Thursday, 29 May 2014

A surprisingly common bad idea

I try not to read the 'celebrity' gossip that passes for news in some of the trashier media, but even I couldn't quite avoid reading about what's been called the world's most expensive divorce.

Earlier this month, a Swiss court awarded Elena Rybolovleva, former wife of Russian oligarch Dmitry Rybolovlev, half of his wealth, which came to 4,020,555,987.80 Swiss francs (there is something very Swiss about the 80 centimes). That's about NZ$5.3 billion in our money.

Where it starts to get interesting, though, from an economist's point of view, is where Mr Rybolovlev made his money. The bulk of it came from the 2010 sale of his majority stake in Uralkali, a Russian fertiliser company (phosphates, mainly), which realised some US$6.5 billion.

And where it gets more interesting still is why Uralkali was worth so much. No doubt some of it reflected the assets of the business: phosphate mines are relatively rare, phosphate is always in demand from farmers, and Uralkali happens to have heaps of it. But the thing that puts the cream on the cake from a valuation point of view is the lolly from the export cartel that Uralkali in Russia operated with Belaruskali, which as you might surmise is based in Belarus. The cartel at least temporarily fell apart in 2013, but when working, the two companies controlled 43% of the global phosphate supply.

More interesting again is the fact that three Canadian companies - Canada's got 46% of the world's phosphates - also run a perfectly legal export cartel. So you've got by far the largest share of the world's phosphate market tied up in collusive arrangements. There's a terrific article by two economists, for The American Antitrust Institute - 'The Fertilizer Oligopoly: The Case for Global Antitrust Enforcement' - which gives you chapter and verse on the whole thing (it's the source for those market share estimates, for example), as well as being, if you're in the economics teaching trade, a great classroom resource on how cartels develop and why. The authors cite a Wall Street Journal article which said that fertilizer markets are so manipulated, “they might make a Saudi prince blush”, and if you google "potash export cartel" for yourself, you'll find that many others have come to the same conclusion.

All of which got me thinking about why export cartels are tolerated. Yes, there are some obvious venal motives - governments get to share in the export cartels' ill-gotten gains, for example. And it's not just the Belaruses of this world who think that way. In Canada, according to a 2011 paper in the Canadian Student Review published by the Fraser Institute, 'The failed potash takeover':
"When BHP made its initial hostile take-over bid [for PotashCorp, one of the Canadian companies], its CEO Marius Kloppers stated that the new firm would market outside of the cartel, which would effectively break it up. Both the Saskatchewan provincial government and the Government of Canada were concerned about the end of the tax revenues they received from the artificially high world prices of potash made possible by the cartel...The deal finally failed because...Minister of Industry Tony Clement used his power under the Investment Canada Act to block the takeover".
To be fair, their potential attraction to amoral taxmen isn't the only motivation. Some people have put up efficiency arguments for export cartels, for example, usually in the area of smaller firms needing to collaborate to compete more effectively in large global markets.

Even so, the balance of arguments strongly points to export cartels as a counterproductive rort on the world economy, and a surprisingly pervasive one at that. 'The Changing International Status of Export Cartel Exemptions', a 2005 article in the American University International Law Review (which isn't behind a paywall, by the way), traverses the arguments for and against the damn things, but is especially good on documenting their prevalence.

Of the 55 countries surveyed, all but four have explicit (17) or implicit (34) exemptions from domestic action legal against export cartels (ours is in s44(1)g of the Commerce Act, which says that "Nothing in this Part applies" - 'this Part' being the part that covers restrictive trade practices - "to the entering into of a contract, or arrangement, or arriving at an understanding in so far as it contains a provision that relates exclusively to the export of goods from New Zealand or exclusively to the supply of services wholly outside New Zealand"). The only countries wearing the white hats are Luxembourg, Russia, Uruguay and Thailand, and while the de jure description of Russia may be correct, the de facto position is that it has turned a blind eye, at least to the potash cartel.

The papers I've cited list most of the reasons why export cartels are such a bad idea. The biggest one is that we end up collectively worse off:  if North American is ripping off Europe and Asia, and the Europeans are ripping off Asia and North America, and Asia is ripping off North America and Europe, we've all ended up being ripped off (which is why I've called them a "counterproductive" rort). There's often also the issue of who's getting ripped off: in the phosphates case, for example, it's farmers, and hobbling the world's food supply with high input prices is a deeply regressive thing to do. And then there's the potential leakage from companies agreeing not to compete overseas to their competitive behaviour in their home market: how likely is it that companies working together overseas will compete vigorously at home (or as vigorously as they might have)? Not very likely at all, I'd say.

For me, there are two things that look especially egregious. One is the sheer banditry that lies at the heart of export cartels - what has been called their "beggar my neighbour" character. It's back to the days of Queen Elizabeth I, when any buccaneers trying it on in English waters would be hanging in chains in no time, whereas privateers robbing the Spanish silver fleet got knighthoods. And the other is the way they place yet another obstruction in the way of workably competitive international trade. Trade is gummaged up enough already with assorted protectionisms: it doesn't need export cartels as well.

Realistically, it would take concerted global action to deal to them. But neither the mooted Trans Pacific Partnership (TPP), nor the Transatlantic Trade and Investment Partnership (TIPP), appear to have export cartels in their sights. A pity: they should get both barrels, once for efficiency, and again for equity.

1 comment:

Hi - sorry about the Captcha step for real people like yourself commenting, it's to baffle the bots