Back when England was in the empire building mode, colonizing the world, the idea was not to control all the people in the colonies so much as it was to control all the natural resources. They wanted to get everything from trees to gold to furs, ship it back home to jolly old England where it would be manufactured into valuable stuff the world needed, keep what they wanted and get rich selling the rest to coutries that did not control the trees and such. Pretty good idea while it lasted – control all the natural resources and you get very wealthy and pretty much own the world.
A modern day squabble is emerging that has profound implications for global manufacturing and the global economy. The question of exactly who owns the natural resources is at the center of it.
Earlier this year the Aussies had themselves worked up into a full blown conniption fit over the Labor Party's proposed 'super profits tax'. The idea was to hit the likes of Rio Tinto and BHP with a 40% tax based on the theory that they were getting rich digging up all of Australieas minerals and peddling them to China, and the good people in Australia deserved compensation for losing the country's natural resources. Rio Tinto may have mineral rights but the people in Australia still had a claim to the core wealth of the country. I thought this was a singularly bad idea and ranted accordingly in the Pacific Excellence blog.
The same BHP is now at the center of another natural resources squabble – this time in Canada. Earlier this week the Canucks nnixed their bid to buy Potash Corp – a big Canadian mining outfit – saying BHP, "had not satisfied the requirement that such a large foreign investment create a 'net benefit' for Canada." Also in Canada, while the Canadian government has OK'd selling lumber to China, there is a growing unrest at the idea based on the very legitimate concern that doing so will empty out the forests and undermine manufacturing jobs for those Canadian folks currently engaged in turning trees into wood products.
I ranted on a similar issueover the glee in New Zealand, taking the Kiwi's to task over selling raw logs to Chinese manufacturers who then sold their wares to Europe, instead of building up their manufacturing industries to do a lot more value adding and sell manufactured wood products to Europe.
The Germans are concerned about natural resources, as well. While they are in good shape for the basic inputs to steel making and the like, they are in desperate shape for 'rare earth' metals – the sorts of minerals that go into making high tech products. And the heart of the problem is China. The Chinese have plenty of rare earth minerals but they are increasingly squeezing the supply for exports and creating problems for manufacturers around the world. The world's #2 manufacturing exporter (Germany) is threatening a trade war with the world's #1 manufacturing exporter (China).
The Chinese have a lot in common with the old Brits in terms of their national strategy to control natural resources. China has plenty of trees, but they prefer to hord them and buy the Canadian trees cheap because the Canadians are in a recession and need to sell all they can – but the Canadians are drawing the line at selling minerals. The Chinese are also running around the world buying mining interests in Australia and Africa, taking control of vast natural resources to ship back to China to feed their manufacturing industry. While the Chinese are not so overtly political in their drive to control the natural resources, their aims are no less an extension of their foreign policy.
So the question for the United States – and Canada and Australia and the rest of the western world – is whether the state has a claim to natural resources even though the mineral rights have been sold to a private concern. Somewhere between the naive philosophies of the libertarians, and the socialist underpinnings of the Australian 'super profits tax' lies a solution that preserves the western free-market ideology that has made us great, yet defends future generations from the potential depletion of the basic resources they will need to assure the quality of their lives. I am inclined to think that an export tax is the answer. Something along the lines of a 20% tax on exported natural resources – but no tax when those resources are sold to domestic manufacturers.
Whatever the solution, manufacturers should be very concerned. All of the management talent and executional excellence in the world won't help if you can't buy the basic raw materials needed to produce.
Potash Corp. is bankrupt? I missed that. Got a reference?
Sorry Robert – my mistake – I was thinking of another company in the article. Thanks for correcting me.
Original post corrected to delete “bankrupt” reference to Potash Corp. They are very much alive and well.
A different rare earth viewpoints:
EE Times has run a bunch of articles, too.
“Somewhere between the naive philosophies of the libertarians…lies a solution that preserves the western free-market ideology that has made us great”
I’m pretty sure most libertarians are pro free market? Does that make capitalism naive?
“…yet defends future generations from the potential depletion of the basic resources they will need to assure the quality of their lives. I am inclined to think that an export tax is the answer. Something along the lines of a 20% tax on exported natural resources – but no tax when those resources are sold to domestic manufacturers.”
If the efficient use and trade of natural resources (and the gradual expansion of that practice to all Americans) is what made this country great, than how can limiting the efficient use and trade of those resources through an export tax be good for the general welfare of the people? We have an import tax now, and all that has done is raise domestic prices in relation to foreign goods. Won’t an export tax do something similar, in that it will limit the supply of natural resources? I’m not really following this very well, I guess?
Bill Waddell says
We have Free Trade Agreements with our NAFTA partners – Canada and Mexico. With everyone else – China in particular – we have nothing remotely like “free trade”. Yes, libertariens tend to be ‘free traders’ and they are incredibly naive in thinking that our trade with China is anything like an honest arms length transaction between free people.
Yes, we have an import tax now – it ranges from 2-4%. China, on the other hand, taxes imports from the USA at 10% or more, Brazil taxes our goods at 39% coming into their country, and India slaps 35% on goods from the USA. Our paltry tax hardly ‘raises the price you pay for anything relative to foreign goods’.
All the raw materials in the world aren’t of any use if you can’t get the licenses and environmental permits to build/operate your plant. (And for capital intensive industries, try to predict your regulatory burden 10-15 years into the future.)
Warwick Carter says
The super profits tax kicks in only when the miners make a profit over a certain level – set by ageement with the Miners (Can I negotiate my income tax, please).
Given that the Government subsidises the mines to start up, then charges a pittance through royalties it’s not a bad deal. Of course, any Government charges are offset since the Mining industry gets tax breaks Manufacturers would chew their own arms off for.
I wouldn’t mind it at all if my suppliers sold me product dirt cheap & only increased prices after I made a hefty wad of cash.
It comes down to supply & demand. The miners renegotiate their contract prices yearly, but somehow expect that the price for the minerals should be fixed for the life of the mine. Somehow, I as a taxpayer & owner of the asset do not feel that is a great business proposition. The resource rent tax is a way of tieing the price of the asset to the market without renegotiating the contract every year or so.