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09.08.2003, 16:46

Protectionism Didn't Help Copper / Artikel mises.org

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http://www.mises.org/fullstory.asp?control=1290
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Protectionism Didn't Help Copper
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by
Jacob D. Steelman, Jr.

[Posted
August 9, 2003]

<img alt src="http://www.mises.org/images3/copper.gif" align="right" border="0" width="191" height="270">While
protectionism may temporarily prop up inefficient industries and businesses,
ultimately market forces will prevail, hurting even the favored industry. What
follows is a case in point.

In the late
1970s, I was appointed by my company to be its representative in an industry
group exploring protectionism for the US copper industry. The allegation was
that foreign copper producers (particularly Chilean) were"dumping"
copper into the United States market at prices below market. The US producers
wanted the US International Trade Commission to curtail the imports.

Unlike gold,
silver or other precious metals, copper is primarily an industrial metal sold
by copper producers to large manufacturers. The price of copper traditionally
was priced on a producer price basis--a price set by the copper producer.
Until the late 1970s that price appeared to work well.

Then producer
prices began to diverge from the market price, as represented on the Comex
futures and the London futures markets. This disparity became too much for the
buyers of copper since the gap between the producer price and market price
continued to be quite large-as much as 10 cents per pound.

One of the
leading copper producers, CODELCO (the state-owned-copper company of Chile),
changed its pricing policy (and ultimately changed the entire pricing
structure of the industry) from one set by the producer to one set by the
major copper futures markets.

The company for
whom I worked realized  that the disparity between producer pricing and
market pricing would not continue. In response we were one of the first to
follow CODELCO and give up the producer price mechanism in favor of a pure
market based price based on the Comex futures prices - Flexible Pricing we
called it.

Customers were
given various choices on pricing based on the futures prices. This allowed
buyers to obtain price protection through hedging the prices they would pay
for copper. This generally resulted in much lower prices to the buyer than the
producer price. We were able to provide such pricing since we had recently
brought on stream a modern more efficient mine which had much lower costs.
Ultimately the producer price was abandoned by all the producers in favor of a
market-oriented price.

Although
misguided, the industry's reaction to the change in pricing was understandable.
It was just coming out of the disastrous era of the Nixon price controls of
the early seventies that had limited price increases during an inflationary
environment. The industry had hoped to recoup the lost prices by maintaining
the producer price as long as possible.

On top of that,
the industry was being pummeled by the environmental regulations of the
Environmental Protection Agency. Debt to equity ratios of copper companies
increased from 10% to 30% and above as a result of such regulations. For the
less efficient producers profit margins were small or non-existent.
   

I recall the
first major meeting of executives of our company to decide whether to
participate in this process. There were 20-30 managers and executives at the
meeting. We went around the large conference table with each person giving his
or her view on participating or not--each speech evoked supporting comments
from all the other attendees.

When my turn
came—I was a young lawyer still somewhat naive in corporate matters—I
  voiced my opposition citing the failed policies of protectionism and
the ultimate weakening of the industry the protectionism is suppose to help. I
argued that we would be better off spending our time lobbying for reduced
regulation and reduced taxation on the our industry.

When I finished
you could have heard a pin drop—no comments in support and no comments
against.<a id="_ftnref1" title href="http://www.mises.org/fullstory.asp?control=1290#_ftn1" name="_ftnref1">[1]</a>The
management group decided that the company should participate in the
protectionist project of the industry. I was asked to attend an organizational
meeting of the industry reviewing the matter.

In fact, the
larger companies had already made a decision to move forward with the project.
Since there is strength in numbers, the larger companies needed the rest of
the companies in the industry to participate in the process to ensure there
was no break in ranks, as well as to allocate the costs of the project.

An industry
group was formed with representatives from each company participating in the
group. In addition to the lawyers and public relations firms of each company
the industry group hired a large PR  and lobbying firm, two large law
firms, an accounting firm  and other support required for this project.

Within weeks of
the organizational meeting, very emotional articles suddenly began to appear
in the press and TV describing the plight of copper miners and their families.<a id="_ftnref2" title href="http://www.mises.org/fullstory.asp?control=1290#_ftn2" name="_ftnref2">[2]</a>There
were many meetings of the industry group to review the progress of the project
and to make sure that everyone remained in support of it.

The lawyers and
accountants for each of the companies and the industry group spent hours
collecting data to support the case and preparing scripts to be used for
testimony in support of the protectionism. Local politicians were brought in
to voice their two cents and to support the claim for protectionism. Large
hearings and media events were held in Tucson for industry executives and
expert witnesses who flew in to give their testimony and flew out after they
were finished.

The testimony
was scripted by the lawyers and extensively rehearsed with the witnesses to
make sure that each witness made the correct statement of facts and argument
to support the case for trade sanctions against the foreign imports.

The US copper
industry received some of the protectionist relief it requested—to little
avail<a id="_ftnref3" title href="http://www.mises.org/fullstory.asp?control=1290#_ftn3" name="_ftnref3">[3]</a>. 
The world price of copper continued to drop, as plastics and other substitutes
used in automobile manufacturing, plumbing re-placed copper, and fiber optic
cable replaced much of the copper cables used in the telecommunications
industry.

The efforts of
the US copper industry to insulate itself from foreign competition masked the
real and more serious competitive threat from new technology which was on the
horizon.

Once at a
luncheon with our Vice President of Sales (he was a widely recognized expert
in the copper industry), the subject of fiber optic cables came up. One of our
major customers was Western Electric (WE), then an AT&T subsidiary
responsible for manufacturing all the copper cables for AT&T. Contracts in
the copper industry were negotiated in the fall of each year and WE would take
virtually all our production for the year with one contract.

After returning
from a sales trip our VP reported that WE was experimenting with some new
technology called fiber optics - cables made of sand as our VP characterized
it. When I inquired about its potential to replace copper cable, our VP said
it was some highly experimental technology that would never replace copper
cable. At that time we did not foresee the 1984 break up of AT&T, and the
impact this would have on radically changing the US and international
telecommunications industry. Nor did the industry foresee the new fiber optic
technology, which would rapidly develop to support this changing industry.

Years later,
one of the company executives who had voted for participation in the industry
protection project admitted to me that it had been a mistake to participate in
the protection project and that the industry should have concentrated its
efforts on reducing regulations and taxes on the industry.

Unfortunately
for the company and the industry such revelations came much too late to
revitalize the industry or our company. Coincidentally, I ended up developing
fiber optic telecommunications companies during the late 1990s and co-founding
and developing four fiber optic communications companies in Australia, Brazil,
Argentina and Chile - the world's leading copper producer.

Protectionism
did not save the cooper industry in the long run. Neither will it save any
sector in the face of economic reality.


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Mr. Steelman is a US ex-pat currently living in the
Sydney, Australia area where he and his wife own an international trading and
development company. He has co-founded and developed numerous international
businesses  in the Americas, Asia and Europe. goldsea@ihug.com.au

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<a id="_ftn1" title href="http://www.mises.org/fullstory.asp?control=1290#_ftnref1" name="_ftn1">[1]</a>
While I was somewhat naïve in
corporate politics I was not inexperienced in corporate commercial matters
or economics. My corporate law practice consisted of commercial
transactions, mergers, anti-trust, analyzing government laws and
regulations among other legal matters. I had studied Austrian economics at
Grove City College and The Foundation for Economic Education so I was 
prepared to take on any arguments.

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<div id="ftn2">
<a id="_ftn2" title href="http://www.mises.org/fullstory.asp?control=1290#_ftnref2" name="_ftn2">[2]</a>
  The New York Times,
The Washington Post, The Wall Street Journal, Time,
and other major news magazines and newspapers (particularly in areas where
the offices and headquarters of the copper companies were located), local
papers in Salt Lake City, Tucson and Phoenix, the cities in the largest US
copper producing areas, carried extensive  articles with pictures
depicting the plight of the miners.

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<a id="_ftn3" title href="http://www.mises.org/fullstory.asp?control=1290#_ftnref3" name="_ftn3">[3]</a>
Curiously, while the government
was considering the copper industry's request to provide protection for
the industry the EPA was  waging a war against the copper industry
and in my view helped to drive much of the industry overseas with its
extreme environmental and land use planning regulations. During that
time I recall a meeting with EPA regulators who made the comment that
there was no place in the United States for a non-ferrous (copper)
industry. The industry ended up overseas primarily in Chile and some
other isolated places in the world while dramatically consolidating and
retrenching in the US.


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