, sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, who was subsequently released.

However no discriminatory ban was imposed on the export to Japan, of semi-processed alloys that combine rare earths with other materials. China has been trying to expand its alloy industry to create higher-paying jobs in mining areas, instead of exporting raw materials for initial processing. 

Legality?

Publication of government regulations or other official pronouncements barring exports from China would reportedly allow Japan to file an immediate complaint with the World Trade Organization, claiming a violation of free trade rules. But an administrative halt to exports, by preventing the loading of rare earths on ships bound for Japan, is much harder to challenge at the W.T.O. This is possibly because there is no formal directive.

On general export controls, the Japanese media has also reported that China has repeatedly rejected Japan's requests for Beijing to consider lifting its export controls on rare earth material. Beijing has cited national security concerns and the protection of natural resources for its export restrictions. It has also argued that the export controls do not violate World Trade Organization rules. Chinese officials also pointed out that there are other countries that export rare earth minerals and that Japan should diversify its sources. 

Natural Resource Stabilization Funds in Latin America

According to the 2010 World Bank report "Natural Resources in Latin America and the Caribbean: Beyond Booms and Bust?", the current commodity bonanza, if managed wisely, can propel Latin America to rich-world growth levels, contradicting the long-held view that commodities are a curse to a country’s development. Is there something for Africa to learn?

The Report indicates that Latin American countries are increasingly savvier with commodities, implying that Latin America may be breaking the “natural resource curse” – a huge deal for a region where similar to Africa, 93 percent of the population and 97 percent of economic activity is in countries that are net commodity exporters.  For instance, in 2008, commodity exports for the seven largest economies in LAC reached a high of nearly US$400 billion. This accounted for just over half of overall exports (52 percent). In the Southern Cone of the region (Argentina, Uruguay, Paraguay, and Southern Brazil) the share of agriculture related exports represents more than 50% of total exports, as an average.

The commodity boom seems to working in South America because those countries that are rich in natural resources are being smarter in the way they manage their income.  For instance, Chile’s copper stabilization fund is a good example of wisely managing a commodity boom. By saving the proceeds of its copper windfall during good times Chile has been able to maintain its social programs and invest in new industries during lean times. Chile even used part of the stabilization fund to finance the country’s reconstruction following its February 27 earthquake. Other commodity-exporting countries such as Peru, Colombia and Brazil, which are following responsible economic policies, may be following Chile's steps. 

The report further argues that well-designed natural resource stabilization or long term savings funds could help the region deal with revenue instability and wealth preservation. Of five countries that began the boom in 2002 with stabilization funds or similar fiscal arrangements, Chile and Trinidad and Tobago ended it with significant savings to be able to finance a counter cyclical response to the downturn. The Report however warns that many stabilization funds have failed because it is hard to resist political pressure to spend unduly during the boom. 

Along similar lines, a recent report indicates that Ghana is expected to adopt the Norwegian model for managing petroleum revenue. The Government has also presented Parliament with a Petroleum Revenue Management Bill, drafted along the lines of the Norwegian model, which  divides petroleum revenue into three modules; Budget, Heritage and Stabilization Funds, aimed at preventing volatility shock in the market whilst promoting budget stability and continuity in government expenditures.  The Heritage Fund will ensure intergenerational equity because of the finite nature of resource revenue which compels some governments to save windfall revenues for future generation. The Stabilization Fund on the other hand would be used to mitigate volatile situations that might arise in future.

Herein lies the lesson and the solution for Africa. good governance, political stability. If Latin America can do it, so can we. Ghana seems to be on the right track.

Need for Capacity for Value Addition in Natural Resources

We need to build capacity in Africa in order to add value to natural resources. 

In a recent post, we discussed a proposal from African countries to ban exports of natural resources. Tanzania reportedly has in place a ban on the export of raw gemstones. However, in a recent news piece, the Tanzania Government Ministry of Minerals and Energy has proposed to lift the ban on exports of gem stones with a weight of over one gram, due to lack of local capacity to cut stones, stating "as there is no point of people staying with uncut stones while there is no capacity."

The Ministry's Commissioner for Minerals, Dr Peter Kafumu, also stated that the government move was propelled by the fact that the lapidary is still at infant stage and exporters need additional time. He also added "In actual fact we were not ready when we imposed the ban. I think politicians pushed us a bit harder."

It is interesting to note that investors such as TanzaniteOne are pushing for exemption from the export ban while the labour market opposes lifting of the ban, which could reduce employment opportunities locally. What is Government to do?

Discouraging Exports of Raw Materials

Delegates at a recent meeting proposed that Africa should ban or discourage exports of raw materials to developed countries. Instead these resources should be developed and added value locally. The AU commission may be requesting Presidents to put their political weight behind such a proposal ahead of the 3rd Africa-Europe Summit in November in Libya.

Indeed such an approach would put local content and value addition policy at the heart of Africa's development plans. Local content is where foreign companies are obliged to procure a percentage of labour, goods and services from the host country. Norway pioneered it. See related post on the Norwegian case study. Brazil, a rising oil giant, is using it.

Two questions to ask are: how many African countries currently have the regulatory, investment and governance environment necessary to efficiently manage and add value to natural resources?  Additionally are there legal agreements- regional or bilateral including other barriers that would prohibit such an approach at a national level?

The WTO dimension.

Tariff escalation in developed countries e.g. in fuels, forestry and mining sectors would continue to be a concern. Non tariff barriers e.g. technical regulations, import licensing and prohibitions in value added products would also be prohibitive.

WTO rules (e.g. GATT Articles I, III, XI, XIII) would ordinarily not permit a WTO Member to undertake a legal measure to ban or discourage exports, even for reasons of poverty. It may be possible to use export taxes especially where natural resources dominate an economy. However there are proposals and/or disputes in the WTO and EPAs seeking to phase them out. There could also be possibilities for developmental flexibility for the economic development of LDCs. GATT Article XI:2 also provides an exception to the ban of export restrictions to prevent critical shortages. In addition, general exceptional measures found in GATT Article XX, could be relevant. These include measures:

XX (g) for the conservation of exhaustible natural resources. However measures taken pursuant to this provision, would need to be implemented in conjunction with restrictions on domestic production or consumption. This is therefore a two part legal requirement- a need to show conservation of exhaustible resources such as fossil fuels and metallic ores and restrictions on domestic production. However even renewable resources can be exhausted if over-traded or mismanaged hence export restrictions may be necessary.

XX (i) involving restrictions of exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing plant during periods when the domestic price of such materials is held below world price as part of a government stabilisation programme. This is a periodic measure applicable specifically to export restrictions undertaken to ensure sufficient quantities for domestic processing, specifically when domestic price is below world price and as part of an internal price stabilisation scheme. Given the extreme price volatility of certain natural resources, this provision maybe relevant however the precise requirements require dual pricing mechanisms. 

XX (j) essential to the acquisition of products in general or local short supply. However such measures must be consistent with the principle that all members are entitled to an equitable share of the international supply of such products.

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Daily Monitor Uganda

Participants at a meeting of the African Union’s Trade and Industry Commission yesterday proposed that the continent adopts policies to discourage the export of raw materials to the developed world.

During a media briefing at Munyonyo, Kampala, Ms Elizabeth Tankeu, the Trade and Industry Commissioner, said: “We have been exporting our raw materials to Europe since the colonial times when the Europeans came to Africa. They still come here for our resources but we have remained the poorest continent”.

“The European Union through its Economic Partnership Agreements wants Africa to trade with them at zero per cent tariffs. They say they want reciprocal trade. But we are saying Africa still needs a lot in place for reciprocation to begin. We’re telling them we are not going to continue exporting raw materials.”

More here.