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The Progressive Economics Forum

In Praise of Export Cartels

Concerns about the prospect of BHP Billiton leaving Canpotex have prompted a backlash of hand-wringing about Canpotex’s very existence. For example, The Globe and Mail featured an editorial earlier this month that began by suggesting, “Canadian policy-makers should reconsider the status of Canpotex.”

But it concluded, “In practice, unwinding Canpotex would be no simple matter. Moreover it would be a drastic measure to legislate to prohibit an existing entity of this kind.” So, The Globe has no policy proposal but believes that Canadians ought to “feel uneasy about a fertilizer cartel based in their own country.”

Canpotex and OPEC

The argument is that Canadians “are being hypocritical in opposing foreign cartels, while taking for granted one of their own.” In particular, The Globe claims, “Most Canadians have long taken an unfavourable view of one cartel, the Organization of Petroleum Exporting Countries.”

That premise is debatable. Canadians who favour lower greenhouse-gas emissions might thank OPEC for imposing a global carbon tax that far outstrips anything environmentalists have been able to implement. Indeed, OPEC’s oil-price shock in the 1970s prompted substantial (although still insufficient) improvements in energy efficiency.

Whatever upward pressure OPEC still places on oil prices imposes economic costs on some Canadian industries and regions. But higher oil prices obviously benefit other Canadian industries and regions. Since Canada is a significant net exporter of oil, price increases presumably provide a “net benefit” to Canada.

This conclusion is more clear-cut for potash, with Canada exporting huge volumes and consuming almost none. So, I feel no hypocrisy in applauding the efforts of both OPEC and Canpotex to raise commodity prices.

Taxing the Golden Geese

The problem is how the “net benefit” from higher commodity prices is distributed. While oil and potash reserves belong to the public, price increases mostly accrue to the private companies that extract them.

The solution is for provincial governments to charge companies higher royalties for these resources. Also, the federal government should stop cutting corporate taxes for such super-profitable industries.

The Globe muses about killing Canpotex and OPEC, geese that lay golden eggs for Canada. Instead, governments should simply collect more of the eggs for public purposes.

Developing Countries

What about the argument that high potash prices are detrimental to food production in the developing world? I am all for Canada spending more money on foreign aid to feed people and assist agricultural development in poor countries. But it is doubtful that lowering the price of a particular input like potash is the most effective way to achieve these goals.

We should also ask which developing countries are most affected. Potash exports from New Brunswick to the Carribean and Latin America do not flow through Canpotex, which controls potash exports from Saskatchewan through the Pacific.

Typically, China has been Canpotex’s biggest customer. The exception was 2009, when China bought less than Malaysia! This dramatic cut was engineered by Sinochem, the state-owned chemicals corporation that controls almost all of China’s potash imports.

If China can leverage its position as a major potash consumer to bargain lower prices, surely Canada should be able to leverage its position as a major producer to negotiate higher prices. Even if one believes that the world would be better served by more competitive potash markets, a viable “second best” may be for Canada’s coordinated selling power to offset China’s coordinated buying power.

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Comments

Comment from Purple Library Guy
Time: September 15, 2010, 6:53 pm

Higher royalties would be nice. Nationalizing would be even better. Most countries with significant reserves have their own oil companies. Why can’t we manage? Why shouldn’t we keep the profits in the country, like other non-chump countries do, rather than let them drain away?

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