UNPROCESSED MINERAL EXPORT BAN

If locally processed products can’t compete in the market, then the export ban may escalate into an import ban: that is, force the locals to buy local. Say hello to the 1950s.

In his 2017 SONA, Pres. Duterte threatened, among others, to stop the export of unprocessed mining products. This follows the ban on similar products in 2014 by Indonesia. The ostensive purpose of this exercise is to raise the value added from each unit of mineral export by subjecting to further processing locally. As Pres. Duterte put it:

“If possible, we shall put a stop to the extraction and exportation of our mineral resources to foreign nations for processing abroad and importing them back to the Philippines in the form of consumer goods at prices twice or thrice the value of the original raw materials foreign corporations pay for them.”

This narrative is as popular as it is seductive. It is the WMD of every industrial policy advocate. But like most bald slogans, it is easier to shout out loud than to defend under closer scrutiny.

The goods you import are almost never the ores you export. The goods imported are a composite of inputs from many different countries and different industries. Granting for the sake of argument the greatest plausibility to the narrative — let the product imported be copper wires which was produced using many inputs, one of which is copper concentrates exported by PASAR, Leyte. The copper wires are then used by NGCP to maintain or extend the power grid and by households in their appliances. The narrative asks the question, “Why don’t we produce the copper wires?” The subliminal claim is that we should be able to produce copper wires cheaper here; we will not incur the cost of transporting copper concentrates to the foreign buyer, more likely China. While exported unprocessed ores contribute to the cost of the processed downstream product, many other inputs combine to produce — say, the downstream steel ingots or copper cables — and in fact they (ores) may be far from being dominant. There is the power cost (especially heavy in the case of steel and aluminum), capital cost (all smelting plants are fixed capital-intensive), other chemicals, specialized human capital, technology, environmental and regulatory cost. By the time the finished product is packed for the market, iron ore or copper concentrates is a small part of total cost of steel and copper wires, respectively.

That is why China and Middle Eastern countries lead in processing and smelting because the cost of capital and the cost of power are lowest there. Likewise, their excess capacities in processing and smelting are causing the downtrend of prices of these products. The contentious term is “dumping.” Comparative advantage in intermediate inputs and in finished goods is no longer dictated by mineral factor endowments especially because the cost of transportation has declined precipitously.

The ultimate test of the policy: will the home-processed copper wires be cheaper? It is no longer clear that this is the case — putting the whole building and manufacturing industries at risk. If the past is any indication it will be dearer. The cost of domestic steel in the 1960s and 1970s stunted our fish canning industry because domestically produced tin cans using domestic steel were very costly.

Time was when the forwardlinkage narrative had a strong support in trade theory. The Heckscher- Ohlin Theorem stated that a country with abundant iron ore deposits should export the iron ore-intensive product. That used to be steel, the cost of steel being viewed as mostly ore inputs and factors were not tradable. This may have been true when transport cost was prohibitive and lumpy cargo did not go. Likewise, the then widely believed Prebisch-