I’ve been thinking about the term stockpiling lately because it has come up recently in many conversations. In a classic sense, most of us probably think of stockpiling as buying up something. And when we talk about China and metals, we can say it’s true (has been true) for commodities such as steel, copper, zinc, lead and aluminum ” that the Chinese have engaged in such practices. There is nothing wrong with the practice, on the face of it one could argue China may no longer be stockpiling many of those metals. If we peel back the onion one more layer though we may begin to think about the notion of stockpiling in a couple of different ways. On the one hand, countries stockpile all sorts of commodities. We in the US have what is formally called a Strategic National Stockpile which according to this definition only includes antibiotics, chemical antidotes and anti-toxins. But according to this article, The Ã‹Å“strategic stockpile’ was a large amount of metals, minerals and other items. Planners believed these things were critical for the national economy to function.
We’re not going to get into the subject today of what is or isn’t in our nation’s strategic stockpile (though we reserve the right to comment on this at a later date). Instead, let’s examine how and more important, for what reasons other nations engage in stockpiling because that forms the basis of a major WTO case filed last week by the US involving a range of raw material trade practices, which if not addressed, could impact US manufacturing. The US accuses China of applying export restraints on various raw materials. According to US Trade Representative Ron Kirk, China’s measures appear to be part of a troubling industrial policy aimed at providing substantial competitive advantages for the Chinese industries using these inputs. The materials at issue are: bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc, according to the Office of The United States Trade Representative.
Now let’s return to this notion of stockpiling. As mentioned, countries often do add to and go out to the market to replenish their version of a Ã‹Å“strategic stockpile’. But in this case, the US believes China has kept some of these raw materials out of the global marketplace purposely to create a competitive advantage by allowing Chinese domestic industries access to lower priced raw materials and thereby creating supply constraints for overseas companies forcing them to pay higher prices.
China imposes a number of tactics to, in effect, stockpile these raw materials. These tactics include export quotas, export duties and other export related administrative measures and costs. Some of these measures are expressly prohibited by the WTO of which China is a part. According to the National Association of Manufacturers in a recent press release, after two years of discussion on this issue with the Chinese government, we are well past the time when China should have taken action to resolve the issue.”
We see three primary ramifications to this case. The first, and most obvious relates to the fact that many of these raw materials are imported to the US and used in downstream products and industries including the steel, aluminum and chemical industries. Manganese, as an example, has few product substitutes. The second ramification relates to the administration’s stance on this particular trade policy concern. President Obama has [wisely] decided to take this fight to the WTO and given that much of the green economy depends upon these and other metals, it’s a step in the right direction. Last, this case highlights some inconsistencies within Obama’s position on trade. In this case, he’s taken a stand against China’s practices but he’s hinted that he won’t support a tariff provision within the recently passed (House passed) carbon cap and trade scheme. That’s another long story we’ll save for a post later this week.