Business World, 1 August 2017


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 forward-linkage 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-Singer hypothesis claimed that the terms of trade always moved against primary products and in favor of finished goods; thus, the post-World War II rush to move out of primary products and minerals. Thus, the Import Substitution spell in the Post-World War II period. This narrative was still alive and kicking when PASAR and Marinduque Mining and Industrial Corp. were propped up by the Marcos regime. Now we know better — transport cost has fallen drastically, steel is no longer cost-wise iron ore-intensive, and there is little evidence that terms of trade of primary products are permanently on the down-slide. Finally, there is little evidence that forward linkage strategy plays any role in long-term growth.

In the age of slipstream industrialization, the smart thing to do is get on the slipstream of established and upwardly mobile multinational corporations by being better than rivals in one or two links in their value chains. Foxconn got into the slipstream of the Samsungs and the Apples of this world in the 1990s and became the largest employer in the world. President Trump has just discovered it in 2017.

The Philippines has already two nickel processing (High Pressure Acid Leach) plants (Coral Bay and Taganito), both co-owned by Nickel Asia Corp. and Sumitomo. But these are not the same as the plants in China which use the pyrometallurgical process to smelt the higher grade Saprolite ores. PASAR, now part of the Glencore supply chain, already processes copper into concentrates and electrolytic cathodes. Will they be forced to step out of their respective supply chains? Some self-proclaimed nationalists are hoping to get the government to commit to the symbol of 19th century industrialization: an integrated steel plant. The big danger: if the locally processed intermediate 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.

Forcing extracting companies via an export ban to go process when the economics is not there is counterproductive. Indonesia’s prospect for forcing the mining hand is better than the Philippines’ overall: their deposits are larger and of higher grade and could justify long-term investment. Indonesia’s power cost is lower. Even then, Indonesia has now re-thought its 2017 zero export deadlines because of the difficulties.

On the whole, it is better to take the fiscal route to higher returns from mining and from everything else: better royalty sharing, fairer and competitive taxes, lower power cost and simply better infrastructure. In other words, TRAIN (Tax Reform for Acceleration and Inclusion).


Raul V. Fabella is the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology.