9 February 2017

Why Trump’s right about one of his executive orders


Donald Trump is to suspend Section 1502 of the Dodd-Frank Act by executive order. This is excellent news and should be welcomed by all who wish to see the economy well regulated. For the actual effect of 1502 has been to squander $4 billion to no great effect – other than to reduce the incomes of some of the poorest people on earth. This is not known to be a result we desire from regulation.

Given my own background in weird and wonderful metals, I’ve been shouting about this appalling rule ever since it was first proposed, let alone passed. So much so that Global Witness and the Enough Project, the original proponents of the idea, have regularly complained to editors about my discussions of it.

Section 1502 concerns conflict minerals – and is an attempt to prevent the trading of them. There are four so designated; the metals tantalum, tungsten, tin and gold, and the rules cover only those coming from the Democratic Republic of Congo and environs.

The ore bodies in these places are so rich that they can be mined by “artisanal mining”. Not quite as nice as the euphemism makes it sound, this is peasant mining and basically someone on $3 a day with a spade goes and digs up the metals.

During the conflicts, however, militia groups took control of certain artisanal mines and forced slaves (quite literally) to mine for them. They used the revenues gained to purchase weapons to continue to fight. Or, more to the point, they used the revenues to buy weapons to defend their ore bodies and the slaves who were produced the revenues.

Obviously, we’re not wild about this sort of thing. And so various ideas were floated as to what could be done to stop it.

The ore that was of most concern was coltan, a possible source of tantalum and a vital component of our mobile phones. Attempts to draw attention to the nasty trade in this metal led to the Blood in the Mobile campaign, which claimed that it would only cost one cent per mobile to make sure that we could rid the supply chain of this monstrosity  – that’s $10 million a year globally.

But the major Western processors of coltan (HC Starck in Germany, Cabot in the US) had already been refusing to handle central African metals before anyone had even though about passing a law about it.

The industry had also started a processor licensing scheme. It is possible to determine exactly which mine an ore comes from – the German geological survey group, BGR, created a database of the trace elements in the various ores from different mines – thus allowing anyone to make a precise identification.

So, we have a database, we are going to test the minerals anyway, and we have a system we can use. This is how we can push illegal minerals out of the system. And given most electronics manufacturers have signed up along with the Western processors that means we are pretty much done. Excellent.

Even so, the NGOs couldn’t resist the Dodd-Frank Reform Act, a ragbag of all sorts of regulation that people thought they could get passed in the wake of the financial crisis. Section 1502 of the Act said that every listed American company must write to each of its suppliers and ask if it used conflict minerals in its production.

Now the Guardian claims:

“The Trump administration has prepared a new executive order that would extinguish regulatory controls designed to prevent US companies profiting from and encouraging the spread of “conflict minerals” that are inflaming violence in Congo. A draft executive order, composed last week and obtained by the Guardian, proposes a two-year suspension of a portion of the Dodd-Frank financial reforms that requires US firms to carry out due diligence to ensure that the products they sell include no minerals mined in the Democratic Republic of the Congo or neighbouring countries.”

That’s not what it insists at all. Section 1502 merely insists that you ask. And then you tell customers. So possible answers could be: “Yes, we use conflict minerals”, “No, we’ve checked and we don’t”, and “We don’t know”. And that’s all.

So the 5,000 or so listed American companies must write to each of its suppliers and ask them about where the metal comes from. And then tell people what the answer is. And that’s it.

The Securities and Exchange Commission estimated that this would cost (as the executive order itself says) $4 billion in the first year, and $200 million a year subsequently. That is just to fill out paperwork.

But this does have an interesting side effect. There are entirely legal mines in the area (not all, by any means, are controlled by slave driving thugs) but the burden of this paperwork has meant that legitimate processors won’t touch any of it.

As a result, DR Congo coltan now goes to very shady processors indeed and at substantial discounts – making entirely legal miners, already among the poorest people in the world, even poorer.

So we have forked out $4 billion for this? And we are spending $200 million a year to carry on doing it? American foreign assistance to DR Congo, by way of comparison – runs at less than $200 million a year.

So lets talk about the regulation. Sure, there’s a problem. One we’d like to solve. It’s actually a problem which government action might usefully solve – say, all processors should join the industry identification scheme, maybe?

I am not, despite my reputation, against all regulation. There are times when it is the only way of achieving something. But such regulation must be efficient. Not just the squandering of resources which ends up making poor people poorer.

Section 1502 is bad regulation. And if we want to do something about conflict minerals let’s not put anything as wasteful in its place.

And yes, even if it is Donald Trump rescinding it, there’s no denying that ending Section 1502 is a good thing.

Tim Worstall is senior fellow at the Adam Smith Institute