December 8, 2006EconomyForeign Affairs

Selling the family iron ore to China

Contemplating a ban on iron-ore exports is absurd

This is an archived blog post from The Acorn.

The bulk of India’s iron-ore exports last year went to China. This is being bandied as something sinister by those who dislike China because of geopolitical reasons and by those who dislike selling our’ ore to them’ instead of letting our’ manufacturers have it.

  1. So why do Indian mining companies prefer to sell their iron-ore to Chinese buyers?
  1. Because they like the Chinese

  2. Because they are not patriotic

  3. Because they get a better deal by selling to the buyer who pays them a higher price

  1. So why do Chinese buyers pay a higher price?
  1. Because they like the Indian iron-ore producers

  2. Because they are not patriotic

  3. Because they get a better deal by buying iron ore from the cheapest seller

  1. If the situation were reversed, Indian iron-ore was more expensive then
  1. Indian manufacturers would pay a higher price to buy desi maal, out of patriotism

  2. Chinese sellers would refuse to sell iron-ore to India at international prices

  3. Indian manufacturers would buy the cheapest iron-ore available in the international market

  1. If Indian politicians decided to ban iron-ore exports to China then:
  1. China will stop selling cheap consumer goods, and India will retain its trade surplus

  2. Indian cafeterias will serve drinks in disposable cups made of steel

  3. China will continue selling cheap consumer goods to India, and India will face a trade deficit

  1. Why do Indian consumers buy cheap consumer goods manufactured in China?
  1. Because they love the Chinese like they love Chicken Manchurian (which by the way, we have from authority, is not even an authentic mainland Chinese dish)

  2. Because they are not patriotic

  3. Because they end up with more money in their pockets by buying the cheaper Chinese goods.

Indian iron-ore producers benefit. Indian consumers benefit. Indian manufacturing benefits too—because manufacturers are whipped up into shape by competition. If there is something that the Indian government needs to do it is to allow Indian manufacturers to compete with their Chinese counterparts on a level playing field. The playing field is not level. Not because of the Chinese government, but because of the Indian one. First, inflexible labour laws cause manufacturers to be less productive, or invest in automation instead of using the abundant labour. Second, the looming threat of private sector reservations is about to make this worse. Third, the government is adding to manufacturers’ costs (or hurting their productivity) by not getting its act together fast enough on the infrastructure front.

That’s the way to think about China.

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