Congratulations to the government on making an excellent decision.
We, who comment upon matters economic and political, are eager enough to pounce upon perceived mistakes -- but it's worth being consistent and praising good decisions when they are made.
For Commerce Minister TipuMunshi has announced that the export of rawhide is to be allowed immediately. This is a useful example of good free-market policy the greater the number of potential buyers the more accurate the market price will be.
The Tanner's Association is up in arms about it, of course,which is just another reason why we can praise this policy. But first let’s talk about something entirely different:Crude oil in America.
In the 1970s, the American government banned the export of crude oil over the usual foolish concerns about the country running out. But it was always possible to export processed oil products like petrol and so on. Then, more recently, came fracking for oil, something that has really only happened in this past decade at any scale.
This has meant much, much more crude oil in the US. But it was not legal to export that crude oil. It was, as always, legal to export processed products like petrol and diesel.
It's possible to predict what will happen here. The US price of crude oil will be lower than the world price. But the US price of petrol, diesel, will be the same as the world price. Because there is now an excess of crude, the price is lower.
But anything that has been transformed into petrol can be exported at the global price. Which is exactly what happened. We can even track this, WTI is the oil price inside the US, roughly enough, and Brent is the price outside.
We saw differences of $10 and $15 a barrel. This is the amount that oil drillers inside the US were losing because they could not export. And, obviously enough, the refiners into petrol were making this amount. Because they could buy at the depressed domestic price and sell at the higher global.
So, some two years ago, the Trump administration changed the law. It is now legal to export crude oil. The price of petrol to Americans hasn’t changed as a result -- it has for other reasons, but not this one -- but the price of domestic crude has.
The profit that used to go to the refineries now goes to the drillers inside America. Nothing else has changed. We have changed who gets the profit, that's all.
Now, back to our starting point:Rawhide.
This being one of the joys of economics, the principles are universal. When it is not possible to export the raw material, but it is possible to export the processed one -- then those who do the processing have a stranglehold on the price.
The only way to gain the world price -- the real price -- is by exporting. So, those who can export have power over the domestic market. Which is exactly what has been happening.
Exporters of processed goods are getting the world price. But the glut of hides at this time of year means very low domestic prices. Who is getting this profit? Those with the ability to export through processing.
How do we change this?
We remove the necessity to process before export. This removes that market power from those exporters. All we’ve done is move around who gains the profit. The same profit is made -- that difference between domestic and global rawhide prices. Who gets the profit changes -- the people with the rawhide or the people who can process it? And while we can argue the relative merits here there doesn’t seem to be any good reason why it should be the tanners who get this profit rather than anyone else.
It’s possible to assert, as will be done, that there is a benefit. Because the processing will be done in Bangladesh then that's a benefit to Bangladesh. Jobs created and so on. But this is also true if the tanners must pay the full market price for the hides, isn't it? If adding Bangladeshi labour adds value then that will be done anyway, whether there's the extra profit from the artificially low domestic price or not.
So, the government has decided to free up the export market for rawhide. This will annoy the tanners because they lose a source of profit and please those who currently own the hides because they now get this profit. But that's all that has been done -- the profit from the price difference between the domestic and global markets has changed hands. Arguably, to where it should have been all along, the owners of the hides.
An advance in economic freedom and liberty. Why shouldn't we say this is a good decision and thereby praise it?
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
