Think-Tank Warns Resource Nationalism Causes Commodity Prices Volatility

on Dec 11, 2012

**“Every Country for Itself” — Threat to Resource Prices**

Resource nationalism is causing instability in commodity prices and threatens global security, warns British think-tank Chatham House in a report released today. The Financial Times announced on 11 December 2012 that, based on recent data concerning commodity trade flows, the report highlights how international politics have come to dominate the global resource market, causing increasingly sharp swings in prices of commodities such as food, metals and oil that threaten stability within and between countries.

The report states that “every country for itself” resource politics results in markets unable to respond properly to higher prices, as well as increasing the risk of trade wars, famine in poorer countries and environmental degradation. The London-based think-tank also cites the effects of a recent increase in expropriations and investment disputes over resource assets in emerging economies. It also alerts that these “escalating trade wars over resources could overwhelm the dispute settlement regime at the World Trade Organisation.”

**Responses to Resource Threats**
“The markets for critical resources have always been political. States have often taken action to preserve access to resources for their own economies” Chatham House’s report says, giving as an example countries such as China, Argentina and Ukraine which responded to the food prices increase in 2008 with taxes and/or controls on the export of grain. These measures triggered similar moves in other countries, driving up global commodities prices, and creating a crisis of confidence spreading from one raw material to the next. They also increased resource price volatility and reduced investment in new production, as exporters could not benefit from high international prices with local governments heavily taxing increased revenues which result.

Yet the recent report highlights that “unilateralism, however, is not always the norm.” Alongside unilateral measures to secure access to resources, there are also multilateral initiatives to sustain their availability through open markets and fair market access, including the negotiations for new regional and bilateral trade agreements, some of which resulting in new interdependencies. Thus, the reshaped resource trade includes relationships, such as those involving oil exports from the Middle East to China, wheat from Ukraine and Russia to the Middle East and palm oil from Indonesia and Malaysia to India and China. Currently, the largest agricultural trade relationships are those of Soybean exports from the US and Brazil to China. Meanwhile, flows to China of iron ore from Australia and copper from Chile are the largest in the metals sector.

**Building New Resources Politics**
!m[Chatham House Says Governments Should Cooperate to Tackle Swings in Resource Prices and Protect Global Security](/uploads/story/1011/thumbs/pic1_inline.png)The size of fluctuations in commodity prices has more than tripled since 2005 compared to the period from 1980, Chatham House’s report shows, based on International Monetary Fund (IMF) data. To avoid further resource price instability and preserve global security, the think–tank suggests new methods to decrease the impact of commodity price shocks. For instance, it proposes that grain and oilseed producers — such as the US — should buy options from their biofuel industries, letting them divert food back to human consumption when prices rise. Chatham House also recommends the integration of China and India into existing mechanisms to share oil in an emergency and for compulsory stockholding reports by metals traders to reduce speculative bubbles and panic buying. The report also advocates the reduction of food waste, the recycling of metals and states that a circular economy could “deliver business models fit for a resource constrained world.”
Ultimately, however, the think-tank calls on the creation of new institutions to collaborate in governing the global natural resources. The report recommends a coalition of the world’s 30 biggest consumers and producers of resources to set rules on export restrictions and the activities of state-owned resources companies in order to tackle the global commodity price volatility. “The question is whether people with the capacity to influence the market can come together and try to reduce volatility,” Bernice Lee at Chatham House told *The Financial Times*.


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