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Blood diamonds and do-gooders

Tim Worstall on conflict minerals – good economics, bad politics.

Photograph: Getty Images

Earlier this week, Global Witness, the organisation behind restrictions on blood diamonds, called for an EU law to restrict the use of conflict minerals. This would match a US law, called the Dodd-Frank Act, which requires companies to trace the origin of certain metals through their supply chain to ensure they don’t come from known conflict zones.

To be clear, conflict minerals are both horrible and, unfortunately, in most of our electronics. Few would defend them, but the call for a new law was immediately met by criticism. "There are times when the actions of do-gooders makes [sic] me want to kneel down and weep bitter tears of pain," exclaimed Tim Worstall in Forbes, who wrote a riposte to the call for the new law. This isn’t because Worstall supports conflict minerals – he doesn’t – but because he thinks that we can prevent conflict minerals from being used for 300-400 times less money. Fundamentally, this is a debate about how best to create supply chain transparency, an essential component of resource resilience.

In essence, Worstall’s solution is to regulate smelters rather than manufacturers. Because the mineral ores used to create metals have a unique "fingerprint", they can be tested prior to smelting to ensure the fingerprint doesn’t match that of mines from known conflict areas. As there are only around 500 smelters capable of processing the majority of conflict metals, it would only cost around $10m to set up a certification scheme. In contrast, supply chain transparency is expensive: the Dodd-Frank Act is expected to cost $3-4bn.

It’s a neat idea, and the economics certainly stack up. But the politics and policy don’t. Here’s why:

First, public concern matters. As "do-gooders" know, regulation creates the risk of buck-passing. At worst, it invites unethical consumer companies to accept tick box certification and look the other way when this proves meaningless. This disadvantages ethical companies and doesn’t chime with public opinion about the responsibility companies should bear for their supply chains: when the issue of suicides at Foxconn or sweatshop labour arose, the response wasn’t to call for regulation of manufacturing facilities in China or elsewhere, but to put pressure on Apple and western clothing brands. A regulator’s job is infinitely easier when they know that a company breaching regulations will face consumer backlash. The activities of smelters are effectively invisible to the public.

Second, the location of the smelters matters. As Worstall admits, the vast majority are outside the EU and, therefore, outside the jurisdiction of European regulators. Because it’s economically advantageous to smelt conflict minerals, there’s a strong incentive for fraud. We have a readymade example of what this might look like: in Shetland, a fish processor fraudulently avoided EU fishing quotas by using a "secret specially-built underground pipeline which allowed illegally-landed fish to be pumped into the factory from fishing boats, undetected by regulators." If we have difficulty policing illegal fish processing in the UK, it’s hard to believe that EU protestations will affect non-EU smelters. In contrast, business relationships span regulatory boundaries. It makes sense to regulate at the consumption end.

Tim Worstall suggests that we should adopt "the vastly cheaper way that the industry is already addressing the problem." What he doesn’t say is that this programme doesn’t "require members or their supply chains to purchase from the compliant smelter list." This isn’t a conspiracy to promote conflict minerals. Instead, it stems from the fact that smelters are invisible and without public pressure, it’s easier and cheaper to not have to reconfigure sourcing and supply chain relationships. The inability of voluntary regimes to deliver sustainable outcomes across a whole host of globalised supply chains is feeding a wider change in consumer preferences. As one of the company members of the Circular Economy Task Force said, "Five years ago, our customers where asking for recycled content in packaging. Today, they’re asking about the origin of the materials in our products."

Supply chain traceability may not be cheap, but it’s increasingly a condition for good business. Global Witness could bolster its campaign by pointing to the upside of traceability: businesses that understand their supply chains can foresee resource constraints. There’s already evidence that mining companies which report their water use across their supply chains outperform those which don’t. Indeed, much of the economic opportunity in the circular economy lies in better connections across supply chains. Rather than trying just to minimise costs, we should be designing regulation with an eye to the opportunities of more visible supply chains.

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