The Allure of the Export Ban
The Allure of the Export Ban
Who wins when countries try to flex their resources muscles?
Sometimes size does matter. In October 1973 OPEC (Organization of the Petroleum Exporting Countries) controlled ~55% of the world’s total oil production. Unhappy at the United States’s support of Israel in the Yom Kippur war, OPEC – led by Saudi Arabia – imposed an oil embargo on exports to the US and other countries who supported Israel. Global prices quadrupled.
September 2020. India is the 2nd largest onion producer in the world, only behind its long-time bitter onion rival, China, who are busy cultivating their allium bulbs just over the Himalayas. Heavy rains cause the Indian onion crop to fail, local prices spike, and the government reflexively imposes an export ban. Suddenly an eye-watering 23% of the world’s onion production is off the table. Global prices… shrug. Sometimes size doesn’t matter.
Both OPEC and India sought to leverage their dominate position in a global value chain to engineer a certain desired outcome. Teach the West a lesson, keep the domestic price of onions low. This will-to-power inclination of global governments is not uncommon. Particularly when you are sitting on top of something a lot of people want but there isn’t that much of around.
Which brings us to Indonesia and its nickel. In 2009, eyeing its position at the top of the nickel tailings pile, the Indonesian government passed a law banning the export of unprocessed nickel in an effort to spur local refining and value addition. At the time it mined around 25% of the world’s nickel. Implementation of the ban was delayed until 2014, when production promptly, and rather predictably, collapsed. This precipitous fall temporarily made the Philippines the Steven Bradbury of global nickel production as they “overtook” Indonesia as the world’s largest producer. It also prompted the government to pause the ban in January 2017.
Figure 1: Things went downhill fast…
In 2020 the government tried again but this time with a host of signed contracts from Chinese smelting companies tucked in their back pocket. Throw in some multi-decade tax holidays for new refineries, purpose-built Special Economic Zones, loosen a few environmental regulations and just a few short years later you have yourself a booming nickel refining industry. From two smelters before 2014, to 13 in 2020, as many as 30 are now in production. As well as regaining the top spot from the Philippines, the nickel export ban is being eyed enviously by governments around the world who are sitting atop globally significant piles of rocks (onions remain of less strategic value).
So what’s the lesson in all of this? Certainly, “it’s complicated”, but it also demonstrates that industrial policy often needs to be a whole of government endeavour. This may raise the stakes as more resources are dedicated to the desired policy outcome, but half-hearted attempts or political whims are unlikely to get you anywhere. Also, bans and embargoes are blunt instruments. Food export bans are perennial favourites in times of shortage but often only make situations worse, the oil embargo initially caused a boom in revenue for OPEC but ushered in an era of increased volatility, and Indonesia’s nickel ban was delayed, tanked the industry, then re-implemented to (some) critical acclaim.
Global attitudes towards industrial policy are shifting, at least amongst those poor souls who think about such matters. Even within the relatively narrow church of the GPI, opinions are split, as old thinking is challenged by Rodrik, Hausmann, and Jokowi. Our recent piece calling out The Economist’s split personality on industrial policy felt like “punching my dad in the face” according to one GPI contributor. But good industrial policy is often only recognised or known to have been successful ex-post. Unfortunately, governments make decisions ex-ante.
Indonesia is planning on replicating its success in nickel processing by banning bauxite and copper exports. Short term pain is a given. If and when the ban is implemented, the bauxite mining industry is bracing for a decline of as much as 40% as customers move elsewhere. This without a doubt means fewer jobs but also reduced foreign earnings and tax revenue for social projects. Long term success depends on many factors; some of which may be directly controllable by the Indonesian government, others may not be. The prospects for a repeat successful performance look less promising not least because Indonesia mines less than 5% of the world’s bauxite and high-income countries do not need aluminum as much as they need nickel for the transition to renewable energy. With other options for raw material, refiners may decide to spur Indonesian ore.
Industrial policy is often accused of “picking winners”. That’s more often than not a strawman argument mounted by reflexive critics. However, what is indisputable is that industrial policy creates winners and losers even if they weren’t the ones they picked. The oil embargo spurred the first major wave of investments in solar power. The Indian onion ban handed more customers to China. Buoyed by their success in nickel refining the Indonesian government may inadvertently drive bauxite customers into the waiting arms of that dynamic duo, Australia and Guinea.
Export bans, and industrial policy writ large, have the power to make or break industries, cement political legacies, or even bring down governments. Politicians and policy makers have a powerful set of tools at their disposal. They should think more than twice before using them.
Thanks for a very informative post!
Export bans are very crude trade policy, and it seems unlikely that they are in the country's interests very often. Indonesia's first nickel export ban looks clearly harmful for the country. The second export ban, on this showing, may have been successful and it's goal of capturing more of the nickel value chain, but at what cost? Traditional free trade models to give a good reason to presume that the harms exceed the benefits. To refute that conclusion, some sort of market failure would need to be demonstrated. For example, do industries downstream of nickel mining have positive externalities, perhaps through creation of good jobs that facilitate upward social mobility or reduce welfare dependency? Until that's demonstrated, the presumption has to be that the nickel export ban appeased the government's arbitrary preference for more manufacturing, but made the country as a whole worse off, albeit the downsides maybe too diffuse to capture and setting the balance against the benefits.
But let's suppose for the sake of argument that a comprehensive cost-benefit analysis of the nickel export ban would reveal that it's a good thing for Indonesia, taken separately. Is it a good thing for other countries? Almost certainly not. To take away theit option of buying Indonesian nickel almost certainly hurts them. And if Indonesia benefits but other countries lose out, are Indonesian nickel bans a good thing for the human race as a whole? Again, almost certainly not.
So it would be nice if export bans were prohibited somehow. That's the old logic of trade deals, and of wonderful old organizations like GATT and WTO, but unfortunately, good behavior in trade policy has gone somewhat out of fashion, which is probably a contributor to the global trend toward violent chaos, aggression and fascism and all that. I'd be delighted if Global Prosperity Institute took that as a provocation to prove me wrong!
There's also the question of justice. By what right does Indonesia forbid its citizens from exporting unprocessed nickel? The question seems antiquated somehow, maybe because it has an aura of moral realism which is out of tune with our morally relativistic age. Not that people are ultimately all that serious in their moral relativism: in the face of genocide or naked aggression or rape, they tend to assume that their moral intuitions are authoritative. But they're moral relativists in small matters. The irony here, as in many places once you start to look for it is that utilitarian ends would be best served if people believed that export bans were unjust.
Free trade is a global public good. And one of the best things that rich countries could do is to launch robust and generous foreign aid programs conditional on free trade. Then pretty soon developing countries would feel they couldn't afford to institute export bans, because of all the foreign aid they would lose.