Dave Waters, Paetoro Consulting UK Ltd

Regardless of what the commodity is, and what its use is, my sense is there are half dozen commonly postulated arguments for keeping production domestic rather than international – i.e. paying over the odds to keep it domestic. These reasons overlap and are linked. They are not totally independent.

1. Domestic production provides local jobs.
2. Domestic production may be less environmentally damaging than imports.
3. Domestic production is socially ethical where international production is not.
4. Domestic production provides security in a geopolitically unpredictable world.
5. Domestic production delivers a better quality product better suited for local applications.
6. Domestic production is cheaper.

A few points then, on each.

1 - While jobs are a great bonus and stimulus, arguably this should never be a reason on its own to choose a particular route. Doing anything makes jobs. Building a Disneyland at the bottom of the ocean would make jobs. What we are all looking for ideally are jobs that have long term security, and that really depends on establishing jobs related to products with genuine market value. Put another way, doing something purely because it creates jobs is commercially unsustainable in the long run, unless competitive margins for justifying investment accompany them. While there is maybe a case for paying to ensure changes don’t happen too quickly, so that transitions happen on a bearable timescale without too much social disruption, paying to keep jobs happening that lose everyone money long term ultimately does no-one any favours. The best job security comes from genuine competitiveness. A caveat is that for many commodities price goes up and down a lot on short time frames. A bit of medium and long term resilience and perseverance in the face of short term fluctuations - is implicit in most commodity based industries.

2 - If domestic production is genuinely less environmentally damaging than international equivalents, then ultimately this can be captured in costs, if/when realistic cost penalties are attributed to environmental damage. If for example, a domestic route is less CO2 emitting than an imported one, including the emissions costs of transit, then carbon pricing is one route of addressing the imbalance and assessing relative favourability of the options. If a domestic oil production supply is argued for on this basis, then carbon pricing is the way to achieve it. That is to say, penalise and compete based on the real physical difference rather than the simple point of origin. After all, depending on the product - in an age of mass production and hugely varying international production methods, sometimes internationally supplied production can be less emitting even with the emissions costs of transit accounted for.

3 - Socially ethical considerations are a bit more Boolean - more true or false than environmental considerations above, which are a more quantitative comparison of options that all have some environmental damage. In terms of social ethics, it's more a case of it is or it isn't. This covers things like health and safety practices of factories, fair minimum wages, use of child labour, and that kind of thing. In this kind of situation internationally accepted certification standards are probably the correct route. This is a growth area, and to an extent overlaps with 2 - especially in the mining arena. As just one example ethical treatment of mining and processing wastes is both a social and an environmental problem. Others, such as sustainable timber, have similar issues.

4 – Geopolitical instability is not an unfair point.  To have security of some domestic supply in a world where political or natural disaster affected supply chains can change overnight, is a not unreasonable thought.  However there is also, arguably, a lot of undue scaremongering that goes on. The diversity of international suppliers that occur for most commodities these days tends to give an underestimated degree of security if one or two of them should suddenly fall out of the supply loop. That's not to say it isn't an issue, and things like COVID-19 illustrate how unexpectedly and rapidly many international suppliers of a commodity might suddenly become a whole lot more introspective, curtailing exports. And how others might rapidly increase the price they are prepared to pay to meet a domestic crisis, displacing normal clientele.

It’s just that on historical data, the probabilities of problems on this front for particular things sometimes seems overstated. The number of countries that supply most commodities tend to be very varied in geographical spread and political spectrum. There are some commodities that are much more geographically restricted in a real physical sense (as opposed to reserve commerciality) – such as cobalt, or platinum – but these are the exception rather than the rule. In many cases the current supply may be geographically restricted, but that is more to do with cost competitiveness of that place than physical restriction of global resource supply to that place. Granted, new supply chains take time to establish – so that is where some domestic supply – as possible – has a genuine case as a safety net. A case of something in reserve to tide over through the unexpected. In that case there is a trade-off between reserve stockpiles and indigenous supply industries. Is the better solution really a domestic supply or a more diverse spread of international suppliers? Open question, with no one answer.

The reality is that few commodity cartels truly exist any more, and that producing countries are typically hugely dependent economically on sales. Commodity blackmail is a tool they can use with only limited effect before it starts to hurt them more than the customer. The moment it is used in that way, other customers are more than likely to take flight, and that is a big incentive not to do so - unless there is also a very large domestic market present.

5 - A bit like the environmental damage penalty, any quality premium, is also really captured in the pricing. If a domestic product is genuinely of better quality than an internationally supplied poorer quality one, then there should be a price driven balance achievable where those customers for whom quality matters, are willing to pay more.

6 - If domestic production is genuinely cheaper, then fine, there isn't a problem, and competition can occur naturally. Maybe it is the converse of 5 - where better quality products come from international supplies, but in that instance the domestic production should be able to compete - opposite to 5 - on the basis of targeting those customers for whom quality matters less.

In a nutshell

In general conclusion, if environmental damage is costed, penalised consistently, and if quality is likewise, assigned fair cost premium, then the drive for or against domestic production is adequately captured in cost/price. That implies there is no particular need for domestic subsidy. The only real case for domestic production subsidy is to protect against natural disaster or political change in a supplying country, or if there is a need to transition over some timescale a long established industry, to limit social disruption. A premium to allow communities to adjust. Implicit in a need to transition though, as a justification for some kind of subsidy, is an envisaged schedule to that transition. Not an open ended blank cheque.

Where there are ethical considerations that is more of an on-off certification question, that impacts international supply competitiveness in a self sustaining way. We see this happening for example with DRC and cobalt. The alternatives which bypass cobalt are being researched in competition, and at the same time, this increases the drive and incentive for genuine internationally accepted ESG certification of large producing mines there.

In practice though, the diversity of supply for most products suggests the risk of total supply chain failure is oft overestimated. Not zero, but maybe not quite as large as it is often made out.  That said, this will look different as a function of where we are and who our neighbours are. Countries in western Europe with strong economic clout to compete in a global market as buyers will perhaps have a different take on that to smaller economy countries historically part of the Soviet Union and still dependent on historic discounts. Or similarly, countries caught in the cross-fire of bigger regional players taking pot-shots at each other overhead.

What we can say in a COVID and cold-war chastened world, is that it is always good to think carefully about the relative proportions of domestic and international supply chains for the things we need. The knee-jerk reaction that domestic supply is good and international supply is bad however, is an oversimplification that really deserves closer inspection on a commodity by commodity basis. Many fears do not loom as large in reality as they are portrayed.

KeyFacts Energy Industry Directory: Paetoro Consulting