Another Preposterous Attempt to Punish Evil Foreign Regimes

Today’s Wall Street Journal carried a piece headlined “Gold from North Korea Stymies U.S. Firms.” It seems that U.S. firms that use various minerals, not just gold but also tungsten, tantalum and tin, are required by U.S. law to ask their suppliers whether any of these materials are so-called “conflict minerals.” Up to now this provision has mainly covered minerals sourced from areas of the Congo which are embroiled in warfare. Now it seems firms must also find out whether any of the gold they use in their products came from North Korea.

It’s not so simple as asking each supplier, because those suppliers may in turn have obtained their supplies from a variety of sources, all of which may have gotten mixed in together in their inventory. And of course it’s an open question as to whether suppliers can document their sources; presumably their say-so won’t suffice. They might also raise their asking prices to cover the costs of time-consuming compliance exercises.

The article says the North Korean central bank refined gold into bars that were certified by the London Bullion Market Association up until 2006. It is believed that they have continued to produce gold bars.

Gold is highly marketable. It’s uniform, nearly indestructible, and traded internationally. It’s unlikely the North Koreans would be stamp any of the bars they refine “made in the DPRK.” The North Koreans are known to be experts at counterfeiting U.S. currency, so how easy would it be for them to stamp a fake refinery mark on their gold bars?

What’s the point of this requirement? As with all political actions, this one has both an ostensible and a real (“public choice”) goal. The ostensible reason is to harm the evil North Korean regime by reducing the revenue they get from gold sales. The likely real reason is to make politicians and bureaucrats look good. None of this is to downplay the horror that is the North Korean regime. I only want to consider who will benefit and who will be hurt by this program.

All right, so who bears the costs? The requirement is an obvious expense for the firms involved. They will pass on as much of the compliance costs to customers as they can, but they will find little ability to do so if they face foreign competitors who suffer from no such regulatory burden. I won’t attempt to estimate elasticities here, just guess that costs will be borne primarily by shareholders and employees of gold-using firms and not so much by customers. These firms will become a little bit less competitive. To some extent suppliers will be burdened as well, but they probably have options like shifting to other customers or getting another intermediary in between them and their U.S. customers.

Lastly, how likely is this measure to succeed? The answer depends on which goal we’re thinking of. If it’s the political goal, politicians and bureaucrats will probably accrue a little bit of credit. If it’s the ostensible goal, hurting the North Korean regime, the answer is: no chance whatsoever. The only harm the North Koreans might endure would be busting a gut from laughing. In the unlikely event they find some of their customers have withdrawn, they can easily and with almost total anonymity dispose of their gold through international markets.

The effects of this requirement will be minor for a huge firm like Hewlett Packard. But U.S. industries are dying from a thousand cuts like this, and as they gradually lose out to foreign competitors, we wonder why.

You will notice I have not invoked any libertarian ideology in this humble piece. It’s just a matter of tracing consequences a little further and looking for public choice explanations of behavior. Hooray for the San Jose State University graduate program that helped me learn these skills.

Please keep it civil

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