287. Memorandum From the Assistant Secretary of the Treasury for Trade, Energy, and Financial Resources Policy Coordination (Parsky) to the Executive Committee of the Economic Policy Board 1

SUBJECT

  • Summary of report on Commodity Policy for Non-Fuel Minerals

On February 25 the Economic Policy Board directed its constituent agencies to form a task force to reexamine U.S. commodity policy for non-fuel minerals and report its findings to the Board on April 30.

Attached is the report summarizing the task force’s findings. The body of the report, which is presently several hundred pages long, will be forwarded as soon as it has been edited.

Gerald L. Parsky
2

Attachment

Summary of Report to Economic Policy Board on Commodity Policy for Non-Fuel Minerals

I. Background

This reexamination of commodities policy was undertaken in anticipation of increasing pressure in international forums for commodities agreements and out of concern that the commodity market instabilities of the 1972–74 period might mark the dawn of a new era for which past commodity policy was no longer suited. Consequently, this study aims to assess the likelihood that we are in a new era, analyze the merits of the major new commodity proposals, and, to the extent time permitted, assess the alternatives and point out areas where further consideration might be fruitful.

To permit more intensive analysis, the Board accepted the task force’s recommendations that the study focus on the six non-fuel [Page 991]minerals which the less developed countries identified in UNCTAD as suitable for commodity agreements. These six account for more than half the value of U.S. non-fuel mineral imports.

II. Conclusions

Our tentative conclusions for the six minerals studies are as follows:

1. This study tends to confirm the desirability of continuing our long standing existing commodities policy: a preference for non-interference by governments but a willingness to entertain proposals on a case by case and commodity by commodity basis.

a.
No New Era—The extreme volatility of the commodity markets during the 1972–74 period is more likely to prove the exception than the rule. While business cycles will be more synchronized in the future than during the average of the 1960s, the extraordinary amplitude and synchronization of the 1972–74 period are not likely to be recurrent. The market instability during this period was exacerbated by an unusual amount of speculative buying.
b.
Commodity Agreements In General Are Not the Answer: Economic or Political—The commodity proposals which have been tabled internationally rely on two major mechanisms: a price setting mechanism and a buffer stockpile to support it. We looked at the likelihood that such agreements would provide a solution to the problems of commodity markets. Our conclusion is that the prospects, in general, are not good.

Economic Value

First the benefits are not certain. While stabilization seems a desirable goal to some, short term stabilization can lead to longer term instability. Past agreements for tropical products have only been marginally successful and never last long. The evidence of benefits is at best inconclusive.

On the other hand, for most of the six commodities studied, the evidence of high economic costs is fairly clear:

i.

The LDCs in UNCTAD have proposed commodity agreements for these commodites, yet less than 10 percent of U.S. imports of these commodities come from LDCs. To sustain the price for this 10 percent through agreement would probably require imposing import/export controls, domestic production controls, or quotas with their attendant costs in administration and market disruption. Moreover, it would be technically difficult to implement an agreement for one of these commodities—iron ore.

If a buffer stockpile were used, the capital cost would be quite high—our econometric model suggested $1.2–4.8 billion for copper, [Page 992]lead and zinc—and it is not really technically feasible for iron ore. Moreover, some, including many in industry, believe buffer stockpiling would interfere with the investment process.

ii.

Bauxite and Tin—Bauxite (aluminum ore) does not appear to be a serious candidate for a commodity agreement or buffer stockpile. It is traded primarily between different parts of integrated companies, ore grades differ, and no real market reference price exists. Even the producer countries don’t seem to think a price agreement is feasible: they have relied on export taxes to increase their revenues.

For twenty years a tin buffer stock agreement has existed in which all major consumers and producers except the U.S. have participated. Its impact on the market is difficult to assess but it will shortly be renegotiated and the U.S. may be pressed to join. This study reached no significant specific conclusions, positive or negative, with respect to tin.

iii.
Qualification—Our conclusions, based on a two month study, are not so negative that we would preclude further study of these commodities on a case by case basis. The likelihood of anything beneficial emerging in general seems slight, but further consideration of both the tin agreement and buffer stockpiles for copper seem warranted. Our econometric buffer stockpile studies, possibly the first of their kind, suggest that in theory, at least, a buffer stockpile could be useful. The capital cost is very high—in the billions—but sharing with other consumers and producers might reduce U.S. costs below $1 billion.

Political

For the four domestically produced commodities—copper, lead, zinc, and iron ore—commodity agreements will prove a very unsatisfactory response to the LDCs’ political pressure for better terms of trade (resource transfer). While a few LDCs might benefit significantly, as previously indicated, only $1 out of every additional $10 spent by the U.S. consumer through higher prices for these commodities will go to the LDCs. The other $9 will go to producers in the U.S. and the resource rich developed countries, notably Australia and Canada.

If resource transfer is the objective, direct aid is more satisfactory for these four minerals. If commodity agreements are used, the LDCs can be expected to renew their demands in a few years. They will correctly maintain they benefited very little from agreements despite the fact that the U.S. consumer paid a high price. By that time, an artificial pricing structure would have been created that would be politically difficult to disassemble.

III. Alternatives

Alternatives to commodity agreements were considered. One is to strengthen the market mechanism through better information exchange, [Page 993]intergovernmental consultation, futures markets, and through pursuit of supply access agreements in the MTN negotiations. These steps would reduce the information scarcity and anxiety over supplies which contributed to excessive speculation during the 1972–74 period.

If direct aid to the LDCs is considered necessary for political reasons, then compensatory financing like the Lome (Stabex) agreement3 which the Europeans recently signed could be considered. The economic effects seem to be minimal—but it has political appeal, perhaps because, like the lottery, the actual return to individual countries may substantially exceed the average expected return.

Another alternative is an economic emergency stockpile. It would make supplies available in times of extreme shortage. Sales would be authorized under very stringent conditions, such as those required for imposing export controls. It would primarily aim to help consumers, but would have some immediate appeal for producing countries because stockpile purchases will strengthen prices. It has attracted some legislative attention and will be studied further by the forthcoming Commission on Supplies and Shortages.

IV. Further Study

Time constraints prevented adequate consideration of other commodity related issues. One which clearly deserves further study is how a better international climate for priviate investment in natural resources can be created. In 1973, 80 percent of exploration investment for non-fuel minerals was made in four developed countries. This means economically marginal deposits are being exploited because private investors consider the climate in developing countries too hostile for investment. A change in this climate would benefit both developed and developing countries. A real opportunity for mutual benefit may lie here.

  1. Source: Ford Library, U.S. Council of Economic Advisers Records, Alan Greenspan Files, Box 58, Economic Policy Board Meetings, EPB—April 1975 (2). No classification marking. Attached to the minutes of an April 30 EPB Executive Committee meeting, which indicate that the committee reviewed the attached report and decided: "Procedures for further consideration of commodity agreement policy" would be examined at a review of international economic policy scheduled for May 3.
  2. Printed from a copy bearing this typed signature.
  3. On February 28, 1975, the EC and 46 LDCs signed the Lomé Convention, whose provisions included an earnings stabilization fund for LDC primary commodity exports known as Stabex. (The New York Times, March 1, 1975, p. 1)